<PAGE>
As filed with the Securities and Exchange Commission on June 7, 1999
Registration No. 333-73459
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 4
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
drkoop.com, Inc.
(Exact name of registrant as specified in its charter)
----------------
Delaware 7375 95-4697615
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
8920 Business Park Drive, Suite 200
Austin, Texas 78759
(512) 726-5110
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
C. Everett Koop, M.D.
Chairman of the Board
drkoop.com, Inc.
8920 Business Park Drive, Suite 200
Austin, Texas 78759
(512) 726-5110
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Anthony J. Richmond, Esq. Jeffrey D. Saper, Esq.
Harold R. DeGraff, Esq. Paul R. Tobias, Esq.
Latham & Watkins Caine T. Moss, Esq.
135 Commonwealth Drive Wilson Sonsini Goodrich & Rosati, P.C.
Menlo Park, California 94025 650 Page Mill Road
(650) 328-4600 Palo Alto, California 94304
(650) 493-9300
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 7, 1999
PROSPECTUS
9,375,000 Shares
[LOGO OF DRKOOP APPEARS HERE]
drkoop.com, Inc.
Common Stock
------------
This is an initial public offering of 9,375,000 shares of common stock of
drkoop.com, Inc. drkoop.com, Inc. is selling all of the shares of common stock
offered under this prospectus.
There is currently no public market for the shares. Our common stock has been
approved for listing on the Nasdaq National Market under the symbol "KOOP." We
anticipate that the initial public offering price will be between $7.00 and
$9.00 per share.
At our request, the underwriters will reserve at the initial public offering
price up to $10 million of common stock for sale to each of Dell Computer
Corporation and FHC Health Systems Investment Company, L.C., and up to $5
million of common stock for sale to Quintiles Transnational Corp., all of whom
have expressed a non-binding interest in acquiring these shares. This would
represent an aggregate of 3,125,000 shares of common stock at the midpoint of
the estimated offering price range.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8 to read about risks that you should consider
carefully before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price...............................................
Underwriting discounts and commissions..............................
Proceeds, before expenses, to us....................................
</TABLE>
------------
drkoop.com, Inc. has granted the underwriters a 30-day option to purchase up to
an additional 1,406,250 shares of common stock from us at the initial public
offering price less the underwriting discount. The underwriters expect to
deliver the shares on , 1999.
------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
as e-Manager(TM)
The date of this prospectus is , 1999
<PAGE>
Description of Artwork
Inside Front Cover Overleaf
Photograph of C. Everett Koop, M.D., with the following caption: "During my
tenure as U.S. Surgeon General, I saw first-hand the powerful impact a well-
informed public made on the nation's health. Now, the World Wide Web presents
exciting new opportunities to empower consumers to become active, informed
participants in managing their own healthcare. I firmly believe that this is
the path to significantly improving the quality of healthcare for years to
come."
Inside Front Cover
Pictures of the drkoop.com logo and the logos of portals and other websites,
traditional media and healthcare organization affiliates.
Underneath the drkoop.com logo in the middle of the inside front cover is a
caption that reads as follows: "We are an Internet-based consumer healthcare
network that includes the interactive website, www.drkoop.com. Our network
provides individuals with trusted healthcare content, services and tools to
empower them to better manage their health. Our network affiliates include
other Internet portals, websites, healthcare organizations and traditional
sources of health and medical news."
The following caption is under the logos of the new media affiliates: "We
distribute drkoop.com content to affiliated portals and other websites that
have established themselves as pathways for a broad variety of information. We
intend to affiliate with selected websites that have the potential to drive
traffic to our network and provide broad exposure to the drkoop.com brand."
The following caption is under the logos of the traditional media affiliates:
"Establishing affiliations with traditional media outlets allows us to deliver
quality healthcare content to a targeted audience. Affiliates provide local,
relevant information directly to a local audience. Through this unique means of
distribution, drkoop.com is building a leading network of health content and
editorial-based, breaking health news on the Internet."
The following caption is under the logos of the healthcare industry
affiliates: "Through our Community Partner Program, we enroll hospitals and
health systems as local affiliates. This enables healthcare organizations to
integrate the drkoop.com brand and content into their on-line initiatives.
Through this program, healthcare organizations can supply their patients with
on-line health resources and interactive capabilities that allow patients to
educate themselves and make informed decisions."
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information found in greater detail elsewhere
in this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.
drkoop.com
Our Business
Our company operates drkoop.com, an Internet-based consumer healthcare
network consisting of a consumer-focused interactive website and affiliate
relationships with Internet portals, certain other websites, healthcare
organizations and traditional media outlets. Our website, www.drkoop.com, is a
healthcare portal with the following components:
. dynamic healthcare content on a wide variety of subjects, including
information on acute ailments, chronic illnesses, nutrition, fitness and
wellness, and access to medical databases, publications, and real-time
medical news;
. interactive communities consisting of over 130 hosted chat support groups
and tools that permit users to personalize their on-line experience; and
. opportunities to purchase healthcare-related products and services on-
line.
We launched our website in July 1998 and, according to commercial software
that we utilize, by June 1, 1999 www.drkoop.com had attracted over 6 million
unique users and enrolled over 280,000 registered users.
Our network affiliates provide easy access to the information and services we
offer on www.drkoop.com to their respective customers. We believe that we will
benefit from these affiliate relationships through:
. broader exposure of our brand;
. higher volumes of traffic being driven to www.drkoop.com; and
. a cost-effective method of acquiring and distributing local healthcare
content.
Our Market Opportunity
Healthcare is the largest segment of the U.S. economy, representing the
annual expenditure of roughly $1 trillion, and health and medical information
is one of the fastest growing areas of interest on the Internet. According to
Cyber Dialogue, an industry research firm, during the 12-month period ended
July 1998, approximately 17 million adults in the United States searched on-
line for health and medical information, and approximately 50% of these
individuals made off-line purchases after seeking information on the Internet.
Cyber Dialogue estimates that approximately 70% of the persons searching for
health and medical information on-line 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 the number of adults in the United States
searching for on-line health and medical information will grow to approximately
30 million in the year 2000, and they will spend approximately $150 billion for
all types of health-related products and services off-line.
Our Business Model
Our company's founders, including former U.S. Surgeon General Dr. C. Everett
Koop, created drkoop.com to empower consumers to better manage their personal
health with comprehensive, relevant and timely information. Our objective is to
establish the drkoop.com network as the most trusted and comprehensive source
of consumer healthcare information and services on the Internet. Our business
model is
3
<PAGE>
to earn advertising and subscription revenues from advertisers, merchants,
manufacturers and healthcare organizations who desire to reach a highly
targeted community of healthcare consumers on the Internet. We also earn
revenues by facilitating e-commerce transactions, such as sales of prescription
refills, vitamins and nutritional supplements, and insurance services offered
by outside parties.
Our Strategy
Our business strategy incorporates the following key elements:
. establish the drkoop.com brand so that consumers associate the
trustworthiness and credibility of Dr. C. Everett Koop with our company;
. provide consumers with high quality healthcare content to attract users
to www.drkoop.com and promote their loyalty to our website;
. syndicate content through affiliates to promote traffic growth;
. develop and expand on-line healthcare communities to allow users with
similar health-related experiences to exchange information and gather
news and knowledge in a secure, anonymous environment;
. provide consumers with unique features and tools, such as one that
educates consumers on the interaction among various drugs and other
substances;
. deploy a comprehensive personal medical record which will allow users to
establish and maintain a lifelong record of their health and medical
information in a secure portion of our database;
. provide an attractive website that can deliver advertising in a highly
targeted manner, thereby commanding higher advertising rates; and
. facilitate e-commerce transactions offered by merchants, manufacturers
and service providers to a highly targeted community of health-conscious
consumers.
Recent Developments
On April 9, 1999 we entered into agreements with Infoseek Corporation and the
Buena Vista Internet Group, a unit of The Walt Disney Company, under which we
will be the exclusive provider of health and related content on three websites
of the Go Network: Go.com Health Center, ESPN.com Training Room and the
Family.com Health Channel. Under the Infoseek agreement, drkoop.com will also
be the premier health content provider for ABCnews.com. In addition, drkoop.com
will be the exclusive pharmacy and drugstore, health insurance and clinical
trials partner in the Go.com Health Center. In the event drkoop.com elects not
to provide specific content, it may be obtained from a third party. We believe
that these agreements will contribute substantially to our brand awareness and
increase traffic on our website. The term of these agreements is for three
years, although either party may elect to terminate the relationship after two
years. We will pay Infoseek and Buena Vista approximately $57.9 million in
total consideration.
----------------
Our principal executive offices are located at 8920 Business Park Drive,
Suite 200, Austin, Texas 78759, and our telephone number is (512) 726-5110.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered........ 9,375,000 shares
Common stock outstanding
after this offering ....... 27,514,591 shares
Use of proceeds............. We intend to use the net proceeds of this
offering to fund operating losses and for
general corporate purposes, including expansion
of our network, advertising, brand promotion,
content development and working capital. We may
also use a portion of the proceeds for strategic
alliances and acquisitions and to repay debt.
See "Use of Proceeds."
Nasdaq National
Market symbol.............. KOOP
</TABLE>
- --------
The number of shares of common stock outstanding after this offering is based
on shares outstanding on March 31, 1999. This calculation excludes:
. 10,492,530 shares of common stock issuable upon exercise of options
outstanding under our Amended and Restated 1997 Stock Option Plan with a
weighted average exercise price of $0.53 per share (5,240,902 of these
options were exercisable as of March 31, 1999; the balance are subject to
future vesting requirements);
. 1,742,800 shares of common stock issuable upon exercise of options to be
granted contemporaneously with this offering under our 1999 Equity
Participation Plan with an exercise price equal to the public offering
price listed on the cover of this prospectus;
. 33,482 shares of common stock issuable upon exercise of warrants with an
exercise price of $4.78 per share;
. 775,000 shares of common stock issuable upon exercise of warrants with an
exercise price of $8.60 per share; and
. 318,750 shares of common stock issuable upon exercise of options to be
granted upon the closing of this offering with an exercise price equal to
the public offering price listed on the cover of this prospectus.
This calculation includes:
. 7,249,667 shares of common stock to be issued upon the conversion of all
outstanding shares of convertible preferred stock;
. 439,187 shares of common stock issuable assuming conversion of all
convertible notes outstanding at March 31, 1999 ($2.8 million aggregate
principal amount plus accrued interest); and
. 1,345,185 shares of common stock to be issued upon the closing of this
offering to satisfy in full a purchase option and related anti-dilution
adjustment rights.
Please see "Management--Stock Option Plans" and "Description of Securities."
5
<PAGE>
Conventions Which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus reflects the
following:
. a three-for-one stock split effected in March 1999;
. a five-for-two stock split effected in June 1999;
. no exercise by the underwriters of their overallotment option to purchase
up to 1,406,250 additional shares of common stock;
. the conversion of all outstanding shares of our convertible preferred
stock into 7,249,667 shares of our common stock upon the closing of this
offering;
. the conversion of all convertible notes outstanding as of March 31, 1999
($2.8 million aggregate principal amount plus accrued interest) into
439,187 shares of common stock upon the closing of this offering; and
. the issuance of 1,345,185 shares of common stock to satisfy in full a
purchase option and related anti-dilution adjustment rights.
References in this prospectus to "drkoop.com," "we," "our" and "us" refer to
drkoop.com, Inc., a Delaware corporation. References to the offering refer to
the initial public offering of our common stock being made by this prospectus.
drkoop.com, Inc. was incorporated as a Texas corporation in July 1997 under the
name Personal Medical Records, Inc., changed its name to Empower Health
Corporation in April 1998 and reincorporated as drkoop.com, Inc., a Delaware
corporation, in March 1999. "drkoop.com," "Dr. Koop's Community" and "Dr.
Koop's Personal Medical Records" are trademarks of ours. Each trademark, trade
name or service mark of any other company appearing in this prospectus belongs
to its holder.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Please see the financial statements and the notes to such statements
appearing elsewhere in this prospectus for the determination of shares used in
computing basic and diluted and pro forma basic and diluted net loss per common
share.
<TABLE>
<CAPTION>
Period from
Inception Three Months Ended
through Year Ended -----------------------------
December 31, 1997 December 31,1998 March 31, 1998 March 31, 1999
----------------- ---------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ -- $ 43 $ -- $ 404
Loss from operations.. (622) (9,117) (709) (4,097)
Net loss.............. (622) (9,084) (709) (4,295)
Net loss attributable
to common
stockholders......... (622) (23,408) (709) (24,378)
Basic and diluted net
loss per common
share................ $ (.09) $ (2.89) $ (.10) $ (2.84)
====== ======== ====== ========
Weighted average
shares outstanding
used in basic and
diluted net loss per
common share
calculation.......... 6,750 8,100 7,030 8,569
====== ======== ====== ========
Pro forma basic and
diluted net loss per
common share(1)...... $ (.75) $ (.26)
======== ========
Weighted average
shares outstanding
used in pro forma
basic and diluted net
loss per common share
calculated(1)........ 12,111 16,347
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31, 1999
--------------- -------------------------------------
Pro Forma
1997 1998 Actual Pro Forma(1) As Adjusted(2)
----- -------- -------- ------------ --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents................ $ 8 $ -- $ 2,021 $ 2,021 $70,416
Working capital (defi-
cit)................. (649) (2,905) (3,038) (286) 68,109
Total assets.......... 43 380 11,717 11,717 80,112
Convertible note pay-
able................. -- 451 2,741 -- --
Mandatorily redeemable
convertible
(Series B) preferred
stock................ -- 18,406 29,342 -- --
Total stockholders'
equity (deficit)..... (614) (20,993) (23,201) 8,893 77,288
</TABLE>
- --------
(1) Gives pro forma effect to the following:
. the conversion of all outstanding shares of our convertible preferred
stock into 7,249,667 shares of our common stock upon the closing of this
offering;
. the conversion of all convertible notes outstanding as of March 31, 1999
($2.8 million aggregate principal amount plus accrued interest) into
439,187 shares of common stock upon the closing of this offering; and
. the issuance of 1,345,185 shares of common stock to satisfy in full a
purchase option and related anti-dilution adjustment rights.
(2) As adjusted to give effect to the sale of shares of common stock offered by
us in this offering at an assumed initial public offering price of $8.00
per share, after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
7
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
any such case, the market price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
Risks Related to Our Business
Our business is difficult to evaluate because we have an extremely limited
operating history.
We were incorporated in July 1997 and launched our Internet operations in
July 1998. Accordingly, we have an extremely limited operating history. An
investor in our common stock must consider the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets,
including the Internet market. These risks and difficulties include our ability
to:
. attract a larger audience of users to our Internet-based consumer
healthcare network;
. increase awareness of our brand;
. strengthen user loyalty and increase the number of registered users;
. offer compelling on-line content, services and e-commerce opportunities;
. maintain our current, and develop new, affiliate relationships;
. attract a large number of advertisers who desire to reach our users;
. respond effectively to the offerings of competitive providers of
healthcare information on the Internet;
. continue to develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
We also depend on the growing use of the Internet for advertising, commerce
and communication, and on general economic conditions. We cannot assure you
that our business strategy will be successful or that we will successfully
address these risks or difficulties. If we fail to address adequately any of
these risks or difficulties our business would likely suffer. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements for detailed information on our
extremely limited operating history.
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenues 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 revenues, then our business 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 and maintain
advertiser and sponsor satisfaction;
. traffic levels on our Internet site;
. our ability to attract and retain customers and maintain customer
satisfaction for our existing and future e-commerce offerings;
8
<PAGE>
. new Internet sites, services or products introduced by us or our
competitors;
. the level of Internet and other on-line 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.
Our revenues for the foreseeable future will remain dependent on user traffic
levels, advertising and e-commerce activity on drkoop.com and the level of
affiliate subscriptions. Such future revenues are difficult to forecast. In
addition, we plan to increase our sales and marketing operations, expand and
develop content and upgrade and enhance our technology and infrastructure
development in order to support our growth. Many of the expenses associated
with these activities--for example, personnel costs and technology and
infrastructure costs--are relatively fixed in the short-term. We may be unable
to adjust spending quickly enough to offset any unexpected revenue shortfall,
in which case our results of operations would suffer.
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 March 31, 1999, had an accumulated deficit of approximately
$23.9 million, which included $9.9 million for accretion to fair value of the
mandatory redeemable Series B convertible preferred stock. 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. We have received a report from our independent auditors for our fiscal
year ended December 31, 1998 containing an explanatory paragraph that describes
the uncertainty as to our ability to continue as a going concern due to our
historical negative cash flow and because, as of the date they rendered their
opinion, we did not have access to sufficient committed capital to meet our
projected operating needs for at least the next twelve months. Upon completion
of this offering, we will have available that capital. However, we cannot
assure you that we will achieve profitable operations. Please see "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We must establish, maintain and strengthen our brand in order to attract users
to our network and generate advertising, sponsorship and e-commerce revenue.
In order to expand our audience of users and increase our on-line traffic, we
must establish, maintain and strengthen our brand. For us to be successful in
establishing our brand, healthcare consumers must perceive us as a trusted
source of healthcare information, and advertisers, merchants and manufacturers
must perceive us as an effective marketing and sales channel for their products
and services. We expect that we will need to increase 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, a key element of our strategy to establish, maintain and
strengthen our brand is to encourage consumers to associate us with Dr. C.
Everett Koop. We believe that consumers consider Dr. C. Everett Koop to be a
trustworthy and credible leader in the healthcare field. We cannot assure you,
however, that Dr. C. Everett
9
<PAGE>
Koop will maintain this reputation, any damage to which could materially
adversely impact our business. In addition, if our relationship with Dr. C.
Everett Koop terminates for any reason, we would need to change the name of our
website and devote substantial resources towards building a new marketing and
brand strategy.
Key elements of our marketing and brand building strategies are dependent on
our relationship with Dr. C. Everett Koop.
A key element of our strategy is to associate our company with former U.S.
Surgeon General C. Everett Koop, Chairman of the Board of our company and a
person who we believe is viewed by consumers as a trustworthy and credible
leader in the healthcare field. We are a party to an agreement, dated January
5, 1999, as amended, with Dr. C. Everett Koop which permits us to use his
image, name and likeness in connection with healthcare-related services and
products. Under this agreement, our use of Dr. C. Everett Koop's name, image or
likeness is subject to his prior written approval of the resulting products,
which may not be unreasonably withheld. As consideration for the Koop
agreement, we are obligated to pay Dr. C. Everett Koop a royalty equal to 2% of
our revenues derived from sales of our current products and up to 4% of our
revenues derived from sales of new products during the term of the agreement,
including any rebranding period. The Koop agreement is exclusive and for a term
of five years, subject to automatic renewal for additional three-year terms
unless it is terminated by either party within 120 days of the end of each
term. If a voluntary termination is requested by Dr. C. Everett Koop and is not
the result of a breach or default by us, we will have the right on a non-
exclusive basis for three years following the end of the term to rebrand and
sell approved products bearing the name, image or likeness of Dr. C. Everett
Koop. If we default in our obligations and do not promptly cure the default,
Dr. C. Everett Koop may terminate the Koop agreement, no rebranding period will
apply and we would immediately lose all rights to use Dr. C. Everett Koop's
name and likeness. Dr. C. Everett Koop may also terminate the Koop agreement
upon a change in control of our company.
If our agreement with Dr. C. Everett Koop were terminated prior to the end of
its current term or not renewed at the end of its current term, we would need
to change the name of our website and devote substantial resources towards
building a new marketing and brand strategy. Without our ability to use
Dr. C. Everett Koop's name and likeness or Dr. C. Everett Koop's participation
in our business, we may not be able to continue to attract a significant amount
of user traffic and advertisers to our website. The potential also exists that
if Dr. C. Everett Koop ends his affiliation with our company, we could suffer a
significant loss of credibility and trust with healthcare consumers as a
result. Any development that would cause Dr. C. Everett Koop to exercise his
right to terminate his relationship with our company or which otherwise would
cause us to lose the benefits of our affiliation with him would have a material
adverse effect on our business, results of operation and financial condition.
We do not maintain "key person" life insurance for Dr. C. Everett Koop or any
of our personnel. Please see "Management--Agreements with Dr. C. Everett Koop."
We have committed significant financial and marketing resources to expand our
network; if we are unable to earn revenues in excess of these commitments, our
business will suffer.
In order to expand our network, we have entered into a number of strategic
partnerships which involve the payment of significant 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 revenues 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. On April 9, 1999 we entered into agreements
with Infoseek Corporation and the Buena Vista Internet Group, a unit of The
Walt Disney Company, under which we will be the exclusive provider of health
and related content on three websites of the Go Network. Under the Infoseek
agreement, drkoop.com will also be the premier health content provider for
ABCnews.com. The term of these agreements is for three years for total
consideration of approximately $57.9 million.
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In order to attract and retain our audience of users, we must provide
healthcare content, tools and other features which meet the
changing demands of those users.
One of our fundamental business objectives is for drkoop.com to be a trusted
source for healthcare information and services. As with any form of consumer-
oriented media, we have to provide editorial content, interactive tools and
other features that consumers demand in order to continue to attract and retain
our audience of users. We expect that competitive factors will create a
continuing need for us to retain, improve and add to our editorial content,
interactive tools and other features. We will not only have to expend
significant funds and other resources to continue to improve our network, but
we must also properly anticipate and respond to consumer preferences and
demands. Competition for content will likely increase the fees charged by high
quality content providers. The addition of new features will also require that
we continue to improve the technology underlying our website. These
requirements are significant, and we may fail to execute on them quickly and
efficiently. If we fail to expand the breadth of our offerings quickly, or
these offerings fail to achieve market acceptance, our business will suffer
significantly.
Our business model relies on Internet advertising and sponsorship activities
which may not be effective or profitable marketing media.
Our future is highly dependent on increased use of the Internet as an
advertising medium. We expect to derive a substantial amount of our revenues
from advertising and sponsorships. The Internet advertising market is new 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.
Various pricing models are used to sell advertising on the Internet. It is
difficult to predict which, if any, will emerge as the industry standard,
thereby making it difficult to project our future advertising rates and
revenues. Our advertising revenues 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.
In order to execute our growth plan we must attract, retain and motivate highly
skilled employees, and we face significant competition from other Internet and
new media companies in doing so.
Our ability to execute our growth plan and be successful also depends on our
continuing ability to attract, retain and motivate highly skilled employees. In
addition to Dr. C. Everett Koop, Chairman of the Board, we depend on the
continued services of key board members, our senior management and other
personnel, particularly Donald W. Hackett, Chief Executive Officer. As we
continue to grow, we will need to hire additional personnel in all operational
areas. Competition for personnel throughout the Internet and related new-media
industry is intense. We may be unable to retain our key employees or attract,
assimilate or retain other highly qualified employees in the future. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees 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. Please see "Management" for detailed information on
our key personnel.
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In addition, as our market develops, seasonal and cyclical patterns may
emerge. These patterns may affect our revenues. 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 fall. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We depend on third-party relationships, many of which are short-term or
terminable, to generate advertising and provide us with content.
We depend, and will continue to depend, on a number of third-party
relationships to increase traffic on drkoop.com and thereby generate
advertising and other revenues. Outside parties on which we depend include
unrelated website operators that provide links to drkoop.com, providers of
healthcare content and the on-line property representation company which
provides us with advertising sales services. Many of our arrangements with
third-party Internet sites and other third-party service providers are not
exclusive and are short-term or may be terminated at the convenience of either
party. We cannot assure you that third parties regard our relationship with
them as important to their own respective businesses and operations. They may
reassess their commitment to us at any time in the future and may develop their
own competitive services or products.
We intend to produce only a portion of the healthcare content that will be
found on the drkoop.com network. We will rely on third-party organizations that
have the appropriate expertise, technical capability, name recognition,
reputation for integrity, and willingness to syndicate product content for
branding and distribution by others. As health-related content grows on the
Internet, we believe that there will be increasing competition for the best
product suppliers, which may result in a competitor acquiring a key supplier on
an exclusive basis, or in significantly higher content prices. Such an outcome
could make the drkoop.com network less attractive or useful for an end user
which could reduce our advertising and e-commerce revenues.
We cannot assure you that we will be able to maintain relationships with
third parties that supply us with content, software or related products or
services that are crucial to our success, or that such content, software,
products or services will be able to sustain any third-party claims or rights
against their use. Also, we cannot assure you that the content, software,
products or services of those companies that provide access or links to our
website will achieve market acceptance or commercial success. Accordingly, we
cannot assure you that our existing relationships will result in sustained
business partnerships, successful product or service offerings or the
generation of significant revenues for us.
We have recently experienced and are currently experiencing rapid growth in our
business, and our inability to manage this growth could harm our business.
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.
Several members of our senior management joined us in 1998 or early 1999,
including Dennis J. Upah, Chief Operating Officer, and Susan M. Georgen-Saad,
Chief Financial Officer. These individuals are currently becoming integrated
with the other members of our management team. We cannot assure you that our
management team will be able to work together effectively or successfully
manage our growth. We believe that the successful integration of our management
team is critical to our ability to effectively manage our operations and
support our anticipated future growth.
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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. To date we have entered into such
relationships with Superior Consultant Holdings Corporation and HealthMagic,
Inc. 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 stockholders. As of the
date of this prospectus, we have no agreement to enter into any material
investment or acquisition transaction.
If our ability to expand our network infrastructure is constrained in any way
we could lose customers and suffer damage to our operating results.
Presently, a relatively limited number of consumers use our website. We must
continue to expand and adapt our network infrastructure to accommodate
additional users, increase transaction volumes and changing consumer and
customer requirements. We may not be able to accurately project the rate or
timing of increases, if any, in the use of our website or to expand and upgrade
our systems and infrastructure to accommodate such increases. Our systems may
not accommodate increased use while maintaining acceptable overall performance.
Service lapses could cause our users to instead use the on-line services of our
competitors.
Many of our service agreements, such as those with our Community Partners,
contain performance standards. If we fail to meet these standards, our
customers could terminate their agreements with us or require that we refund
part or all of the license fees. The loss of any of our service agreements
and/or associated revenue would directly and significantly impact our business.
We may be unable to expand or adapt our network infrastructure to meet
additional demand or our customers' changing needs on a timely basis, at a
commercially reasonable cost, or at all.
We may have liability for information we provide on our website or which is
accessed from our website.
Because users of our website access health content and services relating to a
condition they may have or may distribute our content to others, third parties
may sue us for defamation, negligence, copyright or trademark infringement,
personal injury or other matters. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought, sometimes successfully, against on-line services in the past. Others
could also sue us for the content and services that are accessible from our
website through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards. While our
agreements, including those with content providers, in some cases provide that
we will be indemnified against such liabilities, such indemnification, if
available, may not be adequate. Our insurance may not adequately protect us
against these types of claims. Further, our business is based on establishing
the drkoop.com network as a trustworthy and dependable provider of healthcare
information and services. Allegations of impropriety, even if unfounded, could
therefore have a material adverse effect on our reputation and our business.
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Any failure or inability to protect our intellectual property rights could
adversely affect our ability to establish our brand.
Our intellectual property is important to our business. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property.
Federal registrations are pending for the trademark "drkoop.com," as well as
other service and trademarks which incorporate the Dr. Koop name. Our right to
use the Dr. Koop name is granted to us under an agreement with Dr. C. Everett
Koop. If we lose our right to use the Dr. Koop name, we would be forced to
change our corporate name and adopt a new domain name. These changes could
confuse current and potential customers and would adversely impact our
business. We also rely on a variety of technologies that are licensed from
third parties, including our database and Internet server software, which is
used in the drkoop.com website to perform key functions. These third-party
licenses may not be available to us on commercially reasonable terms in the
future. For a more complete description of the risks we face relating to our
intellectual property, please see "Business--Intellectual Property."
Year 2000 problems may disrupt our operations which could result in lost
revenues and increased operating costs.
Because our business depends on computer software, we have begun to assess
the Year 2000 readiness of our systems. We are also in the process of
contacting certain third-party vendors, licensors and providers of hardware,
software and services regarding their Year 2000 readiness. Following our Year
2000 assessment and after contacting these third parties, we will be able to
make a final evaluation of our state of readiness, potential risks and costs,
and to determine to what extent a contingency plan is necessary. Third-party
software, hardware or services incorporated into our systems may need to be
revised or replaced, which could be time consuming and expensive, potentially
resulting in lost revenues and increased costs for us. For a preliminary
evaluation of the potential impact of these Year 2000-related issues on us,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of the Year 2000."
We do not expect to pay dividends, and investors should not buy our common
stock expecting to receive dividends.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future. Investors should not purchase our common stock with the expectation of
receiving cash dividends.
We are subject to anti-takeover provisions in our charter and in our contracts
that could delay or prevent an acquisition of our company, even if such an
acquisition would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation, our bylaws, Delaware
law and contracts to which we are party could make it more difficult for a
third party to acquire us, even if doing so might be beneficial to our
stockholders. Please see "Management--Agreements with Dr. C. Everett Koop" and
"Description of Securities."
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
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healthcare information available on our network, that 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 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
on-line 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.
We compete directly for users, advertisers, e-commerce merchants, syndication
partners and other affiliates with numerous Internet and non-Internet
businesses, including:
. health-related on-line services or websites targeted at consumers, such
as accesshealth.com, ahn.com, betterhealth.com, drweil.com,
healthcentral.com, healthgate.com, intelihealth.com, mayohealth.org;
mediconsult.com, onhealth.com, thriveonline.com and webmd.com;
. on-line and Internet portal companies, such as America Online, Inc.;
Microsoft Network; Yahoo! Inc.; Excite, Inc.; Lycos Corporation and
Infoseek Corporation;
. 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.
Many of these potential competitors are likely to enjoy substantial
competitive advantages compared to our company, including:
. the ability to offer a wider array of on-line products and services;
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger customer and user bases; and
. substantially greater financial, technical and other resources.
To be competitive, we must respond promptly and effectively to the challenges
of technological change, evolving standards and our competitors' innovations by
continuing to enhance our products and services, as well as our sales and
marketing channels. Increased competition could result in a loss of our market
share or a reduction in our prices or margins. Competition is likely to
increase significantly as new companies enter the market and current
competitors expand their services. Please see "Business--Competition."
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, distribution and
characteristics and quality of production and services. For a description of
risks associated with governmental regulation relating to the Internet, please
see "Business--Governmental Regulation."
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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 on-line, covering areas
such as:
. the regulation of medical devices;
. the practice of medicine and pharmacology and the sale of controlled
products such as pharmaceuticals on-line;
. 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. The fee is not based on the value of the sales transaction.
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 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.
State Insurance Regulation. In addition, we market insurance on-line, offered
by unrelated third parties, and receive referral fees from those providers in
connection with this activity. The use of the Internet in the marketing of
insurance products is a relatively new practice. It is not clear whether or to
what extent state insurance licensing laws apply to our activities. If we were
required to comply with such licensing laws, compliance could be costly or not
possible. This could have a material adverse effect on our business. Please see
"Business--Government Regulation."
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There is no established market for the consumer healthcare e-commerce
transactions we facilitate.
We plan to develop relationships with retailers, manufacturers and other
providers to offer healthcare products and services through direct links from
our website to their website. Such a strategy involves numerous risks and
uncertainties. There is no established business model for the sale of
healthcare products or services over the Internet. Accordingly, we have limited
experience in the sale of products and services on-line and the development of
relationships with retailers, manufacturers or other providers of such products
and services, and we cannot predict the rate at which consumers will elect to
engage in this form of commerce or the compensation that we will receive for
enabling these transactions.
Consumers may sue us if any of the products or services that are sold through
our website are defective, fail to perform properly or injure the user, even if
such goods and services are provided by unrelated third parties. Some of our
agreements with manufacturers, retailers and other providers contain provisions
intended to limit our exposure to liability claims. These limitations may not
however prevent all potential claims, and our insurance may not adequately
protect us from these types of claims. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages.
As a result, any such claims, whether or not successful, could seriously damage
our reputation and our business.
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, in large part, upon a robust communications industry
and infrastructure for providing Internet access and carrying 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.
Our business is dependent on the continuous, reliable and secure operation of
our website and related tools and functions we provide.
We rely on the Internet and, accordingly, depend upon the continuous,
reliable and secure operation of Internet servers and related hardware and
software. Recently, several large Internet commerce companies have suffered
highly publicized system failures which resulted in adverse reactions to their
stock prices, significant negative publicity and, in certain instances,
litigation. We have also suffered service outages from time to time, although
to date none of these interruptions has materially adversely effected our
business operations or financial condition. To the extent that our service is
interrupted, our users will be inconvenienced, our commercial customers will
suffer from a loss in advertising or transaction delivery and our reputation
may be diminished. Some of these outcomes could directly result in a reduction
in our stock price, significant negative publicity and litigation. Our computer
and communications hardware are protected through physical and software
safeguards. However, they are still vulnerable to fire, storm, flood, power
loss, telecommunications failures, physical or software break-ins and similar
events. We do not have full redundancy for all of our computer and
telecommunications facilities and do not maintain a back-up data facility. Our
business interruption insurance may be inadequate to protect us in the event of
a catastrophe. We also depend upon third parties to provide potential users
with web browsers and Internet and on-line services necessary for access to our
website. In the past, our users have occasionally experienced difficulties with
Internet and other on-line services due to system failures, including failures
unrelated to our systems. Any sustained disruption in Internet access provided
by third parties could adversely impact our business.
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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 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.
Risks Related to This Offering
Investors will be relying on our management's judgment regarding the use of
proceeds from this offering.
Our management will have broad discretion with respect to the use of the net
proceeds from this offering, and investors will be relying on the judgment of
our management regarding the application of these proceeds. Presently,
anticipated uses include the funding of operating losses and for general
corporate purposes, including expansion of our network, advertising, brand
promotion, content development and working capital. We may also use a portion
of the proceeds for strategic alliances and acquisitions and to repay debt. We
have not yet determined the amount of net proceeds to be used specifically for
each of the foregoing purposes. Please see "Use of Proceeds."
