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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-26275
drkoop.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware 74-2845054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 North Mopac, Suite 400
Austin, Texas 78731
(Address of principal executive offices)
----------------
(512) 583-5667 (Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
(1) Yes X No
-------- --------
(2) Yes X No
-------- --------
As of November 7, 2000 there were 39,589,902 shares of the Registrant's
common stock outstanding, which does not include shares of common stock issuable
upon exercise or conversion of outstanding preferred stock, warrants and
options.
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drkoop.com, Inc.
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets at September 30,2000 (Unaudited) and December 31,1999......... 3
Condensed Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 (Unaudited)........................................... 4
Condensed Statement of Changes in Stockholders' Equity for the nine months
Ended September 30, 2000 (Unaudited).............................................. 5
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999(Unaudited)............................................ 6
Notes to Condensed Financial Statements (Unaudited).................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 28
Item 2. Changes in Securities and Use of Proceeds..................................... 29
Item 3. Defaults Upon Senior Securities............................................... 32
Item 4. Submission of Matters to a Vote of Security Holders........................... 32
Item 5. Other Information............................................................. 32
Item 6. Exhibits and Reports on Form 8-K.............................................. 32
SIGNATURES............................................................................. 32
</TABLE>
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Item 1: Financial Information
drkoop.com, Inc.
Condensed Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
Assets (unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 17,361 $ 35,706
Trade accounts receivable, net 1,710 6,532
Other receivable - 4,000
Prepaids and other 18,064 22,862
------------ ------------
Total current assets 37,135 69,100
------------ ------------
Property and equipment, net 9,631 10,435
Investment in HealthMagic - 5,000
Intangible assets, net - 2,778
Other assets 390 12,407
------------ ------------
Total assets $ 47,156 $ 99,720
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 3,726 $ 8,197
Accrued liabilities 3,329 8,711
Leases payable 1,082 473
Related party payables - 2
Deferred credit 2,000 2,000
Deferred revenue 1,675 3,415
------------ ------------
Total current liabilities 11,812 22,798
------------ ------------
Leases payable, less current portion 1,056 605
Deferred credit 3,500 5,000
------------ ------------
Total liabilities 16,368 28,403
------------ ------------
Stockholders' equity:
Series D Convertible preferred stock, par value
$.001; 15,000,000 shares authorized; liquidation
value $41,250; 2,750,000 and -0- shares issued
and outstanding at September 30, 2000 and
December 31, 1999 3 -
Common stock, par value $.001; 100,000,000 shares
authorized; 37,656,487 and 30,508,324 shares
issued and outstanding at September 30, 2000
and December 31, 1999 38 30
Additional paid-in capital 209,674 149,447
Deferred stock compensation (7,504) (2,447)
Accumulated deficit (171,423) (75,713)
------------ ------------
Total stockholders' equity 30,788 71,317
------------ ------------
Total liabilities and stockholders' equity $ 47,156 $ 99,720
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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drkoop.com, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Content subscription and software license $ 838 $ 459 $ 2,521 $ 913
Advertising and sponsorship 1,193 2,402 6,759 3,364
E-commerce and other 15 49 32 56
--------- --------- --------- ---------
2,046 2,910 9,312 4,333
--------- --------- --------- ---------
Operating expenses:
Production, content and product development 3,845 2,390 14,992 5,535
(excludes stock-based charges of $334, $289,
$950 and $574)
Sales and marketing 1,847 17,842 39,057 27,774
(excludes stock-based charges of $9,612, $938,
$16,828 and $1,213)
General and administrative 2,537 2,246 11,367 5,091
(excludes stock-based charges of $7,008, $355,
$7,453 and $994)
Stock-based charges 16,954 1,582 25,231 2,781
Write off of investment and intangible assets -- -- 7,444 --
--------- --------- --------- ---------
Total operating expenses 25,183 24,060 98,091 41,181
--------- --------- --------- ---------
Loss from operations (23,137) (21,150) (88,779) (36,848)
Interest income, net 5 550 329 587
(excludes stock-based charges of $7,260, $0,
$7,260, and $0)
Interest expense-non-cash (7,260) -- (7,260) --
--------- --------- --------- ---------
Net loss (30,392) (20,600) (95,710) (36,261)
Beneficial conversion feature related
to Series D preferred stock (27,500) -- (27,500) --
Accretion of redeemable securities to fair value -- -- -- (17,255)
Dividend to preferred stockholders -- -- -- (9,147)
--------- --------- --------- ---------
Net loss attributable to common stock $ (57,892) $ (20,600) $(123,210) $ (62,663)
========= ========= ========= =========
Net loss per common share:
Basic and diluted $ (1.60) $ (0.68) $ (3.65) $ (3.56)
========= ========= ========= =========
Basic and diluted weighted average shares
outstanding 36,222 30,137 33,789 17,581
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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drkoop.com, Inc.
Condensed Statement of Changes in Stockholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Deferred
--------------- --------------- Paid-in Stock Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
------ ------- ------ ------ ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 -- $ -- 30,508 $ 30 $149,447 $ (2,447) $ (75,713) $ 71,317
Issuance of stock under employee plans -- -- 674 1 728 -- -- 729
Deferred stock compensation -- -- -- -- 825 (825) -- --
Amortization of deferred stock compensation -- -- -- -- -- 652 -- 652
Net loss for three months ended March 31, 2000 -- -- -- -- -- -- (24,757) (24,757)
------ ------- ------- ------- -------- ----------- --------- ---------
Balance at March 31, 2000 -- -- 31,182 31 151,000 (2,620) (100,470) 47,941
Issuance of stock under employee plans -- -- 164 -- 64 -- -- 64
Issuance of stock to partner -- -- 3,500 4 9,621 -- -- 9,625
Issuance of warrants -- -- -- -- 6,828 -- -- 6,828
Deferred stock compensation -- -- -- -- 65 (65) -- --
Amortization of deferred stock compensation -- -- -- -- -- 552 -- 552
Net loss for three months ended June 30, 2000 -- -- -- -- -- -- (40,561) (40,561)
------ ------- ------- ------- -------- ----------- --------- ---------
Balance at June 30, 2000 -- -- 34,846 35 167,578 (2,133) (141,031) 24,449
Issuance of Series D preferred stock, net 2,750 3 -- -- 24,622 -- -- 24,625
Issuance of stock under employee plans -- -- 209 -- 106 -- -- 106
Issuance of warrants -- -- -- -- 5,940 -- -- 5,940
Forfeiture of stock options upon termination -- -- -- -- (441) 845 -- 404
Issuance of stock for debt settlement -- -- 2,602 3 2,135 -- -- 2,138
Deferred stock compensation -- -- -- -- 9,734 (9,734) -- --
Amortization of deferred stock compensation -- -- -- -- -- 3,518 -- 3,518
Net loss for the three months ended September
30, 2000 -- -- -- -- -- -- (30,392) (30,392)
------ ------- ------- ------- -------- ----------- --------- ---------
Balance at September 30, 2000 2,750 $ 3 37,657 $ 38 $209,674 $ (7,504) $(171,423) $ 30,788
====== ======= ======= ======= ======== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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drkoop.com, Inc.
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Operating Activities:
Net loss $(95,710) $(36,261)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,238 1,488
Amortization of stock-based charges 25,231 2,781
Amortization of non-cash interest expense 7,260 --
Provision for doubtful accounts 984 100
Interest accretion on convertible notes payable -- 94
Write-off of investment and intangible asset 7,444 --
Changes in assets and liabilities:
Accounts receivable 3,838 (2,778)
Other receivable 4,000 --
Prepaids and other assets 12,929 (21,180)
Accounts payable (4,471) 3,628
Accrued and other liabilities (5,103) 5,071
Related party payables (2) (991)
Deferred revenue (1,739) 5,562
Deferred credit (1,500) --
-------- --------
Cash used in operating activities (42,601) (42,486)
-------- --------
Investing Activities:
Purchase of furniture, fixtures and equipment (1,081) (6,483)
-------- --------
Cash used in investing activities (1,081) (6,483)
-------- --------
Financing Activities:
Proceeds from issuance of preferred stock, net 24,625 3,500
Proceeds from issuance of convertible notes payable -- 5,775
Proceeds from exercise of stock options 293 323
Proceeds from issuance of common stock, net 419 88,448
Proceeds from borrowing on bridge loan and line of credit 1,900 --
Repayment of borrowings (1,900) --
-------- --------
Cash provided by financing activities 25,337 98,046
-------- --------
(Decrease) / increase in cash and cash equivalents (18,345) 49,077
Cash and cash equivalents at beginning of period 35,706 --
-------- --------
Cash and cash equivalents at end of period $ 17,361 $ 49,077
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
drkoop.com, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2000
NOTE 1 - ORGANIZATION
drkoop.com, Inc. (the "Company"), a Delaware corporation, 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 also develops internet
enabled software tools for use on its website and licensing to third parties.
NOTE 2 - BASIS OF PRESENTATION
The condensed financial statements included herein are unaudited and reflect all
adjustments, which in the opinion of management are necessary to fairly state
the Company's financial position, results of operations and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's financial statements and notes thereto for the year ended December
31, 1999, which are contained in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The results of operations for the
three and nine month periods ended September 30, 2000 and 1999 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year.
NOTE 3 - PREFERRED STOCK
In August, 2000 the Company completed a Private Placement ("Private Placement")
of 2,750,000 shares of Series D 8% convertible preferred stock ("Preferred
Stock"). The Preferred Stock was issued for $10 per share and has a liquidation
preference of $15 per share, plus accrued and unpaid dividends. The 2,750,000
preferred shares may be converted into 78,571,428 shares of common stock,
reflecting a conversion price of $0.35 per share, subject to adjustment.
