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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File No. 0-26275
drkoop.com, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 95-4697615
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7000 N Mopac, Suite 400
Austin, TX 78731
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 583-5667
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 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: YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on February 29, 2000,
as reported by Nasdaq, was approximately $113,815,000. Shares of voting stock
held by each officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be deemed
to be affiliates. This assumption regarding affiliate status is not necessarily
a conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock on February
29, 2000 was 31,152,597.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's Annual Meeting of Stockholders to be held
on May 30, 2000 are incorporated by reference into Part III.
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drkoop.com, Inc.
Form 10K
For the year ended December 31, 1999
Table of Contents
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Page Number
PART ONE
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Item 1. Business............................................................................ 3
Item 2. Properties.......................................................................... 13
Item 3. Legal Proceedings................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................. 13
PART TWO
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 14
Item 6. Selected Financial Data............................................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risks......................... 35
Item 8. Financial Statements and Supplemental Data.......................................... 35
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures. 35
PART THREE
Item 10. Directors and Executive Officers of the Registrant.................................. 36
Item 11. Executive Compensation.............................................................. 36
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 36
Item 13. Certain Relationships and Related Transactions...................................... 36
PART FOUR
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................... 36
Signatures .................................................................................... 37
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PART I
Item 1: Business
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements based on our
current expectations about our company and our industry. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Risk Factors" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report. We undertake no obligation to publicly update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Background
Our company operates drkoop.com, an Internet-based consumer health network. Our
network consists of a consumer-focused interactive website which provides users
with comprehensive health information and services, as well as affiliate
relationships with Internet portals, healthcare organizations and traditional
media outlets. Our website, www.drkoop.com, is a health portal which integrates
dynamic health content on a wide variety of subjects, interactive communities
and tools, as well as opportunities to purchase health-related products and
services on-line. Our company's founders, including former U.S. Surgeon General
Dr. C. Everett Koop, created drkoop.com to empower consumers to better manage
their personal health with comprehensive, relevant and timely information. Our
objective is to establish the drkoop.com network as the most trusted and
comprehensive source of consumer health information and services on the
Internet.
We launched our Network in July 1998 and, by January 20, 2000, www.drkoop.com
had attracted 18,022,000 unique users according to Media Metrics, and enrolled
over 1 million registered users. Our network is designed to provide consumers
with a variety of health content, including information on acute ailments,
chronic illnesses, nutrition, fitness and wellness, and access to medical
databases, publications, and real-time medical news. In addition, we offer eight
interactive communities consisting of over 170 hosted chat support groups. Our
support groups allow users to share experiences with others who face, or have
faced, similar health conditions, leveraging the aggregate community to benefit
each member. We also provide interactive tools that permit users to personalize
their drkoop.com experience and are developing additional features to expand the
functionality of our website.
Currently, our affiliates consist of Internet portals, healthcare organizations
and traditional media outlets. Each affiliate provides to its customers easy
access to the information and services offered on drkoop.com. Through these
relationships, we believe that we will gain broad exposure of our brand, drive
high volumes of traffic to the drkoop.com website, and acquire and distribute
relevant local content. We intend to expand our network by continuing to
establish relationships with affiliates that have the ability to direct
additional users to our website.
Our belief is that health-concerned consumers are highly motivated in their need
to find accurate information and to act on it. Our objective is to establish the
drkoop.com Network as the most trusted source of consumer health information and
services on the Internet. Our business model is to earn advertising and
subscription revenues from advertisers, merchants, manufacturers and healthcare
organizations that desire to reach a highly targeted community of health
consumers on the Internet. We also earn revenues by facilitating e-commerce
transactions, such as sales of prescription refills, vitamins and nutritional
supplements, health and wellness, and insurance products offered by outside
parties.