The liquidity of our common stock is uncertain since it has not been publicly
traded.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. Please see "Underwriting."
Our need for additional financing is uncertain as is our ability to raise
further financing if required.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least 12 months
after the date of this prospectus. We may need to raise additional funds,
however, to respond to business contingencies which may include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. develop new or enhance existing editorial content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including those acquiring shares in
this offering. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance editorial content,
features or services, or otherwise respond to competitive pressures would be
significantly limited. Please see "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
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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. Recent initial public
offerings by Internet companies have been accompanied by exceptional share
price and trading volume changes in the first days and weeks after the
securities were released for public trading. Investors may not be able to
resell their shares at or above the initial public offering price. Please see
"Underwriting." In the past, following periods of volatility in the market
price of a public company's securities, securities class action litigation has
often been instituted against that company. Such litigation could result in
substantial costs and a diversion of management's attention and resources.
We have negative net book value for accounting purposes, and new investors will
suffer immediate and substantial dilution in the tangible net book value of
their shares.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. The net tangible
book value of a share of common stock purchased at an assumed initial public
offering price of $8.00 per share will be only $2.67. You may incur additional
dilution if holders of stock options, whether currently outstanding or
subsequently granted, exercise their options or if warrantholders exercise
their warrants to purchase common stock. Please see "Dilution" for a summary of
this dilution.
The large number of shares eligible for public sale after this offering could
cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market after this offering or the perception that such sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate. Please see
"Shares Eligible for Future Sale" for a description of sales that may occur in
the future.
Many corporate actions will be controlled by officers, directors and affiliated
entities regardless of the opposition of other investors or the desire of other
investors to pursue an alternative cause of action.
Our executive officers and directors and entities affiliated with them will,
in the aggregate, beneficially own approximately 58% of our common stock
following this offering. These stockholders will, if they act together, be able
to exercise control over most matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company, which could have a
material adverse effect on our stock price. These actions may be taken even if
they are opposed by the other investors, including those who purchase shares in
this offering. Please see "Management" and "Principal Stockholders."
Forward-looking statements contained in this prospectus may not be realized.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risks faced
by us described above and elsewhere in this prospectus. We undertake no
obligation after the date of this prospectus to update publicly any forward-
looking statements for any reason, even if new information becomes available or
other events occur in the future.
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USE OF PROCEEDS
The net proceeds to our company from the sale of the shares offered hereby
(after deducting underwriting discounts and estimated offering expenses) are
estimated to be approximately $68,395,000 ($78,857,500 if the underwriters'
over-allotment option is exercised in full), assuming an initial public
offering price of $8.00 per share.
We intend to use the net proceeds of this offering to fund operating losses
and for general corporate purposes, including expansion of our network,
advertising, brand promotion, content development and working capital. We may
also use a portion of the proceeds for strategic alliances and acquisitions and
to repay debt.
As of March 31, 1999, we had outstanding $2.8 million in principal amount of
convertible notes and held binding commitments which would permit us to issue
up to $3.5 million in additional convertible notes. Upon the completion of this
offering, $2.0 million principal amount of the notes that have been issued are,
at the option of each holder, convertible into common stock at a conversion
price of $7.43 per share or redeemable for the principal amount plus accrued
and unpaid interest at the rate of 7.0% per annum. For purposes of this
prospectus, we have assumed that all outstanding notes are converted into
common stock and thus do not require repayment in cash. To the extent any
holder elects to receive cash, this will represent a use of the proceeds of
this offering.
We have not yet determined the amount of net proceeds to be used specifically
for each of the foregoing purposes. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. Pending
any such use, as described above, we intend to invest the net proceeds in high
quality, interest-bearing instruments. See "Risk Factors--Any future
acquisitions we make of companies or technologies may result in disruption to
our business and/or the distraction of our management, due to difficulties in
assimilating acquired personnel and operations." and "--Investors will be
relying on our management's judgment regarding the use of proceeds from this
offering."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception and do not expect to pay any cash dividends for the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. Investors should not purchase our common stock with
the expectation of receiving cash dividends.
20
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1999, the capitalization of
our company
. on an actual basis;
. on a pro forma basis to reflect automatic conversion of all outstanding
convertible preferred stock into 7,249,667 shares of our common stock and
convertible notes ($2.8 million aggregate principal amount plus accrued
interest) into 439,187 shares of common stock upon the closing of this
offering, and other issuances of 1,345,185 shares of common stock related
to the termination of a purchase option and related anti-dilution
adjustment rights; and
. on a pro forma as adjusted basis to give effect to the sale of the
9,375,000 shares offered hereby at an assumed initial public offering
price of $8.00 per share, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us.
This information should be read in conjunction with our financial statements
and the notes relating to such statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C>
-------- -------- --------
Convertible notes payable...................... $ 2,741 $ -- $ --
-------- -------- --------
Accrued interest, convertible notes............ 11 -- --
-------- -------- --------
Mandatorily redeemable Series B convertible
preferred stock............................... 29,342 -- --
-------- -------- --------
Series A convertible preferred stock, $.001 par
value; 750,000 shares designated; 619,102
shares issued and outstanding actual; no
shares issued and outstanding pro forma or pro
forma as adjusted............................. 1 -- --
Series C convertible preferred stock, $.001 par
value; 3,000,000 shares designated; 2,615,677
shares issued and outstanding actual; no
shares issued and outstanding pro forma or pro
forma as adjusted............................. 3 -- --
Common stock, $.001 par value, 100,000,000
shares authorized; 9,105,552 shares issued and
outstanding actual; 18,139,591 shares issued
and outstanding pro forma; and 27,514,591
shares issued and outstanding pro forma as
adjusted...................................... 9 18 28
Additional paid-in capital..................... 4,705 36,852 105,237
Obligation to issue common stock pursuant to
option cancellation agreement (Note 7)........ 9,147 -- --
Dividend payable to preferred stock holders
(Note 7)...................................... (9,147) -- --
Deferred stock compensation.................... (4,045) (4,045) (4,045)
Accumulated deficit............................ (23,873) (23,932) (23,932)
-------- -------- --------
Total stockholders' (deficit) equity......... (23,201) 8,893 77,288
-------- -------- --------
Total capitalization........................ $ 8,893 $ 8,893 $ 77,288
======== ======== ========
</TABLE>
21
<PAGE>
DILUTION
The pro forma net tangible book value of our company as of March 31, 1999 was
$5,115,580, or $0.28 per share of common stock. Pro forma net tangible book
value per share is equal to the amount of our company's total tangible assets
(total assets less intangible assets) less total liabilities, divided by the
pro forma number of shares of common stock outstanding as of March 31, 1999.
Assuming the sale by us of the shares offered by this prospectus at an assumed
initial public offering price of $8.00 per share and after deducting
underwriting discounts and the estimated offering expenses payable, the pro
forma net tangible book value of our company as of March 31, 1999 would have
been $73,510,580, or $2.67 per share of common stock. This represents an
immediate increase in pro forma net tangible book value of $2.39 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $5.33 per share to new investors. That is, after this offering the
excess of the tangible assets of drkoop.com over its liabilities calculated on
a per share basis will be less than the purchase price paid for those shares by
investors in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $8.00
Pro forma net tangible book value per share as of March 31,
1999............................................................ $0.28
Pro forma increase in net tangible book value attributable to new
investors....................................................... 2.39
-----
Pro forma net tangible book value per share after this offering.. 2.67
-----
Pro forma dilution per share to new investors.................... $5.33
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors purchasing shares in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 18,139,591 66% $ 36,870,632 33% $2.03
New investors............. 9,375,000 34 75,000,000 67 8.00
---------- --- ------------ --- -----
Total................... 27,514,591 100% $111,870,632 100% $4.07
========== === ============ === =====
</TABLE>
The foregoing tables and calculations are based on shares outstanding on
March 31, 1999 and exclude:
. 10,492,530 shares of common stock issuable upon exercise of options
outstanding under our Amended and Restated 1997 Stock Option Plan with a
weighted average exercise price of $0.53 per share (5,240,902 of these
options were exercisable on March 31, 1999; the balance are subject to
future vesting requirements);
. 33,482 shares of common stock issuable upon exercise of warrants with an
exercise price of $4.78 per share;
. 775,000 shares of common stock issuable upon exercise of warrants with an
exercise price of $8.60 per share; and
. 318,750 shares of common stock issuable upon exercise of options to be
granted upon the closing of this offering with an exercise price equal to
the public offering price listed on the cover of this prospectus.
The tables and calculations include:
. 7,249,667 shares of common stock to be issued upon the conversion of all
outstanding shares of convertible preferred stock;
. 439,187 shares of common stock issuable upon conversion of all
convertible notes outstanding at March 31, 1999 ($2.8 million aggregate
principal amount plus accrued interest); and
. 1,345,185 shares of common stock to be issued upon the closing of this
offering to satisfy in full a purchase option and related anti-dilution
rights.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to such statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from July 17, 1997 (inception) through December 31, 1997 and for the
year ended December 31, 1998, and the balance sheet data at December 31, 1997
and 1998, are derived from our audited financial statements included elsewhere
in this prospectus. Interim results for the periods ended March 31, 1998 and
1999 are derived from our unaudited financial statements which, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
that data. Historical results are not indicative of the results to be expected
in the future.
<TABLE>
<CAPTION>
Three Months Ended
Period From Year Ended -------------------
Inception through December 31, March 31, March 31,
December 31, 1997 1998 1998 1999
----------------- ------------ --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ -- $ 43 $ -- $ 404
----- -------- ------ --------
Operating expenses:
Production, content and
product development...... 461 4,448 284 1,035
Sales and marketing....... -- 2,008 166 2,048
General and
administrative........... 161 2,704 259 1,585
----- -------- ------ --------
Total operating expenses... 622 9,160 709 4,668
----- -------- ------ --------
Loss from operations....... (622) (9,117) (709) (4,264)
Other income (expense),
net....................... -- 34 -- (31)
----- -------- ------ --------
Net loss................... (622) (9,083) (709) (4,295)
Accretion of redeemable
securities to fair value.. (14,325) -- (10,936)
Dividend to preferred
stockholders.............. -- -- -- (9,147)
----- -------- ------ --------
Loss attributable to common
stockholders.............. $(622) $(23,408) $ (709) $(24,211)
===== ======== ====== ========
Basic and diluted net loss
per common share(1)....... $(.09) $ (2.89) $(0.10) $ (2.84)
===== ======== ====== ========
Weighted average shares
outstanding used in basic
and diluted net loss per
common share
calculation(1)............ 6,750 8,100 7,030 8,569
===== ======== ====== ========
Pro forma basic and diluted
net loss per common
shares(1)(2).............. $ (.75) $ (.26)
======== ========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per common share
calculation(1)(2)......... 12,111 16,347
======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------
Pro Forma
December 31, December 31, As
1997 1998 Actual Pro Forma(2) Adjusted(2)
------------ ------------ -------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 8 $ -- $ 2,021 $2,021 $70,416
Working capital
deficiency............. (649) (2,905) (3,038) (286) 68,109
Total assets............ 43 380 11,717 11,717 80,112
Convertible notes
payable to
stockholder............ -- 451 2,741 -- --
Mandatorily redeemable
convertible (Series B)
preferred stock........ -- 18,406 29,342 -- --
Stockholders' equity
(deficit).............. (614) (20,993) (23,201) 8,893 77,288
</TABLE>
- --------
(1) Please see the financial statements and the notes to such statements
appearing elsewhere in this prospectus for the determination of shares used
in computing basic and diluted and pro forma basic and diluted net loss per
common share.
(2) Gives pro forma effect to all the following:
. the conversion of all outstanding shares of our convertible preferred
stock into 7,249,667 shares of our common stock upon the closing of this
offering;
. the conversion of all convertible notes outstanding as of March 31, 1999
($2.8 million aggregate principal amount plus accrued interest) into
439,187 shares of common stock upon the closing of this offering; and
. the issuance of 1,345,185 shares of common stock to satisfy in full a
purchase option and related anti-dilution adjustment rights.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of our company should be read in conjunction with the financial statements and
the notes to those statements included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Please see "Risk Factors."
Overview
Our company operates drkoop.com, an Internet-based consumer healthcare
network. Our network consists of a consumer-focused interactive website which
provides users with comprehensive healthcare information and services, as well
as affiliate relationships with portals, other websites, healthcare
organizations and traditional media outlets. Our website, www.drkoop.com, is a
healthcare portal which integrates dynamic healthcare content on a wide variety
of subjects, interactive communities and tools as well as opportunities to
purchase healthcare-related products and services on-line.
Our company was founded in July 1997 as Personal Medical Records, Inc. From
July to December 1997 our primary operating activities related to the
development of software for Dr. Koop's Personal Medical Record SystemTM. A
personal medical record is a software application designed for consumers to
establish and maintain lifelong control of personal health and medical
information and related expense records. We originally contemplated the PMR as
a free-standing product. As we developed it, however, we concluded that the PMR
was best suited as one component of an Internet-based network including
healthcare information, interactive tools and other useful features.
Accordingly, in early 1998 we changed our primary emphasis to the development
of the software and hardware infrastructure for the drkoop.com website,
licensing and creating content, negotiating relationships with strategic
partners, recruiting personnel and raising capital. We launched the drkoop.com
website in late July 1998. After the launch of the website and for the
remainder of 1998, we focused on broadening the functionality of the website
and attracting an audience to the drkoop.com network. We presently expect to
add a personal medical record feature to our website in the first half of 1999
as an element of our technology relationship with HealthMagic, Inc.
For 1998 and the quarter ended March 31, 1999, our revenues were derived
primarily from recurring revenues from content subscriptions and software
licensing through our Community Partner Program, and to a lesser extent from
the sale of advertising. Content subscription and software licensing revenue
accounted for $27,000 or 63% of revenues for the year ended December 31, 1998
and $216,000, or 53% of revenues for the quarter ended March 31, 1999.
In October 1998, we officially launched our first local affiliate
subscription offering, the Dr. Koop Community Partner Program. Subscriptions to
our Community Partner Program run from one to three years. Under this program,
we develop co-branded Internet pages and software consisting of visual icons
containing embedded links back to the drkoop.com website for local healthcare
organizations, such as hospitals and payor organizations. Advance billings and
collections relating to future services are recorded as deferred revenue and
recognized when revenue is earned. Sales of software licensed to CPP affiliates
is recognized as revenue upon shipment of the software, provided that the
portion of the contract allocated to the software license is based upon vendor
specific objective evidence of fair value, and collectibility is probable.
Content subscription revenue is recognized ratably over the term of the CPP
contract, generally ranging from twelve to thirty-six months.
In November 1998, we sold our first advertising contract and in December
began running advertising banners on the website. Advertising revenues are
derived principally from short-term advertising contracts in which we typically
guarantee a minimum number of user "impressions" to be delivered over a
specified period of time for a fixed fee. Impressions are the times that an
advertisement is viewed by users of our website. We recognize advertising
revenues at the lesser of the ratio of impressions delivered over the total
guaranteed impressions or the straight-line rate over the term of the contract,
provided that no significant obligations remain and collection of the resulting
receivable is probable. Our obligations typically include the guarantee of
24
<PAGE>
a minimum number of impressions, or times that an advertisement appears in
pages viewed by the users of the Company's website. Historically we have
utilized third party firms to sell and insert advertisements on drkoop.com.
Advertising rates, measured on a cost per thousand impressions basis, are
dependent on whether the impressions are for general rotation throughout
drkoop.com or for targeted audiences and properties within specific areas of
the website. Advertising revenue is recognized in the period in which the
advertisement is displayed. Advertising revenue accounted for $15,000, or 35%,
of revenues for the year ended December 31, 1998 and $188,000, or 47%, of
revenues for the quarter ended March 31, 1999.
Sponsorship revenues are derived principally from contracts ranging from one
to twelve months in which we commit to provide sponsors enhanced promotional
opportunities that go beyond traditional banner advertising. Sponsorships are
designed to support broad marketing objectives, including branding, awareness,
product introductions, research and transactions, frequently on an exclusive
basis. Sponsorship agreements typically include the delivery of a guaranteed
minimum number of impressions and the design and development of customized
pages on the website that enhance the promotional objectives of the sponsor.
Costs associated with the creation of the customized pages are minimal and
expensed as incurred. Sponsorship revenues are recognized at the lesser of the
ratio of impressions delivered over the total guaranteed impressions or the
straight line rate over the term of the contract, provided that no significant
obligations remain and collection of the resulting receivable is probable.
Company obligations typically include the guarantee of a minimum number of
impressions.
In December 1998, we began to generate electronic commerce revenues through
alliances with certain retailers of pharmaceuticals and related products and to
provide insurance companies with the opportunity to sell products and services
to our audience. We do not provide any of the goods or services offered. We
receive compensation in the form of transaction fees or anchor tenant rental
fees from third parties who have entered into preferred provider arrangements
with us. Revenues from our share of the proceeds from the commerce partner's
transactions are recognized by us upon notification from the commerce partner
of sales attributable to users from the drkoop.com website. E-commerce revenues
were nominal for the year ended December 31, 1998 and the quarter ended March
31, 1999.
On January 29, 1999, we received $3.5 million in cash and acquired 10% of the
outstanding stock of HealthMagic, Inc., a subsidiary of Adventist Health System
Sunbelt Healthcare Corporation, in exchange for 2,615,677 shares of our Series
C Convertible Preferred Stock, which will be converted into an equivalent
number of shares of common stock upon the closing of this offering. We also
established a technology relationship with HealthMagic, a supplier of
applications to Internet companies, whereby we contributed to them our PMR
product and received from them a license to use a broad range of Internet
technologies, including a web-enabled personal medical record, personalization
tools, and security and authentication features. HealthMagic will develop,
implement and support these technologies for us. Currently, we expect to deploy
these features in the first half of 1999. We have capitalized the fair value of
the licenses acquired based upon an analysis of the cost required to build the
technology versus purchasing it from HealthMagic. In addition, on January 29,
1999 we entered into a master content subscription and software licensing
agreement with Adventist for $500,000.
Contract research organizations offer comprehensive clinical trial services
which are the basis for obtaining regulatory approval for drugs and medical
devices. The identification and enrollment of qualified individuals into these
studies is usually a time-consuming and expensive process. In December 1998 we
implemented the drkoop.com Clinical Research Center, a portion of our website
designed to educate consumers about clinical trials, including how to find and
enroll in an appropriate trial if the individual and their physician believe
that it is a viable therapy option. We expect to receive transaction fee
revenues for assisting contract research organizations in the identification
and enrollment of qualified individuals into studies.
On March 10, 1999, we entered into a two year relationship with The @Home
Network to be the anchor tenant partner within the Health Channel area of the
@Home service. We will be the premier content provider appearing in the Health
Channel. Under the terms of this agreement, we will have the ability to direct
users to related commerce, community and interactive tool features appearing on
the drkoop.com website from within
25
<PAGE>
all health content appearing in the Health Channel. In addition, we will share
in all advertising revenues generated by @Home in the Health Channel where our
content dominates the related page. We will pay a carriage fee of $2.25 million
to @Home in installments over the term of the agreement.
On April 9, 1999 we entered into agreements with Infoseek Corporation and the
Buena Vista Internet Group, a unit of The Walt Disney Company, under which we
will be the exclusive provider of health and related content on three websites
of the Go Network: Go.com Health Center, ESPN.com Training Room and the
Family.com Health Channel. Under the Infoseek agreement, drkoop.com will also
be the premier health content provider for ABCnews.com. In addition, drkoop.com
will be the exclusive pharmacy and drugstore, health insurance and clinical
trials patron in the Go Health Center. In the event drkoop.com elects not to
provide specific content, it may be obtained from a third party. We believe
that these agreements will contribute substantially to our brand awareness and
increase traffic on our website. The term of these agreements is for three
years, although either party may elect to terminate the relationship after two
years. We will pay Infoseek and Buena Vista approximately $57.9 million in
total consideration consisting of cash and warrants to purchase up to 775,000
shares of common stock for $8.60 per share assuming the agreements run for the
full three years. The cash portion of this obligation is payable as
approximately $16.2 million in the first year of the agreements, $18.2 million
in the second year of the agreements and $21.3 million in the third year.
We recorded deferred stock compensation of $1.5 million and $3.1 million
during the year ended December 31, 1998 and the quarter ended March 31, 1999,
respectively, for the difference between the exercise price and the deemed fair
value of certain stock options granted by us to our employees, of which
$107,000 and $314,000 was recorded as compensation expense in 1998 and the
quarter ended March 31, 1999. This accounting treatment will generate non-cash
amortization expense of $2.0 million in 1999, $1.4 million in 2000, $748,000 in
2001, $311,000 in 2002 and $31,000 in 2003.
Since inception, we have incurred significant losses and negative cash flow,
and as of March 31, 1999 we had an accumulated deficit of $23.9 million
including $9.9 million for accretion to fair value of the mandatorily
redeemable (Series B) convertible preferred stock. 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 the areas
of 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 on-line network which will, in turn, allow us the
opportunity to sell advertising designed to reach those consumers. Our business
model also assumes that those users will access important healthcare needs
through electronic commerce and that local healthcare participants 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. Please see "Risk Factors--Our business
is difficult to evaluate because we have an extremely limited operating
history" and "--We have a history of losses and negative cash flow and
anticipate continued losses."
We have a very limited operating history on which to base an evaluation of
our business and prospects. Our prospects must be considered in light of the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets such as the Internet market. In view of the
rapidly evolving nature of our business and our limited operating history, we
believe that period-to-period comparisons of revenues and operating results are
not necessarily meaningful and should not be relied upon as indications of
future performance.
Results of Operations
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998
Revenues. Our website, www.drkoop.com, was launched in July 1998. Revenues
increased to $404,000 for the three months ended March 31, 1999 as compared to
no revenues recorded for the three months ended
26
<PAGE>
March 31, 1998. Revenues for the quarter ended March 31, 1999 consisted of
content subscription and software licenses of $216,000 or 53% of total
revenues, including barter revenues of $32,000, and advertising and sponsorship
revenue of $188,000 or 47% of total revenues including barter revenues of
$20,000. The increase in content subscription and software license revenue was
attributable to delivery of software licenses and content from six new
contracts in the quarter ended March 31, 1999 under the Community Partner
Program which ranged in value from $50,000 to $500,000 and had terms of one to
three years. The increase in advertising and sponsorship revenues was
attributable to an increase in the traffic to our website as well as an
increase in the number of advertising arrangements entered into during late
1998 and the first quarter of 1999.
Production, content and product development. Production, content and product
development expenses consist primarily of salaries and benefits, consulting
fees and other costs related to content acquisition and licensing, software
development, application development and website operations expense.
Production, content and product development expenses increased by $751,000 or
265%, to $1.0 million for the quarter ended March 31, 1999, as compared to
$284,000 for the quarter ended March 31, 1998. The primary reason for the
increase was the addition of personnel which resulted in higher salaries,
benefits, facilities and travel costs. We believe that additional significant
investments in content development and operating infrastructure are required to
remain competitive and therefore expect that production, content and product
development expenses will continue to increase in absolute dollars for the
foreseeable future.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of salaries and related costs, web-based advertising, commissions, general
advertising and other related expenses. Sales and marketing expenses increased
by $1.8 million to $2.0 million during the quarter ended March 31, 1999 as
compared to $166,000 during the quarter ended March 31, 1998. The primary
reasons for the increase were costs related to web-based advertising and
promotion of the drkoop.com website and a significant increase in the number of
sales and marketing personnel resulting in higher salaries, benefits,
facilities and travel costs. We expect that sales and marketing expenses will
continue to grow in absolute dollars for the foreseeable future as we hire
additional sales and marketing personnel and increase expenditures for
advertising, brand promotion, public relations and other marketing activities.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate
functions, including executive, finance, accounting, human resources,
facilities and fees for professional services. General and administrative
expenses increased by $1.3 million, or 512%, to $1.6 million for the quarter
ended March 31, 1999 as compared to $259,000 for the quarter ended March 31,
1999. The primary reasons for the increase were the addition of personnel and
the resultant increase in salaries, benefits, non cash compensation facilities
and travel costs. We expect that we will incur additional general and
administrative expenses as we continue to hire personnel and incur incremental
costs related to the growth of the business and compliance with public company
obligations, including directors' and officers' liability insurance, investor
relations programs and fees for professional services. Accordingly, we
anticipate that general and administrative expenses will continue to increase
in absolute dollars in future periods, although at a slower rate than other
major expense categories such as sales and marketing expense.
Interest income (expense). Interest expense was $31,000 for the quarter ended
March 31, 1999 as compared to no expense for the quarter ended March 31, 1998.
Interest expense relates to outstanding convertible notes.
Income Taxes. We have incurred net losses to date. As of March 31, 1999 we
had a net operating loss carryforward of $13.5 million for financial reporting
purposes. We have recorded a valuation reserve equal to the amount of the
carryforward due to the uncertain realization of these tax benefits.
Comparison of the year ended December 31, 1998 to the period from July 17,
1997 (inception) through December 31, 1997
Revenues. For the year ended December 31, 1998, we recorded revenues of
$43,000, with $27,000, or 63% of revenues, attributable to content subscription
and software licenses and $16,000, or 37% of revenues,
27
<PAGE>
attributable to advertising; no revenues were recognized for the period from
July 1997 (inception) to December 31, 1997.
Production, Content and Product Development Expense. Production, content and
product development expenses consist primarily of salaries and benefits,
consulting fees and other costs related to content acquisition and licensing,
software development, application development and website operations expense.
Production, content and product development expense increased by $4.0 million,
or 866%, to $4.4 million for the year ended December 31, 1998 as compared to
$461,000 for the period ended December 31, 1997. This increase was primarily
attributable to increases in personnel and related costs to provide the
infrastructure necessary to launch the drkoop.com website in July 1998, as well
as costs for product development work on the PMR. We believe that additional
significant investments in content development and operating infrastructure are
required to remain competitive and therefore expect that production, content
and product development expense will continue to increase in absolute dollars
for the foreseeable future.
Sales and Marketing Expense. Sales and marketing expenses consist primarily
of salaries and related costs, web-based advertising, commissions, general
advertising and other related expenses. We did not have any sales and marketing
expense during the period ended December 31, 1997. During the year ended
December 31, 1998, we incurred costs of $2.0 million as we built a direct sales
organization comprised of 11 sales professionals. During 1998 we also
implemented a variety of approaches to promote the drkoop.com brand to attract
new users, including advertising on the Internet, public relations campaigns
and event marketing. We expect that sales and marketing expenses will continue
to increase in absolute dollars for the foreseeable future as we hire
additional sales and marketing personnel and increased expenditures for
advertising, brand promotion, public relations and other marketing activities.
General and Administrative Expense. General and administrative expenses
consist primarily of salaries and related costs for general corporate
functions, including executive, finance, accounting, human resources,
facilities and fees for professional services. General and administrative
expenses increased by $2.5 million to $2.7 million for the year ended December
31, 1998 as compared to $161,000 for the period ended December 31, 1997. The
increase in general and administrative expenses was primarily attributable to
salaries and related expenses associated with hiring personnel and increased
professional fees and facility-related expenses to support the growth of our
operations. Administrative personnel headcount, including executive management,
went from one person at December 31, 1997 to nine people at December 31, 1998.
We expect that we will incur additional general and administrative expenses as
we hire additional personnel and incur incremental costs related to the growth
of the business and compliance with public company obligations, including
directors and officers liability insurance, investor relations programs and
fees for professional services. Accordingly, we anticipate that general and
administrative expenses will continue to increase in absolute dollars in future
periods, although at a slower rate than other major expense categories such as
sales and marketing expense.
Interest and Other Income. Interest income includes interest income from the
investment of cash and cash equivalents.
Income Taxes. We have incurred net losses to date. As of December 31, 1998,
we had a net operating loss carryforward of $9.2 million for financial
reporting purposes. We have recorded a valuation reserve equal to the amount of
the carryforward due to the uncertain realization of these tax benefits.
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Quarterly Results of Operations Data
The following table sets forth certain unaudited quarterly statement of
operations data for the period from inception to December 31, 1997 and each of
the five quarters ended March 31, 1999. In the opinion of management, this data
has been prepared substantially on the same basis as the audited financial
statements appearing elsewhere in this prospectus, including all necessary
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of such data. The quarterly data should be read in
conjunction with the financial statements and the notes to such statements
appearing elsewhere in this prospectus. In view of the rapidly evolving nature
of our business and our limited operating history, we believe that period-to-
period comparisons of revenues and operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
<TABLE>
<CAPTION>
Period From Three Months Ended
Inception to Year Ended --------------------------------------------------------
December 31, December 31, March 31, June 30, September 30, December 31, March 31,
1997 1998 1998 1998 1998 1998 1999
------------ ------------ --------- -------- ------------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ -- $ 43 $ -- $ -- $ -- $ 43 $ 404
----- ------- ----- ------- ------- ------- -------
Operating expenses
Production, content and
product development... 461 4,448 284 672 1,847 1,645 1,035
Sales and marketing.... -- 2,008 166 181 646 1,016 2,048
General and
administrative........ 161 2,704 259 562 870 1,012 1,585
----- ------- ----- ------- ------- ------- -------
Total operating
expenses............. 622 9,160 709 1,415 3,363 3,673 4,668
----- ------- ----- ------- ------- ------- -------
Loss from operations..... (622) (9,117) (709) (1,415) (3,363) (3,630) (4,264)
Interest income
(expense)............... -- 33 -- 14 13 6 (31)
----- ------- ----- ------- ------- ------- -------
Net loss................. $(622) $(9,084) $(709) $(1,401) $(3,350) $(3,624) $(4,295)
===== ======= ===== ======= ======= ======= =======
</TABLE>
Revenues. Our initial revenues were recorded in the quarter ended December
31, 1998. Revenues to date have consisted of revenue attributable to content
subscription, software licenses and advertising arrangements.
Production, content and product. Production, content and product expenses
have fluctuated in the brief operating history of drkoop.com. Production,
content and product costs increased significantly in the third quarter of 1998
due primarily to development work on the personal medical record technology.
Production, content and product expenses decreased in the quarters ended
December 31, 1998 and March 31, 1999 as compared to the previous quarters due
to the reduction in outsourced development on the personal medical record
technology.
Sales and marketing. Sales and marketing expenses have increased every
quarter. Sales and marketing expenses increased significantly in the third
quarter of 1998 as compared to the prior quarter due to significant increases
in advertising costs related to the launch of the drkoop.com website and the
hiring of additional marketing personnel to market the website and the initial
hiring of sales personnel. The following quarterly increases in sales and
marketing expenses resulted primarily from building our sales and marketing
organization. The addition of sales and marketing personnel resulted in higher
salaries, benefits and travel costs. We have also increased the amount expended
on advertising each quarter.
General and administrative. General and administrative costs have increased
every quarter as we have hired our executive team and built our administrative
infrastructure.
As a result of our extremely limited operating history, we do not have
historical financial data for a significant number of periods on which to base
planned operating expenses. Quarterly revenues and operating results depend
substantially on the advertising, sponsorship, subscription and e-commerce
revenues received
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within the quarter, which are difficult to forecast accurately. Accordingly,
the cancellation of a Community Partner Program subscription or the
cancellation or deferral of a small number of advertising contracts or
sponsorships could have a material adverse effect on our business, results of
operations and financial condition. We may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall, and any
significant shortfall in revenue in relation to our expectations would have an
immediate adverse effect on our business, results of operation and financial
condition. Due to the foregoing factors, 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 fall.
Seasonality
We believe that advertising sales in traditional media, such as television
and radio, generally are lower in the first and third calendar quarters of each
year. If our market makes the transition from an emerging to a more developed
market, seasonal and cyclical patterns may develop in our industry and in the
usage of our website. Seasonal and cyclical patterns in Internet advertising
would affect our revenues. Those patterns may also develop on our website.
Given the early stage of the development of the Internet and our company,
however, we cannot predict to what extent, if at all, our operations will prove
to be seasonal.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
equity and debt financings. During the years ended December 31, 1997 and 1998,
we received net proceeds from the sale of stock and issuance of convertible
note payable to stockholder of $6,000 and $7.1 million, respectively. During
the three months ended March 31, 1999 we received net proceeds of $5.8 million
from the sale of stock and issuance of convertible notes payable.
Cash used in operating activities for the quarter ended March 31, 1998 of
$502,000 was due primarily to net operating losses of $709,000 offset by
increases in accounts payable and accrued expenses of $75,000 and $158,000,
respectively. Cash used in operating activities for the quarter ended March 31,
1999 of $3.7 million resulted primarily from net operating losses of $4.3
million, a decrease in related party payable of $1.1 million and an increase in
accounts receivable of $365,000, partly offset by an increase in accrued
expenses of $807,000 and deferred revenue of $544,000. The increase in accounts
receivable and deferred-revenue amounts are attributable primarily to Community
Partner Program contracts. Net cash used in operating activities was $6.8
million for the year ended December 31, 1998 primarily attributable to net
operating losses of $9.0 million offset by increases in accounts payable,
accrued expenses and related party payable of $747,000, $458,000 and $872,000,
respectively. Net cash provided by operating activities for the period from
inception to December 31, 1997 of $44,000 was provided primarily through
increases in accounts payable, accrued expenses and related party payable of
$58,000, $62,000 and $537,000, respectively, offset by a net operating loss of
$622,000.
Cash used in investing activities was $29,000 and $120,000 for the three
months ended March 31, 1998 and March 31, 1999, respectively, and was $42,000
and $335,000 for the period from inception through December 31, 1997 and the
year ended December 31, 1998. Net cash used in investing activities for these
periods consisted primarily of capital expenditures for computer equipment.