Associated with this transaction, the Company recorded a beneficial conversion
feature charge of $27.5 million.
In connection with the Private Placement, the Company issued options to purchase
13,371,000 shares of common stock for $0.35 per share to certain new employees.
The options vest 25% immediately and an additional 25% on the first, second and
third anniversaries of August 22, 2000.
Warrants were issued to certain investors to purchase 6,350,431 shares of common
stock at $0.35 per share, subject to adjustment. 2,721,431 of the warrants were
exercisable in full immediately. The remaining 3,629,000 are exercisable
immediately for up to 25% of the shares and for up to an additional 25% of the
shares on the first, second and third anniversaries of August 22, 2000. Warrants
to purchase 6,142,857 shares of common stock at $0.35 per share (subject to
adjustment) were also issued to the placement agent and are exercisable in full
immediately. All of these warrants have a five year term. The warrants that were
immediately exercisable of 2,721,431 and 6,142,857 are recorded at a fair value
of $1.04 per share and $1.15 per share, respectively, which was calculated at
the time of issuance using the Black-Scholes option-pricing model with the
following weighted average assumptions: zero dividend yield; 164% volatility;
risk-free rate of 5.0% and a legal life of five years. The Company treated the
$9.9 million as an offering cost of the Private Placement.
Also, the Company restructured certain warrants previously issued to the
placement agent and its affiliate related to a bridge loan and line of credit.
In connection with the consummation of the Private Placement, the placement
agent and its affiliate converted warrants to purchase 6,900,000 shares of
common stock for $0.75 into warrants to purchase 14,785,714 shares of common
stock for $0.35 per share, subject to adjustment. These warrants have a seven
year life and are exercisable November 1, 2000. The Company recorded non-cash
interest expense of $7.3 million associated with these warrants in the quarter
ended September 30, 2000 (see note 7).
NOTE 4 - NET LOSS PER SHARE
Basic earnings per share is computed by dividing income or loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by giving effect to all
dilutive potential common shares that were outstanding during the period. The
Company has excluded all preferred stock
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and outstanding stock options and warrants from the calculation of diluted net
loss per share because all such securities are antidilutive for all periods
presented.
NOTE 5 - PREPAIDS AND OTHER ASSETS
Prepaids and other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ----------------
<S> <C> <C>
Prepaid portal expense $3,781 $16,088
Prepaid warrant expense 12,075 5,578
Prepaid content expense 1,510 436
Employee receivables 5 230
Other prepaids 693 530
-------------- ----------------
Total $ 18,064 $22,862
============== ================
</TABLE>
NOTE 6 - OTHER ASSETS
Other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ----------------
<S> <C> <C>
Prepaid warrant expense, non-current $ 0 $11,773
Deposits 140 384
Pledged certificate of deposit 250 250
-------------- ----------------
Total $ 390 $12,407
============== ================
</TABLE>
NOTE 7 - BRIDGE LOAN AND LINE OF CREDIT
In June 2000, the Company borrowed $1.5 million from ComVest Venture Partners,
L.P. and Commonwealth Associates, L.P. ("Commonwealth"). In conjunction with
these notes, the Company issued to Commonwealth warrants to purchase 4.0 million
shares of the Company's stock at $0.75 per share. The Company recorded a
discount of $1.2 million on the notes associated with the issuance of these
warrants, which was amortized to interest expense over the period of the loan,
which was repaid from the proceeds of the Private Placement.
On June 30, 2000 the Company entered into a line of credit agreement with
Commonwealth for up to $3.0 million. In consideration of the agreement, the
Company issued to Commonwealth warrants to purchase 2.5 million shares of the
Company's stock at $0.75 per share. On August 14, 2000 the Company borrowed
$400,000 under the line of credit, which was repaid from the proceeds of the
Private Placement. Under the terms of the credit agreement, the Company issued
to Commonwealth warrants to purchase 400,000 shares of the Company's common
stock at an exercise price of $0.75 per share.
In connection with the consummation of the Private Placement, the warrants to
purchase 6,900,000 shares of common stock for $0.75 were converted into warrants
to purchase 14,785,714 shares of common stock for $0.35 per share. These
warrants have a seven-year life and are exercisable November 1, 2000. The
14,785,714 warrants are recorded at a fair value of $1.06 per share which was
calculated at the time of issuance using the Black-Scholes option-pricing model
with the following weighted average assumptions: zero dividend yield; 164%
volatility; risk-free rate of 5.0% and a legal life of seven years. The Company
recorded non-cash interest expense of $7.3 million associated with these
warrants in the quarter ended September 30, 2000.
NOTE 8 - STOCK-BASED CHARGES
In connection with the Private Placement in August 2000, the Company recorded
stock-based charges totaling $20.8 million, including $9.7 million in deferred
compensation. Of the $20.8 million, the Company expensed $13.7 million during
the three and nine months ended September 30, 2000, consisting of amortization
of private placement warrants, deferred compensation and financing warrants of
$3.8 million, $2.6 million and $7.3 million, respectively. The Company recorded
additional non-cash deferred compensation expense of $882,000 and $839,000 for
the three months ended September 30, 2000 and 1999, respectively, and $2.1
million and $1.9 million for the nine months ended September 30, 2000 and 1999,
respectively. Deferred stock compensation is recorded for the difference between
the exercise
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<PAGE>
price and the fair market value of certain stock options granted to its
employees. The deferred stock compensation is being amortized over the four-year
vesting period of such options.
The Company also recognized stock-based charges of $488,000 related to
agreements with GO.com for the nine months ended December 31, 1999 and stock-
based charges of $3.7 million for the three and nine months ended September 30,
2000, related to the Go.com agreements. The Company recognized stock-based
charges of $312,000 related to agreements with AOL, net of fees earned under the
DSA, for the nine months ended December 31, 1999 and stock-based charges of $5.7
million and $12.3 million for the three and nine months ended September 30,
2000, respectively, related to the AOL agreements. Other stock-based charges
include a charge related to the 2,600,000 shares of common stock for the
settlement of contracts with certain of the Company's trade creditors.
Amortization of stock-based charges consist of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Private placement warrants $ 3,789 $ 0 $ 3,789 $ 0
Deferred stock compensation 3,518 839 4,722 1,912
GO warrants 3,684 488 3,684 488
AOL warrants 5,656 186 12,312 312
Other 307 69 724 69
-------- -------- -------- --------
Total operating expense 16,954 1,582 25,231 2,781
Non-cash interest 7,260 0 7,260 0
-------- -------- -------- --------
Total $ 24,214 $ 1,582 $ 32,491 $ 2,781
======== ======== ======== ========
</TABLE>
NOTE 9 - COMMITMENTS & CONTINGENCIES
Portal Agreements
GO.com (Infoseek and Buena Vista Internet Group)
On April 9, 1999, the Company entered into agreements with Infoseek Corporation
and the Buena Vista Internet Group, each a unit of The Walt Disney Company
(collectively, "GO.com" or the "GO network"), under which the Company became 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, the Company also became the premier
health content provider for ABCnews.com. Under these agreements, users on the Go
Network were to be able to access various health information, services,
interactive tools and commerce opportunities through a co-branded website served
by the Company.
The term of both agreements was originally three years with the ability to
terminate the relationship after two years. The Company was scheduled to pay
Infoseek and the Buena Vista Internet Group $57.9 million in total cash
consideration 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.
Effective April 15, 2000, Infoseek Corporation, the Buena Vista Internet Group
and the Company entered into an amendment to the original agreements. In
exchange for additional cash payments of $5.3 million, an additional 820,000
warrants to purchase common stock at an exercise price of $1.25, and
acceleration of the vesting of the initial warrants, the original agreements
were terminated effective July 15, 2000 without further obligation for either
party. Due to the anti-dilution rights of the $8.60 warrants the Company issued
an additional 890,000 warrants on the same terms and price. The newly-issued
$1.25 warrants are to be exercisable on or after July 15, 2000 and are recorded
at a fair value of $1.91 per share which was calculated at the time of issuance
using the Black-Scholes option-pricing model with the following weighted average
assumptions: zero dividend yield; 100% volatility; risk-free interest rate of
5.0% and a legal life of 3 years.
The Company recognized total sales and marketing expense of $6.9 million and
stock-based charges of $488,000 related to agreements with GO.com for the year
ended December 31, 1999; and sales and marketing expense of $0 and $10.6 million
and stock-based charges of $3.7
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million and $3.7 million for the three and nine months ended September 30, 2000,
respectively, related to the Go.com agreements.
America Online
Effective July 1, 1999, the Company and America Online, Inc. ("AOL") signed a
four-year Interactive Services Agreement ("ISA") pursuant to which the Company
was designated as AOL's premier provider of healthcare content. The ISA
obligated the Company to make carriage payments aggregating $89.0 million in
cash over a four-year period. Concurrently, the Company and AOL entered into a
four-year Development and Services Agreement ("DSA") pursuant to which the
Company is to provide specified software development services to AOL for the
term of the agreement and AOL is to pay the Company $8.0 million. In addition,
the Company provided AOL 1,570,932 immediately vested warrants (the "time
warrants") to purchase drkoop.com, Inc. common stock at an exercise price of
$15.94 per share and the right to earn up to an additional 4,320,063 warrants
based on performance (the "performance warrants"). In June 1999, the Company
made a total cash payment of $24.3 million under the ISA. In September 1999 and
February 2000, the Company received two equal installments representing payment
in full for the $8.0 million under DSA.