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Our Market Opportunity
Healthcare is the largest segment of the U.S. economy, representing an annual
expenditure of approximately $1 trillion, and health and medical information is
one of the fastest growing areas of interest on the Internet. According to
Cyber Dialogue, an industry research firm, during the 12-month period ended July
1999, approximately 25 million adults in the United States searched on-line for
health and medical information, and approximately 50% of these individuals made
off-line purchases after seeking information on the Internet. Cyber Dialogue
estimates that approximately 70% of the persons searching for health and medical
information on-line believe the Internet empowers them by providing them with
information before and after they go to a doctor's office. Cyber Dialogue also
estimates that the number of adults in the United States searching for on-line
health and medical information will grow to approximately 30 million in the
year 2000, and they will spend approximately $150 billion for all types of
health-related products and services off-line.
Business Strategy
Our objective is to establish the drkoop.com network as the most trusted and
comprehensive source of consumer health information and services on the
Internet. Our business strategy incorporates the following key elements:
Establish the drkoop.com Brand. Our strategy is to create a strong brand with
which consumers associate the trustworthiness and credibility of Dr. C. Everett
Koop and which will enable us to implement his vision of empowering individuals
to better manage their personal health. We also intend to enhance our brand
through association with other notable leaders in the consumer healthcare field,
such as ABC News Medical Correspondent Dr. Nancy Snyderman and television and
radio medical journalist Dr. Bruce Hensel. Our company is engaged in a major
campaign to increase awareness of the drkoop.com brand among consumers,
healthcare organizations, Internet portals and other websites. We intend to
continue to allocate significant resources to further develop and build brand
recognition through on-line advertising, general advertising, portal agreements,
strategic alliances and other marketing initiatives.
Provide Consumers with Health Content of High Quality. We provide our users
with high quality health content, including information on acute ailments,
chronic illnesses, nutrition, fitness and wellness, and access to medical
databases, publications, and real-time medical news. This information is
provided by established sources such as Dartmouth Medical School, Reuters, the
National Institute of Health, Multum Interactive Services, Inc., and the
American Cancer Society. We also offer a directory that compares and rates over
1,100 other health-oriented websites. Our strategy is to integrate dynamic
health information on a wide variety of subjects with relevant interactive
communities and tools, and opportunities to purchase health-related products and
services on-line. We believe that the quality of our health information is a
competitive advantage that will enable us to attract users to our website,
promote user loyalty and increase page views per visit.
Earn Consumer Trust with Stringent Privacy Standards. In response to increasing
emphasis on ethics and privacy standards in the Internet health category,
drkoop.com allied with other industry leaders in late 1999 to form the Hi-Ethics
(Healthcare Internet Ethics) coalition. This group is striving to self-regulate
privacy and other standards for eHealth companies in areas such as content,
advertising and connectivity.
Syndicate Content, to Promote Traffic Growth. We have entered into
relationships with portals, such as the GO.com network and AOL, and other
websites which position drkoop.com as their primary source for consumer health
content. In addition, we have entered into relationships with over 300 local
hospitals, payor entities and 22 local media outlets such as television
stations. These relationships include the creation of co-branded websites and
the distribution of branded health information to affiliated entities. We
intend to expand our network by continuing to establish relationships with
affiliates that have the ability to direct additional users to our website.
Develop and Expand On-line Health Communities. We currently offer our registered
users free access to eight on-line communities consisting of over 170 hosted
chat support groups. Our eight communities are organized by the following
general health topics: Addiction & Recovery, Aging Healthy, General Health,
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Men's Health, Mental Health, Parenting & Children's Health, Physical Conditions
and Women's Health. Our support groups cover topics including hepatitis C, child
development, stress management and relaxation skills and anxiety disorders. Our
communities and support groups allow users with similar health-related
experiences to exchange information and gather news and knowledge
in a secure, anonymous, on-line environment.
Provide Consumers with Unique Features and Tools. Our website is designed to
provide easy access to innovative features and tools. Currently, our most
popular tools include on-line calculators, such as calculator tools used to
calculate an individual's body mass index, ideal weight, and sleep requirements,
as well as our drug checker tool which educates consumers about the possible
interactions among various drugs and other substances. We intend to continue to
add useful tools to enable our users to personalize their on-line experience. We
believe that our tools and features will continue to encourage users to visit
our website frequently and increase the likelihood of users selecting drkoop.com
as their preferred website for health-related issues.