Cash provided by financing activities was $519,000 and $5.8 million for the
three months ended March 31, 1998 and March 31, 1999, respectively, and $6,000
and $7.1 million for the period from inception through December 31, 1997 and
the year ended December 31, 1998, respectively. Cash provided by financing
activities has been provided primarily from the sale of convertible preferred
stock and issuance of convertible notes payable. Our financing activities to
date are described in detail below.
From March 1, 1998 through April 6, 1998, we issued 619,102 shares of Series
A 8% Convertible Preferred Stock to accredited investors for an aggregate
purchase price of $743,000. These shares will be converted into 671,727 shares
of common stock upon the closing of this offering.
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On April 28, 1998, we issued 3,850,597 shares of Series B Non-voting
Preferred Stock to Superior Consultant Holdings Corporation for a purchase
price of $6.0 million. These shares will be converted into 3,962,265 shares of
common stock upon the closing of this offering. In connection with this
transaction we gave Superior the right to require us to repurchase their shares
for the current fair market price during each of the 90-day periods following
April 28, 2000 and April 28, 2001. Due to these terms, we are required under
generally accepted accounting principles to accrete the Series B Non-voting
Preferred Stock to its fair value for the periods reported. We incurred a
charge for accretion to fair value for the redeemable stock of $14.3 million
for the year ended December 31, 1998 which resulted in a fair value of $18.4
million as of December 31, 1998. We incurred a charge of $10.9 million for the
quarter ended March 31, 1999 which resulted in a fair value of $29.3 million as
of March 31, 1999. Upon the completion of an underwritten public offering of
not less than $20.0 million, after which the common stock is listed on a
national securities exchange or admitted for quotation on the Nasdaq National
Market, the Series B Non-voting Preferred Stock is required to be converted
into common stock. Upon conversion to common stock, the repurchase right held
by Superior as holder of Series B Non-voting Preferred Stock terminates. In
addition, Superior received the right to purchase an additional
3,850,597 shares of either Series B Non-voting Preferred Stock or common stock
at a per share exercise price equal to 70% of the fair market value of the
common stock on the date of exercise. The Superior purchase option will be
terminated at the closing of this offering in consideration for the issuance of
1,210,665 shares of common stock, valued at $8.2 million, including shares to
be issued as an anti-dilution adjustment. In addition, 134,520 shares, valued
at $900,000, will be issued to satisfy an anti-dilution adjustment right held
by the Series C preferred stockholder. These anti-dilution adjustments were
specific to the Superior purchase option.
On December 24, 1998, we issued a convertible note payable to stockholder in
the original principal amount of $800,000, $500,000 of which was received in
1998, bearing interest at 6% per annum due December 24, 1999, along with five
year warrants to purchase 33,482 shares of Series C Preferred Stock for an
exercise price of $4.78 per share, which will become the right to purchase
33,482 shares of common stock for $4.78 per share upon the closing of this
offering. Interest on the note is payable at maturity. At any time prior to
maturity any unpaid principal and interest may be converted into Series C
Preferred Stock at a conversion price of $4.78 per share.
On January 29, 1999, we received $3.5 million in cash and acquired 10% of the
outstanding stock of HealthMagic, Inc., a subsidiary of Adventist Health System
Sunbelt Healthcare Corporation, in exchange for 2,615,677 shares of our Series
C Convertible Preferred Stock, which will be converted into an equivalent
number of shares of common stock upon the closing of this offering. We recorded
our 10% ownership in Healthmagic at $5.0 million as investment in affiliate. We
also established a technology relationship with HealthMagic, a supplier of
applications to Internet companies, whereby we contributed to them our PMR
product and received from them a license to use a broad range of Internet
technologies, including a web-enabled personal medical record, personalization
tools, and security and authentication features. HealthMagic will develop,
implement and support these technologies for us. We did not attribute any value
to the desktop-based PMR technology we contributed to HealthMagic as we believe
the fair value was zero. We recorded the license received from HealthMagic as
an intangible asset in the total amount of $4.5 million.
On or prior to March 5, 1999, we entered into loan agreements pursuant to
which the investors are irrevocably obligated to loan to us the aggregate
principal amount of up to $5.5 million at an interest rate of 7% per annum.
Upon the closing of this offering, the principal amount borrowed under these
agreements and all accrued interest will, solely at the option of each
investor, either be due and payable or convert into common stock at a
conversion price of $7.43 per share. We currently anticipate borrowing under
these agreements prior to the closing of this offering. As of March 31, 1999,
we had borrowed $2.0 million. We also have outstanding $800,000 in convertible
notes issued in December 1998 and January 1999 and which may be converted into
common stock at a conversion price of $4.78 per share.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least 12 months
after the date of this prospectus. These requirements are expected to include
the funding of
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operating losses, working capital requirements and other general corporate
purposes, including expansion of our network, advertising, brand promotion and
content development. We may also elect to repay debt and pursue one or more
strategic alliances or acquisition transactions, although, as of the date of
this prospectus, we have no agreement to enter into any material investment or
acquisition transaction. We may need to raise additional funds, however, to
respond to business contingencies which may include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. develop new or enhance existing editorial content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including those acquiring shares in
this offering. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance editorial content,
features or services, or otherwise respond to competitive pressures would be
significantly limited. Our business, results of operations and financial
condition could be materially adversely affected by any such limitation.
We have received a report from our independent auditors containing an
explanatory paragraph that describes the uncertainty as to our ability to
continue as a going concern due to our historical negative cash flow and
because, as of the date they rendered their opinion, we did not have access to
sufficient committed capital to meet our projected operating needs for at least
the next twelve months. Upon completion of this offering, we will have
available that capital. If capital requirements vary materially from those
currently planned, we may require additional financing sooner than anticipated.
If this offering is not successful and positive operating results are not
achieved rapidly, we intend to reduce expenditures so as to minimize our
requirements for additional financial resources, if such resources are not
available on terms acceptable to us.
Impact of the Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with such Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the operating costs associated with
time spent by employees in the evaluation process and Year 2000 compliance
matters generally. We do not presently anticipate that such expenditures will
be material.
Risks. We have made a preliminary assessment of the Year 2000 readiness of
our operating and administrative systems and the third-party software, hardware
and services used to host the drkoop.com website. Our assessment plan consists
of:
. contacting third-party vendors of material software, hardware and
services that are both directly and indirectly related to the delivery of
drkoop.com services to our users;
. assessing and implementing repair or replacement of such components as
required; and
. creating contingency plans in the event of Year 2000 failures.
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We plan to perform a Year 2000 simulation on our systems, including the
drkoop.com website, during the second quarter of 1999 to test Year 2000 system
readiness. Many of our vendors of material software, hardware and services have
indicated that the products used by us are currently Year 2000 compliant. We
are not currently aware of any internal Year 2000 compliance problems that
could reasonably be expected to have a material adverse effect on our business,
results of operations and financial condition, without taking into account the
Company's efforts to avoid or fix such problems. However, there can be no
assurance that we will not discover Year 2000 compliance problems in our
computer infrastructure that will require substantial revisions or
replacements. In addition, we cannot assure you that third-party software,
hardware or services incorporated into our material systems or other systems
upon which we are reliant will not need to be revised or replaced, which could
be time consuming and expensive.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure beyond
our control, such as a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering drkoop.com, decrease the
use of the Internet or prevent users from accessing drkoop.com, any of which
would have a material adverse effect on our business, results of operations and
financial condition.
Contingency Plan.
As discussed above, we are engaged in an ongoing Year 2000 assessment and
have developed preliminary contingency plans. The results of our analyses and
the responses received from third-party vendors and service providers will be
taken into account to revise our contingency plans as necessary. It is our goal
to finalize our contingency plans by the end of the third quarter of 1999.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. We currently do not engage or plan to engage in derivative
instruments or hedging activities.
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BUSINESS
Background
Our company operates drkoop.com, an Internet-based consumer healthcare
network. Our network consists of a consumer-focused interactive website which
provides users with comprehensive healthcare information and services, as well
as affiliate relationships with Internet portals, other websites, healthcare
organizations and traditional media outlets. Our website, www.drkoop.com, is a
healthcare portal which integrates dynamic healthcare content on a wide variety
of subjects, interactive communities and tools, as well as opportunities to
purchase healthcare-related products and services on-line. Our company's
founders, including former U.S. Surgeon General Dr. C. Everett Koop, created
drkoop.com to empower consumers to better manage their personal health with
comprehensive, relevant and timely information. Our objective is to establish
the drkoop.com network as the most trusted and comprehensive source of consumer
healthcare information and services on the Internet.
We launched our website in July 1998. By June 1, 1999, www.drkoop.com had
attracted over 6 million unique users and enrolled over 280,000 registered
users, according to commercial software that we utilize. Our network is
designed to provide consumers with a variety of healthcare content, including
information on acute ailments, chronic illnesses, nutrition, fitness and
wellness, and access to medical databases, publications, and real-time medical
news. In addition, we offer eight interactive communities consisting of over
130 hosted chat support groups. Our support groups allow users to share
experiences with others who face, or have faced, similar health conditions,
leveraging the aggregate community to benefit each member. We also provide
interactive tools that permit users to personalize their drkoop.com experience
and are developing additional features to expand the functionality of our
website.
Currently, our affiliates consist of Internet portals and other websites,
healthcare organizations and traditional media outlets. Each affiliate provides
to its customers easy access to the information and services offered on
drkoop.com. Through these relationships, we believe that we will gain broad
exposure of our brand, drive high volumes of traffic to the drkoop.com website,
and acquire and distribute relevant local content. We intend to expand our
network by continuing to establish relationships with affiliates that have the
ability to direct additional users to our website.
Our belief is that health-concerned consumers are highly motivated in their
need to find accurate information and to act on it. Our strategy is to create a
trusted brand that consumers will rely on for that information and for related
e-commerce opportunities. Our business model is primarily to earn advertising,
subscription and e-commerce transaction revenues from advertisers, merchants,
manufacturers and healthcare organizations who desire to reach a highly
targeted community of healthcare consumers on the Internet. For example,
advertisers can target very specific audiences such as persons interested in a
particular disease or individuals who desire to address a particular health
condition. We also earn revenues by facilitating e-commerce transactions, such
as sales of prescription refills, vitamins and nutritional supplements, and
health insurance services, offered by outside parties.
Industry Overview
The Internet has become an important alternative to traditional media,
enabling millions of consumers to seek information, communicate with one
another and execute commercial transactions electronically. According to an
industry research firm, the number of worldwide web users is expected to grow
from approximately 100 million in 1998 to approximately 320 million by 2002.
The Internet is distinct from traditional media in that it offers real-time
access to dynamic and interactive content and instantaneous communication among
users. These characteristics, combined with the fast growth of Internet users
and usage, have created a powerful, rapidly expanding direct marketing and
sales channel. Advertisers can target very specific demographic groups, measure
the effectiveness of advertising campaigns and revise them in response to real-
time feedback. Similarly, the Internet offers on-line merchants the ability to
reach a vast audience and operate with lower costs and greater scale economies,
while offering consumers greater selections, lower prices and heightened
convenience, compared to conventional retailing. We believe that all
participants in the healthcare industry will
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benefit from the Internet because of its unique attributes as an open, low-cost
and flexible technology for the exchange of information and execution of
electronic transactions.
Portals, such as AOL, Excite, the Go Network, Lycos, MSN and Yahoo!, have
established themselves as leading pathways for a broad variety of information.
Users are augmenting these portals with subject-specific vertical portals,
which are becoming one of the fastest growing segments of the Internet. These
vertical portals are using brand awareness driven by high quality topical
content and significant market resources to establish themselves as
destinations for highly concentrated groups of users.
In addition, on-line communities have emerged that allow users with similar
interests to engage in interactive activities. Until recently, use of the
Internet consisted mainly of users seeking one-way, static information on
topics of interest to them. Technologies have recently been developed which
allow users greater flexibility to create and personalize content, communicate
with users having similar interests and engage in other interactive activities.
We believe that on-line communities are particularly relevant to users
interested in healthcare issues, since medical information is often complex and
users value communication with peers who face, or have faced, the same health
conditions, leveraging the aggregated community to benefit each member.
Healthcare is the largest segment of the U.S. economy, representing the
annual expenditure of roughly $1 trillion, and health and medical information
is one of the fastest growing areas of interest on the Internet. According to
Cyber Dialogue, an industry research firm, during the 12-month period ended
July 1998, approximately 17 million adults in the United States searched on-
line for health and medical information, and approximately 50% of these
individuals made off-line purchases after seeking information on the Internet.
Cyber Dialogue estimates that approximately 70% of the persons searching for
health and medical information on-line 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 the number of adults in the United States
searching for on-line health and medical information will grow to approximately
30 million in the year 2000, and they will spend approximately $150 billion for
all types of health-related products and services off-line. Accordingly, we
believe that companies that establish a clear brand identity as a trusted
source of on-line consumer healthcare information and services will have a
significant opportunity to capitalize on multiple revenue sources, including
direct-to-consumer advertising and e-commerce.
Business Strategy
Our objective is to establish the drkoop.com network as the most trusted and
comprehensive source of consumer healthcare information and services on the
Internet. Our business strategy incorporates the following key elements:
Establish the drkoop.com Brand. Our strategy is to create a strong brand with
which consumers associate the trustworthiness and credibility of Dr. C. Everett
Koop and which will enable us to implement his vision of empowering individuals
to better manage their personal health. We also intend to enhance our brand
through association with other notable leaders in the consumer healthcare
field, such as ABC News Medical Correspondent Dr. Nancy Snyderman, a director
of our company. Our company is currently engaged in a major campaign to
increase awareness of the drkoop.com brand among consumers, healthcare
organizations, Internet portals and other websites. We intend to allocate
significant resources to further develop and build brand recognition through
on-line advertising, general advertising, strategic alliances and other
marketing initiatives.
Provide Consumers with Healthcare Content of High Quality. We currently
provide our users with high quality healthcare content, including information
on acute ailments, chronic illnesses, nutrition, fitness and wellness, and
access to medical databases, publications, and real-time medical news. This
information is provided by established sources such as Dartmouth Medical
School, Reuters, the National Institute of Health, Multum Interactive Services,
Inc., and the American Cancer Society. We also offer a directory which compares
and rates over 1,100 other health-oriented websites. Our strategy is to
integrate dynamic healthcare information on a wide variety of subjects with
relevant interactive communities and tools, and opportunities to purchase
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healthcare-related products and services on-line. We believe that the quality
of our health information is a competitive advantage that will enable us to
attract users to our website, promote user loyalty and increase page views per
visit.
Syndicate Content Through Affiliates to Promote Traffic Growth. We have
entered into relationships with portals and other websites which position
drkoop.com as their primary source for consumer healthcare content. In
addition, we have entered into relationships with local hospitals, payor
entities and local media outlets such as television stations. These
relationships include the creation of co-branded websites and the distribution
of branded healthcare information to affiliated entities. We intend to expand
our network by continuing to establish relationships with affiliates that have
the ability to direct additional users to our website.
Develop and Expand On-line Healthcare Communities. We currently offer our
registered users free access to eight on-line communities consisting of over
130 hosted chat support groups. Our eight communities are organized by the
following general health topics: Addiction & Recovery, Aging Healthy, General
Health, Men's Health, Mental Health, Parenting & Children's Health, Physical
Conditions and Women's Health. Our support groups cover topics including
hepatitis C, child development, stress management and relaxation skills and
anxiety disorders. Our communities and support groups allow users with similar
health-related experiences to exchange information and gather news and
knowledge in a secure, anonymous, on-line environment. Communities and support
groups are hosted by selected moderators with experience both in the relevant
topic and on-line forum moderating. We believe that our communities and support
groups are an effective way to attract users to our website and strengthen
their loyalty to the drkoop.com network. In addition, by aggregating users
interested in a particular health topic, we believe we can sell advertising in
a highly targeted manner, thereby commanding higher advertising rates.
Similarly, we offer merchants and others who engage in e-commerce the ability
to market products and services to our community members.
Provide Consumers with Unique Features and Tools. Our website is designed to
provide easy access to innovative features and tools. Currently, our most
popular tool educates consumers on the interaction among various drugs and
other substances. In addition, we recently acquired the right to deploy a
comprehensive personal medical record which will allow users to establish and
maintain a lifelong record of their health and medical information in a secure
portion of our database. We intend to continue to add useful tools to enable
our users to personalize their on-line experience. We believe that our tools
and features will continue to encourage users to visit our website frequently
and increase the likelihood of users selecting drkoop.com as their preferred
website for health-related issues.
Provide an Attractive Advertising Site. We believe our ability to target
specific users, the interactive nature of our website and the demographic
characteristics of our users will be attractive to pharmaceutical, healthcare
and other companies that advertise on the Internet. By identifying users
interested in a particular health-related topic or who desire to address a
particular health condition, we believe we can deliver advertising in a highly
targeted manner, thereby commanding higher advertising rates.
Enable High Value E-commerce Offerings. We enable e-commerce transactions
offered by third parties. Our strategy involves permitting merchants,
manufacturers and service providers access to a highly targeted community of
health conscious consumers through our website and the health channels of our
portal affiliates. We presently enable sales of prescription refills, vitamins
and nutritional supplements and insurance services. Although we do not provide
these products or services, we do provide links to the websites of third
parties that provide these products or services. Some of these third parties
have entered into preferred provider arrangements with us and pay us either a
transaction fee for sales attributable to users from our website or an anchor
tenant rental fee. Anchor tenant fees are annual fees paid by on-line merchants
in exchange for a prominent link to their on-line stores. We believe that
contextual merchandising of e-commerce transactions will attract users to our
website and promote user loyalty.
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The drkoop.com Network
Our network consists of a consumer-focused interactive website which provides
users with comprehensive healthcare information and services, as well as
affiliate relationships with portals, other websites, local healthcare
organizations and traditional media outlets. The website is a healthcare portal
which integrates dynamic healthcare information on a wide variety of subjects,
interactive communities and tools that enable our users to personalize their
drkoop.com experience and opportunities to purchase healthcare-related products
and services on-line. Our affiliate relationships, we believe, allow us to gain
broad exposure of our brand, drive high volumes of traffic to the drkoop.com
website, and acquire and distribute relevant content at the local level.
Affiliates may use our content on television or radio, in print, radio or on-
line, provided they credit drkoop.com as the provider of the content and, where
appropriate, pay a license fee. We believe that displaying logos and credits on
every web page, program and publication where drkoop.com content is displayed
will help us build brand awareness and attract users to our website.
Website
Healthcare Information. Our goal is to provide consumer-focused information
for the health-conscious public, individuals with a health condition, and
individuals who have recovered from illness or injury, all at a level the
average consumer can understand. We currently provide a variety of healthcare
content, including information on acute ailments, chronic illnesses, mental
health and behavioral issues, nutrition, fitness and wellness, and access to
medical databases, other publications, and real-time medical news. To encourage
interactivity, we provide links to relevant communities and other features from
each content page. Examples of healthcare information that we currently provide
include:
<TABLE>
<CAPTION>
Information Sources
----------- -------
<S> <C>
. Physician-authored articles on common Dartmouth Medical School,
medical conditions Nancy Snyderman, M.D.,
drkoop.com
. Updated health-related news and Reuters
editorials on topics of current
interest
. General medical information and National Institute of Health,
statistics American Cancer Society
. Information regarding the interaction Multum Interactive Services, Inc.
among various drugs and other
substances
. Directory of over 1,100 health-related drkoop.com
websites including ratings and reviews
. Information on pharmaceuticals and Graedon Enterprises, Inc.
over-the-counter drugs
. Clinical trials study information Quintiles, Inc.
</TABLE>
We expect that competitive factors will create a continuing need for us to
improve and add to our healthcare content. Accordingly, we intend to seek
additional sources of healthcare information and expand the breadth of our
content offerings.
Interactive Communities. We currently offer eight interactive communities
consisting of over 130 hosted chat support groups. These communities were
developed to provide users with a mechanism to interact with others
experiencing, or who have experienced, similar health conditions. We believe
the communities and their support groups enable users to gain valuable insight,
practical knowledge and support with regard to their health concerns which
supplement their interaction with their physicians. Our eight communities are
organized by the following general health topics: Addiction & Recovery, Aging
Healthy, General Health, Men's Health, Mental Health, Parenting & Children's
Health, Physical Conditions and Women's Health.
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The drkoop.com support groups differ from other Internet chat rooms and
forums in that drkoop.com selects hosts to be involved in each support group.
Although most of our support groups are led by peer monitors, many of whom have
faced similar health concerns, some are led by healthcare professionals with
expertise in the specific area of health on which the support group is focused.
User demand has driven the expansion in the number of drkoop.com support
groups. Our support topics are typically proposed by a user. Accordingly, our
support groups are dynamic and evolve as user interests change. We believe our
support groups are distinct from other support rooms because drkoop.com offers
access to information and news relevant to the support topic on the
corresponding web page. We believe that a user's participation in a focused
chat will stimulate the user's interests in related support groups,
contributing to more frequent usage and longer visits at our website. Examples
of the interactive support groups that we currently offer include:
Addiction & Recovery Parenting & Children's Health
Living with Sobriety Attachment Parenting
Child Development
Aging Healthy Depression and Your Child
Unique Exercise Ideas Parenting an Only Child
General Health Physical Conditions
Angel Power Beating the Pain
Turning Back the Clock Crohn's Colitis Support
Joint Replacement Chat
Men's Health Hepatitis Central
Beyond the Locker Room
Women's Health
Mental Health Balancing Work & Family
Anxiety Disorders Biological Clock Watchers
Mood Disorders Menopause Management
OCD Matters
Tools. We currently provide interactive tools and other features that allow
registered users to personalize their drkoop.com experience and better manage
the healthcare information available on our network. We believe our tools and
features enable us to obtain and retain registered users. To enhance the
experience of our current and future registered users, we intend to develop
additional tools and features. Examples of tools that we have already developed
or intend to develop include:
Existing Tools
Drug Checker. Our drug interaction tool, Drug Checker, allows users to
quickly and easily search for information on a particular product and then
check for interactions between it and other prescription and over-the-
counter drugs. The tool enables the user to search for drugs by complete or
partial name matching and returns a list of drugs for selection. Selection
of more than one drug into the interaction list then permits the user to
test for interaction among the selected drugs. The tool also provides drug-
food interaction data when available. Drug Checker uses the Multum database
which we have modified with an easy to use interface.
Health Search. This tool allows users to search the entire drkoop.com
website and related healthcare websites for specific health and medical
information. We also provide easy access to Medline, a large database of
medical information provided by the National Library of Medicine and
CancerLit, the National Cancer Institute's bibliographic database.
Health Site Reviews. We have created a directory of third party health-
related websites using an industry standard rating scheme from the
Healthcare Information Technology Institute. Our rating methodology
produces an overall website score based on several criteria including
credibility, accuracy, disclosure, links, design and interactivity. This
tool enables a user to search for the highest rated healthcare websites
categorized by various healthcare conditions.
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Health Risk Assessments. Our first health risk assessment tool, Tobacco
Risk Profiler, enables users to understand their reliance on tobacco and
assess a variety of treatment methods. This tool is integrated with content
and interactive community features to provide an educational and supportive
experience for users suffering from nicotine addiction. We expect to
introduce a variety of health risk assessments allowing users a quick and
easy way to assess their health and find corrective measures they can take
to reduce any health-related risks.
Health Polls. Our health polls provide users with opportunities to answer
a variety of health related questions on-line. We can obtain valuable
information from our users as to their interests and demographics. The
survey information is then used to make the related community more aware of
current healthcare issues.
Preventionnaire. This interactive questionnaire, residing in our
Prevention Center, is designed to help consumers identify their healthcare
needs. After answering a series of questions tailored to the user's sex and
age, the tool advises the user to consult with his or her physician on a
variety of preventive tests or immunizations to maintain good health.
Future Tools
Listed below are some of the tools that we are presently developing.
Deployment of these tools will involve our successful acquisition and
integration of the required content and related technology. We cannot
assure you that these tools will be successfully deployed on a timely
basis, or at all, or that users will find these features attractive.
Dr. Koop's Personal Medical Record. We intend to offer a personal medical
record which will allow users to establish and maintain a lifelong record
of personal health and medical information in a secure portion of our
database. We presently expect to add a personal medical record feature to
our website in the first half of 1999 as an element of our technology
relationship with HealthMagic.
My [email protected]. This product is intended to allow consumers to
receive email newsletters with news and information tailored to their
specific needs. We presently expect to add this tool to our website in the
first half of 1999.
Recipe Database. This feature is intended to provide a customized,
searchable database of recipes meeting specific dietary requirements of the
user, such as low-fat, low-salt diets. We presently expect to add this tool
to our website in the second half of 1999.
Personal Health Shopper. This tool is intended to enable consumers to
enter their preferences for shopping and allow us to customize information
and new product offerings for the users. We presently expect to add this
tool to our website in the second half of 1999.
Physician Databases. We intend to provide to consumers access to
physician databases permitting them to find doctors in their local area. In
February 1999, we entered into a content agreement with Physicians' Online
which will allow us to implement a physician database on our website. We
are currently in the process of deploying this tool.
Insurance Assessment. This interactive questionnaire is designed to
enable consumers to better understand their health insurance needs and
assist them in making a purchase decision. We presently expect to add this
tool to our website in the first half of 1999.
Affiliates
Portals and Other Websites. The distribution of drkoop.com content to
affiliated portals and other websites is designed to rapidly increase brand
awareness through co-promotion and direct links with the affiliate's server. We
intend to affiliate with selected websites that have the potential to drive
traffic to our website and provide broad exposure to the drkoop.com brand.
Currently, portals are the leading aggregators of traffic on the Internet.
Users are augmenting these portals with subject-specific vertical portals,
which are becoming one of the fastest growing segments of the Internet. These
vertical portals are using brand awareness
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driven by quality topical content and significant market resources to establish
themselves as destinations for highly concentrated groups of users. Examples of
relationships that we have already established include:
The Go Network. drkoop.com has entered into agreements with Infoseek
Corporation and the Buena Vista Internet Group, a unit of The Walt Disney
Company, under which drkoop.com will be the exclusive provider of health
related content on three websites of the Go Network: Go.com Health Center
on Infoseek, ESPN.com Training Room and the Family.com Health Channel.
Under the Infoseek agreement, drkoop.com will also be the premier health
content provider for ABCnews.com. In addition, drkoop.com will be the
exclusive pharmacy and drugstore, health insurance and clinical trials
partner in the Go.com Health Center. Under these agreements, users on the
Go Network will be able to access various health information, services,
interactive tools and commerce opportunities through a co-branded location
(http://go.drkoop.com) served by drkoop.com. In the event drkoop.com elects
not to provide specific content, it may be obtained from a third party. We
believe that these agreements will contribute substantially to our brand
awareness and increase traffic on our website.
The term of both agreements is for three years, except that each of the
parties may elect to terminate the relationship after two years. We will
pay Infoseek and the Buena Vista Internet Group approximately $57.9 million
in total consideration consisting of cash and warrants to purchase 775,000
shares of common stock at an exercise price of $8.60 per share over the
full three year term. None of the warrants are exercisable prior to one
year after issuance.
Salon Internet, Inc. Salon Internet, Inc. and drkoop.com expect to launch
a health and wellness site called Salon Health in the first half of 1999.
Salon Health will create a unique blend of editorial content and integrated
health information for its users. drkoop.com will be the exclusive provider
of health information for Salon Health. This initiative is expected to
introduce a complete storefront offering of drugstore related products. Our
agreement with Salon has a three-year term. The parties will share in
revenues generated through the storefront and in advertising revenue. We
will pay Salon a fee for running a minimum number of drkoop.com banner
advertisements on the Salon site.
WellSt.com. drkoop.com has been selected as the provider of traditional
health and medical information for WellSt.com, a division of Element Media,
Inc., an alternative health company. The WellSt.com agreement has a three-
year term under which we will be the exclusive provider of traditional
healthcare content to WellSt.com, except that WellSt.com may use other
sources to the extent that we decline to develop any specific content.
WellSt.com will be the preferred provider of alternative medicine and
health information on drkoop.com. The parties have agreed to undertake
joint marketing activities of mutual benefit and will share in revenues
generated through the use of the other party's content. We believe this
strategic partnership will allow drkoop.com to reach a unique audience that
is interested in alternative medicine and health information.
Physicians' Online. drkoop.com will provide content and services to
Physicians' Online, one of the largest Internet communities of doctors.
drkoop.com and Physicians' Online will also undertake joint marketing and
sales of the personal medical record software and services to hospitals and
other managed health facilities and will share in the revenue generated
from these activities. Physicians' Online provides doctors with access to
medical databases, clinical symposia, medical news and other medical
resources, and has a membership in excess of 170,000 doctors. Our agreement
with Physicians' Online has a one-year term during which each party will
promote the other party's website and share in various revenue sources.
iSyndicate. iSyndicate, a service that connects small sites in search of
content with content providers, has selected drkoop.com as a provider of
health information to its 13,000 affiliate sites. Under this agreement,
iSyndicate affiliates can choose to provide headlines, teasers or full-text
content to their users. The iSyndicate agreement has a one-year term under
which iSyndicate will market the drkoop.com content under the several
different marketing models. We pay a fee for each user who links to
drkoop.com from a headline or teaser on an affiliate site, and we receive a
fee when an affiliate elects to license the full-text drkoop.com content to
be hosted and displayed on the affiliate's site.
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SeniorNet. SeniorNet.org, the world's largest trainer of older adults
about computer technology and the Internet, has selected drkoop.com to be
the exclusive provider of health information and services to users of the
SeniorNet On-Line Community. Through this strategic partnership, drkoop.com
will provide our healthcare content and our products and services that will
empower SeniorNet users to better manage their health. SeniorNet operates
over 140 SeniorNet Learning Centers across the United States, providing
access to over 100,000 older adults, while educating them on how to use the
SeniorNet website and the Internet. In addition to the content partnership,
drkoop.com plans to release a co-branded version of the Dr. Koop's Personal
Medical Record for members of the SeniorNet On-Line Community. The
drkoop.com health content and PMR will become part of the Learning Center
curriculum, which is used to educate more than 45,000 older adults each
year. We will pay SeniorNet a fee for this exclusive relationship.
Yahoo! drkoop.com has entered into a relationship with Yahoo! to
syndicate Dr. Nancy Snyderman's Daily Health offering for use in Yahoo!
Health, with a launch expected in the second quarter of 1999. Under this
agreement, Dr. Snyderman will appear daily on Yahoo! in a drkoop.com
branded environment where users of Yahoo! Health are able to read Dr.
Snyderman's responses to user-submitted questions. Users who wish to ask
Dr. Snyderman a question through an email interface will be transferred to
the "Ask Dr. Nancy Snyderman" area of the drkoop.com website. New answers
and archives will be posted daily on Yahoo! Health. This is a non-paid
relationship between the two companies.
@Home Network. drkoop.com entered into a two year relationship with The
@Home Network to be the anchor tenant partner within the Health Channel
area of the @Home service. drkoop.com will be the premier content provider
appearing in the Health Channel. Under the terms of this agreement,
drkoop.com will have the ability to direct users to related commerce,
community and interactive tool features appearing on the drkoop.com website
from within all health content appearing in the Health Channel. In
addition, drkoop.com will share in all advertising revenues generated by
@Home in the Health Channel where drkoop.com content dominates the related
page. drkoop.com will pay a carriage fee of $2.25 million to @Home for the
right to be the premier content provider in the @Home Health Channel.
Healthcare Organizations. drkoop.com enrolls healthcare organizations as
local affiliates through our Community Partner Program. This program allows
local organizations such as hospitals, health systems and other healthcare
organizations to integrate the drkoop.com brand and content into their on-line
initiatives. Under this program, we develop co-branded Internet pages linked to
drkoop.com for local healthcare organizations. The Community Partner Program
enables healthcare organizations to supply their patients with on-line health
resources and interactive capabilities integrated with specific information
about their facilities. This program provides consumers with the ability to
educate themselves, make an informed decision, and take action through a
healthcare organization's local website, strengthening the relationship between
the consumer and the organization. Those consumers are introduced to the
drkoop.com brand through our association with their local provider or payor.
Examples of local healthcare organizations that have enrolled in our Community
Partner Program include:
Adventist Health System. Adventist Health System currently operates
31 hospitals in nine states and has more than 4,900 licensed beds.
Adventist Health System also operates 27 extended-care facilities with
more than 3,000 long-term care beds. Florida Hospital, part of
Adventist Health System, serves the 2.6 million residents of the
Orlando area.
Highmark. Highmark, created in 1996 by the consolidation of Blue
Cross of Western Pennsylvania and Pennsylvania Blue Shield, is one of
the ten largest health insurers in the United States. Highmark offers
managed care programs, health plans, traditional health insurance
coverage, life and casualty insurance, and dental and vision programs
to approximately 18 million people.
MemorialCare. MemorialCare is a comprehensive healthcare system
servicing the over 14 million residents of Los Angeles and Orange
Counties in California. MemorialCare offers Southern Californians four
major medical centers and a children's hospital, as well as a number of
subsidiary facilities.
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Tallahassee Memorial HealthCare. Tallahassee Memorial HealthCare
provides Floridians with a comprehensive system of patient and
healthcare services coordinated under certain specialty centers. These
specialty centers include Tallahassee Memorial Hospital, the eighth
largest hospital in Florida, and eleven satellite facilities in five
counties. Founded more than fifty years ago, Tallahassee Memorial
HealthCare currently services a population of over 500,000 individuals.
Scott and White Hospital and Clinic. Scott and White is one of the
largest multi-specialty hospital and clinic groups in the United
States. Their more than 515 physicians and scientists service the 1.8
million residents of Central Texas as well as patients from throughout
the United States and many foreign countries.
Baptist Health Systems. Baptist Health Systems is South Florida's
largest not-for-profit health care organization with 7,400 employees.
The health system includes Baptist Hospital, Baptist Children's
Hospital, Miami Cardiac & Vascular Institute, Homestead Hospital,
Mariners Hospital in Tavernler and a full spectrum of outpatient
diagnostic and treatment facilities. Baptist Health Systems serves the
3.5 million residents of the Miami area.