Effective April 12, 2000 the Company and AOL entered into a First Amendment to
the Interactive Services Agreement ("First Amendment"). In exchange for 3.5
million shares of drkoop.com, Inc. common stock, the Company was relieved of any
further cash payment obligations to AOL under the ISA; all existing warrant
agreements, vested and unvested, were canceled; and the Company will receive
reduced carriage for a twelve-month period subject to compliance with the
modified terms of the ISA.
The Company recognized total sales and marketing expense of $11.6 million and
stock-based charges of $312,000 related to agreements with AOL, net of fees
earned under the DSA, for the year ended December 31, 1999; and sales and
marketing expense of $1.4 million and $7.9 million and stock-based charges of
$5.7 million and $12.3 million for the three and nine months ended September 30,
2000, respectively, related to the AOL agreements.
Severance Agreements
In May and June, 2000, the Company's Executive Vice President, Marketing,
Executive Vice President and General Manager, Healthcare Division, and its
Senior Vice President, Chief Internet Strategist resigned. In July 2000 the
Company's Chief Operating Officer and Chief Financial Officer resigned. As a
condition to the severance of these employment relationships, the Company
entered into agreements and complete releases with each of the individuals.
Under the agreements, the Company agreed to accelerate the vesting of the
individuals' stock options and to pay the individuals a gross sum totaling
$728,500, which will be paid out in twelve equal monthly installments to the
individuals. In addition, in August 2000, the Company terminated the employment
of Donald Hackett, the Company's former Chief Executive Officer. The Company
expects to continue paying Mr. Hackett his salary of $238,850 for up to one year
following the date of termination.
Legal Matters
The Company is aware of eleven substantially-identical class action lawsuits
that have been filed in the United States District Court for the Western
District of Texas against the Company and certain of its present and former
officers and directors. Other lawsuits may have been filed of which the Company
is not aware. All of the lawsuits that the Company is aware of have been filed
on behalf of purchasers of the securities of drkoop.com, Inc. and allege
violations of the federal securities laws. The first such lawsuit was filed on
July 14, 2000 and is captioned William Gambino, on behalf of himself and all
others similarly situated, v. drkoop.com, Inc., Donald Hackett, C. Everett Koop,
Nancy Snyderman, John F. Zaccaro, and Neal K. Longwill. To date the Company has
either been served with process or complied with a request to waive the service
of process with respect to all except one of the lawsuits. The time for the
Company to respond to the complaints in the lawsuits has not yet expired.
On October 16, 2000, the District Court entered an order consolidating the
eleven lawsuits described above, as well as all other substantially-identical
class action lawsuits, into a single lawsuit (the "Consolidated Action")
captioned In re drkoop.com, Inc. Securities Litigation. In addition, pursuant to
statutory procedural requirements, the Court selected lead plaintiffs for the
plaintiff class. The Court also approved
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<PAGE>
lead plaintiffs' selection of lead plaintiffs' counsel. On November 7, 2000, the
Court entered a scheduling order in the Consolidated Action providing for lead
plaintiffs to file an amended consolidated complaint, and for the Company to
respond to the amended consolidated complaint. The Company believes that the
claims alleged in the lawsuits comprising the Consolidated Action are without
merit and intends to defend the Consolidated Action vigorously.
The Company's counsel has received a letter from a representative of a regional
office of the SEC stating that the SEC is investigating the events and
circumstances surrounding the allegations in the lawsuits comprising the
Consolidated Action, and asking that the Company voluntarily provide the SEC
with information regarding such events and circumstances. The SEC letter states
that the SEC's request for information should not be construed as an indication
by the SEC that any violation of the federal securities laws has occurred. The
investigation described in the letter was commenced by order of the SEC dated
August 16, 2000.
The Company has received a letter demanding that the Company initiate a
derivative action asserting various claims that the letter alleges that the
Company has against certain of its present and former officers and directors for
alleged breaches of fiduciary duty and other alleged wrongdoing. As required
under applicable law, the Company's board of directors is currently evaluating
the alleged claims identified in the letter.
The Company's counsel has received a letter from an attorney representing one of
the purchasers of a convertible promissory note issued by the Company, which
asserts a claim for $208,000 based on the allegation that the purchaser was
misinformed as to the length of the holding period upon conversion of the note
into common stock of the Company.
The Company cannot predict the outcome of the litigation described above or the
extent to which the costs of defense and any settlement or award will be covered
by the Company's insurance policies.
Effective April 18, 2000 the Company and HealthMagic, Inc. ("HMI") entered into
a Settlement Agreement and Mutual General Releases ("Settlement"). Under the
terms of the Settlement, the business relationship between the Company and HMI
was terminated; HMI transferred back to the Company the previously acquired
intellectual property; the Company rescinded and returned its 10% ownership of
HMI; and the Company agreed that it will not launch a Personal Medical Record
(as defined in its agreements with HMI) for a period of nine months after the
date of the Settlement subject to change in control exception. No cash payment
was made and no drkoop.com, Inc. equity securities were issued in connection
with the termination of the relationship. The Company's investment in HMI of
$5.0 million and unamortized intangible assets of $2.4 million were written off
in the second quarter 2000. Also in connection with the termination of the
Health Magic relationship, Mardian Blair resigned from the Company's board of
directors and Dr. C. Everett Koop resigned from the board of HMI.
The Company is also involved in other claims and disputes not described in the
notes that are incidental to the regular conduct of our business and are not
presently believed to be material.
NOTE 10 - SUPPLEMENTAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
2000 1999
---------------------------
(in thousands)
<S> <C> <C>
Supplemental Disclosure of Non-cash Investing and Financing Activities:
----------------------------------------------------------------------------------------------------------------
Deferred stock compensation related to options granted $ 10,624 $ 3,507
-----------------------------------------------------------------------------------------------------------------
Accretion of redeemable securities to fair value $ 0 $ 17,255
-----------------------------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE>
<TABLE>
<S> <C> <C>
Issuance of preferred stock for investment in affiliate $ 0 $ 5,000
-----------------------------------------------------------------------------------------------------------------
Issuance of preferred stock for intangible asset $ 0 $ 4,000
-----------------------------------------------------------------------------------------------------------------
Obligation to issue common stock pursuant to option cancellation agreement $ 0 $ 9,147
-----------------------------------------------------------------------------------------------------------------
Conversion of convertible notes payable to common stock $ 0 $ 6,290
-----------------------------------------------------------------------------------------------------------------
Conversion of series B preferred stock to common stock at IPO $ 0 $ 35,660
-----------------------------------------------------------------------------------------------------------------
Acquisition of assets under capital lease $ 1,918 $ 0
-----------------------------------------------------------------------------------------------------------------
Issuance of warrants to partner $ 1,719 $ 10,052
-----------------------------------------------------------------------------------------------------------------
Issuance of common stock to partner $ 9,625 $ 0
-----------------------------------------------------------------------------------------------------------------
Issuance of common stock for services and debt settlement $ 735 $ 0
-----------------------------------------------------------------------------------------------------------------
Forfeiture of employee options upon termination $ 404 $ 0
-----------------------------------------------------------------------------------------------------------------
Beneficial conversion charge $ 27,500 $ 0
-----------------------------------------------------------------------------------------------------------------
Issuance of warrants upon private placement $ 9,918 $ 0
-----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 11 - RISKS AND UNCERTAINTIES
In December 1999, the Company entered into a content licensing agreement with a
customer in Australia. Revenue from this customer represents 14% and 9% for the
three and nine months ended September 30, 2000.
NOTE 12 - SUBSEQUENT EVENTS
On November 1, 2000, the Company acquired all of the assets of drDrew.com from
Sherwood Partners, Inc., a corporate restructuring and business advisory firm,
for 1.58 million shares of common stock and $150,000 cash. drDrew.com is a
leading online lifestyle community for 14- to 24-year-olds. While both sites
will continue operating independently, there will be some basic content
integration. The Company plans to leverage its existing infrastructure to
operate drDrew.com with minimal additional expense.
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements"
which is required to be implemented no later than the fourth quarter of 2000. In
SAB 101, the SEC staff expresses its view regarding the appropriate recognition
of revenue with regard to a variety of circumstances, some of which are of
particular relevance to the Company. The Company's adoption of SAB 101 is not
expected to have a material impact.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The following discussion of the financial condition and results of operations
should be read in conjunction with the condensed financial statements and the
related notes thereto included elsewhere in this report. This document contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. When
used in this document, the words "expects," "anticipates," "intends" and "plans"
and similar expressions are intended to identify certain of these forward-
looking statements. The cautionary statements made in this document should be
read as being applicable to all related forward-looking statements wherever they
appear in this document. The Company's actual results could differ materially
from those discussed in this document. The Company does not intend to update any
of the forward-looking statements after the date of this filing on Form 10-Q to
conform these statements to actual results.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed in the Company's Form 10-K for the
year ended December 31, 1999.
Overview
-12-
<PAGE>
The Company operates drkoop.com, an Internet-based consumer healthcare network.
The Company's network consists of a consumer-focused interactive website that
provides users with comprehensive healthcare information and services, as well
as affiliate relationships with portals, other websites, healthcare
organizations and traditional media outlets. Its 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. The Company also
develops internet enabled software tools for use on its website and licensing to
third-parties.
Revenues
The Company derives revenue primarily from advertising and sponsorship
arrangements and content subscription and software licensing fees. The Company
also generates revenues from electronic commerce through alliances with certain
retailers of pharmaceuticals and related products and through providing
insurance companies with the opportunity to sell products and services to its
users, although these revenues have not been material.
Advertising revenues are derived primarily from short-term advertising contracts
in which the Company typically guarantees a minimum number of user "impressions"
to be delivered over a specific period of time for a fixed fee. Impressions are
the number of times that users on the Company's website view an advertisement.