Enable High Value E-commerce offerings. We enable e-commerce transactions
offered by third parties. Our strategy involves permitting merchants,
manufacturers and service providers access to a highly targeted community of
health conscious consumers through our website and the health channels of our
portal affiliates. We presently enable sales of prescription refills, vitamins
and nutritional supplements, health and wellness products, and insurance
services. Although we do not provide these products or services, we do provide
links to the websites of third parties that provide these products or services.
Some of these third parties have entered into preferred provider arrangements
with us and pay us either a transaction fee for sales attributable to users from
our website or an anchor tenant rental fee. Anchor tenant fees are annual fees
paid by on-line merchants in exchange for a prominent link to their on-line
stores. We believe that contextual merchandising of e-commerce transactions will
attract users to our website and promote user loyalty.
The drkoop.com Network
Our Network consists of a consumer-focused interactive website which provides
user with comprehensive health information and services, as well as affiliate
relationships with portals, other websites, local healthcare organizations and
traditional media outlets. The website is a health portal which integrates
dynamic health information on a wide variety of subjects, interactive
communities and tools that enable our users to personalize their drkoop.com
experience and opportunities to purchase health-related products and services
on-line. Our affiliate relationships, we believe, allow us to gain broad
exposure of our brand, drive high volumes of traffic to the drkoop.com website,
and acquire and distribute relevant content at the local level. Affiliates may
use our content on television or radio, in print, or on- line, provided they
credit drkoop.com as the provider of the content and, where appropriate, pay a
license fee. We believe that displaying logos and credits on every web page,
program and publication where drkoop.com content is displayed will help us build
brand awareness and attract users to our website.
Affiliates
Portals and Other Websites. The distribution of drkoop.com content to
affiliated portals and other websites is designed to rapidly increase brand
awareness through co-promotion and direct links with the affiliate's server. We
have affiliated with selected websites that have the potential to drive large
volumes of traffic to our website and provide broad exposure to the drkoop.com
brand. Currently, portals are the leading aggregators of traffic on the
Internet. Users are augmenting these portals with subject-specific vertical
portals, which are becoming one of the fastest growing segments of the Internet.
These vertical portals are using brand awareness driven by quality topical
content and significant market resources to establish them as destinations for
highly concentrated groups of users. Examples of relationships that we have
already established include:
GO Network. drkoop.com has agreements with GO.com, formerly Infoseek
Corporation and the Buena Vista Internet Group, a unit of The Walt Disney
Company, under which drkoop.com is the exclusive provider of health related
content on three
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websites of the GO Network: GO.com Health Center, ESPN.com Training Room and the
Family.com Health Channel. Under the Infoseek agreement, drkoop.com is also the
premier health content provider for ABCnews.com. In addition, drkoop.com is the
exclusive pharmacy and drugstore, health insurance and clinical trials partner
in the GO.com Health Center. Under these agreements, users on the GO Network
have access to various health information, services, interactive tools and
commerce opportunities through a co-branded location (http://go.drkoop.com)
served by drkoop.com. These agreements contribute substantially to our brand
awareness and increase traffic on our website.
The term of both agreements is three years, except that each of the parties may
elect to terminate the relationship after two years. We will pay GO.com and the
Buena Vista Internet Group approximately $57.9 million in total consideration
consisting of cash and warrants to purchase 775,000 shares of common stock at an
exercise price of $8.60 per share over the full three-year term. None of the
warrants are exercisable prior to one year after issuance.
America Online, Inc. drkoop.com is America Online's premier provider of health
content, as well as the exclusive tools and utilities partner for the AOL
Service. Through this relationship, we will gain access to the complete AOL user
base.
The term of this agreement is four years. We will pay AOL approximately $89.0
million in cash over the term of the agreement. In addition, we provided AOL
immediately vested warrants to purchase up to 1,570,932 shares of our common
stock for a purchase price of $15.94 per share and the right to earn additional
warrants to purchase up to 1,570,932 shares of our common stock for a purchase
price of $20.00 based on performance and 2,749,131 shares of our common stock
for a purchase price to be established at the time they become vested based on
the development of new interactive software tools. However, if these new
interactive software tools are not used by AOL then the warrants to purchase
2,749,131 shares will not be exercisable. None of the warrants are exercisable
prior to June 30, 2000.