Promina Health Systems. Promina Health Systems is a local, not-for-
profit organization created by local doctors and hospitals who have
come together to protect and improve community-based health care for
the 4.3 million residents of metro Atlanta.
Contracts we enter into under our Community Partner Program typically
specify performance standards that require us to:
. provide up to 10 customized website pages;
. maintain operation of our website for at least 95% of the time;
and/or
. provide monthly traffic reports to our community partners.
Traditional Media. We also intend to establish additional affiliate
relationships with traditional media outlets. There are many areas of overlap
with television and print that allow for collaboration in the delivery of
quality healthcare content to an audience. Late breaking news, daily syndicated
articles and other timely relevant content can be distributed as an information
feed in multiple formats. For example, network television affiliates carry
local, relevant information directly to local audiences. Similarly, by
distributing content at the affiliate level, drkoop.com can be the leading
syndicate of Internet-ready health content and editorial-based, breaking health
news. The content that resides on our website can also be distributed through
newspapers, trade journals, periodicals, and a variety of other print media. By
aligning drkoop.com and our notable leaders in the healthcare field, Dr. C.
Everett Koop and Dr. Nancy Snyderman, with high profile publications, we have
the opportunity to build brand awareness of drkoop.com. Links from traditional
media websites to our website create additional channels for generating traffic
to the drkoop.com website. Examples of traditional media programs include:
Health Resource Marketing. drkoop.com has an agreement with Health
Resource Publishing, a division of Catalina Marketing, Inc., to place
advertisements for the drkoop.com site on up to 50% of the HRP
newsletters distributed through chain drugstores. HRP estimates that it
will distribute up to 20 million newsletters monthly during 1999.
Additionally, personalized healthcare content from the drkoop. com site
will be included in the HRP newsletters thus reaching a highly targeted
health conscious population with branded content and promotion.
Granite Broadcasting. We have entered into an agreement with Granite
Broadcasting Corporation, a publicly-traded owner of ten ABC, CBS, NBC
and WB television stations in markets such as San Francisco, Detroit
and Buffalo. A program was initiated in September 1998 with KEYE,
Granite's CBS affiliate in Austin, Texas, in which drkoop.com provides
the station with Internet health content, and the station provides both
local promotion of drkoop.com and daily prompting of the station's
viewers to drkoop.com following relevant health stories on the
station's local newscasts.
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ABC Affiliates. drkoop.com's multi-year agreement with Infoseek for
the Go Network Internet properties provides that the websites of all
ABC affiliates who participate in the network's Local Net Internet
service, currently 115 stations, will be linked to drkoop.com. ABC will
also provide details to all of its affiliates regarding how they can
participate as a full drkoop.com affiliate in their local news coverage
and promotion. ABC affiliates receive first right of negotiation for
participation in this program.
Revenue Opportunities
Our operating strategy is presently comprised of three primary means of
generating revenue:
. advertising;
. content syndication; and
. electronic commerce.
Advertising. The healthcare industry spends billions of dollars every year to
market products and services to consumers. Jupiter Communications projects that
the on-line health advertising segment will grow from $12.3 million in 1998 to
$265 million in 2002. We believe that health portals and other vertically
focused websites are uniquely positioned to attract a significant share of
these advertising expenditures. By identifying users interested in a particular
health-related topic or who desire to address a particular health condition, we
believe we can sell advertising in a highly targeted manner, thereby commanding
higher advertising rates.
Merchants can purchase advertising on our website in two ways. Banner
advertising is generally sold based on the number of impressions received by
the advertisement and its position on the website. This type of advertising
frequently encourages the user to move to other web pages which describe the
advertiser's product and solicit a direct response from the user. Sponsorships
are contracts that typically grant advertisers rights to promote their products
on a specific portion of the website. Sponsorships are designed to support
broad marketing objectives, including brand awareness, product introductions,
research and transactions, generally on an exclusive basis. Accordingly,
sponsorships are sold based on their duration, the portion of the website
sponsored and the number of impressions delivered. Some of our advertisers and
sponsors include:
. Pfizer, a pharmaceutical company, which advertises Zithromax, a
children's antibiotic, in our Ear, Nose and Throat and Children's Health
sections;
. Biogen, a pharmaceutical manufacturer, which advertises Avonex, a
Multiple Sclerosis medication, in our Multiple Sclerosis disease section;
. Schering-Plough, a pharmaceutical company, which has sponsored our
allergy health topic with Claritin. The integrated sponsorship includes
logo links, keywords, and banner impressions; and
. SmithKline Beecham, a pharmaceutical company, which has sponsored the
drkoop.com smoking cessation center with Nicorette/Nicoderm.
One form of direct response advertising involves pre-screening and
identifying potential participants in clinical trials. In 1997, approximately
$19 billion was spent by the private sector on human health research and
development in the United States alone, according to the Pharmaceutical
Manufacturers Association. A significant portion of these costs are incurred in
the later stages of clinical development, where large numbers of subjects are
enrolled into studies designed to provide the bulk of the safety and efficacy
data needed to obtain a product license from the FDA. The identification and
enrollment of qualified individuals into these studies is usually a time-
consuming and expensive process.
In December 1998 we implemented the drkoop.com Clinical Research Center, a
portion of our website designed to help educate consumers about clinical
trials: what they are; what to expect; and how to find and enroll in an
appropriate trial if the individual and their physician believe that this is a
viable therapy option. When this feature is fully developed, consumers will be
able to search a database of clinical trials by geography and by disease. We
believe that on-line pre-screening will reduce the number of inappropriate
contacts and result in only qualified people being referred to the clinical
trial sponsors. drkoop.com will derive a per respondent advertising fee for
this recruitment service.
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Content Syndication. We license our content and certain interactive tools
through a broad variety of affiliated websites. The majority of the licensed
content is provided by third-parties and is not produced by us. The primary
source of content syndication revenue is our Community Partner Program. Under
the Community Partner Program, we develop co-branded Internet pages and
software consisting of visual icons containing links back to the drkoop.com
website for local healthcare organizations, such as hospitals and payor
organizations. Licensing fees are typically determined based on the channel for
which the content will be used. Content syndication agreements generally
stipulate that all content provided by drkoop.com must retain a legend
indicating "Provided by drkoop.com" and is subject to an acceptable use policy
that defines how and where the content may be used. Editorial content and/or
content control generally remain the exclusive right of the drkoop.com network.
We believe that by allowing other high-traffic websites and portals to offer
our content we will gain broad exposure of our brand and drive high volumes of
traffic to the drkoop.com website, thereby allowing us to generate more
advertising and e-commerce revenues. While we expect to also generate
significant revenues from certain of our syndication programs, this revenue
source is expected to become a smaller proportion of our overall revenues as
our audience continues to grow.
E-Commerce. We provide users with the ability to access e-commerce
opportunities provided by outside parties in numerous locations throughout the
drkoop.com website. For example, users can access prescription refill services
through pages relevant to a particular condition. We also plan to offer the
drkoop.com Health Store, a section of the website which aggregates all of the
e-commerce opportunities found throughout the site into one comprehensive
storefront that users can navigate to find the specific products or services
offered by outside parties. E-commerce interfaces on drkoop.com, whether in the
drkoop.com Health Store or in other locations within the website's general
content, are being designed to be informative and easy to use.
We currently offer two primary categories of products and services which
users can purchase from third parties through our website:
On-line Pharmacy Products. According to industry statistics, the retail
prescription drug market in 1997 accounted for approximately $89.1 billion
in sales generated by 2.6 billion prescriptions. Over-the-counter
medications and the other health and beauty aids accounted for $26.8
billion and $26.9 billion in retail sales, respectively, in 1997. Due to
the convenience, privacy, cost-savings and selection that can be offered to
consumers via the Internet, we believe that the on-line pharmacy will
become a major factor in retail pharmacy sales and will capture a
significant portion of these sales in the near future. Moreover, direct
deliveries of prescription drugs to the home via mail accounts for a
significant proportion of all prescription drug sales. We expect that this
distribution channel will expand to include other products traditionally
associated with retail pharmacy stores.
Our personal drugstore provides links to 23 traditional and on-line
pharmacies where users can order prescription refills and other pharmacy
products over the Internet. We are also offering e-commerce anchor tenant
positions to online and traditional pharmacies on a category-exclusive
basis to allow consumers to link to their online stores. We receive an
annual rental fee for these anchor tenant positions. Our first contract is
with Vitamin Shoppe, an online vitamin and supplement company, and we are
in advanced discussions with several other parties regarding similar
arrangements. We also intend to offer anchor tenant positions for the
online pharmacy on the Go! Health Network.
Insurance. The individual health insurance market is estimated to be an
$85 billion per year industry, according to AM Best. In the past decade,
the AMA estimates that the number of Americans without health insurance
increased from 32 million to 43.4 million. Our website provides access to
an insurance center consisting of comparisons of different insurance plans
designed to assist users in determining their individual health coverage
needs and coverage options. This service is designed to provide useful,
consumer-oriented information and to enable the purchase of insurance
coverage through various links with qualified insurers.
Our current insurance partners include:
. Quotesmith.com, an on-line insurance website where users can obtain
instant quotes from 375 leading insurance companies. We have
implemented a co-branded version of their instant quote system.
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. American Health Value, a user-friendly Medical Savings Account (MSA)
administrator offering consumers access to their MSA funds with a
Visa card. We link to their website through our Personal Insurance
Center.
. HealthCore Medical Solutions, a health and consumer benefits
marketing company, which offers its members discounts on eye care,
dental and pharmacy benefits. We link to their website through our
Personal Insurance Center.
. eHealthInsurance.com, an online retail health insurance provider. We
link to their website through our Personal Insurance Center.
Sales
As of March 31, 1999, we had a direct sales organization consisting of 11
sales professionals with an average of 14 years of sales experience, and had
also contracted with WinStar Interactive, an on-line property representation
company. We have seven geographically-based sales representatives with
extensive healthcare backgrounds calling on large integrated health systems and
payors in major metropolitan areas selling drkoop.com's Community Partner
Program. We also have two sales representatives with pharmaceutical backgrounds
who call directly on pharmaceutical companies. In addition, one of our sales
representative with an insurance background calls on payors for enrollment in
our insurance commerce initiative. Further, members of management and the sales
force call on portals and other websites to establish affiliate relationships.
We also use WinStar to call on the interactive agencies and media buyers for
both sponsorship and banner advertising. As of March 31, 1999, approximately 60
percent of the advertising commitments received by us had been secured by our
direct sales force, with the balance secured by WinStar.
For the year ending December 31, 1998, sales to individual customers
constituting 10% or more of revenue included Memorial Care Hospital (63%), PCS
Health Systems (23%), and Medtronic (12%).
Marketing and Public Relations
We employ a variety of methods to promote the drkoop.com brand to attract
user traffic and affiliate relationships. Our public relations staff oversees a
comprehensive pubic relations program targeting consumer, trade and healthcare
media. In addition, we also conduct media outreach programs consisting of
public service announcements and other promotional activities targeting radio,
broadcast, and print media on a national and local basis.
Advertising. Media purchasing is a significant component to the brand
awareness and customer acquisition strategy for drkoop.com. We believe that
click-through banner advertising has been the accepted means to drive traffic
across the Internet for several years. We believe that we must continue to
promote drkoop.com to the mass Internet audience through banner advertising in
order to attract first time users. Depending on the source, we can use a banner
advertisement to direct a user to our homepage or to a place in the website
that contains topical information of interest to them. We also intend to pursue
general advertising through conventional media.
Public awareness campaigns are a significant part of the user generation
plans for drkoop.com. By strategically aligning drkoop.com with health-related
initiatives and charity organizations, we believe we will be able to reach a
large audience to help raise awareness for specific causes or organizations. By
creating opportunities for users to participate in awareness campaigns, we
believe we can raise money for organizations and charities, and at the same
time drive new registered users to drkoop.com.
Public Relations. As a well recognized, trusted spokesperson on America's
health, we believe that Dr. C. Everett Koop is in a unique position to raise
consumer awareness of health-related issues and our company. Since the launch
of our website, Dr. C. Everett Koop has participated in several industry events
that have dramatically raised our visibility in the Internet healthcare market.
We expect Dr. C. Everett Koop to continue to raise awareness of our company's
mission to empower consumers with information and services to
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better manage their personal healthcare and our initiatives to serve them, by
participating in public relations and public service activities.
Technology
A component of our strategy is to apply existing technologies in novel ways
to deliver content and provide services to our users. The various features of
the drkoop.com network are implemented using a combination of commercially
available and proprietary software components. We favor licensing and
integrating "best of breed" commercially available technology from industry
leaders. We reserve internal development of software for those components that
are either unavailable on the market or that have major strategic advantages
when developed internally. We believe that this component style approach is
more manageable, reliable, and scaleable than single-source solutions. In
addition, the emphasis on commercial components speeds development time, which
is an advantage when competing in a rapidly evolving market. Consistent with
our preference for off-the-shelf software components, we rely primarily on
industry-standard Microsoft operating systems, development, and infrastructure
components including NT, Internet Information Server, Microsoft Site Server,
Visual Interdev, and others. We have also created a content management and
development system and specialized applications, one example of which is the
drug interaction application built upon the Multum commercial database.
In January 1999, we entered into a strategic technology relationship with
HealthMagic, Inc. which includes a long-term fully paid license to use a broad
range of Internet technologies, such as a web-based personal medical record,
personalization tools, and security and authentication features. Under this
arrangement, HealthMagic will develop, implement, and support these
technologies for us, thereby permitting internal resources to address other
needs. Our relationship with HealthMagic, we believe, will allow us to improve
the functionality of our website with lower risk and at less cost than if we
developed this technology ourselves. We expect that as we deploy the
HealthMagic applications we will become dependent on that company for our
personal medical record feature and for personalization tools currently in
development.
Operating Infrastructure
The drkoop.com website is based on a technical operating infrastructure, the
drkoop.com web platform, which is designed to be highly scaleable and reliable.
The drkoop.com web platform consists of several subsystems, including a
scaleable web cluster used to service user requests for web pages. The web
cluster is controlled by a hardware cluster manager which continuously monitors
the performance and availability of the individual servers within the web
cluster. In the event of an individual server failure or when a server requires
maintenance, the hardware cluster manager automatically distributes incoming
requests to other available servers without disrupting the user's experience.
The drkoop.com web platform consists of readily available, off-the-shelf,
computer systems, including dual Intel Pentium servers in a fully redundant
configuration. The drkoop.com web platform was designed using a proprietary
architecture deploying primarily Microsoft technology running the Windows/NT
Operating System. Other Microsoft web enabling technologies used in the
drkoop.com web platform include:
. Microsoft Membership and Personalization Server--software that captures
user data and enables the drkoop.com experience to be customized for each
user;
. Microsoft SQL Server--database software used to store user data and
content; and
. Microsoft Internet Information Server--software which enables pages to be
displayed to the user.
Our data center is maintained offsite by a third party and provides us with
multiple backbone connections to the Internet and a fault-tolerant network
design. In addition, electricity for running the drkoop.com web platform is
protected by uninterruptible power systems including back-up diesel generators.
We have an operations and disaster recovery plan, and drkoop.com is backed up
nightly to an off-site storage facility. We do not maintain a back-up data
center.
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Competition
A large number of Internet companies compete for users, advertisers, e-
commerce transactions and other sources of on-line revenue. The number of
Internet websites offering users healthcare content, products and services is
vast and increasing at a rapid rate. 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 grows as a
communication and commercial medium.
We compete directly for users, advertisers, e-commerce merchants, syndication
partners and other affiliates with numerous Internet and non-Internet
businesses, including:
. health-related on-line services or websites targeted at consumers such as
accesshealth.com, ahn.com, betterhealth.com, drweil.com,
healthcentral.com, healthgate.com, intelihealth.com, mayohealth.org;
mediconsult.com, onhealth.com, thriveonline.com and webmd.com;
. on-line and Internet portal companies, such as America Online, Inc.;
Microsoft Network; Yahoo! Inc.; Excite, Inc.; Lycos Corporation and
Infoseek Corporation;
. electronic merchants and conventional retailers such as CVS, Rite Aid
Corporation, Walgreens, Advanced Paradigm, Express Scripts, Inc. and
Merck-Medco, 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 such as Columbia/HCA Healthcare
Corporation, Kaiser Permanente and VHA Inc., 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 special demographic groups.
We believe that competition in our industry is based primarily on:
. the quality and market acceptance of healthcare content;
. brand recognition; and
. the quality and market acceptance of new enhancements to current content,
features and tools.
Although our competitive position in our market as compared to our
competitors is difficult to characterize due principally to the variety of
current and potential competitors and the emerging nature of the market, we
believe that we presently compete favorably with respect to these factors.
However, we believe that our markets are still evolving, and we cannot assure
you that we will compete successfully in the future. Additionally, many of our
competitors are likely to enjoy substantial competitive advantages compared to
our company, including:
. the ability to offer a wider array of on-line products and services;
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger customer and user bases; and
. substantially greater financial, technical and other resources.
To be competitive, we must respond promptly and effectively to the challenges
of technological change, evolving standards and our competitors' innovations by
continuing to enhance our products and services, as well as our sales and
marketing channels. Increased competition could result in a loss of our market
share or a reduction in our prices or margins, any of which could adversely
affect our business. Competition is likely to increase significantly as new
companies enter the market and current competitors expand their services.
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Intellectual Property
Our intellectual property is important to our business. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. We
intend to file for federal trademark registrations for the mark "drkoop.com,"
as well as other service and trademarks which incorporate the Dr. Koop name.
Our right to use the Dr. Koop name is granted to us under an agreement with Dr.
C. Everett Koop. If we lose our right to use the Dr. Koop name, we would be
forced to change our corporate name and adopt a new domain name. These changes
could confuse current and potential customers and would adversely impact our
business. See "Management--Agreements with Dr. C. Everett Koop."
Our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of
some foreign countries do not protect proprietary rights as well as the laws of
the United States, and the global nature of the Internet makes it difficult to
control the ultimate destination of our products and services. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any such
litigation could be time-consuming and costly.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the content and functionality of our
website overlaps with competitive offerings. Defending against these claims,
even if not meritorious, could be expensive and divert our attention from
operating our company. If we become liable to third parties for infringing
their intellectual property rights, we could be required to pay a substantial
damage award and forced to develop noninfringing technology, obtain a license
or cease using the applications that contain the infringing technology or
content. We may be unable to develop noninfringing technology or content or
obtain a license on commercially reasonable terms, or at all.
We also rely on a variety of technologies that are licensed from third
parties, including our database and Internet server software, which are used in
the drkoop.com website to perform key functions. These third-party licenses may
not be available to us on commercially reasonable terms in the future. The loss
of or inability to maintain any of these licenses could delay the introduction
of software enhancements, interactive tools and other features until equivalent
technology could be licensed or developed. Any such delay could materially
adversely affect our ability to attract and retain users.
Government Regulation
General. There is an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, on-line content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and how
existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, libel, copyright, trade mark, trade
secret, obscenity, personal privacy, taxation, regulation of professional
services, regulation of medical devices and the regulation of the sale of other
specified goods and services apply to the Internet and Internet advertising.
The requirement that we comply with any new legislation or regulation, or any
unanticipated application or interpretation of existing laws, may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our service, increase our cost of doing business or otherwise have a material
adverse effect on our business, results of operations and financial condition.
On-line Content Regulations. Several federal and state statutes prohibit the
transmission of indecent, obscene or offensive content over the Internet to
certain persons. In addition, pending legislation seeks to ban Internet
gambling and federal and state officials have taken action against businesses
that operate Internet gambling activities. The enforcement of these statutes
and initiatives, and any future enforcement activities, statutes and
initiatives, may result in limitations on the type of content and
advertisements available on
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drkoop.com. Legislation regulating on-line content could slow the growth in use
of the Internet generally and decrease the acceptance of the Internet as an
advertising and e-commerce medium, which could have a material adverse effect
on our ability to generate revenues.
Privacy Concerns. The Federal Trade Commission is considering adopting
regulations regarding the collection and use of personal identifying
information obtained from individuals when accessing websites, with particular
emphasis on access by minors. Such regulations may include requirements that
companies establish certain procedures to, among other things:
. give adequate notice to consumers regarding information collection and
disclosure practices;
. provide consumers with the ability to have personal identifying
information deleted from a company's database;
. provide consumers with access to their personal information and with the
ability to rectify inaccurate information;
. clearly identify affiliations or a lack thereof with third parties that
may collect information or sponsor activities on a company's website; and
. obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Such regulation may also include enforcement and redress provisions. While we
have implemented programs designed to enhance the protection of the privacy of
our users, including children, there can be no assurance that such programs
will conform with any regulations adopted by the FTC. Moreover, even in the
absence of such regulations, the FTC has begun investigations into the privacy
practices of companies that collect information on the Internet. One such
investigation has resulted in a consent decree pursuant to which an Internet
company agreed to establish programs to implement the principles noted above.
We may become subject to such an investigation, or the FTC's regulatory and
enforcement efforts may adversely affect the ability to collect demographic and
personal information from users, which could have an adverse effect on the our
ability to provide highly targeted opportunities for advertisers and e-commerce
marketers. Any such developments could have a material adverse effect on the
our business, results of operations and financial condition.
It is also possible that "cookies" may become subject to laws limiting or
prohibiting their use. The term "cookies" refers to information keyed to a
specific server, file pathway or directory location that is stored on a user's
hard drive, possibly without the user's knowledge and which is used to track
demographic information and to target advertising. Certain currently available
Internet browsers allow users to modify their browser settings to remove
cookies at any time or prevent cookies from being stored on their hard drives.
In addition, a number of Internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
limiting or abolishing the use of cookies. Limitations on or elimination of the
use of cookies could limit the effectiveness of the our targeting of
advertisements, which could have a material adverse effect on our ability to
generate advertising revenue.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under this EU directive, EU citizens are
guaranteed certain rights, including the right of access to their data, the
right to know where the data originated, the right to have inaccurate data
rectified, the right to recourse in the event of unlawful processing and the
right to withhold permission to use their data for direct marketing. The EU
directive could, among other things, affect U.S. companies that collect
information over the Internet from individuals in EU member countries, and may
impose restrictions that are more stringent than current Internet privacy
standard in the United States. In particular, companies with offices located in
EU countries will not be allowed to send personal information to countries that
do not maintain adequate standards of privacy. The EU directive does not,
however, define what standards of privacy are adequate. As a result, there can
be no assurance that the EU directive will not adversely affect the activities
of entities such as our company that engage in data collection from users in EU
member countries.
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Planned features of our website include the retention of personal information
about our users which we obtain with their consent. We have a stringent privacy
policy covering this information. However, if third persons were able to
penetrate our network security and gain access to, or otherwise misappropriate,
our users' personal information, we could be subject to liability. Such
liability could include claims for misuses of personal information, such as for
unauthorized marketing purposes or unauthorized use of credit cards. These
claims could result in litigation, our involvement in which, regardless of the
outcome, could require us to expend significant financial resources. Moreover,
to the extent any of the data constitute or are deemed to constitute patient
health records, a breach of privacy could violate federal law.
Data Protection. Legislative proposals have been made by the federal
government that would afford broader protection to owners of databases of
information, such as stock quotes and sports scores. Such protection already
exists in the EU. If enacted, this legislation could result in an increase in
the price of services that provide data to websites. In addition, such
legislation could create potential liability for unauthorized use of such data.
Internet Taxation. A number of legislative proposals have been made at the
federal, state and local level, and by foreign governments, that would impose
additional taxes on the sale of goods and services over the Internet and
certain states have taken measures to tax Internet-related activities. Although
Congress recently placed a three-year moratorium on state and local taxes on
Internet access or on discriminatory taxes on electronic commerce, existing
state or local laws were expressly excepted from this moratorium. Further, once
this moratorium is lifted, some type of federal and/or state taxes may be
imposed upon Internet commerce. Such legislation or other attempts at
regulating commerce over the Internet may substantially impair the growth of
commerce on the Internet and, as a result, adversely affect our opportunity to
derive financial benefit from such activities.
Domain Names. Domain names are the user's Internet "address." Domain names
have been the subject of significant trademark litigation in the United States.
There can be no assurance that third parties will not bring claims for
infringement against us or Dr. C. Everett Koop for the use of this trademark.
Moreover, because domain names derive value from the individual's ability to
remember such names, there can be no assurance that our domain names will not
lose their value if, for example, users begin to rely on mechanisms other than
domain names to access on-line resources.
The current system for registering, allocating and managing domain names has
been the subject of litigation and of proposed regulatory reform. There can be
no assurance that our domain names will not lose their value, or that we will
not have to obtain entirely new domain names in addition to or in lieu of its
current domain names, if such litigation or reform efforts result in a
restructuring in the current system.
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 requires licensing under applicable state law. We have endeavored to
structure our website and affiliate relationships to avoid violation of state
licensing requirements. For example, we have included notices where we have
deemed appropriate advising our users that the data provided on the drkoop.com
network is not a substitute for consultation with their personal physician.
Similar guidelines have been adopted governing the activities of moderators in
our interactive communities, many of whom are not licensed physicians. However,
the application of this area of the law to Internet services such as drkoop.com
is novel and, accordingly, a state regulatory authority may at some point
allege that some portion of our business violates these statutes.
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Similarly, we provide information about drugs and other prescription
medications on our website and enable e-commerce transactions with third
parties who sell these products. We have included within our website
disclaimers and other notices that we have deemed appropriate to advise users
that the information provided is not intended to be a substitute for
consultation with a licensed pharmacist. For example, use of our drug
interaction database requires that the user affirmatively click on a dialog box
on the website page to indicate acceptance of the notices before being given
access to the database. However, as with the practice of medicine, the
application of this area to Internet services such as drkoop.com is novel and,
accordingly, a state regulatory authority may at some point allege that some
portion of our business violates state or federal law governing the dispensing
of pharmacy products. Any application of the regulation of the practice of
medicine or pharmacology to us could result in a material adverse affect on our
business, results of operations and financial condition. 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. The fee is not based on the value of the sales transaction.
Federal and state "anti-kickback" laws govern certain financial arrangements
among healthcare service providers and others who may be in a position to refer
or recommend patients to such providers. These laws prohibit, among other
things, certain direct and indirect payments that are intended to induce the
referral of patients to, the arranging for services by, or the recommending of,
a particular provider of health care items or services. The federal healthcare
program's anti-kickback law has been broadly interpreted to apply to
contractual relationships between healthcare providers and sources of patient
referrals. Such laws apply to the sales of pharmacy products that are
reimburseable under federal Medicare and Medicaid programs and other
reimbursement programs. Violation of these laws can result in civil and
criminal penalties.
As the primary purpose of marketing is to generate business by referring or
recommending, the Office of Inspector General of the United States Department
of Health and Human Services has recognized that "many marketing and
advertising activities may involve at least technical violations of the federal
anti-kickback statute." Because of the breadth of the federal anti-kickback
statute, Congress required DHHS to promulgate regulatory safe harbors to
protect activities which do not harm federal healthcare programs. Some of our
electronic commerce activities do not qualify for safe harbor protection under
the federal anti-kickback statute because the aggregate compensation received
by us for these services is not fixed in advance and takes into consideration
the volume of business generated, because we receive a fixed service fee per
completed prescription drug product transaction. Failure to meet a safe harbor,
however, does not mean that the arrangement violates the statute. Instead, an
analysis of the factual elements must be made. Alternatively, the OIG is
authorized to issue advisory opinions regarding the interpretation and
applicability of the federal anti-kickback statute, including whether an
activity or proposed activity constitutes grounds for the imposition of civil
or criminal sanctions. We have not sought such an opinion and are aware of no
opinion that has been issued related to Internet sales activities. If our
program was deemed to be inconsistent with the federal anti-kickback statute,
we could face civil and criminal penalties. Further, we would be required
either not to accept any transactions which are subject to reimbursement under
federal or state healthcare programs or restructure our compensation structure
to comply with the statute and any applicable regulations. Presently, federal
and state programs provide only limited cost reimbursement for prescription
drugs, although there have been proposals made from time to time to expand the
benefits of these programs. In addition, similar laws in several states apply
not only to government reimbursement but also to reimbursement by private
insurers. Although there is uncertainty regarding the applicability of these
"anti-kickback" laws, 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 present federal or state law. If,
however, our activities were deemed to violate any of these laws, it could
cause a material adverse affect on our business, results of operations and
financial condition.
State Insurance Regulation. We market insurance on-line and receive
transaction fees in connection with this activity. All of the insurance
products are offered by unrelated third-party providers who we believe to be
appropriately licensed under applicable law. The use of the Internet in the
marketing of insurance products is a
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relatively new practice. It is not clear whether or to what extent state
insurance licensing laws apply to our activities. If we were required to comply
with such licensing laws, compliance could be costly or not possible and could
have a material adverse effect on our business.
Jurisdiction. Due to the global reach of the Internet, it is possible that,
although our transmissions over the Internet originate primarily in the State
of Texas, the governments of other states and foreign countries might attempt
to regulate Internet activity and our transmissions or take action against us
for violations of their laws. There can be no assurance that violations of such
laws will not be alleged or charged by state or foreign governments and that
such laws will not be modified, or new laws enacted, in the future. Any of the
foregoing could have a material adverse effect on our business, results of
operations and financial condition.
Human Resources
As of March 31, 1999, we had 73 full-time employees. None of our employees
are represented by a union. We believe that our relationship with our employees
is good.
Facilities
We currently lease approximately 11,000 square feet of office space in
Austin, Texas, under a lease expiring on October 31, 2000. We believe that our
facilities are adequate for our current operations and that additional leased
space can be obtained if needed.
Legal Proceedings
On April 12, 1999, a civil complaint was filed as Agrawal v. drkoop.com,
Inc., Donald W. Hackett and John F. Zaccaro in the District Court of Travis
County, Texas, 126 Judicial District, Case No. 99-04294. In the lawsuit,
plaintiff attempts to allege causes of action including fraud, constructive
fraud, promissory estoppel, negligent misrepresentation, breach of contract,
conversion, stock fraud, defamation and misrepresentation. Plaintiff claims,
among other things, that misrepresentations were made to him regarding his
involvement in the early stages of development of drkoop.com and we breached a
consulting agreement entered into between him and our company in September
1998. Plaintiff seeks recovery of actual damages which he alleges to be
$4 million, punitive damages alleged to be in excess of $5 million, attorneys
fees and costs and a temporary and permanent injunction prohibiting drkoop.com
from offering stock for sale to the public unless and until we recognize
plaintiff's alleged right to options to acquire 232,500 shares of our common
stock which he claims are owed to him under the consulting agreement. In the
event an injunction is granted, we will not complete this offering in a timely
manner, if at all. We believe that the claims made by plaintiff are without
merit and intend to defend this lawsuit vigorously. We filed a counterclaim
against the plaintiff on April 27, 1999 in which we allege causes of action
including breach of contract, fraudulent inducement, breach of fiduciary duty
and professional malpractice.
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MANAGEMENT
The following table sets forth, as of March 31, 1999, the name, age and
position of each director and executive officer of drkoop.com, Inc.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
C. Everett Koop, M.D. .... 82 Chairman of the Board of Directors
John F. Zaccaro(2)........ 64 Vice Chairman of the Board of Directors
Donald W. Hackett......... 42 President, Chief Executive Officer and Director
Dennis J. Upah............ 37 Chief Operating Officer
Susan M. Georgen-Saad..... 41 Chief Financial Officer
Robert C. Hackett, Jr. ... 48 Executive Vice President, Business Development
Louis A. Scalpati......... 35 Senior Vice President, Chief Architect
Jeffrey C. Ballowe(1)(2).. 43 Director
Mardian J. Blair.......... 67 Director
G. Carl Everett,
Jr.(1)(2)................ 48 Director
Richard D. Helppie, Jr.... 43 Director
Nancy L. Snyderman,
M.D.(1).................. 47 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
For purposes of the biographical data set forth below, service with
drkoop.com, Inc. includes service with our predecessor.
C. Everett Koop, M.D., has served as our Chairman of the Board of Directors
since he co-founded drkoop.com in July 1997. Since 1992, Dr. C. Everett Koop
has served as the McInerney Professor of Surgery at the Dartmouth Medical
School and as Senior Scholar at the C. Everett Koop Institute at Dartmouth. Dr.
C. Everett Koop is also a frequent lecturer on healthcare topics. An
internationally respected pediatric surgeon, Dr. C. Everett Koop was Surgeon-
in-Chief of the Children's Hospital of Philadelphia from 1948 to 1981 and
Editor-in-Chief of the Journal of Pediatric Surgery from 1964-1976. Dr. C.
Everett Koop is a director of Superior Consultant Holdings Corporation, a
publicly-traded healthcare consulting company, as well as several private
healthcare companies. From 1994 to 1996, Dr. C. Everett Koop was a director and
ex-officio Chairman of the Board of Patient Education Media, Inc., a producer
of medical video tapes which filed for bankruptcy protection in 1996. Dr. C.
Everett Koop was Surgeon General of the United States from 1981 to 1989. He was
also appointed Director of the Office of International Health in May 1982. Dr.
C. Everett Koop is also the recipient of numerous honors and awards, including
35 honorary doctorates. Dr. C. Everett Koop serves as our Chief Medical
Officer. In this role, he oversees and sets policies and standards for all
content on the website and keeps current with respect to medical issues in the
political and national arenas. Dr. C. Everett Koop is our liaison to the
medical community. He also is our primary spokesperson, making many appearances
on our behalf.
John F. Zaccaro has served as our Vice Chairman of the Board of Directors
since he co-founded drkoop.com in July 1997. From 1991 until November 1997, Mr.
Zaccaro served as the President and Executive Producer of the International
Health & Medical Film Festival. In addition, since 1995 Mr. Zaccaro has served
as a Senior Advisor to the Russian Arts Foundation. Mr. Zaccaro is also a
director of Kit Manufacturing Company, a publicly-traded constructor of
manufactured housing. Mr. Zaccaro is a published author and a motivational
speaker.