The Company recognizes advertising revenues at the lesser of the ratio of
impressions delivered over the 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. The Company has utilized
a combination of third-party firms and in-house staff for the sales and
insertion of advertisements on the drkoop.com website. Advertising rates,
measured on a cost per thousand impressions basis, are dependent on whether the
impressions are for general rotation throughout the drkoop.com website or for
target audiences and properties within specific areas of the website. In
addition, some of the Company's advertising is performance-based whereby payment
is based on "click-throughs" to the customer's website.
Sponsorship revenues are derived from long-term contracts in which the Company
commits to provide sponsors with 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. Sponsorship arrangements typically
include the delivery of a guaranteed minimum number of impressions and the
design and implementation of customized pages on the website that enhance the
promotional objective of the sponsor. Costs associated with the development of
the web pages are minimal and are expensed when 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. Additionally, dependent upon the complexity of
an advertising or sponsorship revenue arrangement, the Company may provide
initial site design consulting and engineering services that require the
development and implementation of specific website enhancements prior to
launching a co-branded site. Revenues and related costs for initial site design
and engineering services are recognized under contract accounting.
Content subscription and software licensing fees are facilitated through the
Company's Community Partnership Program ("CPP") and from the sale of calculators
and other software tools. Subscriptions to the CPP generally vary from one to
three years. Under this program, the Company develops co-branded Internet pages
and software consisting of visual icons containing embedded links back to our
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 licenses to CPP 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 CPP contract, generally ranging from one
to three years. Software licenses are also sold as a stand-alone product for
calculators independent of the CPP. The Company also has a licensing
relationship for an international market, which involves content and software
tools.
The Company has begun 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 its
audience. The Company does not provide any of the goods or services offered. The
Company receives compensation in the form of
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<PAGE>
transaction fees or anchor tenant rental fees from third-parties who have
entered into preferred provider arrangements. Revenues from the Company's share
of the proceeds from the commerce partner's transactions are recognized upon
notification from the commerce partner of sales attributable to users from the
drkoop.com website. E-commerce revenues were nominal for the nine months ended
September 30, 2000 and 1999.
As the Company's market develops, seasonal and cyclical patterns may emerge.
These patterns may affect our revenues. The Company cannot yet predict to what
extent its operations will prove to be seasonal.
Results of Operations
Comparison of the three months ended September 30, 2000 to the three months
ended September 30, 1999
Revenues:
Revenues for the quarter were adversely affected by the Company's widely
publicized liquidity shortfall and similar problems affecting some of its
customers, which resulted in extended sales cycles and extended accounts
receivable cycles. These problems continued to exist as of the date of this
report. The Company does not record revenues unless collection of the related
account receivable is deemed to be probable.
Revenues decreased to $2.0 million for the three months ended September 30,
2000, as compared to $2.9 for the comparable period of 1999. Revenue from
content subscription and software licenses for the quarter ended September 30,
2000 totaled $838,000 or 41% of total revenues, as compared to $459,000, or 16%
of total revenues for the quarter ended September 30, 1999. The increase in
content subscription and software license revenue is attributable to the growth
of the Community Partner Program during 1999 and 2000, resulting in an increase
in the average number of partners for the quarter ended September 2000, as
compared to the quarter ended September 1999. Software licenses revenue during
the quarter ended September 30, 2000, also include $74,000 for the sale of
calculator tool software licenses. There were no such revenues in the
corresponding quarter of 1999. Additionally, in December 1999, the Company
entered into a content and tools syndication agreement with a company in
Australia. Revenue recognized under this agreement represents $282,000, or 14%
of total revenue for the quarter ended September 30, 2000.
Advertising and sponsorship revenues totaled $1.2 million, or 58% of total
revenues for the quarter ended September 30, 2000 as compared to $2.4 million,
or 83% of total revenues, for the same period in 1999. Included in advertising
and sponsorship revenues were recurring revenues from sponsorship agreements of
$972,000, or 48% of total revenues, for the quarter ended September 30, 2000, as
compared to $864,000, or 30% of total revenues for the same period during 1999.
The remaining advertising revenues of $221,000, or 11% of total revenues for the
quarter ended September 30, 2000 and $1.5 million, or 53% of total revenues for
the quarter ended September 1999, were derived from non-recurring short-term
advertising and sponsorship arrangements. The decrease in advertising and
sponsorship revenues was primarily due to a decrease in the number of
advertising arrangements, reflecting the concern about the Company's liquidity
by some advertisers.
Other revenues totaled $15,000, or 1% of total revenues for the quarter ended
September 30, 2000 and $49,000, or 2% of total revenues for the quarter ended
September 30, 1999. Other revenues consist primarily of fees from e-commerce
transactions.
Included in content subscription and software licensing revenues are barter
transactions that accounted for $30,000 for the three months ended September 30,
1999. Barter revenues related to advertising and sponsorship for the three
months ended September 30, 1999 accounted for $160,000. There were no barter
revenues in the quarter ended September 30, 2000. In total, barter revenues
represented $190,000, or 7%, of total revenues for the quarter ended September
30, 1999.
Production, content and product development expenses:
Production, content and product development expenses consist primarily of
salaries and benefits, contract labor and consulting fees related to technology
development 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 $1.4 million,
or 58%, from $2.4 million for the quarter ended September 30, 1999 to $3.8
million for the quarter ended September 30, 2000. The increase in production,
content and product development costs was primarily due to the addition of
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<PAGE>
personnel, resulting in higher salaries, and higher depreciation expenses caused
by an increase in depreciable assets after the Company's initial public offering
in June, 1999.
Sales and marketing expenses:
Sales and marketing expenses consist primarily of portal fees, web-based
advertising, salaries and related costs, commissions, general advertising and
other related expenses. Sales and marketing expense decreased by $16.0 million,
from $17.8 million to $1.8 million for the quarters ended September 30, 1999 and
2000, respectively. The Go.com and America Online agreements were amended in
April, 2000, which resulted in a $7.8 million decrease in portal expense for the
quarter ended September 30, 2000 compared to the same quarter in 1999.
Additionally, marketing expenses were reduced by $5.5 million as the Company
reacted to liquidity issues.
General and administrative expenses:
General and administrative expenses consist primarily of salaries and related
costs for general corporate functions, including executive, finance, accounting,
investor relations, human resources, facilities and fees for professional
services. General and administrative expenses increased by $0.3 million, or 13%,
from $2.2 million to $2.5 million for the quarters ended September 30, 1999 and
2000, respectively. The increase is primarily attributable to increases in legal
fees and bad debt expense, offset by a decrease in the amortization of
intangibles associated with the HealthMagic, Inc. relationship, which was
terminated in April, 2000.
Stock-based charges:
In connection with the Private Placement in August 2000, the Company expensed
$13.7 million during the three months ended September 30, 2000, consisting of
amortization of private placement warrants, deferred compensation and financing
warrants of $3.8 million, $2.6 million and $7.3 million, respectively. The
Company recorded additional non-cash deferred compensation expense of $881,000
and $839,000 for the three months ended September 30, 2000 and 1999,
respectively.
Stock-based charges consist primarily of the amortization of the cost of issuing
stock and warrants for common stock in payment for debt settlement or other
consideration. The Company expensed $17.0 million during the three months ended
September 30, 2000, as compared to $1.6 million during the three months ended
September 30, 1999, an increase of $15.4 million. The primary reasons for the
increase are an $8.7 million increase in amortization of warrants issued to
Go.com and America Online in conjunction with the contract amendments made in
April, 2000 and $6.4 million in amortization of warrants issued with the Private
Placement in August, 2000.
Interest income, net:
Net interest income includes interest income from cash balances and interest
expenses related to financing obligations, particularly on the bridge loan and
the line of credit, as well as convertible notes payable prior to conversion and
capital leases on computer equipment. Net interest income was $5,000 for the
three months ended September 30, 2000 as compared to net interest income of
$550,000 for the three months ended September 30, 1999. Interest income
decreased due to lower average net cash and cash equivalents balances in 2000 as
the Company has utilized cash generated from its IPO completed in June 1999 to
fund operating losses.
Interest expense - non-cash:
In the quarter ended September 30, 2000, the Company incurred charges of $7.3
million for the cost of issuing warrants in conjunction with securing the bridge
loan and the line of credit.
Income tax:
The Company has incurred net losses to date. The Company has recorded an
allowance equal to the amount of the carryforward due to the uncertain
realization of these tax benefits.
Comparison of the nine months ended September 30, 2000 to the nine months ended
September 30, 1999
Revenues:
Revenues increased to $9.3 million for the nine months ended September 30, 2000,
as compared to $4.3 million for the comparable period of 1999. Revenue from
content subscription and software licenses for the nine months ended September
30, 2000 totaled $2.5 million or 27% of total revenues, as compared to $913,000,
or 21% of total revenues for the nine months ended September 30, 1999. The
increase in content subscription and software license revenue is attributable to
the growth of the Community Partner Program during 1999. In January 1999 there
were only 2 partners in the Community Partner Program. By the end of September
1999 there were 30 partners. The Company maintained a monthly average of 28
partners for the nine months ended September 30, 2000. Additionally, in December
1999, the Company entered into a content and tools syndication agreement with a
company in Australia. Revenue recognized under this agreement represents
$845,000, or 9% of total revenue for the nine months ended September 30, 2000.
-15-
<PAGE>
Advertising and sponsorship revenues totaled $6.8 million, or 73% of total
revenues for the nine months ended September 30, 2000 as compared to $3.4
million, or 78% of total revenues, for the same period in 1999. Included in
advertising and sponsorship revenues were recurring revenues from sponsorship
agreements of $5.1 million, or 55% of total revenues, for the nine months ended
September 30, 2000, as compared to $1.2 million, or 27% of total revenues for
the same period during 1999. In the nine months ended September 30, 1999,
revenues included non-recurring engineering services revenues of $432,000, or
10% of total revenues in the 1999 period. The remaining advertising revenues of
$1.7 million, or 16% of total advertising revenues for the nine months ended
September 30, 2000 and $1.8 million, or 42% of total revenues for the nine
months ended September 1999, were derived from non-recurring short-term
advertising and sponsorship arrangements. The increase in advertising and
sponsorship revenues was primarily due to an increased number of sponsorship
agreements during the nine months ended September 30, 2000 as compared to the
same period in 1999. This program began in March 1999 and the number of
agreements increased throughout 1999 and early 2000, primarily in the fourth
quarter of 1999. In 2000, revenue from this source has declined each quarter due
to sponsors' concern over the Company's well-publicized need for additional
capital.
Other revenues totaled $32,000 and $56,000, for the nine months ended September
30, 2000 and 1999, respectively. Other revenues consist primarily of fees from
e-commerce transactions.
Included in content subscription and software licensing revenues are barter
transactions that accounted for $60,000 and $80,000 for the nine months ended
September 30, 2000 and 1999, respectively. Barter revenues accounted for $97,000
and $276,000 of the advertising and sponsorship revenues for the nine months
ended September 30, 2000 and 1999, respectively. In total, barter revenues
represented $157,000, or 2%, and $356,000, or 8%, of total revenues for the nine
months ended September 30, 2000 and 1999, respectively.
Revenues for the nine months ended September 30, 2000 were adversely affected by
the Company's widely publicized liquidity shortfall and similar problems
affecting some of its customers, which resulted in extended sales cycles and
extended accounts receivable cycles. These problems continued to exist as of the
date of this report.
Production, content and product development expenses:
Production, content and product development expenses consist primarily of
salaries and benefits, contract labor and consulting fees related to technology
development 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 $9.5 million,
from $5.5 million for the nine months ended September 30, 1999 to $15.0 million
for the nine months ended September 30, 2000. The increase in production,
content and product development costs was primarily due to the addition of
personnel, resulting in higher salaries, benefits and travel costs, combined
with a $1.7 million increase in content licensing required.
Sales and marketing expenses:
Sales and marketing expenses consist primarily of portal fees, web-based
advertising, salaries and related costs, commissions, general advertising and
other related expenses. Sales and marketing expenses increased by $11.2 million,
from $27.8 million to $39.0 million for the nine months ended September 30, 1999
and 2000, respectively. The increase was primarily due to costs associated with
the distribution agreements with major portals totaling $18.8 million for the
nine months ended September 30, 2000 as compared to $12.9 million for the same
period in 1999. The remainder of the increase was due to a growth in the number
of personnel, resulting in increased salaries and related expenses and increased
depreciation charges caused by an increase in depreciable assets purchased with
proceeds from the IPO in late 1999.
General and administrative expenses:
General and administrative expenses consist primarily of salaries and related
costs for general corporate functions, including executive, finance, accounting,
investor relations, human resources, facilities and fees for professional
services. General and administrative expenses increased by $6.3 million, or
123%, from $5.1 million to $11.4 million for the nine months ended September 30,
1999 and 2000, respectively. During the nine months ended September 30, 2000,
the company incurred expenses of $1.4 million related to the employment
severance of employees and bad debt expenses of $984,000 compared to none in
1999. Additionally, legal and professional fees increased from $572,000 to $2.0
million during the nine months ended September 30, 1999 and 2000, respectively.
The remainder of the increase was primarily due to increased salaries and
related expenses as well as increased depreciation
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<PAGE>
charges due to an increase in depreciable assets after the IPO. Headcount levels
were reduced significantly during May, June and September 2000.
Stock-based charges:
In connection with the Private Placement in August 2000, the Company expensed
$13.7 million during the nine months ended September 30, 2000, consisting of
amortization of private placement warrants, deferred compensation and financing
warrants of $3.8 million, $2.6 million and $7.3 million, respectively. The
Company recorded additional non-cash deferred compensation expense of $2.1
million and $1.9 million for the nine months ended September 30, 2000 and 1999,
respectively.
Stock-based charges consist primarily of the amortization of the cost of issuing
stock and warrants for common stock in payment for debt settlement or other
consideration. The Company expensed $25.2 million during the nine months ended
September 30, 2000, as compared to $2.8 million during the nine months ended
September 30, 1999, an increase of $22.4 million. The primary reasons for the
increase are a $15.2 million increase in amortization of warrants issued to
Go.com and America Online in conjunction with the contract amendments made in
April, 2000 and $6.4 million increase in amortization of warrants issued with
the Private Placement in August, 2000.
Interest income, net:
Net interest income includes interest income from cash balances and interest
expenses related to financing obligations, particularly on the bridge loan and
the line of credit, as well as convertible notes payable prior to conversion and
capital leases on computer equipment. Interest income was $329,000 for the nine
months ended September 30, 2000 as compared to interest income of $587,000 for
the nine months ended September 30, 1999. Interest income decreased due to lower
average net cash and cash equivalents balances in 2000 as the Company has
utilized cash generated from our IPO completed in June 1999 to fund operating
losses.
Interest expense - non-cash:
In the nine months ended September 30, 2000, the Company incurred charges of
$7.3 million for the cost of issuing warrants in conjunction with securing the
bridge loan and the line of credit.
Income tax:
The Company has incurred net losses to date. The Company has recorded an
allowance equal to the amount of the carryforward due to the uncertain
realization of these tax benefits.
Liquidity and Capital Resources:
As of September 30, 2000, the Company had current assets of $37.1 million with a
cash and cash equivalents balance of $17.4 million and current liabilities,
excluding non-cash obligations, of $8.1 million. In August 2000, the Company
received net proceeds of $24.6 million from a private placement of convertible
preferred stock.
Cash used in operating activities for the nine months ended September 30, 2000
was $42.6 million. The Company anticipates that capital expenditures will be
insignificant for the remainder of 2000. The Company may spend funds to invest
in various forms of advertising to increase awareness of the Company and its
services. The Company may also spend funds to acquire strategic investments in
other businesses or technologies. If the Company is able to successfully
implement its current business plan, the Company believes that it will be able
to fund its continuing operations with existing cash, cash expected to be
generated by continuing operations and other sources for at least the next
twelve months.
The Company's working capital requirements in the foreseeable future will depend
on a variety of factors including the Company's ability to implement its
business plan and reduce its net cash outflow. If the Company does not reduce
its net cash outflow, it will require additional debt or equity financing prior
to the end of 2001, the amount and timing of which will depend in large part on
its spending program. If additional funds are raised through the issuance of
equity securities, the Company's stockholders may experience significant
dilution. Furthermore, there can be no assurance that additional financing will
be available when needed or that if available, such financing will include terms
favorable to our stockholders or the Company. If such financing is not available
when required or is not available on acceptable terms, the
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<PAGE>
Company may be unable to meet operating obligations. See "Risk Factors That May
Affect Future Results and Safe Harbor Statement" below.
Risk Factors That May Affect Future Results and Safe Harbor Statement
Investors are cautioned that this Form 10-Q contains forward-looking statements
that involve risks and uncertainties, including the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of management and the Board of Directors; (ii) the
Company's plans and results of operations will be affected by the Company's
ability to manage its growth and working capital and its ability to finance
future operations; (iii) the Company's business is highly competitive and the
entrance of new competitors or the expansion of the operations by existing
competitors in the Company's markets could adversely affect the Company's plans
and results of operations; and (iv) the risk factors identified below are not
represented to be a comprehensive list. In addition, the Company identifies the
risk factors discussed below which may affect the Company's actual results and
may cause actual results to differ materially from those contained in forward-
looking statements.
Risks Related to Our Business
We have a limited operating history and have not attained profitability.
Since inception, we have incurred significant losses and negative cash flow, and
as of September 30, 2000 we had an accumulated deficit of $171.4 million. We
have not achieved profitability and expect to continue to incur operating losses
for the foreseeable future as we fund operating and capital expenditures in 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 health information and
related content available on our online network which will, in turn, allow us
the opportunity to sell advertising and sponsorship 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 and television stations 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 or be
inconsistent with the expectations of the public market. We have received a
report from our independent auditors for our fiscal year ended December 31, 1999
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.
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
health network;
. increase awareness of our brand;
. strengthen user loyalty and increase the number of registered users;
. offer compelling online 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
health information on the Internet;
. continue to develop and upgrade our technology;
. attract, retain and motivate qualified personnel; and
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<PAGE>
. develop new revenue streams in areas such as physician services,
market research, licensing of tools and other technology, and
international opportunities.
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.
We currently have litigation pending against us and cannot predict the outcome
of such litigation.
As described in greater detail in Part II, Item 1 of this report, we are
currently aware of several lawsuits filed against us. The Company's counsel has
received a letter from a representative of a regional office of the SEC stating
that the SEC is investigating the events and circumstances surrounding the
allegations raised in certain of the lawsuits and asking that the Company
voluntarily provide the SEC with information regarding such events and
circumstances. We cannot predict the outcome of the litigation or extent to
which the costs of defense and any settlement or award will be covered by
covered by our insurance policies.
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 revenues 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. These
conditions have existed in the quarter ended September 30, 2000.