Donald W. Hackett has served as our President, Chief Executive Officer and a
director since he co-founded drkoop.com in July 1997. From January 1996 until
joining drkoop.com, Mr. Hackett served in various management positions,
including President and Chief Executive Officer, of Tradewave Corporation, an
Internet network security company. From September 1988 until December 1995, Mr.
Hackett served as Senior Vice President of Physician Computer Network, Inc., a
provider of practice management services. While employed
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at Physician Computer Network, Inc., Mr. Hackett successfully implemented the
first provider-centric, computer-based pay-per-view-advertising network, and
initiated direct data interchange transactions between laboratories, pharmacies
and hospitals with practice management systems.
Dennis J. Upah has served as our Chief Operating Officer since January 1999.
From February 1995 until joining drkoop.com, Mr. Upah served as President and
General Manager of KEYE-TV (the CBS affiliate in Austin, Texas), a unit of
Granite Broadcasting Corporation. From September 1988 until January 1995, Mr.
Upah served as President and General Manager of WEEK-TV (the NBC affiliate in
Peoria, Illinois), also a unit of Granite Broadcasting Corporation. Mr. Upah is
the former Technology Chairman and an elected representative to the national
CBS Affiliates Advisory Board of Directors. He was also elected to the board of
directors for several groups, including the Illinois Broadcasters Association
(where he served as President), Texas Association of Broadcasters, Austin
Better Business Bureau and St. Jude Children's Hospital Midwest Affiliate.
Susan M. Georgen-Saad has served as our Chief Financial Officer since October
1998. From March 1997 until joining drkoop.com, Ms. Georgen-Saad served as
Chief Financial Officer of IntelliQuest Information Group, a market research
company. From July 1996 until February 1997, she served as Chief Financial
Officer of Clinicor, Inc., a clinical research company. From April 1994 until
June 1996, Ms. Georgen-Saad served as Senior Vice President, Finance, of the
Texas Worker's Compensation Insurance Fund, an insurance company. Ms. Georgen-
Saad has more than 19 years of experience in strategic operational and
financial management in the high-technology services, pharmaceutical research,
insurance, healthcare and financial services industries.
Robert C. Hackett, Jr. has served as our Executive Vice President, Business
Development, since he co-founded drkoop.com in July 1997. From September 1996
until July 1997, Mr. Hackett served as Vice President of Business Development,
Vaccine Division, of Merck & Co., a pharmaceutical company. From January 1995
until September 1996, Mr. Hackett served as Assistant Vice President of
International Vaccines of American Home Products, a pharmaceutical company.
From April 1990 until January 1995, Mr. Hackett served as Director of
International Vaccines of American Cyanamid Company, a diversified
pharmaceutical and chemicals company.
Louis A. Scalpati has served as our Senior Vice President, Chief Architect
and Secretary since he co-founded drkoop.com in July 1997. From December 1995
until joining drkoop.com, Mr. Scalpati served as Director of the Healthcare
Business Unit, Tradewave Corporation, an Internet network security company, and
from July 1990 until November 1995, Mr. Scalpati served as Chief Network
Architect of Physician Computer Network, Inc., a provider of practice
management services.
Jeffrey C. Ballowe has served as a director of drkoop.com since March 1999.
Since 1997, Mr. Ballowe has been self-employed. From 1986 until 1997, Mr.
Ballowe held various management positions at Ziff-Davis, Inc., an international
media company, including President of the Interactive Media and Development
Group. Mr. Ballowe is Chairman of the Board of Deja News, Inc. and is a
director of VerticalNet, Xoom.com and ZDTV, a unit of Ziff-Davis, Inc.
Mardian J. Blair has served as a director of drkoop.com since February 1999.
For more than the past five years, Mr. Blair has served as the President of
Adventist Health System Sunbelt Healthcare Corporation. Mr. Blair is also a
director of multiple healthcare organizations in the Adventist system,
including HealthMagic, Inc., as well as numerous not-for-profit charitable and
educational institutions.
G. Carl Everett, Jr. has served as a director of drkoop.com since March 1999.
Mr. Everett has been Senior Vice President, Personal Systems Group, of Dell
Computer Corporation, responsible for worldwide development and marketing of
all Dell desktop and notebook products since February 1998. For the prior
twenty years, Mr. Everett was employed by Intel Corporation, most recently as
General Manager of the Desktop Products Group.
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<PAGE>
Richard D. Helppie, Jr. has served as a director of drkoop.com since May
1998. He has been the Chairman of the Board and Chief Executive Officer of
Superior Consultant Holdings Corporation, a publicly-traded healthcare
consulting company, since its inception in July 1996, and he founded Superior
Consultant Company, Inc., its predecessor, in May 1984. Mr. Helppie has more
than 22 years of experience in the healthcare and information systems
industries. In 1998 Mr. Helppie was the recipient of the Michigan Entrepreneur
of the Year Award (sponsored by Ernst & Young LLP) for healthcare.
Nancy L. Snyderman, M.D., has served as a director of drkoop.com since March
1998. Dr. Snyderman has been a practicing physician for more than fifteen
years. Dr. Snyderman is a medical correspondent for ABC and can be seen on Good
Morning America and Prime Time Live. Dr. Snyderman's Healthtalk segments can be
heard daily on the CBS radio network, and she also writes a monthly column for
Good Housekeeping. Dr. Snyderman is a published author and has received
broadcasting awards from the California Medical Association, Radio and
Television News Directors, the Associated Press, United Press International and
the American Academy of Facial Plastic and Reconstructive Surgery. Dr.
Snyderman continues to publish in peer-reviewed journals and has received
grants from the Kellogg Foundation and the American Cancer Society.
Donald W. Hackett and Robert C. Hackett, Jr. are brothers.
Other Key Employees
Set forth below is the name, age, and recent business experience of the key
members of our management team not described above.
Ian J. Bagnall, 27, serves as our Vice President of Business Development and
has served as Director of our website since April 1998. From October 1996 until
joining drkoop.com, Mr. Bagnall served as Marketing Relations Manager for
ichat, Inc. (now Acuity, Inc.), a provider of web-integrated chat browser and
server products. From October 1995 to October 1996, Mr. Bagnall worked as an
Internet Consultant, and from July 1994 until October 1995 Mr. Bagnall served
as Business Manager for Enter Television, Inc.
Peter Brumleve, 44, joined drkoop.com in May 1999 and serves as our Executive
Vice President and General Manager, Health Division. From August 1994 until
joining drkoop.com Mr. Brumleve was the Chief Marketing Officer and Chairman,
Division of Marketing of the Cleveland Clinic Foundation and the Cleveland
Clinic Health System. Prior to that Mr. Brumleve held the position of Group
Vice President for Planning and Marketing with Group Health Corporation of
Puget Sound.
Alex Cavalli, Ph.D., 49, has served as our Chief Development Officer since
August 1998. From April 1995 until joining drkoop.com, Dr. Cavalli served as
Chief Architect of Tradewave Corporation, an Internet network security company.
From January 1992 until April 1995, Dr. Cavalli served as Chief Architect for
the Enterprise Integration Project at Microelectronics and Computer Technology
Corporation, a research consortium.
Neal K. Longwill, 44, has served as our Senior Vice President of Sales since
May 1998. From May 1980 until joining drkoop.com, Mr. Longwill served in
various sales and management positions with Intel Corporation.
Guy D. MacNeill, 38, has served as our Vice President of Marketing since
February 1998. From January 1997 until joining drkoop.com, Mr. MacNeill served
as Vice President of Marketing of ichat, Inc. (now Acuity, Inc.). From March
1996 until January 1997, he served as Director of Marketing, and from January
1995 until March 1996, he served as a Senior Product Manager, of Intuit, Inc.
While at Intuit, Mr. MacNeill was active in all aspects of product management
and marketing for the best selling TurboTax and MacInTax line of desktop and
on-line consumer tax preparation products.
Keith Schaefer, 49, serves as our Executive Vice President and General
Manager, New Media Division. From August 1997 until joining drkoop.com, Mr.
Schaefer was Executive Partner for USWeb/CKS, a
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<PAGE>
professional services firm, where he was responsible for worldwide business
development. From 1994 to August 1997 he was co-founder of Cybernautics, an
Internet communications company. Prior to Cybernautics, he was Vice President
of Technology at Paramount Communications.
Roy A. Smith, 41, has served as our Chief Technology Officer since January
1998. In November 1996, Mr. Smith founded MarketPlace Consulting, a computer
consulting company. From April 1995 until November 1996, Mr. Smith was the
founder of Tradewave Corporation, an Internet network security company, and
held the following positions: Chief Executive Officer, Vice Chairman and
President. From April 1992 until April 1995, Mr. Smith served as Vice President
of Microelectronics and Computer Technology Corporation, where he led the
development of key information technologies for the National Information
Infrastructure (NII) in conjunction with the Defense Advanced Research Projects
Agency (DARPA) and the National Institute of Standards and Technology (NIST).
Sara B. Wells, 38, has served as our Senior Vice President Sales, Healthcare
Division since May 1999. From January 1998 until joining drkoop.com, Ms. Wells
was Senior Vice President of Sales at Abaton.com, a provider of web-based
clinical solutions. From April 1997 until January 1998, she was Regional Vice
President of Sales for Per-Se Technologies, a provider of healthcare business
systems.
Board Composition
We currently have eight authorized directors. In accordance with the terms of
our restated certificate of incorporation which will become effective upon the
closing of this offering, the terms of office of the directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 2000; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2001; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2002. The Class I
directors are Jeffrey C. Ballowe, Richard D. Helppie, Jr. and Mardian J. Blair,
the Class II directors are G. Carl Everett, Jr., John F. Zaccaro and Nancy L.
Snyderman, M.D., and the Class III directors are Donald W. Hackett and Dr. C.
Everett Koop. At each annual meeting of stockholders after the initial
classification or special meeting in lieu thereof, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election or special
meeting held in lieu thereof. In addition, our restated certificate of
incorporation provides that the authorized number of directors may be changed
only by resolution of the board of directors or a super-majority vote of the
stockholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of drkoop.com.
Board Committees
The audit committee of the board of directors reviews, acts on and reports to
the board of directors with respect to various auditing and accounting matters,
including the recommendation of our independent auditors, the scope of the
annual audits, fees to be paid to the independent auditors, the performance of
our independent auditors and our accounting practices. The members of the audit
committee are Messrs. Ballowe, Everett and Zaccaro.
The compensation committee of the board of directors determines the salaries
and benefits for our employees, consultants, directors and other individuals
compensated by our company. The members of the compensation committee are
presently Dr. Snyderman and Messrs. Ballowe and Everett.
The Company plans to establish a stock awards committee of the board of
directors to administer the 1999 Equity Participation Plan and determine the
stock option grants for our employees, consultants, directors and other
individuals under this plan. A majority of the members of this committee will
be non-employee directors.
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Director Compensation
From and after the completion of this offering, non-employee directors, other
than Dr. Koop and Mr. Zaccaro, will receive $1,500 for attendance at each
meeting of the board. In addition, those non-employee directors will receive
formula stock option grants under our 1999 Equity Participation Plan. This
formula feature will provide for the grant of options to purchase 37,500 shares
of common stock upon initial appointment to the board of directors and an
additional grant of options to purchase 12,500 shares immediately after each
annual meeting of stockholders, provided that no such subsequent annual grant
will be made if the director was initially appointed within 90-days of the
annual meeting. Dr. C. Everett Koop and Mr. Zaccaro will not receive annual
formula grants so long as they receive compensation under their respective
consulting agreements. All of these options will vest in three equal annual
instalments and will have an exercise price equal to fair market value on the
date of grant. These options will vest immediately upon a change in control.
The 1999 Plan permits additional discretionary option grants to non-employee
directors if approved by the full board of directors with the interested
director abstaining.
Each of Dr. C. Everett Koop and Mr. Zaccaro is party to a consulting
agreement with us. The compensation payable to them under those agreements
includes their service as a director. See "--Agreements with Dr. C. Everett
Koop" and "--Other Consulting Agreements with Directors."
In addition, in 1998 we granted options to Dr. Snyderman and Mr. Helppie in
consideration for their services as directors. Dr. Snyderman received an option
to purchase 183,750 shares of common stock with an exercise price of $0.12 per
share. Mr. Helppie received an option to purchase 112,500 shares of common
stock with an exercise price of $0.16 per share. In 1999 we have granted to
Messrs. Blair, Everett and Ballowe options to purchase 87,500, 87,500 and
106,250 shares, respectively. Each option has an exercise price of $7.43 per
share. As noted above, additional grants may be made in the future. All
directors are also reimbursed for their reasonable expenses incurred in
connection with attendance at board and committee meetings and on related
company business.
Compensation Committee Interlocks And Insider Participation
Our compensation committee consists of Dr. Snyderman and Messrs. Ballowe and
Everett. Prior to the offering, all compensation decisions were made by the
full board of directors.
No executive officer serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee. However, Dr. C.
Everett Koop is a director of Superior Consultant Holdings Corporation, and Mr.
Helppie is the Chairman of the Board and Chief Executive Officer of Superior.
On April 28, 1998, we entered into a series of agreements with Superior.
Pursuant to the terms of a stock purchase agreement, Superior purchased
3,850,592 shares of our Series B Non-Voting Preferred Stock for a purchase
price of $6,000,000. These shares will convert into 3,962,265 shares of common
stock upon the closing of this offering. We also entered into an option and put
agreement with Superior. The option and put agreement will terminate upon the
closing of this offering in exchange for the issuance of 1,210,665 shares of
common stock, valued at $8.2 million, to Superior plus 134,520 shares, valued
at $900,000, to be issued to Adventist Health System Sunbelt Healthcare
Corporation to satisfy an anti-dilution right held by them.
On April 29, 1998, we entered into a service agreement with Superior that
obligates us to provide $3.0 million in professional services revenue to
Superior prior to September 1999. During the year ended December 31, 1998, we
paid Superior approximately $1.5 million for services under this agreement.
Please see "Certain Transactions."
Employment Agreements with Management
Donald W. Hackett. We are a party to an employment agreement with Donald W.
Hackett, dated August 1, 1997. The term of the agreement is three years,
although we may, by mutual agreement with
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Mr. Hackett, extend the agreement for successive one-year terms. Pursuant to
the agreement, we are obligated to pay Mr. Hackett an initial annual salary of
$195,000. This salary automatically increases by 20% at the end of each of the
first three years of the agreement. In addition, Mr. Hackett receives a monthly
car allowance of $700 and is eligible for annual discretionary bonuses. In the
event Mr. Hackett's employment is terminated without cause or by reason of
disability, he would receive a severance payment in an amount equal to his
annual base salary. In the event Mr. Hackett resigns or his employment is
terminated with cause, he has agreed not to compete with us for a period of 12
months following the cessation of his employment.
Dennis J. Upah. We are a party to an employment agreement with Dennis J.
Upah, dated January 15, 1999. The term of the agreement is three years.
Pursuant to the agreement, we are obligated to pay Mr. Upah an annual salary of
$140,000 plus an annual bonus of at least $140,000 for the first year of the
agreement and $105,000 for the second and third years. In addition, Mr. Upah
receives a monthly car allowance of $600. Upon commencement of his employment,
Mr. Upah was granted options to purchase 337,500 shares of common stock and,
upon closing of this offering, will receive an option to purchase an additional
150,000 shares of our common stock with an exercise price equal to the public
offering price set forth on the cover of this prospectus. In the event Mr.
Upah's employment is terminated without cause or by reason of disability, each
of the options granted under the agreement would vest immediately, and he would
receive a severance payment in an amount equal to his annual base salary and
annual bonus. Mr. Upah has agreed not to compete with us for a period of 12
months following the cessation of his employment.
Robert C. Hackett. We are a party to an employment agreement with Robert C.
Hackett, dated August 1, 1997. The term of the agreement is three years,
although we may, by mutual agreement with Mr. Robert Hackett, extend the
agreement for successive one-year terms. Pursuant to the agreement, we are
obligated to pay Mr. Robert Hackett an initial annual salary of $165,000. This
salary automatically increases by 20% at the end of each of the first three
years of the agreement. In addition, Mr. Robert Hackett receives a monthly car
allowance of $600 and is eligible for annual discretionary bonuses. In the
event Mr. Robert Hackett's employment is terminated without cause or by reason
of disability, he would receive a severance payment in an amount equal to his
annual base salary. In the event Mr. Robert Hackett resigns or his employment
is terminated with cause, he has agreed not to compete with us for a period of
12 months following the cessation of his employment.
Susan M. Georgen-Saad. We are a party to an employment agreement with Susan
M. Georgen-Saad, dated January 27, 1999. The term of the agreement is two
years. Pursuant to the agreement, Ms. Georgen-Saad's initial annual salary of
$124,000 was increased to $150,000 on January 1, 1999. In addition,
Ms. Georgen-Saad receives a monthly car allowance of $600 and is eligible for
annual discretionary bonuses. Upon commencement of her employment, Ms. Georgen-
Saad was granted options to purchase 337,500 shares of common stock and, upon
the closing of this offering, Ms. Georgen-Saad will receive an option to
purchase an additional 150,000 shares of our common stock with an exercise
price equal to the public offering price set forth on the cover of this
prospectus. In the event Ms. Georgen-Saad's employment is terminated without
cause or by reason of disability, each of the options granted under the
agreement would vest immediately, and she would receive a severance payment in
an amount equal to one-half her annual base salary. Ms. Georgen-Saad has agreed
not to compete with us for a period of 12 months following the cessation of her
employment.
Louis A. Scalpati. We are a party to an employment agreement with Louis A.
Scalpati, dated August 1, 1997. The term of the agreement is three years,
although we may, by mutual agreement with Mr. Scalpati, extend the agreement
for successive one-year terms. Pursuant to the agreement, we are obligated to
pay Mr. Scalpati an initial annual salary of $145,000. This salary
automatically increases by 20% at the end of each of the first three years of
the agreement. In addition, Mr. Scalpati receives a monthly car allowance of
$600 and is eligible for annual discretionary bonuses. In the event Mr.
Scalpati's employment is terminated without cause or by reason of disability,
he would receive a severance payment in an amount equal to his annual base
salary. In the event Mr. Scalpati resigns or his employment is terminated with
cause, he has agreed not to compete with us for a period of 12 months following
the cessation of his employment.
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Agreements with Dr. C. Everett Koop
Name and Likeness Agreement. We are a party to an agreement, dated January 5,
1999 and amended effective as of January 5, 1999, with Dr. C. Everett Koop. The
Koop Agreement permits us to use the image, name and likeness of Dr. C. Everett
Koop in connection with healthcare-related software services and products.
Under the Koop Agreement, our use of Dr. Koop's name, image or likeness is
subject to his prior written approval of the resulting products, which may not
be unreasonably withheld and which must be rendered within ten working days of
our request. Upon his death, these approvals will be made by Dr. Koop's estate.
The agreement is exclusive except that it does not prohibit non-profit
activities of the Koop Institute. The term of the Koop Agreement is for five
years subject to automatic renewal for additional three year terms unless
terminated by either party within 120 days of the end of each term. If a
voluntary termination is requested by Dr. Koop and is not the result of a
breach or default by us, we will have the right on a non-exclusive basis for
three years following voluntary termination to rebrand and sell approved
products bearing the name, image or likeness of Dr. Koop. If we default in our
obligations and do not promptly cure the default, Dr. C. Everett Koop may
terminate the Koop Agreement immediately, no rebranding period will apply and
we would immediately lose all rights to use Dr. Koop's name and likeness. Dr.
C. Everett Koop may also terminate the Koop Agreement upon a change in control
of our company. Any development that would cause Dr. C. Everett Koop to
exercise his right to terminate his relationship with us or which otherwise
would cause us to lose the benefits of our affiliation with him would have a
material adverse effect on our business, results of operation and financial
condition.
As consideration for the Koop Agreement, we are obligated to pay Dr. C.
Everett Koop a royalty equal to two percent (2%) of our revenues derived from
sales of our current products during the term of the agreement including any
rebranding period. In the event any new products are developed in the future,
the royalty will be between two percent (2%) and four percent (4%) of revenues
as determined by the board of directors. We have agreed with Dr. C. Everett
Koop that, when we introduce a personal medical records feature to our users,
we will obtain appropriate and fully informed consent from the user in
compliance with all applicable laws and regulations and will take reasonable
precautions to assure the security of that data. A personal medical records
feature is a product which permits our users to store historical personal and
healthcare information in a secure portion of our database. The Koop Agreement
obligates us to convey to Dr. C. Everett Koop the trademarks "drkoop.com,"
"Dr. Koop's Community" and "Dr. Koop's Personal Medical Records" upon
termination of the Koop Agreement including any rebranding period.
Consulting Agreement. We are party to a letter agreement with Dr. C. Everett
Koop dated October 1, 1997. Under the agreement, which is for a three year
term, we paid him $100,000 for the first year ended September 30, 1998, and are
obligated to pay him $135,000 in the second year ending September 30, 1999 and
$150,000 in the third year ending September 30, 2000. These amounts represent
the cash compensation payable to Dr. Koop for services provided to us as a
consultant and director. Dr. Koop has also provided lecture services from time
to time for which he has been separately compensated, and he has also been
granted stock options to purchase an aggregate of 713,437 shares of common
stock with a weighted average exercise price of $0.11 per share. The options
vested immediately on the date of grant.
Other Consulting Agreements with Directors
John F. Zaccaro. We are party to a letter agreement with John F. Zaccaro
dated October 1, 1997. Under the agreement, which is for a three year term, we
paid him $100,000 for the first year ended September 30, 1998 and are obligated
to pay him $135,000 in the second year ending September 30, 1999 and $150,000
in the third year ending September 30, 1999. These amounts represent the cash
compensation payable to Mr. Zaccaro for services provided to us as a consultant
and director. He has also been granted stock options to purchase an aggregate
of 938,437 shares of common stock with a weighted average exercise price of
$0.08 per share. Options to purchase 225,000 shares will be fully vested on
July 17, 1999. The other options to purchase 713,437 shares of common stock
vested immediately on the date of grant.
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Dr. Nancy L. Snyderman. We are a party to an agreement, dated June 1, 1998,
with Dr. Nancy Snyderman, a director of our company. The Snyderman Agreement
permits us to use the image, name and likeness of Dr. Snyderman in connection
with healthcare-related software services and programs. The agreement is
exclusive in that Dr. Snyderman may not enter into agreements with companies
that directly compete with us, except that Dr. Snyderman may continue to act
under any agreements she entered into prior to entering into this agreement.
The term of the Snyderman Agreement is for three years subject to automatic
renewal for additional three year terms unless terminated by either party
within 60 days of the end of a given term. If the voluntary termination is
requested by Dr. Snyderman and is not the result of a breach or default by us,
we will have the right on a non-exclusive basis for two years following
voluntary termination to rebrand approved software services and programs
bearing the name, image or likeness of Dr. Snyderman. As consideration for the
Snyderman Agreement, we granted to Dr. Snyderman options to acquire 183,750
shares of our common stock with an exercise price of $0.16 per share. The
options vested immediately on the date of grant. Our use of Dr. Snyderman's
name, image or likeness is also subject to her prior written approval of the
resulting programs, which may not be unreasonably withheld and which must be
rendered within ten working days of our request.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or paid
to our Chief Executive Officer and the two other executive officers of the
Company whose annual salary and bonus exceeded $100,000 in 1998 for services
rendered in all capacities to us during 1998. We may refer to these officers as
our named executive officers in other parts of this prospectus.
In accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted for the named
executive officers because the aggregate amount of such perquisites and other
personal benefits was less than the lesser of $50,000 or 10% of the total of
annual salary and bonuses for each of the named executive officers in 1998.
Dennis J. Upah, our Chief Operating Officer, joined drkoop.com in January 1999.
His annual salary is $140,000, and he is guaranteed a bonus of at least
$140,000 in 1999. Susan M. Georgen-Saad, our Chief Financial Officer, joined
drkoop.com in October 1998. Her annual salary is $150,000. In addition, each of
Mr. Upah and Ms. Georgen-Saad have been granted significant stock option awards
in connection with their employment. See "--Employment Agreements with
Management."
Our board of directors appointed two outside directors and an employee
director to our compensation committee on February 24, 1999. Criteria
previously established for determining executive bonus compensation, which is
expected to be ratified by our compensation committee, includes measurement
against predetermined management business objectives and our operating results
for the period in review.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
-------------- Shares Underlying
Name and Principal Position Salary Bonus Options
--------------------------- -------- ----- -----------------
<S> <C> <C> <C>
Donald W. Hackett, President and Chief
Executive Officer........................... $146,250 -- 2,061,975
Robert C. Hackett, Jr., Executive Vice
President................................... $144,750 -- 465,000
Louis A. Scalpati, Senior Vice President,
Chief Architect............................. $129,750 -- 367,500
</TABLE>
Option Grants During the Year Ended December 31, 1998
The following table sets forth specified information regarding options
granted to each of the named executive officers during the year ended December
31, 1998. We have not granted any stock appreciation rights. The options were
granted under our Amended and Restated 1997 Stock Option Plan. In general,
options granted under the plan vest over four years and expire on the tenth
anniversary of the date of grant. The options granted to Donald W. Hackett
expire five years after the date of grant. Potential realizable values are net
of exercise price before taxes, and are based on the initial public offering
price of $8.00 per share and the assumption that our common stock appreciates
at he annual rate shown, compounded annually, from the date of
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grant until the expiration of the option term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future stock price growth.
<TABLE>
<CAPTION>
Individual Grants
---------------------
Potential Realizable
Value At Assumed Annual
Number of % of Total Rates of Stock
Securities Options Price Appreciation
Underlying Granted to for Option Term
Options Employees Exercise Market Expiration -----------------------
Name Granted in 1998 Price Price Date 5% 10%
---- ---------- ---------- -------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald W. Hackett....... 975,000 15% $.13 $8.00 3/24/03 $ 9,828,246 $12,435,228
Donald W. Hackett....... 1,086,975 16% $.13 $8.00 4/27/03 $10,956,982 $13,863,366
Robert C. Hackett,
Jr. ................... 465,000 7% $.12 $8.00 3/24/08 $ 6,003,688 $ 9,592,922
Louis A. Scalpati....... 367,500 5% $.12 $8.00 3/24/08 $ 4,744,850 $ 7,581,503
</TABLE>
The percentage of total options granted to employees in 1998 shown in the
table above is based on options to purchase an aggregate of 6,709,512 shares of
common stock granted during the year ended December 31, 1998.
1998 Year-End Option Values
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the named executive officers at
December 31, 1998. None of the named executive officers exercised options to
purchase common stock during the year ended December 31, 1998. The value of in-
the-money options is based on the initial public offering price of $8.00 per
share and is net of the option exercise price.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options At December 31, In-The-Money Options at
1998 December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald W. Hackett.......... 1,127,682 1,546,480 8,874,865 12,170,798
Robert C. Hackett, Jr. .... 1,008,750 112,500 7,948,950 886,500
Louis A. Scalpati.......... 1,000,312 187,500 7,882,463 1,477,500
</TABLE>
Stock Option Plans
Amended and Restated 1997 Stock Option Plan. Our Amended and Restated 1997
Stock Option Plan authorizes the issuance of up to 11,250,000 shares of common
stock. To date we have granted options to purchase an aggregate of 11,116,902
shares of common stock to employees, directors and consultants under the 1997
Plan with a weighted average exercise price of $0.53 per share. From and after
the completion of this offering, no further options will be granted under the
1997 Plan.
The board of directors, or a committee thereof, has the power to determine
the terms of the options, including the exercise price of the options, the
number of shares subject to each option, the exercisability thereof, and the
form of consideration payable on such exercise, provided that the exercise
price must be at least 100% of fair market value for incentive stock options
and not less than 85% of fair market value for nonqualified stock options. Any
options must be granted within ten years from the date of the 1997 Plan.
Incentive stock options granted to any holder of 10% or more of the combined
voting power of all classes of stock must have an exercise price of not less
than 110% of fair market value and be exercisable for a term of no more than
five years.
1999 Equity Participation Plan. Our 1999 Equity Participation Plan was
adopted by our board of directors in February 1999 as a successor equity plan
to our 1997 Plan. The 1999 Plan will become effective contemporaneously with
this offering and thereafter no further grants will be made under the 1997
Plan. Options to purchase an aggregate of 1,742,800 shares of common stock with
an exercise price equal to the public offering price listed on the cover of
this prospectus will be granted under the 1999 Plan contemporaneously with this
offering. Up to 3,750,000 shares of common stock may be issued under the 1999
Plan.
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The 1999 Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of
1986, to employees and for the grant of nonstatutory stock options, stock
appreciation rights, performance awards, dividend equivalents, stock payments
and deferred stock to employees and consultants. The 1999 Plan provides that we
cannot issue incentive stock options after February 2009. The 1999 Plan also
provides for grants to the non-employee directors of nonstatutory stock options
to purchase 37,500 shares of common stock upon initial election to the board of
directors and 12,500 shares of common stock annually thereafter (except that no
annual grant will be made if the director was first appointed to the board
within 90 days of the applicable annual meeting of stockholders). Dr. C.
Everett Koop and Mr. Zaccaro will not receive annual formula grants so long as
they receive compensation under their respective consulting agreements.
The 1999 Plan may be administered by the board or a board committee. The
administrator has the power to determine the terms of the options or other
awards granted, including the exercise price of the options or other awards,
the number of shares subject to each option or other award (up to 1,250,000 per
year per participant), the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the administrator has
the authority to amend, suspend or terminate the 1999 Plan, provided that no
such action may affect any share of common stock previously issued and sold or
any option previously granted under the 1999 Plan without the consent of the
holder.
The exercise price of all incentive stock options granted under the 1999 Plan
must be at least equal to the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and other awards
granted under the 1999 Plan is determined by the administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the common stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must be
at least equal 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1999 Plan may not exceed ten years.
In the case of restricted stock, unless the administrator determines
otherwise, the restricted stock purchase agreement will grant us a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment or consulting relationship with our company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to a restricted stock purchase agreement must be the
original price paid by the purchaser. The repurchase option will lapse at a
rate determined by the administrator.
Options and other awards granted under the 1999 Plan are generally not
transferable by the optionee, and each option and other award is exercisable
during the lifetime of the optionee only by such optionee. Options granted
under the 1999 Plan must generally be exercised within 3 months after the end
of optionee's status as an employee, director or consultant, or within one year
after such optionee's termination by disability or death, respectively, but in
no event later than the expiration of the option's term.
The 1999 Plan provides that, in the event of a merger of drkoop.com with or
into another corporation, the administrator will have the authority, but not
the obligation to accelerate the vesting of each outstanding option and other
award, except that options issued to non-employee directors will vest in full
upon the closing of such a transaction. Contemporaneously with the closing of
this offering, we will grant options to purchase 318,750 shares of common stock
to three of our employees in accordance with their employment agreements. The
exercise price of these options will be the public offering price disclosed on
the cover of this prospectus.
Employee Stock Purchase Plan. The drkoop.com 1999 Employee Stock Purchase
Plan was adopted by the Board in June 1999 and approved by the stockholders in
June 1999. A total of 750,000 shares of
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common stock has been reserved for issuance under the purchase plan. As of the
date of this prospectus, no shares have been issued under the purchase plan.
The purchase plan, which is intended to qualify under Section 423 of the
Code, contains consecutive offer periods that are generally six months in
duration. The offer periods start and end on February 15 and August 15 of each
year, except for the first two offer periods, which will commence on the date
immediately preceding the first date on which a share of common stock is traded
on an exchange or quoted on Nasdaq or a successor quotation system, and on
August 15, 1999, respectively, and will end on February 15, 2000.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week. However, no
employee may be granted a right to purchase stock under the purchase plan (1)
to the extent that, immediately after the grant of the right to purchase stock,
the employee would own (or be treated as owning) stock possessing 5% or more of
the total combined voting power or value of all classes of the capital stock of
the Company or (2) to the extent that his or her rights to purchase stock under
all of our employee stock purchase plans accrues at a rate which exceed $25,000
worth of stock for each calendar year. The purchase plan permits participants
to purchase common stock through payroll deductions of up to 15% of the
participant's base compensation. Base compensation is defined as the
participant's gross base compensation, excluding overtime payments, sales
commissions, incentive compensation, bonuses, expense reimbursements, fringe
benefits and other special payments. The maximum number of shares a participant
may purchase with respect to a single offer period is 10,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offer period. The price of stock
purchased under the purchase plan is 85% of the lesser of the fair market value
of the common stock (1) the first day of the offer period or (2) the last day
of the offer period. Participants may end their participation at any time other
than the final fourteen days of an offer period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination
of employment with the Company.
Rights to purchase stock granted under the purchase plan are not transferable
by a participant other than by will, the laws of descent and distribution, or
as otherwise provided under the purchase plan. The purchase plan provides that,
in the event of a merger of the Company with or into another corporation or a
sale of substantially all of the Company's assets, each outstanding right to
purchase stock may be assumed or substituted for by the successor corporation.
The Board has the authority to amend or terminate the purchase plan. However,
no such action by the Board may adversely affect any outstanding rights to
purchase stock under the purchase plan, except that the Board may terminate an
offer period on any exercise date if the board of directors determines that the
termination of the purchase plan is in the best interests of the Company and
its stockholders.
Registration under the Securities Act. We intend promptly after the
completion of this offering to register on Form S-8 all shares of common stock
issuable under our compensatory stock plans other than shares which may be
resold under Rule 701 without registration.