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;
. the availability of sufficient capital to fund our business plan;
. 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;
. new Internet sites, services or products introduced by us or our
competitors;
. the level of Internet and other online services usage;
. our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
. our ability to develop new revenue streams;
. our ability to successfully integrate operations and technologies from
any acquisitions, joint ventures or other business combinations or
investments;
. technical difficulties or system downtime affecting the operation of
our website; and
. our ability to attract new business partners, many of whom have become
unsure of the Company's long term viability based on recent adverse
press coverage.
Our revenues for the foreseeable future will remain principally dependent on
user traffic levels, and advertising and sponsorship activity. To a lesser
extent we will also be dependent on the further development of revenue streams
related to e-commerce activities, physician services, market research, sales of
interactive tools and similar technology products and the level of affiliate
subscriptions in our domestic and international content partner programs. Such
future revenues are difficult to forecast due to, among other things, the
involvement of third parties and the time lag in receiving sales data and simply
because these are all new, developing businesses. In addition, we plan to
increase our sales and marketing operations, obtain broader distribution for our
service, expand and develop content and upgrade and enhance our technology and
infrastructure development in order to support our growth.
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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 have endeavored over the past several months to reduce the cost
of operating our business. However, we may be unable to adjust spending quickly
enough to offset any unexpected revenue or capital shortfall, in which case our
results of operations and liquidity would suffer materially.
We must establish, maintain and strengthen our brand in order to attract users
to our network and generate revenue from existing and new businesses.
In order to expand our audience of users and increase our online traffic, we
must establish, maintain and strengthen our brand. For us to be successful in
establishing our brand, healthcare consumers must perceive us as a trusted
source of health information, and advertisers, merchants and manufacturers must
perceive us as an effective marketing and sales channel for their products and
services. In addition, this community must also view us as financially stable.
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, although at times he has been at the center of controversy on
various issues. We cannot assure you, however, that Dr. C. Everett Koop will
maintain this reputation, any damage to which would 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
our business, 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 a Second Amended and Restated
Name and Likeness Agreement, dated June 22, 2000, with Dr. C. Everett Koop which
permits us to use his image, name and likeness in connection with health-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
this extension of the Dr. Koop agreement and the previous amendment completed in
August 1999, we granted Dr. C. Everett Koop options to purchase 214,400 shares
of our common stock for an exercise price of $17.88 per share and options to
purchase 1,000 shares of our common stock at an exercise price of $1.50 per
share. The Dr. Koop agreement is exclusive and for a term of seven years,
subject to automatic renewal for additional five-year terms unless it is
terminated by either party not more than 270 and not less than 180 days before
the end of each term. If the Dr. Koop agreement is terminated other than due to
a breach or default by us, we have the right to use the name, image or likeness
of Dr. C. Everett Koop on a non-exclusive basis, and we have the right to use
the name, image or likeness of Dr. C. Everett Koop on an exclusive basis with
respect to any products or services involving or related to Internet-based
health information, healthcare related software services and products, or
electronic commerce for a period of five (5) years after the termination of the
Dr. Koop agreement. Additionally, Dr. C. Everett Koop's name, image or likeness
may not be licensed or otherwise conveyed to any direct competitor. If we
default in our obligations and do not promptly cure the default, Dr. C. Everett
Koop may terminate the Dr. Koop agreement, no rebranding period will apply and
we would lose all rights to use Dr. C. Everett Koop's name, image and likeness
on the 90th day after such termination. Dr. C. Everett Koop may also terminate
the Dr. Koop agreement under certain circumstances upon a change in control of
our company to which Dr. Koop does not give his prior consent, in which event
the agreement automatically terminates and all rights in the Koop name granted
under the agreement immediately revert to Dr. Koop.
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 health 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
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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.
We have recently materially amended our major portal contracts which may result
in reduced traffic to our website.
In order to expand our network, in 1999 we entered into long-term portal
agreements with AOL and an affiliate of The Walt Disney Company which involved
the payment of significant funds and the granting of large warrant positions for
prominent or exclusive carriage of our health information and services. These
transactions were premised on the assumption that the traffic we would obtain
from these arrangements would permit us to earn revenues in excess of the
payments made to the carriage partners. These assumptions proved to be untrue,
and since we were unsuccessful in generating sufficient revenues to offset these
expenditures, we renegotiated these agreements.
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
became the exclusive provider of health and related content on three websites of
the GO Network. Under the Infoseek agreement, drkoop.com was also the premier
health content provider for ABCNews.com. The term of these agreements was for
three years and they called for the payment of an aggregate of $57.9 million in
cash over three years. We also issued warrants to acquire 775,000 shares of our
common stock at an exercise price of $8.60 per share. Additionally, on July 1,
1999 we entered into agreements with America Online, Inc. under which we became
the premier health content provider across five AOL brands: America Online,
CompuServe, AOL.com, Netscape Netcenter and Digital City. The term of the
agreement was for four years in exchange for cash payments of $89 million, plus
fully vested and performance-based warrants to purchase shares of our common
stock. Both of these agreements were renegotiated in April 2000. The terms of
these renegotiations are described generally in our Form 8-K dated April 25,
2000 and our Form 10-Q for the quarter ended March 31, 2000.
Due to our renegotiation we may receive less traffic from these portal
arrangements than before the renegotiation. As renegotiated, the carriage of our
service on the GO.com sites could end at any time. In recent months, however,
the traffic on our site emanating from our relationship with GO.com has
represented less than five percent of the traffic on our website. Our
relationship with AOL, as renegotiated, no longer entitles us to premier status
and runs through April 2001. Traffic from AOL varies widely, but can be
significant particularly when AOL elects to promote or give prominent placement
to one of our interactive tools or to a news story or feature on our website. We
and AOL also remain party to a separate contract for which we were paid $8.0
million in advance which imposes obligations on us relating to the development
of a personal medical record tool and which could be terminated if our carriage
agreement is terminated, resulting in potential financial penalties.
In order to attract and retain our audience of users, we must provide health
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 health information and services. As with any form of consumer-
oriented media, we have to provide editorial content and other features such as
interactive tools 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 has increased the fees charged by high quality content
providers and we expect this trend to continue. 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.
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Our business model relies on Internet advertising and sponsorship activities,
which may not be an effective or profitable marketing media and may create a
perceived conflict of interest issue.
Our future is highly dependent on increased use of the Internet as an
advertising medium. We expect to derive a substantial portion 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 is 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 revenues
would be materially adversely affected. Further, our relationship with
advertisers and sponsors could be perceived as a conflict of interest by users
regardless of the safeguards put in place to segregate our editorial and
commercial activities.
Various pricing models are used to sell advertising on the Internet. For
example, some arrangements rely on the display of an "impression" to a user,
while others require that the user actually "click-through" to the advertiser's
website. It is difficult to predict which, if either, will emerge as the
industry standard, thereby making it difficult to project our future advertising
rates and revenues. Our advertising revenues could also 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 Richard M. Rosenblatt, our Chief Executive Officer,
Edward A. Cespedes, our President, and Stephen Plutsky, our Chief Financial
Officer. Competition for personnel throughout the Internet and related new-media
industry is intense. We have faced particular challenges recently in light of
our well publicized liquidity issues, our low stock price which has fallen below
the exercise price of many of the stock options granted to employees and a very
competitive labor market for high technology workers in Austin, Texas, where our
headquarters are located. Recently, a significant number of our employees have
been terminated in cost cutting efforts or voluntarily departed to pursue other
opportunities. 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.
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 www.drkoop.com and generate advertising and other
revenues. Outside parties on which we depend include unrelated website operators
that provide links to drkoop.com, providers of health content and portals which
provide us with carriage. 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
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produce only a portion of the health 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. Several key content relationships are up for renewal in
the next year, including the name and likeness agreement with Dr. Nancy
Snyderman (May 31, 2001) and the content agreement for the Drug Checker feature.
Failure to renew existing content relationships may result in a competitor
acquiring a key content provider on an exclusive basis. 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, carriage, 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.
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, increased 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 online 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 revenues 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 online services in the past. Privacy
concerns have also resulted in recent actions by the Federal Trade Commission
and other government agencies. 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 health information and services. Allegations of impropriety, even if
unfounded, could therefore have a material adverse effect on our reputation and
our business.
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. Registrations are
pending for the trademark "drkoop.com," as well as other services 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
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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.
We do not expect to pay dividends on our common stock, and investors should not
buy our common stock expecting to receive dividends.
We have never declared or paid any cash dividends on our common stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any dividends in the foreseeable future
except to the extent required by the terms of the Preferred Stock. Investors
should not purchase our common stock with the expectation of receiving
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 material 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.
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 section or elsewhere in
this report, 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
health 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 health 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 health information available on our network, that consumers
will access important health needs through electronic commerce using our
website, and that local healthcare organizations and other participants in the
healthcare industry will affiliate with us. Our business model also assumes that
the services provided by our network will be supported in part by advertising,
sponsorship and similar activities purchased by companies with commercial
interests in the healthcare industry and that this practice will be accepted by
consumers. Our business model is not yet proven and we have not reached break-
even as to earnings or cash flow.
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 health content, products and
services is vast and increasing at a rapid rate. These companies compete with us
for users, advertisers, e-commerce transactions and other sources of online
revenues. 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 health 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 online services or websites targeted at consumers, such
as healthcentral.com, healthgate.com, intelihealth.com, mayohealth.org;
mediconsult.com, onhealth.com, thriveonline.com and webmd.com;
. online and Internet portal companies, such as America Online, Inc.;
Microsoft Network; Yahoo! Inc.; Excite@Home, Inc.; Lycos Corporation
and GO.com which commonly distribute multiple sources of health data;
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. electronic merchants and conventional retailers that provide health
goods and services competitive to those available from links on our
website;
. hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payers which offer healthcare
information through the Internet; and
. healthcare information technology organizations such as
Healtheon/WebMD, CareInSite, Cerner, IDX and Eclipsys.
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 online 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 distribution,
sales and marketing channels. We must also meet or exceed evolving consumer
expectations and competitive standards regarding medical ethics, Internet ethics
and privacy concerns. 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 or consolidate with each other.
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. Since we operate a health 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 health-related products and services online, covering areas such as:
. the regulation of medical devices;
. the practice of medicine and pharmacology and the sale of controlled
products such as pharmaceuticals online;
. the regulation of government and third-party cost reimbursement; and
. the regulation of insurance sales.
FDA Regulation of Medical Devices. Some computer applications and software
are considered medical devices and are subject to regulation by the United
States Food and Drug Administration. We do not believe that the FDA will
regulate our current applications or services; 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.
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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
effect on our business, results of operations and financial condition.
State Insurance Regulation. In addition, we market insurance online,
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. We have not sought or received a license under any state's insurance
laws. 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. We plan to develop relationships with retailers, manufacturers and
other providers to offer health 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 health
products or services over the Internet. Accordingly, we have limited experience
in the sale of products and services online 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 revenues.
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;
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. 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 as well as the Internet
generally.
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.
There have also been recent incidents involving significant disruptions to
websites and the Internet generally by hackers through computer viruses, "denial
of service attacks" or similar actions which compromise network security and
reliability or damage the personal computer and networks of users. We have also
suffered service outages from time to time, although to date none of these
interruptions has materially adversely affected 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 on third
parties to provide potential users with web browsers and Internet and online
services necessary for access to our website. In the past, our users have
occasionally experienced difficulties with Internet and other online 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.
Growth of Internet businesses, particularly in the healthcare sector, may be
impacted by privacy or security concerns.
In February 2000, concerns about access to consumers' private data on the
Internet were raised through published reports over whether or not practices of
a large third-party ad serving corporation could result in individual consumers
being identified by their Internet behavior. In response to these reports, we
took immediate action, such as designating a Chief Privacy Officer, launching a
Privacy Center which explains to consumers issues regarding privacy online,
releasing a more detailed policy statement, removing personal data "cookies" on
all third party ads, and severing our business relationship with DoubleClick for
the use of its "Dart" third-party ad server which was replaced by an in-house ad
serving solution. In December 1999, we helped form a consortium of over a dozen
eHealth companies called Health Internet Ethics (Hi-Ethics) dedicated to
adopting "best practice standards" for companies in the sector. The group
ratified and released privacy policies related to content, advertising,
electronic commerce, and connectivity. We retain confidential customer
information in our database, and there is no way of determining whether or not
usage of health websites may be adversely impacted by such concerns. While our
privacy policy makes clear that no individual user data will be shared without
an individual's express written consent, it is critical that the facilities and
infrastructure which allows the company to enforce this policy remain secure and
is perceived by consumers to be secure. Despite the implementation of privacy or
security measures, our infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors or similar disruptive problems. Security
and privacy are important concerns for our company especially as we develop
additional interactive tools which retain private user data on our system, and
any perception that this personal data is not private and secure would likely be
a severe public relations problem for our company and our brand.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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We are not subject to any meaningful market risks related to currency, commodity
prices or similar matters. We are sensitive to short-term interest rates
fluctuations to the extent that such fluctuations impact the interest income we
receive on the investment of the proceeds from the Private Placement of
preferred stock and warrants which we completed in August 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Legal Proceedings
The Company is aware of eleven substantially-identical class action lawsuits
that have been filed in the United States District Court for the Western
District of Texas against the Company and certain of its present and former
officers and directors. Other lawsuits may have been filed of which the Company
is not aware. All of the lawsuits that the Company is aware of have been filed
on behalf of purchasers of the securities of drkoop.com, Inc. and allege
violations of the federal securities laws. The first such lawsuit was filed on
July 14, 2000 and is captioned William Gambino, on behalf of himself and all
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others similarly situated, v. drkoop.com, Inc., Donald Hackett, C. Everett Koop,
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Nancy Snyderman, John F. Zaccaro, and Neal K. Longwill. To date the Company has
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either been served with process or complied with a request to waive the service
of process with respect to all except one of the lawsuits. The time for the
Company to respond to the complaints in the lawsuits has not yet expired.
On October 16, 2000, the District Court entered an order consolidating the
eleven lawsuits described above, as well as all other substantially-identical
class action lawsuits, into a single lawsuit (the "Consolidated Action")
captioned In re drkoop.com, Inc. Securities Litigation. In addition, pursuant to
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statutory procedural requirements, the Court selected lead plaintiffs for the
plaintiff class. The Court also approved lead plaintiffs' selection of lead
plaintiffs' counsel. On November 7, 2000, the Court entered a scheduling order
in the Consolidated Action providing for lead plaintiffs to file an amended
consolidated complaint, and for the Company to respond to the amended
consolidated complaint. The Company believes that the claims alleged in the
lawsuits comprising the Consolidated Action are without merit and intends to
defend the Consolidated Action vigorously.
The Company's counsel has received a letter from a representative of a regional
office of the SEC stating that the SEC is investigating the events and
circumstances surrounding the allegations in the lawsuits comprising the
Consolidated Action, and asking that the Company voluntarily provide the SEC
with information regarding such events and circumstances. The SEC letter states
that the SEC's request for information should not be construed as an indication
by the SEC that any violation of the federal securities laws has occurred. The
investigation described in the letter was commenced by order of the SEC dated
August 16, 2000.
The Company has received a letter demanding that the Company initiate a
derivative action asserting various claims that the letter alleges that the
Company has against certain of its present and former officers and directors for
alleged breaches of fiduciary duty and other alleged wrongdoing. As required
under applicable law, the Company's board of directors is currently evaluating
the alleged claims identified in the letter.
The Company's counsel has received a letter from an attorney representing one of
the purchasers of a convertible promissory note issued by the Company, which
asserts a claim for $208,000 based on the allegation that the purchaser was
misinformed as to the length of the holding period upon conversion of the note
into common stock of the Company.
The Company cannot predict the outcome of the litigation described above or the
extent to which the costs of defense and any settlement or award will be covered
by the Company's insurance policies.
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Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds
The effective date of our first registration statement, filed on Form S-1 under
the Securities Act of 1933 (File No. 333-73459) relating to an initial public
offering of our common stock, was June 8, 1999. A total of 10,781,250 shares of
our common stock were sold to an underwriting syndicate, including the exercise
of the 15% over allotment. The managing underwriters were Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC, and Wit Capital Corporation. The offering commenced
and completed on June 8, 1999, at an initial public offering price of $9.00 per
share. The initial public offering resulted in gross proceeds of $97.0 million,
$6.8 million of which was applied to the underwriting discount and approximately
$1.7 million of which was applied to related expenses. As a result, net proceeds
of the offering to us were approximately $88.5 million. From the date of receipt
through September 30, 2000, the net proceeds of the initial public offering were
used to fund operating losses and for general corporate purposes, including
expansion of our network, advertising, brand promotion, content development and
working capital or invested in an interest bearing money market account. None of
the net proceeds of the offering were paid, directly or indirectly, to any
director, officer or general partner of drkoop.com, Inc., or any of their
associates, or to any persons owning ten percent or more of any class of our
equity securities, or any affiliates.
Changes in Securities
Private Placement of Preferred Stock and Warrants
In August 2000, we entered into a series of financing transactions which
permitted us to raise a significant amount of new capital from the issuance of
preferred stock and warrants. An element of these transactions included a change
in control of our company, including the appointment of new directors
constituting a majority of our board of directors and a new executive management
team. The following summaries of our preferred stock and of agreements that we
have entered into are summaries and are qualified in their entirety by
references to the agreements and Certificate of Designation of our preferred
stock which we filed as exhibits to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 1, 2000. Investors are urged
to review the full text of those documents which define the rights of the new
investors.
General
The August financing consisted of a private placement of $27.5 million of our
preferred stock and warrants to accredited investors. The Private Placement was
consummated in two tranches. The first tranche of $20.0 million of preferred
stock was issued on August 22, 2000 and the second tranche of $7.5 million of
preferred stock was issued on August 25, 2000. The offering was made solely to
accredited investors by way of a private placement effected pursuant to
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act") and was exempt from registration under the Securities Act.
Commonwealth Associates, L.P. acted as placement agent in the Private Placement.
The 2,750,000 shares of preferred stock issued in the Private Placement are
initially convertible into 78,571,428 shares of our common stock reflecting a
conversion price of $0.35 per share. This conversion price is subject to
adjustments for dilutive issuances and other events.
In connection with the Private Placement and the hiring of the new management
team, we also issued:
. options to purchase 13,371,000 shares for $0.35 per share to members of
our new management team and certain other new employees,
. warrants to purchase 12,493,288 shares for $0.35 per share to the
placement agent and to certain of the purchasers of preferred stock,
. warrants to purchase 14,785,714 shares for $.035 per share to
Commonwealth in connection with bridge loans extended to us by
Commonwealth prior to the completion of the Private Placement.
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Preferred Stock
The preferred stock, which was issued for an initial issuance price of $10.00
per share, has a liquidation preference of $15.00 per share, plus accrued and
unpaid dividends, which is payable upon:
. the liquidation or dissolution of the Company,
. the merger of the Company where the stockholders immediately prior to
such merger no longer retain more than 50% of the voting control, or
. the sale of all or substantially all of the assets of the Company. In
the event of a merger or sale, we may elect to pay the liquidation
amount in shares of our common stock in lieu of cash.