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PRINCIPAL STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of the common stock as of March 31, 1999, and as adjusted
to reflect the sale of the shares of common stock offered hereby, by:
(1) each person (or group of affiliated persons) who is known by us to
beneficially own 5% or more of the common stock;
(2) each of our directors;
(3) each of our named executive officers; and
(4) all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. Unless otherwise indicated, the persons named in the
table have sole voting and sole investment control with respect to all shares
beneficially owned. The number and percentage of shares beneficially owned are
based on 18,139,591 shares of common stock outstanding as of March 31, 1999,
assuming conversion of all outstanding shares of preferred stock into common
stock and assuming conversion of convertible notes and accrued interest. The
number and percentage of shares beneficially owned also assumes that shares of
common stock subject to options and other rights that are currently exercisable
or exercisable within 60 days of March 31, 1999 are deemed to be outstanding
and beneficially owned. The address for those individuals for which an address
is not otherwise indicated is: c/o drkoop.com, Inc., 8920 Business Park Drive,
Suite 200, Austin, Texas 78759.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Owned After
To This Offering This Offering
------------------------------------------------
Beneficial Owner Number Percent Number Percent
---------------- ------------- ----------------------- ----------
<S> <C> <C> <C> <C>
C. Everett Koop, M.D. (1)...... 2,543,505 11% 2,543,505 7%
John F. Zaccaro (2)............ 1,643,505 7 1,643,505 4
Donald W. Hackett (3).......... 7,058,402 30 7,058,402 19
Jeffrey C. Ballowe ............ -- * -- *
Mardian J. Blair (4)........... 2,750,195 12 2,750,195 7
Adventist Health System Sunbelt 2,750,195 12 2,750,195 7
Healthcare Corporation........
111 North Orlando Avenue
Winter Park, Florida 32789
G. Carl Everett, Jr. .......... -- * -- *
Richard D. Helppie, Jr. (5).... 5,201,055 22 5,201,055 14
Superior Consultant Holdings 5,172,930 22 5,172,930 14
Corporation...................
4000 Town Center, Suite 1100
Southfield, Michigan 48075
Nancy L. Snyderman, M.D. (6)... 367,500 2 367,500 1
Robert C. Hackett, Jr. (7)..... 1,233,750 5 1,233,750 3
Louis A. Scalpati (8).......... 1,375,312 6 1,375,312 4
All directors and executive
officers as a group (10
persons)...................... 22,173,224 94 22,173,224 58
</TABLE>
- --------
(1) Includes 713,437 shares of common stock issuable upon the exercise of
options exercisable within 60 days of March 31, 1999.
(2) Includes 938,437 shares of common stock issuable upon the exercise of
options exercisable within 60 days of March 31, 1999. The business address
of Mr. Zaccaro is 24050 Madison Street, Torrance, California 90505.
(3) Includes 1,643,177 shares of common stock issuable upon the exercise of
options exercisable within 60 days of March 31, 1999.
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(4) Consists of 2,615,677 shares of common stock held by Adventist Health
Systems Sunbelt Healthcare Corporation and 134,520 shares of common stock
that will be issued to Adventist upon the closing of this Offering. Please
see "Certain Transactions." Mr. Blair, a director of drkoop.com, is also
the president of Adventist and disclaims beneficial ownership of the shares
held by Adventist. Mr. Blair's business address is the same as that of
Adventist.
(5) Consists of 3,962,265 shares of common stock held by Superior Consultant
Holdings Corporation, 1,210,665 shares of common stock that will be issued
to Superior upon the closing of this offering and 28,125 shares of common
stock issuable upon the exercise of options exercisable within 60 days of
March 31, 1999. Please see "Certain Transactions." Mr. Helppie, a director
of drkoop.com, is the Chairman of the Board and Chief Executive Officer of
Superior and disclaims beneficial ownership of the shares held by Superior.
Mr. Helppie's business address is the same as that of Superior.
(6) Consists of 367,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days of March 31, 1999.
(7) Includes 1,008,750 shares of common stock issuable upon the exercise of
options exercisable within 60 days of March 31, 1999.
(8) Includes 1,000,312 shares of common stock issuable upon the exercise of
options exercisable within 60 days of March 31, 1999.
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CERTAIN TRANSACTIONS
Series A Financing
From March 1, 1998 through April 6, 1998, we issued 619,102 shares of Series
A 8% Convertible Preferred Stock to 17 accredited investors for an aggregate
purchase price of $742,900. These shares will be converted into 671,727 shares
of common stock upon the closing of this offering. Three members of Donald W.
Hackett's immediate family purchased 104,505 shares of the stock for an
aggregate purchase price of $125,400.
Series B Financing
On April 28, 1998, we entered into a series of agreements with Superior
Consultant Holdings Corporation. Pursuant to the terms of a stock purchase
agreement, Superior purchased 3,850,597 shares of our Series B Non-Voting
Preferred Stock for a purchase price of $6,000,000. Superior has agreed that
these shares will automatically be converted into 3,962,265 shares of common
stock upon the closing of this offering. Pursuant to this agreement Superior
also acquired the right to have one or more designees appointed to our board of
directors. From and after the completion of this offering, we will be obligated
to include on our slate for the election of directors one designee of Superior
so long as they own not less than 10% of the outstanding common stock. Mr.
Hackett, our Chief Executive Officer, has agreed to vote his shares in favor of
Superior's designee. As part of this investment transaction, Richard D.
Helppie, Jr., Chief Executive Officer of Superior, became a director of
drkoop.com. If Superior's designee is other than Mr. Helppie, such person is
subject to the approval of our board of directors, which may not be
unreasonably withheld. In addition, Dr. C. Everett Koop was appointed a
director of Superior.
In connection with the issuance of the Series B shares, we also entered into
an option and put agreement and a registration rights agreement with Superior.
Among other things, the option and put agreement gives Superior the right to
require us to repurchase their shares at specified times prior to our initial
public offering and gave Superior the right to acquire an additional 3,850,597
shares of Series B Preferred Stock (convertible into 3,962,265 shares of common
stock) at an exercise price equal to seventy percent (70%) of the fair market
value of the underlying shares of common stock on the date of exercise. All
substantive provisions of the option and put agreement will be terminated at
the closing of this offering in exchange for the issuance of 1,210,665 shares
of common stock, valued at $8.2 million to Superior plus 134,520 shares valued
at $900,000, to be issued to Adventist Health System Sunbelt Healthcare
Corporation to satisfy an anti-dilution right held by them. The Adventist
investment agreement includes a requirement that upon the issuance of any
shares to Superior under their option and put agreement, additional shares will
be issued to Adventist equal to approximately 9.9 percent of the total combined
issuance. No further issuances are due to Adventist under this anti-dilution
adjustment provision because it is specific to the Superior option and put
agreement. Please see "Description of Securities--Registration Rights" for a
summary of the registration rights granted to Superior.
Other Agreements with Superior
On April 29, 1998, we entered into a service agreement with Superior which
contemplates our retention of them on an exclusive basis to provide
professional services in connection with consulting and information technology
matters, including the construction of our website. The term of the agreement
is five years. The service agreement also includes an agreement calling for
Superior to recognize at least $3.0 million in professional services revenue
from its relationship with us (including specific work for other parties
referred by us) during the first year of the relationship. This commitment has
been modified to extend the period during which we may generate these revenues
to September 1999. During the year ended December 31, 1998, we paid Superior an
aggregate of approximately $1.5 million for services under the service
agreement. We believe that these services have been provided on terms not less
favorable than could have been obtained from an unaffiliated third party. This
assessment reflects the determination of our management based on their business
experience and other professional services firms engaged by them and is not
based on a request for competitive proposals or similar agreements maintained
with other parties.
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Series C Financing
On January 29, 1999, we received $3.5 million in cash and acquired 10% of the
outstanding stock of HealthMagic, Inc., a subsidiary of Adventist Health System
Sunbelt Healthcare Corporation, in exchange for 2,615,677 shares of our Series
C convertible preferred stock, which will be converted into an equivalent
number of shares of common stock upon the closing of this offering. The parties
also entered into related agreements which provide for registration rights and
specified transfer restrictions. These related agreements call for an Adventist
representative, Mr. Mardian J. Blair, to become a director of our company and
for us to designate a director of HealthMagic. The right of Adventist to
designate a director of drkoop.com will terminate with this offering, although
we expect Mr. Blair to continue to serve as a director.
HealthMagic Transaction
On January 29, 1999, we established a technology relationship with
HealthMagic, a supplier of applications to Internet companies, whereby we
contributed to them our PMR product and received from them a license to use a
broad range of Internet technologies, including a web-enabled personal medical
record, personalization tools, and security and authentication features.
HealthMagic will develop, implement and support these technologies for us.
Currently, we expect to deploy these features in the first half of 1999. Under
the terms of the license, drkoop.com and HealthMagic will share in revenues
generated from activities related to the licensed technology. However, in the
event that HealthMagic grants more favorable revenue sharing terms to a third
party, drkoop.com's revenue share will be adjusted to match the other terms. In
addition, drkoop.com has agreed not to develop, support or distribute any
product that significantly duplicates the functionality of the web-enabled
personal medical record. The license is nonexclusive and has a term of 99
years. In general, neither party may assign, delegate or transfer any right or
obligation under this license. HealthMagic may also develop similar
technologies that it licenses to our competitors.
In addition, on January 29, 1999 we entered into a content subscription and
software licensing agreement with Adventist for $500,000. The license fee was
fully paid at the execution of the license, and no future payments by Adventist
are required. Under the agreement, Adventist has the right, over a period of
three years, to enroll affiliates in our Community Partner Program. Each
Community Partner Program affiliate agreement has a term of one year. Mardian
J. Blair, a director of our company, is president of Adventist. To the extent
that our board of directors determines that a potential conflict of interest
exists between our company and either Adventist or HealthMagic, Mr. Blair
abstains from discussions and voting on matters concerning Adventist or
HealthMagic.
Other Financing Agreement with Adventist
On March 3, 1999 we entered into a loan agreement with Adventist. Pursuant to
this agreement, Adventist is irrevocably obligated to loan to us the aggregate
principal amount of up to $2.0 million at an interest rate of 7% per annum.
Upon the closing of this offering, the principal amount borrowed under this
agreement and all accrued interest will, solely at Adventist's option, either
be due and payable or convert into common stock at a per share price of $7.43.
As of March 31, 1999, we had borrowed the full $2.0 million under this
agreement.
Hackett Loan Agreement
From July 1997 through March 1998, Donald W. Hackett loaned the company an
aggregate of $216,043. On March 16, 1998, we issued 1,800,360 shares of common
stock to Mr. Hackett in exchange for cancellation of this indebtedness. The
conversion price was established by the board of directors based on their
assessment of the fair market value of the common stock on the date of
conversion.
Agreements with Dr. C. Everett Koop
We are party to a name and likeness agreement and a consulting agreement with
Dr. Koop. For the year ended December 31, 1998 we accrued royalty fees of $855,
paid him lecture fees of $95,000 and director's fees of $83,333. Additionally,
during such period we reimbursed him for his travel and other expenses incurred
on
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company business in the amount of $9,200. For the year ended December 31, 1997,
we paid Dr. Koop $2,200 in connection with certain services he rendered to our
company. Please see "Management--Agreements with Dr. C. Everett Koop."
Consulting Agreement with Mr. Zaccaro
We are party to a consulting agreement with Mr. Zaccaro pursuant to which we
paid him $83,333 for the year ended December 31, 1998. Please see "Management--
Other Consulting Agreements with Directors."
Name and Likeness Agreement with Dr. Snyderman
We are party to a name and likeness agreement with Dr. Snyderman. For the
year ended December 31, 1998, she received no cash compensation but was granted
options to purchase 183,750 shares of common stock for an exercise price of
$0.12 per share, which we believe was not less than fair market value on the
date of grant. In addition, Dr. Snyderman was granted options to purchase
183,750 shares of common stock for an exercise price of $0.16 per share as
compensation for her services as a director. All of these options vested
immediately on the date of grant. Please see "Other Consulting Agreements with
Directors."
Promoters of drkoop.com, Inc.
Each of Dr. Koop, Chairman of the Board, Mr. Zaccaro, Vice Chairman, Mr.
Donald Hackett, Chief Executive Officer and President, Mr. Robert Hackett,
Executive Vice President, Business Development, and Mr. Scalpati, Senior Vice
President, Chief Architect, is a co-founder of drkoop.com and may be deemed a
promoter for purposes of the federal securities laws. All material transactions
with such persons are described in this section or elsewhere in this
prospectus. Please see "Management" and Note 11 to the financial statements.
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DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of our
restated certificate of incorporation and bylaws are summaries thereof and are
qualified by reference to the certificate and the bylaws. Copies of these
documents have been filed with the SEC as exhibits to our registration
statement, of which this prospectus forms a part. The descriptions of the
common stock and preferred stock reflect changes to our capital structure that
will occur upon the closing of this offering.
Upon completion of this offering, our authorized capital stock consists of
100,000,000 shares of common stock, par value $0.001 per share, and 15,000,000
shares of preferred stock, par value $0.001 per share.
Common Stock
As of March 31, 1999, there were 18,139,591 shares of common stock
outstanding and held of record by 25 stockholders, assuming conversion of all
outstanding shares of preferred stock and the convertible note payable and
accrued interest as set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and they do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
dividends, if any, as may be declared by the board of directors out of funds
legally available therefor, subject to any preferential dividend rights of any
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
drkoop.com the holders of common stock are entitled to receive ratably the net
assets of drkoop.com available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future. Upon the closing of this offering, there will be no shares
of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, the board of directors will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 15,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption including sinking fund provisions, redemption price
or prices, liquidation preferences and the number of shares constituting any
series or designations of such series. We have no present plans to issue any
shares of preferred stock. See "--Anti-Takeover Effects of Provisions of
Delaware Law and our Certificate of Incorporation and Bylaws."
Convertible Notes and Restated Warrants
On December 24, 1998, we issued a convertible note payable to a stockholder
in the original principal amount of $800,000--$500,000 of which was received in
1998--bearing simple interest at 6% per annum and due December 24, 1999, along
with five-year warrants to purchase 33,482 shares of Series C Preferred Stock
for an exercise price of $4.78 per share, which will become the right to
purchase 33,482 shares of common stock for $4.78 per share upon the closing of
this offering. Interest on the notes is payable at maturity. At any time prior
to the closing of this offering any unpaid principal and interest may be
converted at a conversion price of $4.78 per share.
On April 9, 1999, we entered into distribution agreements with Infoseek
Corporation and the Buena Vista Internet Group, a unit of The Walt Disney
Company. Under these agreements, we agreed to issue warrants to purchase an
aggregate of 775,000 shares of common stock at an exercise price of $8.60 per
share.
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None of these warrants are exercisable prior to one year after issuance.
Registration Rights
Pursuant to the terms of the amended and restated investors' rights
agreement, after this offering, the holders of approximately 8,124,017 shares
of common stock will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between us and the holders of such registrable securities, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of such registration
and are entitled to include shares of such common stock therein. Additionally,
such holders are also entitled to certain demand registration rights pursuant
to which they may require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock, and
we are required to use our best efforts to effect such registration. All of
these registration rights are subject to conditions and limitations, among them
the right of the underwriters of an offering to limit the number of shares
included in such registration and our right not to effect a requested
registration within six months following an offering of our securities,
including this offering. In addition, we have agreed to use our best efforts to
provide similar registration rights to the holders of convertible promissory
notes in the event holders convert the notes into shares of common stock.
Please see "Shares Eligible for Future Sale."
Anti-Takeover Effects of Provisions Of Delaware Law and Our Certificate of
Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 of Delaware law
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, fifteen percent or more of a corporation's voting
stock. This statute could prohibit or delay the accomplishment of mergers or
other takeover or change in control attempts with respect to drkoop.com and,
accordingly, may discourage attempts to acquire us.
In addition, some provisions of the certificate and bylaws may be deemed to
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by our stockholders. These provisions include:
Board of Directors. Our board of directors will be divided into three classes
of directors serving staggered three year terms. The certificate of
incorporation authorizes our board of directors to fill vacant directorships or
increase the size of the board of directors. Accordingly, even if a stockholder
brings a successful proxy fight, he would likely only be able to elect a
minority of our board of directors at any one annual meeting.
Stockholder Action; Special Meeting of Stockholders. The certificate of
incorporation provides that stockholders may not take action by written
consent, but only at a duly called annual or special meeting of stockholders.
The certificate of incorporation further provides that special meetings of our
stockholders may be called only by the chairman of the board of directors, by a
committee of the board of directors or a majority of the board of directors,
and in no event may the stockholders call a special meeting. Thus, without
approval by the board of directors or chairman, stockholders may take no action
between annual meetings.
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Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice of this intention in writing. To be timely, a stockholder's notice must
be delivered to or mailed and received at our principal executive offices not
less than 120 days prior to the first anniversary of the date of our notice of
annual meeting provided with respect to the previous year's annual meeting of
stockholders. However, if no annual meeting of stockholders was held in the
previous year or the date of the annual meeting of stockholders has been
changed to be more than 30 calendar days from the time contemplated at the time
of the previous year's proxy statement, then a proposal shall be received no
later than the close of business on the 10th day following the date on which
notice of the date of the meeting was mailed or a public announcement was made,
whichever first occurs. The bylaws also include a similar requirement for
making nominations at special meetings and specify requirements as to the form
and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual or special meeting of
stockholders.
Authorized But Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to certain limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued and unreserved common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of the drkoop.com by means
of a proxy contest, tender offer, merger or otherwise.
Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
drkoop.com has provisions in its certificate and bylaws which require a super-
majority vote of the stockholders to amend, revise or repeal anti-takeover
provisions.
Limitation of Liability and Indemnification Matters
The certificate of incorporation provides that, except to the extent
permitted by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of the certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct, or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by the
Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws.
Section 145 of the Delaware corporate law empowers a corporation to indemnify
its directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided
that this provision shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware corporate law; or
. for any transaction from which the director derived an improper personal
benefit.
71
<PAGE>
Delaware law provides further that the indemnification permitted by that law
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under a corporation's bylaws, any agreement, a vote of
stockholders or otherwise. The certificate of incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware corporate law and provides that we may fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was an employee, director or officer of drkoop.com or is or
was serving at our request as an employee, director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
We have entered into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in the bylaws. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and officers. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions, regardless of whether Delaware law would permit
indemnification.
Transfer Agent And Registrar
Upon the closing of this offering, the transfer agent and registrar for the
common stock will be American Stock Transfer and Trust Company.
Listing
We have applied to have our common stock admitted for quotation on the Nasdaq
National Market under the symbol "KOOP."
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares of common stock
for sale will have on the market price of the common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of common stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the common stock and could impair our future ability
to raise capital through the sale of equity securities. See "Risk Factors--The
sale of shares eligible for future sale and expectations of future sales of
these shares could depress share prices.
Upon the closing of this offering, we will have an aggregate of 27,514,591
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
the outstanding shares, 5,625,000 of the shares sold in this offering will be
freely tradable, except that any shares held by "affiliates" (as that term is
defined in Rule 144 promulgated under the Securities Act) may only be sold in
compliance with the limitations described below. The other 3,750,000 shares
sold in this offering will be available for sale in the public market after 180
days from the date of this prospectus. The remaining 18,139,591 shares of
common stock will be deemed "restricted securities" as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, shares will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
Number
of Shares Date
--------- ----
<C> <S>
5,625,000 After the date of this prospectus
1,891,105 At various times after 90 days from the date of this prospectus
(Rule 144)
19,998,486 At various times after 180 days from the date of this prospectus
(subject, in some cases, to volume limitations)
</TABLE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 275,146 shares immediately after this
offering) or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed,
subject to restrictions. In addition, a person who is not deemed to have been
an affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate, such person's holding period for the purpose of effecting a sale
under Rule 144 commences on the date of transfer from the affiliate.
Our directors and officers and certain stockholders who hold 16,248,486
shares in the aggregate have agreed that they will not offer, sell or agree to
sell, directly or indirectly, or otherwise dispose of any shares of common
stock without the prior written consent of Bear, Stearns & Co. Inc. for a
period of 180 days from the date of this prospectus. Please see "Underwriting."
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of March 31, 1999, the holders of options exercisable into
approximately 10,492,531 shares of common stock
73
<PAGE>
will be eligible to sell their shares on the expiration of the 180-day lockup
period or subject in some cases to vesting of such options.
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issued or issuable under our stock plans. We
expect to file the registration statement covering shares offered pursuant to
the Amended and Restated 1997 Stock Option Plan, the 1999 Equity Participation
Plan and the 1999 Employee Stock Purchase Plan within 180 days after the date
of this prospectus, thus permitting the resale of such shares by nonaffiliates
in the public market without restriction under the Securities Act.
We have agreed not to sell or otherwise dispose of any shares of common stock
during the 180-day period following the date of the prospectus, except that we
may issue, and grant options to purchase, shares of common stock under the 1999
Equity Participation Plan. In addition, we may issue shares of common stock in
connection with any acquisition of another company if the terms of such
issuance provide that such common stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence. See
"Risk Factors--The sale of shares eligible for future sale and expectations of
future sales of these shares could depress share prices."
Following this offering, holders of 8,090,534 shares of outstanding common
stock will have demand registration rights with respect to their shares of
common stock (subject to the 180-day lock-up arrangement described above) to
require us to register their shares of common stock under the Securities Act,
and they will have certain rights to participate in any future registration of
our securities. We are not required to effect more than an aggregate of three
demand registrations on behalf of such holders. These holders are subject to
lock-up periods of not more than 180 days following the date of this prospectus
or any subsequent prospectus. In addition, we have agreed to use our best
efforts to provide similar registration rights to the holders of convertible
promissory notes in the event the holders convert the notes into shares of
common stock. The notes and accrued interest are convertible into an aggregate
of up to 439,187 shares of common stock. See "Description of Securities--
Registration Rights." We also plan to register all shares issuable under our
stock option plans on Form S-8 or to otherwise permit the resale of those
shares in reliance on Rule 701 under the Securities Act.
74
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters and drkoop.com, each of the underwriters named below,
through their representatives Bear, Stearns & Co. Inc., Hambrecht & Quist LLC
and Wit Capital Corporation as e-Manager(TM), has severally agreed to purchase
from drkoop.com the aggregate number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ..........................................
Hambrecht & Quist LLC .............................................
Wit Capital Corporation............................................
---------
Total............................................................ 9,375,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is such
that they are committed to purchase and pay for all of the above shares of
common stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the "public offering price" set forth on the cover page of this
prospectus and at such price less a concession not in excess of $ per share
of common stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and such dealers may
reallow, concessions not in excess of $ per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. The common stock is offered
subject to receipt and acceptance by the underwriters and to certain other
conditions, including the right to reject orders in whole or in part.
The underwriters, at the request of drkoop.com, have reserved for sale at the
initial public offering price up to shares of common stock to registered
users of drkoop.com's website who express an interest in purchasing such
shares. The sale of such shares will be made by Wit Capital acting as
e-Manager(TM) in the offering. Purchases of the reserved shares are to be made
through an account at Wit Capital in accordance with Wit Capital's procedures
for opening an account and transacting in securities. Any reserved shares not
purchased by registered users of our website will be offered by the
underwriters on the same basis as other shares offered hereby. The prospectus
in electronic format is being made available on an Internet website maintained
by Wit Capital Corporation.
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 1,406,250 additional shares of our common stock
exercisable at the "public offering price" less the "underwriting discounts and
commissions," each as set forth on the cover page of this prospectus. If the
underwriters exercise such option in whole or in part, then each of the
underwriters will be severally committed, subject to certain conditions,
including the approval of certain matters by counsel, to purchase the
additional shares of common stock in proportion to their respective purchase
commitments as indicated in the preceding table.
75
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us, assuming an initial public
offering price of $8.00 per share.
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................... $ .56 $5,250,000 $6,037,500
Expenses payable by us.................... $ .14 $1,355,000 $1,355,000
</TABLE>
At the request of drkoop.com, the underwriters will reserve up to $10 million
of common stock at the initial public offering price for sale to each of Dell
Computer Corporation and FHC Health Systems Investment Company, L.C. and up to
$5 million of common stock at the initial public offering price for sale to
Quintiles Transnational Corp. This would represent 3,125,000 shares of common
stock at the midpoint of the estimated offering price range. We cannot assure
you that any of these reserved shares will be purchased. Dell Computer
Corporation, Quintiles Transnational Corp. and FHC Internet Services, L.C. will
each agree that, if it purchases any shares of common stock or other securities
of drkoop.com, it will not sell or otherwise dispose of such shares or
securities until six months after this offering. Any other strategic partners
will also be required to agree to a similar lock-up.
The price of shares reserved for Dell Computer Corporation, Quintiles
Transnational Corp. and FHC Health Systems Investment Company will be the
initial public offering price on the cover page of this prospectus. The number
of shares available to the general public will be reduced to the extent these
entities purchase the reserved shares. Any reserved shares not purchased by
them at the closing of the public offering will be offered by the underwriters
to the general public on the same terms as the other shares offered by this
prospectus.
The underwriters, at the request of drkoop.com, have reserved for sale at the
initial public offering price up to 500,000 shares of common stock to be sold
in this offering for sale to our employees and to their associates and related
persons. The number of shares available for sale to the general public will be
reduced to the extent that any reserved shares are purchased. Any reserved
shares not so purchased will be offered by the underwriters on the same basis
as the other shares offered hereby.
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act of 1933, as amended, or will contribute to payments that the
underwriters may be required to make in respect thereof.
Our directors and officers and certain stockholders who hold 16,248,486 have
agreed that they will not offer, sell or agree to sell, directly or indirectly,
or otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not, without the prior written consent of Bear, Stearns
& Co. Inc., offer, sell or otherwise dispose of any shares of common stock
except for the shares of common stock offered hereby and the shares of common
stock issuable upon exercise of outstanding options and warrants.
76
<PAGE>
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the underwriters. Among the factors
to be considered in such negotiations will be our results of operations in
recent periods, estimates of our prospects and the industry in which we
compete, an assessment of our management, the general state of the securities
markets at the time of this offering and the prices of similar securities of
generally comparable companies. We have been approved for quotation of our
common stock on the Nasdaq National Market, under the symbol "KOOP." There can
be no assurance, however, that an active or orderly trading market will develop
for the common stock or that the common stock will trade in the public markets
subsequent to this offering at or above the initial offering price. Please see
"Risk Factors--The liquidity of our common stock is uncertain since it has not
been publicly traded."
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than we have sold to them. The underwriters may elect to cover any
such short position by purchasing shares of common stock in the open market or
by exercising the over-allotment option granted to the underwriters. In
addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market
and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price
at a level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the common stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
A relative of a person associated with one of the underwriters entered into a
loan agreement in March 1999 to purchase promissory notes in the principal
amount of $500,000. The loan agreement contains substantially the same terms
and conditions as the loan agreements entered into by other investors.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for drkoop.com, Inc. by Latham & Watkins, Menlo Park, California. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The financial statements for drkoop.com, Inc. as of December 31, 1997 and
1998 and for the period from July 17, 1997 (date of inception) to December 31,
1997, the year ended December 31, 1998, and the cumulative period from July 17,
1997 (date of inception) to December 31, 1998, included in this prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) of PricewaterhouseCoopers LLP,
independent certified public accountants, appearing elsewhere herein, upon the
authority of that firm as experts in auditing and accounting.
77
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
the exhibits, schedules and amendments thereto) under the Securities Act with
respect to the shares of common stock to be sold in this offering. As permitted
by the SEC's rules and regulations, this prospectus does not contain all the
information set forth in the registration statement. For further information
regarding our company and the shares of common stock to be sold in this
offering, please refer to the registration statement and the contracts,
agreements and other documents filed as exhibits to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information that we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's website (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission.