The liquidation preference of the preferred stock is payable to holders of
record of the preferred stock before and in preference to any distribution to
the holders of our common stock or any other security that is junior to the
preferred stock.
The holders of preferred stock are entitled to vote their shares of preferred
stock on an as-converted basis with the holders of common stock as a single
class on all matters submitted to a vote of the holders, except as otherwise
required by applicable law. This means that each share of preferred stock will
be entitled to a number of votes equal to the number of shares of common stock
into which it is convertible on the applicable record date. For the 2000 annual
meeting, the holders of the preferred stock will be entitled to 28.57 votes for
each share of preferred stock.
Each share of preferred stock is convertible at any time (subject to the
approval by our stockholders of the amendment to our Restated Certificate of
Incorporation to increase our number of authorized shares of common stock), at
the option of the holder, into a number of shares of common stock determined by
dividing the face value of the preferred stock (i.e., $10.00 per share) by the
conversion price, initially $0.35 per share. The preferred stock will
automatically convert into shares of common stock at the then applicable
conversion price upon either a public offering or private placement of our
common stock raising gross proceeds in excess of $25.0 million, in each case at
a price per share in excess of $1.50 (as adjusted for stock splits,
recapitalizations and other similar events). In addition, the preferred stock
will also automatically convert into shares of common stock at the then
applicable conversion price if the closing bid price for our common stock has
traded at twice the conversion price for a period of 20 consecutive trading
days, so long as our common stock is trading on a national securities exchange
or the Nasdaq Small Cap or National Market and the shares issuable upon
conversion of the preferred stock are registered for resale under the Securities
Act of 1933. The initial $0.35 conversion price of the preferred stock is
subject to adjustment for stock splits, recapitalizations and other similar
structural events or in the event we issue securities at a price per share less
than the then current market price of our common stock or the conversion price,
subject to certain exceptions. In addition, if our average closing bid price for
our common stock for the 20 trading days preceding August 21, 2002 is less than
the then applicable conversion price, the conversion price will automatically be
reset to such lower price.
We currently do not have sufficient shares of common stock authorized under our
Restated Certificate of Incorporation to cover all shares of our common stock
that we may be required to issue upon conversion of the preferred stock and
exercise of the warrants described below. Our board of directors has approved an
amendment to increase the authorized number of shares of common stock to
500,000,000 and this amendment will be considered by our stockholders at our
next annual meeting. We have filed a preliminary proxy statement relating to our
next annual meeting of stockholders with the SEC. The SEC may elect to review
and comment on our preliminary proxy statement. If the SEC elects not to provide
us with comments on our preliminary proxy statement, we anticipate that our next
annual meeting of stockholders will be held on December 13, 2000. Stockholders
of record as of November 7, 2000 will be entitled to vote at our annual meeting.
The purchasers of preferred stock and Dr. Koop and Mr. Hackett have each
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agreed to vote their shares of preferred stock and common stock in favor of this
amendment at our annual meeting.
Warrants
The warrants that we issued in the Private Placement to Commonwealth and certain
preferred stock investors have an exercise price of $0.35 per share, subject to
adjustments under certain circumstances, and each of the warrants has a five-
year term. 9,771,538 of the warrants are exercisable in full immediately. The
remaining 3,629,000 warrants are exercisable immediately for up to 25% of the
shares of common stock underlying such warrants and for up to an additional 25%
of the shares of common stock underlying such warrants on the first, second and
third anniversaries of the completion of the private placement.
In connection with the consummation of the private placement, we restructured
certain warrants we had previously issued to Commonwealth and an affiliate in
connection with a bridge loan and line of credit extended to us by Commonwealth
and its affiliate in June, 2000. These warrants are now exercisable to purchase
14,785,714 shares of common stock for an exercise price of $0.35 per share. They
have a seven-year term and became exercisable November 1, 2000.
Compensation to Placement Agent; Repayment of Bridge Loan
In connection with the private placement, we agreed to (i) pay Commonwealth a
cash fee equal to 7% of the gross proceeds resulting from the sale of the
preferred stock ($1,925,000 in total); (ii) issue to Commonwealth warrants to
purchase 6,142,857 shares of common stock at an exercise price of $0.35 per
share, subject to adjustment; (iii) reimburse Commonwealth for expenses incurred
by it in connection with the Private Placement in an amount equal to $350,000;
and (iv) pay Commonwealth an advisory fee of $600,000. Under the above
arrangements, we paid an aggregate of $2,875,000 from the proceeds of the
Private Placement to Commonwealth and its affiliates, excluding the amounts
described below that we used to repay the outstanding balance under loans
previously extended to us by Commonwealth and an affiliate.
Prior to the consummation of the Private Placement, Commonwealth and an
affiliate provided us with a $1.5 million bridge loan and a $3.0 million standby
line of credit, of which we had drawn $400,000. In connection with these loans,
we issued warrants to Commonwealth and its affiliate. As described above, the
terms of these warrants were restructured in connection with the Private
Placement and these are now exercisable to purchase 14,785,714 shares of common
stock for at an exercise price of $0.35 per share. We used proceeds from the
Private Placement to repay in full all amounts owed under the bridge loan and
our $400,000 balance outstanding under our $3.0 million line of credit, plus
interest to the date of repayment.
We have also engaged Commonwealth as a non-exclusive financial advisor in
connection with merger and acquisition transactions and have agreed to pay to
Commonwealth between 0.5% and 1.0% of the total consideration paid or received
by us in any such transaction identified by Commonwealth.
Registration Rights
We have agreed to register for resale the shares of common stock underlying the
preferred stock and warrants issued in the Private Placement. We are required to
file a registration statement covering such securities in November 2000 and to
cause the registration statement to become effective no later than May 2001.
Private Placement of Common Stock
In August 2000, we agreed to issue approximately 2,600,000 shares to certain of
our trade creditors in exchange for a reduction in our liabilities to those
trade creditors. These issuances were exempt from registration under Section
4(2) of the Securities Act. We have agreed to register for resale certain of
these shares of common stock, as well as other shares of common stock that we
previously issued in private placements, and to file a registration statement
covering these securities in November 2000.
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We are required to cause this registration statement to become effective as soon
as reasonably practicable and, in any event, prior to the effectiveness of the
registration statement covering shares of common stock underlying the preferred
stock and warrants issued in the Private Placement.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On November 1, 2000, the Company acquired all of the assets of drDrew.com from
Sherwood Partners, Inc., a corporate restructuring and business advisory firm,
for 1.58 million shares of common stock and $150,000 cash. drDrew.com is a
leading online lifestyle community for 14- to 24-year-olds. While both sites
will continue operating independently, there will be some basic content
integration. The Company plans to leverage its existing infrastructure to
operate drDrew.com with minimal additional expense.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by reference to this
Item.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended September 30, 2000.
Report on Form 8-K filed September 1, 2000: Describing change of control of
the Company resulting from our private placement of preferred stock and
warrants.
Report on Form 8-K filed September 15, 2000: Describing the resignation
of PricewaterhouseCoopers, LLC, the Company's independent auditors, and the
subsequent decision of PricewaterhouseCoopers, LLC to remain as independent
auditor of the Company through the filing of this Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
drkoop.com, Inc.
Date: November 14, 2000 /s/ Stephen Plutsky
----------------------------------
Name Stephen Plutsky
Title: Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Exhibit Title
(i)3.6 Certificate of Designation of Series 8% Convertible Preferred
Stock of drkoop.com, Inc.
(i)4.2 Bridge Warrant to purchase 13,071,107 shares issued to ComVest
Venture Partner L.P.
(i)4.3 Bridge Warrant to purchase 1,714,607 shares issued to
Commonwealth Associates,L.P.
(i)4.4 Bridge Warrant to purchase 6,142,857 shares issued to
Commonwealth Associates,L.P.
(i)4.5 Form of Prime Investor Warrants
(i)4.6 Prime Warrants to purchase 3,629,000 shares issued to Prime
Ventures, LLC
(i)4.7 Amended and Restated Registration Rights Agreement dated as of
August 22, 2000 by and among the company, Commonwealth
Associates, L.P. and the other signatures, thereto
(i)10.62 Placement Agency Agreement by and between the Company and
Commonwealth Associates, L.P. dated June 23, 2000
(i)10.81 Letter Agreement dated August 18, 2000 between Commonwealth
Associates, L.P. and the Company
(i)10.82 Letter Agreement dated August 22, 2000 between Prime Ventures,
LLC and the Company
(i)10.83 Form of Lock-up Agreement
(i)10.84 Non-Qualified Stock Option Agreement dated as of August 22,
2000 by and between the Company and Richard M. Rosenblatt
(i)10.85 Non-Qualified Stock Option Agreement dated as of August 22,
2000 by and between the Company and Edward A. Cespedes
(i)10.86 Non-Qualified Stock Option Agreement dated as of August 22,
2000 by and between the Company and Stephen Plutsky
(ii)10.87 Employment Agreement dated August 22, 2000 by and between the
Company and Richard M. Rosenblatt.
(ii)10.88 Employment Agreement dated August 22, 2000 by and between the
Company and Edward Cespedes.
(ii)10.89 Employment Agreement dated August 22, 2000 by and between the
Company and Stephen Plutsky.
(ii)10.90 Employment Agreement dated October 24, 2000 by and between the
Company and William H. Carlson
(ii)10.91 Asset Purchase Agreement dated November 1, 2000 by and between
Sherwood Partners, Inc. and the Company
(i) Incorporated by reference to the identically numbered Exhibit to the
Company's Report on Form 8-K filed on September 1, 2000
(ii) Filed herewith.
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