78
<PAGE>
drkoop.com, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999, actual
(unaudited) and pro forma (unaudited).................................... F-3
Statements of Operations for the period from July 17, 1997 (date of
inception) to December 31, 1997, the year ended December 31, 1998, the
cumulative period from July 17, 1997 (date of inception) to December 31,
1998, and the three months ended March 31, 1998 (unaudited) and 1999
(unaudited).............................................................. F-4
Statements of Changes in Stockholders' Deficit for the period from July
17, 1997 (date of inception) to December 31, 1997, the year ended
December 31, 1998, and the three months ended March 31, 1999
(unaudited).............................................................. F-5
Statements of Cash Flows for the period from July 17, 1997 (date of
inception) to December 31, 1997, the year ended December 31, 1998, the
cumulative period from July 17, 1997 (date of inception) to December 31,
1998, and the three months ended March 31, 1998 (unaudited) and 1999
(unaudited).............................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
drkoop.com, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' deficit and cash flows listed in the index
on page F-1 of this Form S-1 Registration Statement present fairly, in all
material respects, the financial position of drkoop.com, Inc., a development
stage enterprise ("the Company"), at December 31, 1997 and 1998, and the
results of its operations and its cash flows for the period from July 17, 1997
(date of inception) to December 31, 1997, for the year ended December 31, 1998,
and the cumulative period from July 17, 1997 (date of inception) to December
31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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 amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses and negative cash flows
from operations since inception, which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
March 4, 1999, except for Note 14, for which the date is May 13, 1999
F-2
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31, 1999
----------------------- --------------------------
1997 1998 Actual Pro Forma
--------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............ $ 7,586 $ 303 $ 2,021,273 $ 2,021,273
Accounts receivable..... -- 40,531 405,725 405,725
Employee receivables.... -- 4,130 2,630 2,630
Prepaids and other...... -- 17,500 108,940 108,940
--------- ------------ ------------ ------------
Total current assets.. 7,586 62,464 2,538,568 2,538,568
Equipment, furniture and
fixtures, net............ 35,204 306,539 389,745 389,745
Investment in affiliate... -- -- 5,000,000 5,000,000
Intangible assets, net.... -- -- 3,777,778 3,777,778
Other assets.............. -- 11,373 11,373 11,373
--------- ------------ ------------ ------------
Total assets.......... $ 42,790 $ 380,376 $ 11,717,464 $ 11,717,464
========= ============ ============ ============
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable........ $ 57,747 $ 804,459 $ 860,437 $ 860,437
Accrued liabilities..... 61,993 519,800 1,327,090 1,315,248
Related party payables.. 537,308 1,193,125 104,049 104,049
Deferred revenue........ -- -- 544,372 544,372
Convertible notes
payable to
stockholders, net of
discount of $49,439 and
$59,326 at December 31,
1998 and March 31,
1999................... -- 450,561 2,740,674 --
--------- ------------ ------------ ------------
Total current
liabilities.......... 657,048 2,967,945 5,576,622 2,824,106
Commitments and
contingencies (Note 5)... -- -- -- --
Mandatorily redeemable
convertible (Series B)
preferred stock;
liquidation preference of
$2,998,408 (Note 7)...... -- 18,405,857 29,341,552 --
Stockholders' equity
(deficit):
Convertible preferred
stock: $0.001 par
value; 15,000,000
shares authorized:
Series A 750,000 shares
designated; 619,102
shares issued and
outstanding;
liquidation preference
of $790,639 and
$805,498 (unaudited)
at December 31, 1998
and March 31, 1999.... -- 619 619 --
Series C 3,000,000
shares designated:
2,615,677 shares
issued and outstanding
(unaudited);
liquidation preference
of $12,440,162........ -- -- 2,616 --
Common stock: $0.001 par
value; 15,000,000
shares authorized at
December 31, 1998,
25,000,000 shares
authorized at March 31,
1999, and 75,000,000
shares authorized pro
forma; 6,750,000 and
8,550,360 shares issued
and outstanding in 1997
and 1998, 9,105,552
(unaudited) and
18,139,591 (unaudited)
shares at March 31,
1999, actual and pro
forma.................. 6,750 8,550 9,106 18,139
Additional paid-in
capital................ 2,250 -- 4,704,897 36,852,493
Deferred stock
compensation........... -- (1,425,047) (4,045,374) (4,045,374)
Amounts receivable from
common stockholders.... (1,300) -- -- --
Accumulated deficit..... (621,958) (19,577,548) (23,872,574) (23,931,900)
--------- ------------ ------------ ------------
Total stockholders'
equity (deficit)..... (614,258) (20,993,426) (23,200,710) 8,893,358
--------- ------------ ------------ ------------
Total liabilities and
stockholders' equity
(deficit)............ $ 42,790 $ 380,376 $ 11,717,464 $ 11,717,464
========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
Cumulative
Period from Year Period from Three Months Ended
Inception to Ended Inception to March 31,
December 31, December 31, December 31, -----------------------
1997 1998 1998 1998 1999
------------ ------------ ------------ --------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Content subscription
and software
license.............. $ -- $ 27,000 $ 27,000 $ -- $ 216,216
Advertising and
sponsorship.......... -- 15,470 15,470 -- 187,526
Other................. -- 264 264 -- 473
---------- ------------ ------------ --------- ------------
-- 42,734 42,734 -- 404,215
---------- ------------ ------------ --------- ------------
Operating expenses:
Production, content
and product
development.......... 460,629 4,448,125 4,908,754 283,716 1,034,654
Sales and marketing... -- 2,008,372 2,008,372 165,927 2,048,090
General and
administrative....... 161,329 2,703,500 2,864,829 259,244 1,585,575
---------- ------------ ------------ --------- ------------
Total operating
expenses........... 621,958 9,159,997 9,781,955 708,887 4,668,319
---------- ------------ ------------ --------- ------------
Loss from operations.... (621,958) (9,117,263) (9,739,221) (708,887) (4,264,104)
Interest income
(expense).............. -- 33,646 33,646 -- (30,922)
---------- ------------ ------------ --------- ------------
Net loss.............. (621,958) (9,083,617) (9,705,575) (708,887) (4,295,026)
Accretion of redeemable
securities to fair
value.................. -- (14,324,221) (14,324,221) -- (10,935,695)
Dividend to preferred
stockholders (Note 7).. -- -- -- -- (9,147,258)
---------- ------------ ------------ --------- ------------
Loss attributable to
common stockholders.... $ (621,958) $(23,407,838) $(24,029,796) $(708,887) $(24,377,979)
========== ============ ============ ========= ============
Net loss per share--
basic and diluted...... $ (.09) $ (2.89) $ (3.14) $ (.10) $ (2.84)
========== ============ ============ ========= ============
Shares used in per share
calculations--basic and
diluted................ 6,750,000 8,100,270 7,650,180 7,030,055 8,568,867
========== ============ ============ ========= ============
Pro forma net loss per
share--basic and
diluted (unaudited).... $ (.75) $ (.26)
============ ============
Shares used in pro forma
calculations--basic and
diluted (unaudited).... 12,110,670 16,347,347
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Statements of Changes in Stockholders' Deficit
For the Period from Inception to December 31, 1997, the Year Ended December
31, 1998, and the Three Months Ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Amounts
Preferred Stock Common Stock Additional Deferred Receivable
---------------- ---------------- Paid-in Stock from Common Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Deficit Total
--------- ------ --------- ------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock in July 1997
to founders for
cash and other
consideration..... -- $ -- 6,750,000 $6,750 $ 2,250 $ -- $(1,300) $ -- $ 7,700
Net loss.......... -- -- -- -- -- -- -- (621,958) (621,958)
--------- ------ --------- ------ ----------- ----------- ------- ------------ ------------
Balance at
December 31,
1997.............. -- -- 6,750,000 6,750 2,250 -- (1,300) (621,958) (614,258)
Issuance of Series
A preferred stock
for cash,
net of issuance
costs of $6,232... 525,750 526 -- -- 624,140 -- -- -- 624,666
Issuance of Series
A preferred stock
for services...... 93,352 93 -- -- 111,932 -- -- -- 112,025
Issuance of
options to Series
B stockholders.... -- -- -- -- 1,918,364 -- -- -- 1,918,364
Issuance of common
stock upon
conversion of
stockholder note
payable........... -- -- 1,800,360 1,800 214,243 -- -- -- 216,043
Payment received
on amounts
receivable from
common
stockholders...... -- -- -- -- -- -- 1,300 -- 1,300
Deferred stock
compensation...... -- -- -- -- 1,531,880 (1,531,880) -- -- --
Amortization of
deferred stock
compensation...... -- -- -- -- -- 106,833 -- -- 106,833
Issuance of
warrant to
convertible note
holder............ -- -- -- -- 49,439 -- -- -- 49,439
Accretion of
redeemable
securities to fair
value............. -- -- -- -- (4,452,248) -- -- (9,871,973) (14,324,221)
Net loss.......... -- -- -- -- -- -- -- (9,083,617) (9,083,617)
--------- ------ --------- ------ ----------- ----------- ------- ------------ ------------
Balance at
December 31,
1998.............. 619,102 619 8,550,360 8,550 -- (1,425,047) -- (19,577,548) (20,993,426)
Issuance of Series
C preferred stock
for cash and
investment
(unaudited)....... 2,615,677 2,616 -- -- 12,497,384 -- -- -- 12,500,000
Issuance of
warrant to
convertible note
holder
(unaudited)....... -- -- -- -- 29,663 -- -- -- 29,663
Exercise of stock
options
(unaudited)....... -- -- 555,192 556 12,018 -- -- -- 12,574
Deferred stock
compensation
(unaudited)....... -- -- -- -- 3,101,527 (3,101,527) -- -- --
Amortization of
deferred stock
compensation
(unaudited)....... -- -- -- -- -- 481,200 -- -- 481,200
Obligation to
issue common stock
pursuant to option
cancellation
agreement (Note
7)................ -- -- -- -- 9,147,258 -- -- -- 9,147,258
Dividend payable
to preferred
stockholder (Note
7)................ -- -- -- -- (9,147,258) -- -- -- (9,147,258)
Accretion of
redeemable
securities to fair
value
(unaudited)....... -- -- -- -- (10,935,695) -- -- (10,935,695)
Net loss
(unaudited)....... -- -- -- -- -- -- -- (4,295,026) (4,295,026)
--------- ------ --------- ------ ----------- ----------- ------- ------------ ------------
Balance as of
March 31, 1999
(unaudited)....... 3,234,779 $3,235 9,105,552 $9,106 $ 4,704,897 $(4,045,374) $ -- $(23,872,574) $(23,200,710)
========= ====== ========= ====== =========== =========== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative
Period from Year Period from Three Months Ended
Inception to Ended Inception to March 31,
December 31, December 31, December 31, ----------------------
1997 1998 1998 1998 1999
------------ ------------ ------------ --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net loss............. $(621,958) $(9,083,617) $(9,705,575) $(708,887) $(4,295,026)
Depreciation and
amortization........ 6,941 64,090 71,031 5,036 258,631
Amortization of
deferred stock
compensation........ -- 106,833 106,833 -- 481,200
Interest accretion on
convertible note
payable to
stockholders........ -- -- -- -- 19,776
Stock issued for
services............ 2,000 112,025 114,025 -- --
Changes in assets and
liabilities:
Accounts
receivable........ -- (40,531) (40,531) -- (365,194)
Employee
receivables....... -- (4,130) (4,130) (500) 1,500
Prepaids and other
current assets.... -- (17,500) (17,500) (7,264) (91,440)
Other assets....... -- (11,373) (11,373) -- --
Accounts payable... 57,747 746,712 804,459 75,416 55,978
Accrued expenses... 61,993 457,807 519,800 158,150 807,290
Related party
payable........... 537,308 871,860 1,409,168 (23,783) (1,089,076)
Deferred revenue... -- -- -- -- 544,372
--------- ----------- ----------- --------- -----------
Cash provided by
(used in)
operating
activities...... 44,031 (6,797,824) (6,753,793) (501,832) (3,671,989)
--------- ----------- ----------- --------- -----------
Investing Activities:
Purchase of
equipment, furniture
and fixtures........ (42,145) (335,425) (377,570) (29,030) (119,615)
--------- ----------- ----------- --------- -----------
Cash used in
investing
activities...... (42,145) (335,425) (377,570) (29,030) (119,615)
--------- ----------- ----------- --------- -----------
Financing Activities:
Proceeds from
issuance of
convertible note
payable to
stockholder......... -- 500,000 500,000 -- 2,300,000
Proceeds from
issuance of
preferred stock,
net................. -- 6,624,666 6,624,666 518,680 3,500,000
Proceeds from
issuance of common
stock, net.......... 5,700 -- 5,700 -- 12,574
Repayment of
stockholder
payables............ -- 1,300 1,300 -- --
--------- ----------- ----------- --------- -----------
Cash provided by
financing
activities.......... 5,700 7,125,966 7,131,666 518,680 5,812,574
--------- ----------- ----------- --------- -----------
Increase (decrease) in
cash and cash
equivalents........... 7,586 (7,283) 303 (12,182) 2,020,970
Cash and cash
equivalents at
beginning of period... -- 7,586 -- 7,586 303
--------- ----------- ----------- --------- -----------
Cash and cash
equivalents at end of
period................ $ 7,586 $ 303 $ 303 $ (4,596) $ 2,021,273
========= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
1. Organization and Basis of Presentation
drkoop.com, Inc. (formerly Empower Health Corporation and Personal Medical
Records, Inc.) ("the Company"), a Delaware corporation, was incorporated on
July 17, 1997 (date of inception). The Company's name as of March 4, 1999
was Empower Health Corporation, a Texas corporation. The Company
reincorporated in the State of Delaware as drkoop.com, Inc. on March 24,
1999. This change has been reflected in the financial statements. The
Company operates an Internet-based consumer healthcare network, consisting
of an interactive website providing consumers with healthcare information
and services, as well as affiliate relationships with portals, other
websites, local healthcare organizations and traditional media outlets.
The Company has sustained losses and negative cash flows from operations
since its inception. The Company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to raise
additional financing through public or private equity financings, establish
profitable operations, enter into collaborative or other arrangements with
corporate sources, or secure other sources of financing to fund operations.
During 1998, the Company received cash and services of approximately $6.7
million through the issuance of preferred stock. In January 1999, the
Company received approximately $4.3 million through transactions which
included the issuance of preferred stock, convertible debt and warrants.
Additionally, the Company has received loan commitments from a preferred
stockholder and new investors to finance anticipated working capital
requirements up to $5.5 million.
Management intends to raise working capital through additional equity
and/or debt financings in the near future. If anticipated financing
transactions and operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so
as not to require additional financial resources, if such resources were
not available on terms acceptable to the Company. Nevertheless, these
matters raise substantial doubt about the Company's ability to continue as
a going concern. This uncertainty will be mitigated if the Company
successfully completes the initial public offering of its common stock
which it is pursuing. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products and
services. These risks include the failure to develop and extend the
Company's on-line service brands, the rejection of the Company's services
by Internet consumers, vendors and/or advertisers, the inability of the
Company to maintain and increase the levels of traffic on its on-line
services, as well as other risks and uncertainties. In the event that the
Company does not successfully implement its business plan, certain assets
may not be recoverable.
2. Summary of Significant Accounting Policies
Development Stage Enterprise
For the period from inception through December 31, 1998, the Company was a
development stage enterprise, as planned principal operations had not yet
begun to generate significant revenue. In its development stage, all pre-
operating costs have been expensed as incurred.
Interim Financial Statements (Unaudited)
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 are unaudited and should be read in
conjunction with the Company's annual financial statements for the
F-7
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
year ended December 31, 1998. Such interim financial statements have been
prepared in conformity with the rules and regulations of the Securities and
Exchange Commission. Certain disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations pertaining to interim financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included. The results of
operations of any interim period are not necessarily indicative of the
results of operations for the full year.
Unaudited Pro Forma Information
In conjunction with the Company's anticipated initial public offering, all
of the Company's outstanding convertible preferred stock and convertible
notes payable to stockholders will be converted into shares of common
stock. The pro forma effect of these conversions has been reflected in the
accompanying unaudited pro forma balance sheet assuming the conversion had
occurred on March 31, 1999. Original issue discount representing the
unamortized portion of the value attributed to the warrants on such
convertible notes amounting to approximately $59,000 has been charged to
accumulated deficit (interest expense) as of the assumed date of
conversion.
Cash Equivalents
Highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the
assets, generally three to seven years. Upon disposal, the Company removes
the asset and the accumulated depreciation from its records and recognizes
the related gain or loss in the results of operations.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company typically guarantees a minimum number of
impressions or pages to be delivered to users over a specified period of
time for a fixed fee. Advertising revenues are recognized at the lesser of
(i) the ratio of impressions delivered over the total guaranteed
impressions or (ii) the straight-line rate over the term of the contract,
provided that no significant obligations remain and collection of the
resulting receivable is probable. Company obligations typically include the
guarantee of a minimum number of impressions or times that an advertisement
appears in pages viewed by the users of the Company's website.
The Company has entered into revenue sharing arrangements whereby it is
entitled to revenue sharing for advertising revenue derived from
advertisements delivered on partner sites which display the Company's
content. The Company recognizes advertising revenue under revenue sharing
arrangements as the related impressions or pages are delivered, based on
information obtained from our partner, provided that no significant
obligations remain and collection of the resulting receivable is probable.
Advertising revenues earned under these revenue sharing arrangements from
partner websites are recorded net of commissions as the commissions are not
contractual obligations of the Company. Revenues derived from advertising
arrangements where the Company contracts directly with the advertiser are
recorded at the gross contract amount and commissions paid to obtain these
advertisements are recorded as selling expense.
Sponsorship revenues are derived principally from contracts ranging from
one to twelve months in which we commit to provide sponsors enhanced
promotional opportunities that go beyond traditional banner
F-8
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
advertising. Sponsorships are designed to support broad marketing
objectives, including branding, awareness, product introductions, research
and transactions, frequently on an exclusive basis. Sponsorship agreements
typically include the delivery of a guaranteed minimum number of
impressions and the design and development of customized pages on the web-
site that enhance the promotional objectives of the sponsor. Costs
associated with the creation of the customized pages are minimal and
expensed as incurred. Sponsorship revenues are recognized at the lesser of
the ratio of impressions delivered over the total guaranteed impressions or
the straight line rate over the term of the contract, provided that no
significant obligations remain and collection of the resulting receivable
is probable, Company obligations typically include the guarantee of a
minimum number of impressions or times that an advertisement appears in
pages viewed by the users of our web-site.
Content subscription and software license revenues are derived from
contracts under the Dr. Koop Community Partner Program with local
affiliates such as healthcare providers and third party payor
organizations. Sales of software licenses to Community Partner Program
affiliates are recognized as revenue upon shipment of the software,
provided that the portion of the contract allocated to the software license
is based upon vendor specific objective evidence of fair value, and
collectibility is probable. Content subscription revenue is recognized
ratably over the term of the Community Partner Program contract, generally
ranging from twelve to thirty-six months.
Revenues from barter transactions are recorded at the estimated fair value
of the advertisements, goods or services received or the estimated fair
value of the advertisements given, whichever is a more clearly evident
measure of fair value of the transaction. Revenue from barter transactions
is recognized as income when advertisements are delivered on the Company's
websites. Barter expense is recognized when the Company's advertisements
are run on other companies' websites, which is typically in the same period
when the related barter revenue is recognized. For the quarter ended March
31, 1999, barter transactions represented 13% of total revenues from
continuing operations, respectively.
Transactional revenues are derived primarily from sales of pharmacy and
insurance products. The Company earns transaction fees and recognizes
revenue at the time the related referred sale occurs.
Production, Content and Product Development Expense
Production, content and product development expenses consist primarily of
salaries and benefits, consulting fees and other costs related to content
acquisition and licensing, software development, application development
and website operations. These costs are equivalent to cost of revenue and
are expensed as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" issued
by the Financial Accounting Standards Board requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. To date, costs incurred following the
establishment of technological feasibility, but prior to general release,
have been insignificant.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the
period from inception to December 31, 1997 and for the year ended December
31, 1998 were $0 and $1,140,000, respectively.
F-9
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", which prescribes accounting and
reporting standards for all stock-based compensation plans, including
employee stock options. As allowed by SFAS No. 123, the Company accounts
for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized and
measured using enacted tax rates in effect for the year in which the
differences are expected to be realized. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. The primary sources of temporary differences are
depreciation of equipment, furniture and fixtures.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes.
Actual results could differ from the estimates.
Net Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with SFAS No. 128, "Earnings Per Share," for all
periods presented. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock
issued or granted for nominal consideration prior to the anticipated
effective date of the Company's initial public offering must be included in
the calculation of basic and diluted net loss per common share as if they
had been outstanding for all periods presented. To date, the Company has
not had any issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic net loss per common share has been
computed using the weighted-average number of shares of common stock
outstanding during the period. Because the Company
has incurred net losses since inception, the effect of all common stock
equivalent shares (6,757,457 common equivalent shares as of December 31,
1998) is anti-dilutive; therefore basic and diluted loss per share are
equivalent. Basic pro forma net loss per common share, as presented in the
statement of operations, has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of the convertible and convertible redeemable preferred stock
and the convertible note payable to stockholder and to common stock issued
subsequent to December 31, 1998 to satisfy in full a purchase option and
anti-dilution right held by a stockholder (using the if-converted method)
from the original date of issuance.
F-10
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
The numerator in the pro forma net loss per share calculation is equivalent
to net loss. The denominator in the pro forma net loss per share
calculation is comprised of the following weighted average shares:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ----------
<S> <C> <C>
Weighted average number of common shares
outstanding....................................... 8,100,270 8,568,867
Effect of convertible securities:
Convertible preferred stock........................ 3,201,282 6,406,840
Common stock issued to satisfy purchase option and
anti-dilution right held by a stockholder......... 807,110 1,210,665
Convertible notes payable and interest payable to
stockholders...................................... 2,008 160,975
---------- ----------
Shares used in pro forma calculation............. 12,110,670 16,347,347
========== ==========
</TABLE>
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 33 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company currently does not engage or plan to engage in
derivative instruments or hedging activities.
3. Equipment, Furniture and Fixtures, Net
Equipment, furniture and fixtures are comprised of the following at
December 31, 1997 and 1998, and March 31, 1999:
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment............................ $42,145 $324,695 $ 403,221
Furniture and fixtures........................ -- 40,144 81,869
Leasehold improvements........................ -- 12,264 12,096
------- -------- ---------
42,145 377,103 497,186
Accumulated depreciation...................... (6,941) (70,564) (107,441)
------- -------- ---------
$35,204 $306,539 $ 389,745
======= ======== =========
</TABLE>
Depreciation expense of $6,941 and $64,090 for the period from inception to
December 31, 1997 and the year ended December 31, 1998, respectively, is
included in the statements of operations.
4. Convertible Notes Payable to Stockholders
On December 24, 1998, the Company issued a convertible note payable to a
stockholder in the amount of $800,000, of which $500,000 was received at
closing and $300,000 was received on January 11, 1999. The note, which is
payable December 24, 1999, bears interest at 6% and is subordinated to
senior indebtedness of the Company, if any. The principal and accrued
interest of the note is convertible, at the option of the holder and until
such time as the Company closes a firm commitment for an underwritten
public offering, into Series C preferred stock, at a conversion price of
$4.78 per share equivalent to the share price for the sale of Series C
preferred stock completed subsequent to December 31, 1998 and more fully
described in footnote 13.
F-11
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
In connection with the convertible note payable, the Company issued stock
purchase warrants to acquire the number of Series C preferred stock shares
equating to twenty percent of the face amount of the note divided by the
exercise price. At December 31, 1998, warrants to acquire 20,927 shares of
a total of 33,482 shares were deemed outstanding based upon the cash
received as of that date. Warrants for the remaining 12,555 shares were
deemed outstanding upon funding of the remaining $300,000 in January 1999.
The exercise price is $4.78 per share, subject to anti-dilution provisions,
and is equivalent to the share price for the sale of Series C preferred
stock completed subsequent to December 31, 1998 and more fully described in
footnote 13. The warrants expire December 24, 2003.
The proceeds from the note payable have been allocated to the note and the
warrants based upon the relative fair values of the instruments. The
warrants are recorded at a fair value of $2.36 per warrant which is
calculated at the time of issuance using the Black-Scholes option-pricing
model with the following weighted average assumptions: zero dividend yield;
0.5 volatility; risk-free interest rate of 4.9%; and expected life of 5
years. The amount allocated to the warrants is recognized as original issue
discount and amortized, using the interest method, over the term of the
related indebtedness.
On March 3, 1999, the Company issued a convertible note payable to a
stockholder in the amount of $2,000,000, the proceeds of which were
received on March 30, 1999. The note, which is payable March 5, 2000, bears
interest at 7%, and is subordinated to all senior indebtedness of the
Company, if any. The principal and accrued interest of the note is
convertible, at the option of the holder and until such time as the Company
closes a firm commitment for an underwritten public offering, into common
stock, at a conversion price of $7.43 per share.
5. Commitments and Contingencies
Leases
The Company is obligated through December 31, 2000 under operating lease
agreements covering certain facilities and computer equipment.
Future minimum payments for all noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Fiscal Year
1999............................................................. $252,236
2000............................................................. 206,630
--------
Total minimum lease payments.................................... $458,866
========
</TABLE>
Rental expense for the period from inception to December 31, 1997 and for
the year ended December 31, 1998 was $11,855 and $131,298, respectively.
Legal Matters
Subsequent to December 31, 1998, the Company paid $99,000 to settle a legal
matter in which a former contractor of the Company claimed breach of
contract. This amount was accrued by the Company as of December 31, 1998.
On April 12, 1999, a civil complaint was filed against the Company
attempting to allege, among other things, fraud and breach of contract
regarding a terminated consulting arrangement and seeking recovery
F-12
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
of damages of $4 million, punitive damages exceeding $5 million, attorney's
fees and an injunction prohibiting the Company from offering stock for sale
to the public unless and until it recognizes plaintiff's claim to options
to acquire 232,500 shares of the Company's common stock alleged to be owed
under the consulting agreement. The Company believes that the claims are
without merit and intends to defend this lawsuit vigorously.
Other Matters
The Company has a contingent liability resulting from a preferred
stockholder's right to require the Company to repurchase its shares. That
stockholder also has an option to acquire shares at a 30% discount. The
Company also has a consulting services purchase commitment with that
stockholder. As disclosed in Note 7, the preferred stockholder has agreed
to terminate the option and put agreements upon the completion of a
specified offering, in exchange for 1,210,665 shares of common stock,
valued at approximately $8.2 million, and 134,520 shares, valued at
approximately $900,000, to be issued to satisfy an antidilution right held
by the Series C stockholder. These amounts have been reflected as dividends
to preferred stockholders.
6. Income Taxes
The Company did not incur any income taxes for the period from July 17,
1997 (inception) to December 31, 1997 and for the year ended December 31,
1998 as a result of operating losses.
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $9,189,000. These net operating loss and tax
credit carryforwards will expire from 2012 through 2019 if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
Significant components of the Company's deferred taxes as of December 31,
1997 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Depreciable assets........................... $ 810 $ (7,585)
Tax carryforwards............................ 208,600 3,124,200
Accrued liabilities.......................... -- 142,800
--------- -----------
Net deferred tax assets........................ 209,410 3,259,415
--------- -----------
Valuation allowance for net deferred tax
asset......................................... (209,410) (3,259,415)
--------- -----------
Net deferred taxes............................. $ -- $ --
========= ===========
</TABLE>
The Company has established valuation allowances equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $3,050,000 during the year ended
December 31, 1998.
The Company's provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate
of 34% to income before income taxes as a result of permanent differences
and the increase in the valuation allowance.
F-13
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
7. Mandatorily Redeemable Convertible (Series B) Preferred Stock
The Company has authorized various classes of preferred stock, up to a
maximum of 15,000,000 shares. As of December 31, 1998, the Company had
designated 13,781,145 shares as $.001 par value Series B Convertible Non-
Voting Preferred Stock. On April 28, 1998, the Company issued 3,850,597
shares of Series B to Superior Consultant Holdings Corporation for
consideration of $6.0 million. Each share of Series B is convertible into
1.029 shares of common stock. In the event that the Company's board of
directors elects to declare a dividend on the shares of common stock,
Superior is entitled to received dividends as if the Series B shares had
been converted to common stock. In the event of any liquidation,
dissolution or winding up of the Company, the holders of each share of
Series B then outstanding are entitled to receive a liquidation preference
over common stockholders and preferred stockholders other than Series A
holders. At December 31, 1998, this liquidation preference was $2,998,408,
which is equivalent to $0.78 per share plus an amount in cash equal to all
accumulated and unpaid dividends thereon.
At the date of closing, Superior was granted an option to purchase up to
3,962,265 shares of common stock, or the number of shares of preferred
stock convertible into 3,962,265 shares of common stock. The exercise price
per share shall be a price, subject to adjustment for dilution, equal to
70% of the fair market value per share of common stock into which each
share of preferred stock is convertible. The option expires on April 28,
2000.
Superior was granted a right to require the Company to repurchase the
Series B shares, or the shares of common stock into which the Series B
shares may have been converted, for the current fair market price per
share. The put option may only be exercised during each of the 90-day
periods following April 28, 2000 and April 28, 2001. If the Company is
unable to complete the purchase of the shares under the put option,
Superior may elect nominees representing a majority of the Company's board
of directors. Upon completion of an underwritten public offering by the
Company of not less than $20.0 million after which the common stock is
listed on a national securities exchange or admitted for quotation on the
Nasdaq National Market, Superior has agreed to terminate the provisions of
the aforementioned option agreement in exchange for 1,210,665 shares of
common stock, valued at approximately $8.2 million (an additional 134,520
shares, valued at approximately $900,000 will be issued to the Series C
holder pursuant to antidilution protection provisions). These amounts have
been reflected as dividends to preferred stockholders.
The Company allocated the $6.0 million of proceeds as follows: $4.1 million
to the Series B stock and $1.9 million to the options based on the fair
values determined as of the closing date using the Black-Scholes valuation
model with the following weighted average assumptions: zero dividend yield;
0.5 volatility; risk free interest rate of 5.9%; and expected life of 2
years. The Company is recognizing accretion of value on the mandatorily
redeemable convertible preferred stock to redemption value (fair value)
over the period between the closing date and the redemption dates as
defined by the agreement. The per share redemption value is $4.78 as of
December 31, 1998.
In conjunction with the January 1999 equity financing (Note 13), Superior
received voting rights on an as-if converted to common stock basis and
additional anti-dilution rights similar to those granted to preferred
Series C stockholders.
The Company has a purchase commitment with Superior whereby the Company is
obligated to purchase a minimum of $3.0 million in management consulting,
information technology or outsourcing services from Superior by September
30, 1999, or pay the difference in cash. As of December 31, 1998, the
Company had purchased approximately $1.5 million of such services from
Superior.
F-14
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
8. Capital Stock
The authorized capital stock of the Company consists of 25,000,000 shares
of common stock, par value $0.001 per share, and 15,000,000 shares of
preferred stock, par value $0.001 per share.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and they do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available therefor, subject to any
preferential dividend rights of any outstanding preferred stock. Upon the
liquidation, dissolution or winding up of the Company the holders of common
stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject
to the prior rights of any outstanding preferred stock. Holders of the
common stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders
of shares of any series of preferred stock which the Company may designate
and issue in the future. Upon the closing of this offering, there will be
no shares of preferred stock outstanding.
Series A Preferred Stock
The Company designated 750,000 shares of its authorized preferred stock as
Series A 8% convertible preferred stock. From March 1, 1998 through April
6, 1998, the Company issued 619,102 Series A preferred shares for $742,923
including 104,505 shares issued to three members of an officer's immediate
family for $125,400. Each share of Series A is senior to all other
preferred stock and common stock and is convertible into 1.085 shares of
common stock. Conversion is automatic in the event of an initial public
offering. Holders of Series A shares have the right to vote on all matters,
except the election of directors, with the number of votes equal to the
number of shares into which the Series A is convertible. Series A shares
have a cumulative dividend, which are payable when and if declared, prior
to any class or series of the Company's equity, at the per annum rate of
8%, or $0.096 per share. Dividends are cumulative and accrue on each share
from the date of issuance. In the event of any liquidation, dissolution or
winding up of the Company, the holders of each share of Series A then
outstanding have a liquidation preference over other preferred and common
stockholders. The liquidation preference of $790,639 at December 31, 1998
is equivalent to $1.20 per share plus an amount equal to all accumulated
and unpaid dividends thereon which totaled $47,716 at December 31, 1998.
9. Stock Option Plan
The Company has established the 1997 Stock Option Plan under which
3,750,000 shares of common stock were reserved for issuance. During 1998,
the Company amended the 1997 Plan and increased the number of shares of
common stock reserved under the 1997 Plan by 7,500,000 shares to 11,250,000
shares. Under the 1997 Plan, incentive options can be issued to employees,
officers and directors of the Company at an exercise price not less than
100% of the fair market value of the Company's common stock at the date of
grant as determined by the board of directors or by a committee of the
board appointed to administer the 1997 Plan, except for incentive option
grants to a stockholder that owns greater than 10% of the Company's
outstanding stock in which case the exercise price per share is not less
than 110% of the fair market value of the Company's common stock at the
date of grant. Non-statutory stock options can be issued to employees,
officers, directors or consultants of the Company at exercise prices
determined by the
F-15
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
board of directors or by a committee of the board appointed to administer
the 1997 Plan but not less than 85% of the fair market value of the
Company's common stock at the date of grant. The 1997 Plan provides that
options are exercisable no later than ten years from the date of grant.
Generally 25% of the options granted are exercisable after one year, and
then ratably over the remaining three years.
Option activity under the 1997 Plan for the period from inception to
December 31, 1997 and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Options Options Exercise
Authorized Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
Options authorized........................... 3,750,000 -- $ --
Options granted.............................. -- 2,851,500 0.02
Options canceled............................. -- -- --
Options exercised............................ -- -- --
---------- --------- -----
Balances, December 31, 1997.................. 3,750,000 2,851,500 0.02
Options authorized........................... 7,500,000 -- --
Options granted.............................. -- 6,822,012 0.13
Options canceled............................. -- (69,180) 0.10
Options exercised............................ -- -- --
---------- --------- -----
Balances, December 31, 1998.................. 11,250,000 9,604,332 $0.10
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- -------------------------------
Number Number
Outstanding at Weighted-Average Exercisable at
Exercise December 31, Remaining Weighted-Average December 31, Weighted-Average
Price 1998 Contractual Life Exercise Price 1998 Exercise Price
-------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01 868,245 8.50 $0.01 433,787 $0.01
$0.03 1,970,325 9.00 0.03 1,842,827 0.03
$0.12 - $0.13 5,159,700 9.25 0.12 2,960,868 0.12
$0.16 1,606,062 9.75 0.16 183,750 0.16
--------- ---------
$0.01 - $0.16 9,604,332 9.21 $0.10 5,421,232 $0.08
========= =========
</TABLE>
At December 31, 1997 and 1998, 1,970,250 and 5,421,232 options were vested,
respectively.
During 1997 and 1998 the Company issued stock options under the 1997 Stock
Option Plan, with the following weighted average fair values:
<TABLE>
<CAPTION>
Options Weighted Average
Granted Fair Value
--------- ----------------
<S> <C> <C>
At fair value................................. 5,178,038 $0.08
Below fair value.............................. 1,821,312 $0.99
Above fair value.............................. 2,674,162 $0.10
</TABLE>
F-16
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plan, which are described below. Had compensation cost for the Company's
stock option plans been determined based on the fair market value at the
grant dates for awards under the Plan consistent with the method provided
by SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
loss would have been increased to the following pro forma amounts for the
periods ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Period from Year Ended
Inception to December
December 31, 31,
1997 1998
------------ -----------
<S> <C> <C>
Net loss: As reported.............................. $(621,958) $(9,083,617)
Pro forma...................................... $(629,445) $(9,142,413)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the periods ended December 31, 1997 and
1998:
<TABLE>
<CAPTION>
Period from
Inception to Year Ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Dividend yield..................................... -- --
Expected volatility................................ 0% 0%
Risk-free rate of return........................... 5.9% 5.9%
Weighted average expected life..................... 3.1 years 3.6 years
</TABLE>
The Company granted 1,355,497 stock options under the 1997 plan and 87,893
additional stock options with weighted average exercise prices of $3.37 and
$.01, respectively, during the three month period ending March 31, 1999.
During this period, 555,192 options were exercised with a weighted average
exercise price of $0.02 per share.
Contingent upon the successful completion of this offering, certain
officers and employees will receive 318,750 options with an exercise price
equivalent to the offering price.
10. Concentrations of Credit Risk
The Company maintains its cash and cash equivalent balances in high credit
quality financial institutions and has not experienced any material losses
relating to cash or cash equivalent balances.
At December 31, 1997 and December 31, 1998, the financial instruments which
subject the Company to significant concentrations of credit risk consist
principally of cash investments and trade receivables.
For the year ending December 31, 1998, sales to individual customers
constituting 10% or more of revenue were as follows:
<TABLE>
<S> <C>
Customer A............................................................... 63%
Customer B............................................................... 23%
Customer C............................................................... 12%
</TABLE>
F-17
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
11. Related Party Transactions
Related party payables are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts payable to stockholder for
consulting services (Note 7)............. $ -- $1,032,219 $ 29,934
Stockholder note payable.................. 216,043 -- --
Other payables to employees and
stockholders............................. 321,265 160,906 74,115
-------- ---------- --------
$537,308 $1,193,125 $104,049
======== ========== ========
</TABLE>
On March 16, 1998, the Company issued 1,800,360 shares of common stock to
its stockholder/CEO in exchange for cancellation of the $216,043 note
payable. The conversion price was established by the board of directors
based on their assessment of the fair market value of the common stock at
the date of conversion.
The Company has entered into a name and likeness agreement with a
stockholder, whereby the Company pays the stockholder 2% of revenues
derived from sales of current products and up to 4% of revenues derived
from sales of new products during the five-year term of the agreement.
During 1998, the Company accrued royalty fees of $855 to this stockholder.
Additionally, during this period, the Company reimbursed him for his travel
and other expenses incurred on Company business in the amount of $9,200.
The Company has entered into a consulting agreement with this stockholder
whereby the Company pays the stockholder $11,250 per month relating to his
services as Chief Medical Officer.
During 1998, the Company paid a stockholder professional fees of $95,000
related to speaking engagements, and director's fees of $83,333.
During 1998, the Company paid a board member $83,333 for corporate
governance consulting services.
The Company has entered into a name and likeness agreement with a
stockholder whereby the stockholder has received options to purchase
183,750 shares at an exercise price of $0.16 per share. The Company
recorded deferred stock compensation in the amount of $28,664 related to
the option grant.
F-18
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
12. Supplemental Cash Flows Information
<TABLE>
<CAPTION>
Cumulative
Period from Year Period from Three Months Ended
Inception to Ended Inception to March 31,
December 31, December 31, December 31, ---------------------
1997 1998 1998 1998 1999
------------ ------------ ------------ -------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Disclosure
of Noncash Financing
Activities:
Conversion of related
party payable to common
stock.................. $ -- $ 216,043 $ 216,043 $216,043 $ --
====== ============ ============ ======== ============
Issuance of notes
receivable from common $
stockholders........... $1,300 $ -- $ 1,300 -- $ --
====== ============ ============ ======== ============
Deferred stock
compensation related to
options granted........ $ -- $ (272,233) $ (272,233) $ -- $ (1,853,726)
====== ============ ============ ======== ============
Accretion of redeemable
securities to fair
value.................. $ -- $(14,324,221) $(14,324,221) $ -- $(10,935,695)
====== ============ ============ ======== ============
Stock issued for
services............... $2,000 $ 112,025 $ 114,025 $ -- $ --
====== ============ ============ ======== ============
Amortization of deferred
stock compensation..... $ -- $ 106,833 $ 106,833 $ -- $ 481,200
====== ============ ============ ======== ============
Issuance of preferred
stock for investment in
affiliate.............. $ -- $ -- $ -- $ -- $ 5,000,000
====== ============ ============ ======== ============
Issuance of preferred
stock for intangible
asset.................. $ -- $ -- $ -- $ -- $ 4,000,000
====== ============ ============ ======== ============
Obligation to issue
common stock pursuant
to option cancellation
agreement.............. $ -- $ -- $ -- $ -- $ 9,147,258
====== ============ ============ ======== ============
</TABLE>
13. Subsequent Events
On January 29, 1999, the Company received $3.5 million in cash and a
license to certain Internet technology, and acquired 10% of the outstanding
stock of HealthMagic, Inc. ("HealthMagic"), a subsidiary of Adventist
Health System Sunbelt Healthcare Corporation ("Adventist"), in exchange for
2,615,677 shares of Series C convertible preferred stock (which will be
converted into an equivalent number of shares of common stock upon the
closing of this offering). HealthMagic is a supplier of applications to
Internet companies. The Company has recorded its 10% investment in
HealthMagic using the cost method of accounting valuing it at $5.0 million
based on a discounted cash flow analysis. The Company also established a
technology relationship with HealthMagic, a supplier of applications to
Internet companies, whereby the Company contributed certain technology,
which the Company had assigned a zero value, and received from HealthMagic
a license to use a broad range of Internet technologies, including a web-
enabled personal medical record, personalization tools, security and
authentication features. HealthMagic will develop, implement and support
these technologies for the Company. The Company has capitalized $4.0
million related to the HealthMagic technology license. The fair value of
this license was determined using the cost method and is being amortized on
a straight-line basis over a three-year period, based on the economic life
of the technology.
The Series C is senior to common stock and upon the closing of this
offering, each share of Series C will convert into one share of common
stock. Holders of Series C are entitled to one vote for each share held.
Series B and Series C stockholders were given certain anti-dilution
protections as a result of this transaction. In connection with these
provisions, Series B stockholders received 21,982 shares of Series C
preferred stock and Series C stockholders received 134,520 shares of Series
C preferred stock.
F-19
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
We also entered into selected agreements with HealthMagic and Adventist
which provide for registration rights and specified transfer restrictions.
These agreements call for the appointment of an Adventist representative to
the Company's board of directors, and for the Company to appoint a
representative to HealthMagic's board of directors.
In addition, on January 29, 1999, the Company entered into a master content
subscription and software licensing agreement with Adventist for $500,000.
The master content subscription and software licensing agreement grants
Adventist the right, over a period of three years, to enroll affiliates in
our Community Partner Program. Each Community Partner Program affiliate
agreement has a term of one year. The software licensing fee will be
recognized upon shipment of the software, and the content subscription fees
will be recognized ratably over the one year term of each individual
affiliate's agreement.
On March 3, 1999, the Company entered into loan agreements with a preferred
stockholder and a new investor whereby these investors are irrevocably
obligated to loan the Company up to $2.5 million at an interest rate of 7%
per annum. Upon the closing of this offering, borrowings under these
agreements plus accrued interest will, solely at the option of each
investor, either be due and payable or convert into common stock at a
conversion price of $7.43 per share. As of March 31, 1999, the Company has
borrowed $2.0 million under these loan agreements.
14. Events Subsequent to March 4, 1999
On March 5, 1999, the Company effected a three-for-one stock split of
common and preferred stock. The effect of the stock split has been recorded
retroactively to inception of the Company in the accompanying financial
statements.
On March 5, 1999, the Company entered into loan agreements with new
investors, whereby those investors are irrevocably obligated to loan the
Company up to $3.0 million at an interest rate of 7% per annum. Upon the
closing of this offering, borrowings under these agreements plus accrued
interest will, solely at the the option of each investor, either be due and
payable or convert into common stock at a conversion price of $7.43 per
share.
On April 9, 1999, the Company entered into agreements with Infoseek
Corporation and the Buena Vista Internet Group, a unit of The Walt Disney
Company, under which the Company will be the exclusive provider of health
and related content on three websites of the Go Network: Go.com Health
Center on Infoseek, ESPN.com Training Room and the Family.com Health
Channel. Under the Infoseek agreement, the Company will be also the premier
health content provider for ABCnews.com. In addition, the Company will be
the exclusive pharmacy and drugstore, health insurance and clinical trials
partner in the Go.com Health Center. Under these agreements, users on the
Go Network will be able to access various health information, services,
interactive tools and commerce opportunities through a co-branded website
served by the Company. In the event the Company elects not to provide
specific content, content may be obtained from a third party.
The term of both agreements is for three years; except that, each of the
parties may elect to terminate the relationship after two years. The
Company will pay Infoseek and the Buena Vista Internet Group $57.9 million
in total consideration consisting of cash and warrants to purchase 775,000
shares of common stock at an exercise price of $8.60 per share over the
full three year term. The Company will recognize the costs associated with
the agreements ratably over the term of agreements. The cash portion of
this obligation is payable as approximately $16.2 million in the first year
of the agreements, $18.2 million in the second year of the agreements and
$21.3 million in the third year. None of the warrants are exercisable prior
to one year after issuance.
F-20
<PAGE>
drkoop.com, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements--(Continued)
The warrants have been recorded at a fair value of $2.89 per share which is
calculated at the time of issuance using the Black-Scholes option-pricing
model with the following weighted average assumptions: zero dividend yield;
0.5 volatility; risk-free interest rate of 5.0% and an expected life of 3
years.
The Company entered into a two year relationship with The @Home Network to
be the anchor tenant partner within the Health Channel area of the @Home
service. The Company will be the premier content provider appearing in the
Health Channel. Under the terms of this agreement, the Company will have
the ability to direct users to related commerce, community and interactive
tool features appearing on the Company's website from within all health
content appearing in the Health Channel. In addition, the Company will
share in all advertising revenues generated by @Home in the Health Channel
where the Company's content dominates the related page. The Company will
pay a carriage fee of $2.25 million to @Home in installments over the term
of the agreement. The Company will recognize the costs associated with the
agreements ratably over the term of the agreement.
On March 24, 1999, the Company increased its authorized capital stock to
25,000,000 shares of common stock, par value $0.001 per share.
In June 1999, the Company effected a five-for-two stock split of common and
preferred stock. The effect of this stock split has been recorded
retroactively to inception of the Company in the accompanying financial
statements.
In June 1999, the Company increased its authorized capital stock to
75,000,000 shares of common stock, par value $0.001 per share.
* * *
F-21
<PAGE>
Inside Back Cover
Picture of the drkoop.com home page with call-outs describing the features of
selected linked sites within our network.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither drkoop.com, Inc. nor any underwriter has authorized anyone to
provide prospective investors with different or additional information. This
prospectus is not an offer to sell nor is it seeking an offer to buy these se-
curities in any jurisdiction where the offer or sale is not permitted. The in-
formation contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of the delivery of this prospectus or any
sale of these securities.
No action is being taken in any jurisdiction outside the United States to per-
mit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to in-
form themselves about and to observe the restrictions of that jurisdiction re-
lated to this offering and the distribution of this prospectus.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 34
Management............................................................... 53
Principal Stockholders................................................... 64
Certain Transactions..................................................... 66
Description of Securities................................................ 69
Shares Eligible for Future Sale.......................................... 73
Underwriting............................................................. 75
Legal Matters............................................................ 77
Experts.................................................................. 77
Additional Information................................................... 78
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF DRKOOP APPEARS HERE]
drkoop.com, Inc.
9,375,000 Shares
Common Stock
-------------
PROSPECTUS
-------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
as e-Manager(TM)
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount to
Be Paid
----------
<S> <C>
SEC registration fee............................................. $ 26,975
NASD filing fee.................................................. 10,204
Nasdaq National Market listing fee............................... 94,000
Legal fees and expenses.......................................... 600,000
Accounting fees and expenses..................................... 195,000
Printing and engraving........................................... 350,000
Blue sky fees and expenses (including legal fees)................ 10,000
Transfer agent fees.............................................. 7,500
Miscellaneous.................................................... 61,321
----------
Total........................................................ 1,355,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our restated certificate of incorporation in effect as of the date hereof,
and our restated certificate of incorporation to be in effect upon the closing
of this offering provides that, except to the extent prohibited by the Delaware
General Corporation Law, as amended, the Registrant's directors shall not be
personally liable to the Registrant or its stockholders for monetary damages
for any breach of fiduciary duty as directors of the Registrant. Under Delaware
law, the directors have a fiduciary duty to the Registrant which is not
eliminated by this provision of the Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to the Registrant, for acts or omissions which are
found by a court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the directors' responsibilities under
any other laws, such as the Federal securities laws or state or Federal
environmental laws. The Registrant has applied for liability insurance for its
officers and directors.
Section 145 of Delaware law empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of Delaware law, or (iv) for any transaction from which the
director derived an improper personal benefit. Delaware law provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of Delaware law and provides that the
Registrant may fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the
II-1
<PAGE>
Registrant as a director or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding.
On or prior to the effectiveness of this Registration Statement, we intend to
enter into contractual indemnification agreements with each of our executive
officers and directors. These agreements provide for contractual
indemnification to the fullest extent permitted by applicable law and provide
mechanical and administrative procedures to be followed in the event of any
such claim.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities since July 17, 1997
(inception):
(1) Since July 17, 1997, we have granted options to purchase 11,116,902
shares of common stock to a total of 107 employees, consultants and non-
employee directors at a weighted average exercise price of $0.53 per share
pursuant to compensatory stock option plans.
(2) On July 17, 1997, we issued an aggregate of 6,750,000 shares of common
stock to Dr. C. Everett Koop, Donald W. Hackett, John F. Zaccaro, Robert C.
Hackett, Jr. and Louis A. Scalpati, the founders of our company, for an
aggregate purchase price of $9,000.
(3) On March 16, 1998, we issued 1,800,360 shares of common stock to Donald
W. Hackett in exchange for cancellation of indebtedness in the amount of
$216,043.
(4) On April 28, 1998, we issued 3,850,597 shares of Series B Non-voting
Preferred Stock to Superior Consultant Holdings Corporation for a purchase
price of $6.0 million. These shares will be converted into 3,962,265 shares of
common stock upon the closing of this offering. In connection with this
transaction, we also gave Superior the right to require us to repurchase their
shares prior to our initial public offering and the right to purchase an
additional 3,850,597 shares of either Series B Non-voting Preferred Stock or
common stock at a per share exercise price equal to 70% of the fair market
value of the common stock on the date of exercise. All substantive provisions
of these rights will terminate at the closing of this offering for the issuance
of an additional 1,210,665 shares of common stock to Superior and 134,520
shares to Adventist Health System Sunbelt Healthcare Corporation.
(5) From March 1, 1998 through April 6, 1998, we issued 619,102 shares of
Series A 8% Convertible Preferred Stock to 17 accredited investors, including
one of our officers, for an aggregate purchase price of $742,923. These shares
will be converted into 671,727 shares of common stock upon the closing of this
offering.
(6) On December 24, 1998, we issued a convertible note payable in the
original principal amount of $800,000, $500,000 of which was received in 1998,
bearing interest at 6% per annum due December 24, 1999 along with five year
warrants to purchase 33,482 shares of Series C Preferred Stock for an exercise
price of $4.78 per share (which will become the right to purchase 33,482 shares
of common stock for $4.78 per share upon the closing of this offering).
Interest on the note is payable at the maturity. At any time prior to maturity
any unpaid principal and interest may be converted into Series C Preferred
Stock at a conversion price of $4.78 per share.
(7) On January 29, 1999, we received $3.5 million in cash and acquired 10% of
the outstanding stock of HealthMagic, Inc., a subsidiary of Adventist Health
System Sunbelt Healthcare Corporation, a supplier of applications to Internet
companies, in exchange for 2,615,677 shares of Series C convertible preferred
stock. These shares will be converted into an equivalent number of shares of
common stock upon the closing of this offering.
II-2
<PAGE>
(8) On March 24, 1999, we reincorporated our predecessor corporation as a
Delaware corporation and changed our name to drkoop.com, Inc.
(9) From March 3, 1999 through March 5, 1999, we entered into loan agreements
with ten accredited investors. None of these investors is an executive officer,
director or 5% stockholder of drkoop.com except that Adventist Health System
Sunbelt Healthcare Corporation committed to provide convertible notes of up to
$2.0 million aggregate principal amount. Pursuant to these agreements, the
investors are irrevocably obligated to loan to us the aggregate principal
amount of up to $5.5 million at an interest rate of 7% per annum. Upon the
closing of this offering, the principal amount borrowed under these agreements
and all accrued interest will, solely at the option of each investor, either be
due and payable or convert into common stock at a conversion price of $7.43 per
share. As of March 31, 1999, we had borrowed $2.0 million.
(10) On April 9, 1999, we entered into distribution agreements with Infoseek
Corporation and the Buena Vista Internet Group, a unit of The Walt Disney
Company, pursuant to which we will be the exclusive provider of health-related
content on three websites of the Go Network, Go.com Health Center, ESPN.com
Training Room and the Family.com Health Channel. drkoop.com will also be the
premier health content provider for ABCnews.com. As an element of the
consideration paid by us, we agreed to issue warrants to purchase an aggregate
of 775,000 shares of common stock. These warrants are governed by substantially
identical strategic warrant agreements, none of which may, under any
circumstances, be exercised prior to one year of issuance. The exercise price
of the warrants is $8.60 per share, subject to customary anti-dilution
adjustments.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or, with respect to issuances to
employees, directors and consultants, Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments representing such securities issued in such transactions. All
recipients either received adequate information about drkoop.com or had
adequate access, through their relationships with drkoop.com to such
information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
-------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Restated Certificate of Incorporation of drkoop.com, Inc., a
Delaware corporation, as currently in effect
3.2** Bylaws of drkoop.com, Inc., a Delaware corporation, as currently in
effect
3.3** Form of Bylaws of drkoop.com, Inc., a Delaware corporation, as in
effect after the closing of the offering made under this
registration statement
3.4 Form of Restated Certificate of Incorporation of drkoop.com, Inc.,
a Delaware corporation, to be filed after the closing of the
offering made under this registration statement
3.5** Certificate of Amendment of Restated Certificate of Incorporation
of drkoop.com, Inc., a Delaware corporation
4.1** Specimen common stock certificate
5.1** Opinion of Latham & Watkins
10.1** Amended and Restated 1997 Stock Option Plan
10.2** 1999 Equity Participation Plan
10.3** Amended and Restated Registration Rights Agreement, dated as of
January 29, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
-------- -----------
<C> <S>
10.4** Employment Agreement dated January 27, 1999 by and between Company
and Susan M. Georgen-Saad
10.5** Employment Agreement dated August 1, 1997 by and between Company
and Donald W. Hackett
10.6** Employment Agreement dated August 1, 1997 by and between Company
and Robert C. Hackett, Jr.
10.7** Employment Agreement dated August 1, 1997 by and between Company
and Louis A. Scalpati
10.8** Employment Agreement dated January 15, 1999 by and between Company
and Dennis J. Upah
10.9+** Distribution Agreement dated April 9, 1999 by and between Company
and Infoseek Corporation
10.10+** Content Agreement dated March 30, 1999 by and between Company and
the Trustees of Dartmouth College
10.11+** D.A.R.T. Service Agreement dated November 15, 1998 by and between
Company and DoubleClick, Inc.
10.12+** Distribution Agreement dated April 9, 1999 by and between Company
and Buena Vista Internet Group
10.13** Software Sale, License and Development Agreement dated January 29,
1999 by and between Company and HealthMagic, Inc.
10.14+** Content License and Distribution Agreement dated March 10, 1999 by
and between Company and @Home Network
10.15** Tradename License Agreement dated January 5, 1999 by and between
Company and C. Everett Koop, M.D.
10.16** Consulting Letter Agreement dated October 1, 1997 by and between
Company and C. Everett Koop, M.D.
10.17+** License Agreement dated July 13, 1998 by and between Company and
Multum Information Services, Inc.
10.18+** Linking Agreement dated February 10, 1999 by and between Company
and Physicians' Online
10.19+** Content License Agreement dated December 11, 1998 by and between
Company and Excite, Inc. (terminated on March 1, 1999)
10.20+** Interim Linking Agreement dated January 28, 1999 by and between
Company and Quotesmith.com
10.21+** First Amendment to License Agreement dated March 25, 1999 by and
between Company and Multum Information Services, Inc.
10.22** Tradename License Agreement dated June 1, 1998 by and between
Company and Nancy Snyderman, M.D.
10.23 Reserved
10.24** Agreement for Sub-Sublease dated May 20, 1998 by and between
Company and The Software Atelier L.L.C.
10.25 Reserved
10.26+** Internet Advertising Sales Agreement dated October 16, 1998 by and
between Company and WinStar Interactive Media Sales, Inc.
10.27** Consulting Letter Agreement dated October 1, 1997 by and between
Company and John Zaccaro
10.28+** Sponsorship Agreement dated March 11, 1999 by and between Company
and Vitamin Shoppe Industries, Inc.
10.29+** Preferred Partner Agreement dated April 1999 by and between Company
and Salon Internet, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Description
------- -----------
<C> <S>
10.30** Master Community Partner Program Agreement dated January 29, 1999 by
and between Company and Adventist Health System Sunbelt Healthcare
Corporation
10.31 Reserved
10.32** Form of Community Partner Program Agreement
10.33** Form of Indemnification Agreement
10.34** 1999 Employee Stock Purchase Plan
10.35** Investment Agreement dated January 29, 1999 by and among Company,
Adventist Health System Sunbelt Healthcare Corporation and
HealthMagic, Inc.
10.36** Letter Agreement dated February 25, 1999 by and among Company,
Superior Consultant Holdings Corporation and Donald W. Hackett
10.37** Letter Agreement dated January 29, 1999 by and among Company,
Superior Consultant Holdings Corporation, Adventist Health System
Sunbelt Healthcare Corporation, HealthMagic, Inc. and Donald W.
Hackett
10.38** Stock Restriction Agreement dated January 29, 1999 by and among
Company, HealthMagic, Inc. and Adventist Health System Sunbelt
Healthcare Corporation
10.39** Loan Agreement dated December 24, 1998 between Company and Neal
Longwill
10.40** Form of Loan Agreement between Company and accredited investors
10.41** Loan Agreement dated March 3, 1999 between Company and Adventist
Health System Sunbelt Healthcare Corporation
10.42** Warrant to Purchase Shares of Common Stock Issued to Infoseek
Corporation as of April 9, 1999
10.43** Agreement for Issuance and Sale of Stock between Company and
Superior Consultant Holdings Corporation dated April 28, 1998
10.44** Letter of Donald W. Hackett dated April 28, 1998 constituting a
Voting Agreement between Donald W. Hackett and Superior Consultant
Holdings Corporation
10.45** Option and Put Agreement dated April 28, 1998 between Company and
Superior Consultant Holdings Corporation
10.46** Service Agreement dated April 29, 1998 between Company and Superior
Consultant, Inc., a wholly owned subsidiary of Superior Consultant
Holdings Corporation
10.47** Warrant to Purchase Shares of Common Stock Issued to Buena Vista
Interactive Group as of April 9, 1999
23.1 Consent of PricewaterhouseCoopers LLP
23.2** Consent of Latham & Watkins (included in Exhibit 5.1)
24.1** Powers of Attorney
27.1** Financial Data Schedule
</TABLE>
- --------
** Previously filed.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
(b) Financial Statement Schedules.
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
II-5
<PAGE>
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or
(4), or 497(h) under the Securities Act of 1933, shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Austin, State of Texas, on this 7th day of June, 1999.
drkoop.com, Inc.
Donald W. Hackett*
By:
------------------------------------
Name: Donald W. Hackett
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Donald W. Hackett* President, Chief Executive June 7, 1999
______________________________________ Officer and Director
Donald W. Hackett (Principal Executive
Officer)
/s/ Susan M. Georgen-Saad Chief Financial Officer June 7, 1999
______________________________________ (Principal Financial and
Susan M. Georgen-Saad Accounting Officer)
C. Everett Koop, M.D.* Chairman of the Board June 7, 1999
______________________________________
C. Everett Koop, M.D.
John F. Zaccaro* Vice Chairman of the Board June 7, 1999
______________________________________
John F. Zaccaro
Mardian J. Blair* Director June 7, 1999
______________________________________
Mardian J. Blair
Richard D. Helppie, Jr.* Director June 7, 1999
______________________________________
Richard D. Helppie, Jr.
Nancy L. Snyderman, M.D.* Director June 7, 1999
______________________________________
Nancy L. Snyderman, M.D.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey C. Ballowe Director June 7, 1999
______________________________________
Jeffrey C. Ballowe
/s/ G. Carl Everett, Jr. Director June 7, 1999
______________________________________
G. Carl Everett, Jr.
</TABLE>
*By: /s/ Susan M. Georgen-
Saad
-----------------------------
Susan M. Georgen-Saad
Attorney-in-Fact
II-8
<PAGE>
Index of Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Restated Certificate of Incorporation of drkoop.com, Inc., a Delaware
corporation, as currently in effect
3.2** Bylaws of drkoop.com, Inc., a Delaware corporation, as currently in
effect
3.3** Form of Bylaws of drkoop.com, Inc., a Delaware corporation, as in
effect after the closing of the offering made under this registration
statement
3.4 Form of Restated Certificate of Incorporation of drkoop.com, Inc., a
Delaware corporation, to be filed after the closing of the offering
made under this registration statement
3.5** Certificate of Amendment of Restated Certificate of Incorporation of
drkoop.com, Inc., a Delaware corporation
4.1** Specimen common stock certificate
5.1** Opinion of Latham & Watkins
10.1** Amended and Restated 1997 Stock Option Plan
10.2** 1999 Equity Participation Plan
10.3** Amended and Restated Registration Rights Agreement, dated as of
January 29, 1999
10.4** Employment Agreement dated January 27, 1999 by and between Company
and Susan M. Georgen-Saad
10.5** Employment Agreement dated August 1, 1997 by and between Company and
Donald W. Hackett
10.6** Employment Agreement dated August 1, 1997 by and between Company and
Robert C. Hackett, Jr.
10.7** Employment Agreement dated August 1, 1997 by and between Company and
Louis A. Scalpati
10.8** Employment Agreement dated January 15, 1999 by and between Company
and Dennis J. Upah
10.9+** Distribution Agreement dated April 9, 1999 by and between Company and
Infoseek Corporation
10.10+** Content Agreement dated March 30, 1999 by and between Company and the
Trustees of Dartmouth College
10.11+** D.A.R.T. Service Agreement dated November 15, 1998 by and between
Company and DoubleClick, Inc.
10.12+** Distribution Agreement dated April 9, 1999 by and between Company and
Buena Vista Internet Group
10.13** Software Sale, License and Development Agreement dated January 29,
1999 by and between Company and HealthMagic, Inc.
10.14+** Content License and Distribution Agreement dated March 10, 1999 by
and between Company and @Home Network
10.15** Tradename License Agreement dated January 5, 1999 by and between
Company and C. Everett Koop, M.D.
10.16** Consulting Letter Agreement dated October 1, 1997 by and between
Company and C. Everett Koop, M.D.
10.17+** License Agreement dated July 13, 1998 by and between Company and
Multum Information Services, Inc.
10.18+** Linking Agreement dated February 10, 1999 by and between Company and
Physicians' Online
10.19+** Content License Agreement dated December 11, 1998 by and between
Company and Excite, Inc. (terminated on March 1, 1999)
10.20+** Interim Linking Agreement dated January 28, 1999 by and between
Company and Quotesmith.com
10.21+** First Amendment to License Agreement dated March 25, 1999 by and
between Company and Multum Information Services, Inc.
10.22** Tradename License Agreement dated June 1, 1998 by and between Company
and Nancy Snyderman, M.D.
10.23 Reserved
10.24** Agreement for Sub-Sublease dated May 20, 1998 by and between Company
and The Software Atelier L.L.C.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.25 Reserved
10.26+** Internet Advertising Sales Agreement dated October 16, 1998 by and
between Company and WinStar Interactive Media Sales, Inc.
10.27** Consulting Letter Agreement dated October 1, 1997 by and between
Company and John Zaccaro
10.28+** Sponsorship Agreement dated March 11, 1999 by and between Company and
Vitamin Shoppe Industries, Inc.
10.29+** Preferred Partner Agreement dated April 1999 by and between Company
and Salon Internet, Inc.
10.30** Master Community Partner Program Agreement dated January 29, 1999 by
and between Company and Adventist Health System Sunbelt Healthcare
Corporation
10.31 Reserved
10.32** Form of Community Partner Program Agreement
10.33** Form of Indemnification Agreement
10.34** 1999 Employee Stock Purchase Plan
10.35** Investment Agreement dated January 29, 1999 by and among Company,
Adventist Health System Sunbelt Healthcare Corporation and
HealthMagic, Inc.
10.36** Letter Agreement dated February 25, 1999 by and among Company,
Superior Consultant Holdings Corporation and Donald W. Hackett
10.37** Letter Agreement dated January 29, 1999 by and among Company,
Superior Consultant Holdings Corporation, Adventist Health System
Sunbelt Healthcare Corporation, HealthMagic, Inc. and Donald W.
Hackett
10.38** Stock Restriction Agreement dated January 29, 1999 by and among
Company, HealthMagic, Inc. and Adventist Health System Sunbelt
Healthcare Corporation
10.39** Loan Agreement dated December 24, 1998 between Company and Neal
Longwill
10.40** Form of Loan Agreement between Company and accredited investors
10.41** Loan Agreement dated March 3, 1999 between Company and Adventist
Health System Sunbelt Healthcare Corporation
10.42** Warrant to Purchase Shares of Common Stock Issued to Infoseek
Corporation as of April 9, 1999
10.43** Agreement for Issuance and Sale of Stock between Company and Superior
Consultant Holdings Corporation dated April 28, 1998
10.44** Letter of Donald W. Hackett dated April 28, 1998 constituting a
Voting Agreement between Donald W. Hackett and Superior Consultant
Holdings Corporation
10.45** Option and Put Agreement dated April 28, 1998 between Company and
Superior Consultant Holdings Corporation
10.46** Service Agreement dated April 29, 1998 between Company and Superior
Consultant, Inc., a wholly owned subsidiary of Superior Consultant
Holdings Corporation
10.47** Warrant to Purchase Shares of Common Stock Issued to Buena Vista
Interactive Group as of April 9, 1999
23.1 Consent of PricewaterhouseCoopers LLP
23.2** Consent of Latham & Watkins (included in Exhibit 5.1)
24.1** Powers of Attorney
27.1** Financial Data Schedule
</TABLE>
- --------
** Previously filed.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
<PAGE>
EXHIBIT 3.4
RESTATED
CERTIFICATE OF INCORPORATION
OF
DRKOOP.COM, INC.
DRKOOP.COM, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
I. The name of the Corporation is drkoop.com, Inc.
II. The original Certificate of Incorporation of the Corporation was filed
with the Delaware Secretary of State on February 26, 1999.
III. The Board of Directors of the Corporation, acting in accordance with
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware, duly adopted resolutions and declared the advisability of such
resolutions to amend and restate the Certificate of Incorporation of the
Corporation to read in its entirety as follows:
ARTICLE I
The name of the corporation is drkoop.com, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purpose to be conducted or promoted is to
engage in any lawful act or activity for which a corporation may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
(a) The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation shall have authority to issue is one
hundred and fifteen million (115,000,000) shares. The total number of shares of
Common Stock which the Corporation shall have authority to issue is one hundred
million (100,000,000) shares, and the par value of each share of Common Stock is
one-tenth of one cent ($0.001). The total number of shares of Preferred Stock
which the Corporation shall have authority to issue is fifteen million
(15,000,000) shares, and the par value of each share of Preferred Stock is one-
tenth of one cent ($0.001). The Preferred Stock may be issued
<PAGE>
from time to time, in one or more series, each series to be appropriately
designated by a distinguishing letter or title, prior to the issue of any shares
thereof.
(b) The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions, if any), the redemption
price or prices, the liquidation preferences, any other designations,
preferences and relative, participating, optional or other special rights, and
any qualifications, limitations or restrictions thereof, of any wholly unissued
series of Preferred Stock, and the number of shares constituting any such
unissued series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to adopt, repeal, alter, amend
and rescind the bylaws of the Corporation.
ARTICLE VI
Notwithstanding Article V hereof, the bylaws may be rescinded, altered,
amended or repealed in any respect by the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66 2/3) of the outstanding voting stock
of the Corporation, voting together as a single class.
ARTICLE VII
The Board of Directors shall have that number of Directors set out in the
bylaws of the Corporation as adopted or as set from time to time by a duly
adopted amendment thereto by the Board of Directors or stockholders of the
Corporation acting in accordance with Article VI.
ARTICLE VIII
The Board of Directors shall be and is divided into three classes, Class I,
Class II and Class III. The number of directors in each class shall be the
whole number contained in the quotient arrived at by dividing the number of
directors by three, and if a fraction is also contained in such quotient then if
such fraction is one-third (1/3) the extra director shall be a member of Class
III and if the fraction is two-thirds (2/3) one of the extra directors shall be
a member of Class III and the other shall be a member of Class II. Each
director shall serve for a term ending on the date of the third annual meeting
following the annual meeting at which such director was elected; provided,
--------
however, that the directors of the Corporation as of the date of filing of this
- -------
Restated Certificate of Incorporation are hereby each assigned to a class, and
the directors assigned to Class I shall serve for a term ending on the date of
the first annual meeting next following April 1, 1999, the directors
2
<PAGE>
assigned to Class II shall serve for a term ending on the date of the second
annual meeting next following April 1, 1999, and the directors assigned to Class
III shall serve for a term ending on the date of the third annual meeting next
following April 1, 1999.
The members of the present Board of Directors are allocated as follows:
Jeffrey C. Ballowe Class I
Mardian J. Blair Class I
Richard D. Helppie Class I
G. Carl Everett, Jr. Class II
John F. Zaccaro Class II
Nancy L. Snyderman, M.D. Class II
Donald W. Hackett Class III
Dr. C. Everett Koop Class III
In the event of any increase or decrease in the number of directors, (a)
each director then serving as such shall nevertheless continue as a director of
the class of which he or she is a member until the expiration of his or her
current term, or his or her prior death, retirement, resignation or removal, and
(b) the newly created or eliminated directorships resulting from such increase
or decrease shall be apportioned by the Board of Directors to such class or
classes as shall, so far as possible, bring the number of directors in the
respective classes into conformity with the formula in this Article VIII, as
applied to the new number of directors.
Notwithstanding any of the foregoing provisions of this Article VIII, each
director shall serve until his successor is elected and qualified or until his
death, retirement, resignation or removal. Should a vacancy occur or be
created, the remaining directors (even though less than a quorum) may fill the
vacancy for the full term of the class in which the vacancy occurs or is
created.
ARTICLE IX
Elections of directors at an annual or special meeting of stockholders need
not be by written ballot unless the bylaws of the Corporation shall so provide.
ARTICLE X
No action shall be taken by the stockholders except at an annual or special
meeting of stockholders. The stockholders may not take action by written
consent.
ARTICLE XI
Special meetings of the stockholders of the Corporation for any purpose or
purposes may be called at any time by the Board of Directors, or by a majority
of the members of the Board of Directors, or by a committee of the Board of
Directors which has been duly designated by the Board of Directors and whose
powers and authority, as provided in a resolution of the Board of
3
<PAGE>
Directors or in the Bylaws of the Corporation, include the power to call such
meetings, but such special meetings may not be called by any other person or
persons; provided, however, that if and to the extent that any special meeting
-------- -------
of stockholders may be called by any other person or persons specified in any
provisions of the Certificate of Incorporation or any amendment thereto or any
certificate filed under Section 151(g) of the Delaware General Corporation Law,
then such special meeting may also be called by the person or persons, in the
manner, at the times and for the purposes so specified.
ARTICLE XII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on stockholders herein
are granted subject to this reservation; provided, however, that no amendment,
-------- -------
alteration, change or repeal may be made to Article VI, VII, VIII, X, XI or XII
without the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66%) of the outstanding voting stock of the Corporation, voting
together as a single class.
ARTICLE XIII
Each reference in this Certificate of Incorporation to any provision of the
Delaware General Corporation Law refers to the specified provision of the
General Corporation Law of the State of Delaware, as the same now exists or as
it may hereafter be amended or superseded.
ARTICLE XIV
To the fullest extent permitted by the General Corporation Law of the State
of Delaware, the Corporation shall indemnify and advance indemnification
expenses on behalf of all directors and officers of the Corporation. The
Corporation shall indemnify such other persons as may be required by statute or
by the bylaws of the Corporation. The Corporation may, to the full extent
permitted by Delaware law, purchase and maintain insurance on behalf of any
director or officer, or such other person as may be permitted by statute or the
bylaws of the Corporation, against any liability which may be asserted against
any director, officer or such other person and may enter into contracts
providing for the indemnification of any director, officer or such other person
to the full extent permitted by Delaware law. The liability of directors of the
Corporation (for actions or inactions taken by them as directors) for monetary
damages shall be eliminated to the fullest extent permissible under Delaware
law.
If the General Corporation Law of the State of Delaware is hereafter
amended to authorize corporate action further limiting or eliminating the
personal liability of directors, then the liability of the director to the
Corporation shall be limited or eliminated to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended from time to
time. Any repeal or modification of this Article XIV by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
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IV. Thereafter, pursuant to a resolution of the Board of Directors,
this Restated Certificate of Incorporation was duly approved by the holders of
the necessary number of shares of the Company's voting securities in accordance
with the provisions of Section 228, 242 and 245 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, drkoop.com, Inc. has caused this certificate to be
signed by its duly authorized officer this ____ day of June, 1999.
DRKOOP.COM, INC.
By: ______________________________
Donald W. Hackett, President
Attest:
_________________________________
Susan M. Georgen-Saad
Assistant Secretary
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Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 (File
No. 333-73459) of our report dated March 4, 1999, except for Note 14, for which
the date is May 13, 1999, relating to the financial statements of drkoop.com,
Inc., a development stage enterprise, which appear in such Registration
Statement. We also consent to the reference to us under the headings "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Austin, Texas
June 7, 1999