Salon Internet, Inc. Salon Internet, Inc. and drkoop.com offer a health and
wellness site called Salon Health. Salon Health creates a unique blend of
editorial content and integrated health information for its users. drkoop.com
is the exclusive provider of health information for Salon Health. This
initiative includes a complete storefront offering of drugstore related
products. Our agreement with Salon has a three-year term. The parties share
revenues generated through the storefront and advertising revenue. We will pay
Salon a fee for running a minimum number of drkoop.com banner advertisements on
the Salon site.
SeniorNet. SeniorNet.org, the world's largest trainer of older adults about
computer technology and the Internet, selected drkoop.com to be the exclusive
provider of health information and services to users of the SeniorNet On-Line
Community. Through this strategic partnership, drkoop.com provides our health
content and our products and services that empower SeniorNet users to better
manage their health. SeniorNet operates over 140 SeniorNet Learning Centers
across the United States, providing access to over 100,000 older adults, while
educating them on how to use the SeniorNet website and the Internet. We will pay
SeniorNet a fee for this exclusive relationship.
theglobe.com. drkoop.com is the premier anchor tenant for theglobe.com.
Through this partnership, drkoop.com is the only provider of health and medical
information to this community based website. As one of six main content
channels on theglobe.com, drkoop.com content is exposed to over 5 million
members monthly, providing exposure and traffic to the drkoop.com web site.
This is a two year relationship where we pay theglobe.com $10,000 per month for
this relationship, and share all revenues generated by the health channel on
theglobe.com servers.
Yahoo. drkoop.com syndicates Dr. Nancy Snyderman's Daily Health offering for use
in Yahoo! Health. Under this agreement, Dr. Snyderman appears daily on Yahoo in
a drkoop.com branded environment where Yahoo Health users are able to read Dr.
Snyderman's responses to user-submitted questions. Users who wish to ask Dr.
Snyderman a question through an email interface are transferred to the "Ask Dr.
Nancy Snyderman" area of the drkoop.com website. New answers and archives are
posted daily on Yahoo Health. This is a non-paid relationship between the two
companies.
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Healthcare Organizations. drkoop.com enrolls healthcare organizations as local
affiliates through our Community Partner Program. This program allows local
organizations such as hospitals, health systems and other healthcare
organizations to integrate the drkoop.com brand and content into their on-line
initiatives. Under this program, we develop co-branded Internet pages linked to
drkoop.com for local healthcare organizations. The Community Partner Program
enables healthcare organizations to supply their patients with on-line health
resources and interactive services integrated with specific information about
their facilities. This program provides consumers with the ability to educate
themselves, make an informed decision, and take action through a healthcare
organization's local website, strengthening the relationship between the
consumer and the organization. Those consumers are introduced to the drkoop.com
brand through our association with their local provider or payor. Examples of
local healthcare organizations that have enrolled in our Community Partner
Program include:
Highmark - Created in 1996 by consolidating Blue Cross of Western
Pennsylvania and Pennsylvania Blue Shield -- two of the most trusted names
in health insurance -- Highmark is among the 10 largest U.S. health
insurers with nearly six decades' experience in healthcare delivery and
financing.
Intermountain Healthcare - Intermountain Healthcare is a charitable,
community owned nonprofit health care organization serving the needs of
Utah and Idaho including 22 hospitals, 2200 affiliated physicians and 400
physician group members, health plans, clinics, and 16 home health
agencies.
MemorialCare - MemorialCare is a comprehensive healthcare system serving
the residents of Los Angeles and Orange Counties in California.
MemorialCare offers Southern Californians four major medical centers and a
children's hospital as well as a number of subsidiary facilities. It is
also the only health system in southern California to have two facilities
rated by the state as the safest places for surviving a heart attack.
ProMedica Health System - ProMedica Health System is a not-for-profit
locally owned health system in Toledo, Ohio and is one of the largest and
fastest growing healthcare systems in the Midwest. ProMedica is comprised
of more than 2,000 medical staff members, seven hospitals and more than
11,000 employees.
PROMINA Doctors and Hospitals - PROMINA Doctors and Hospitals is a local,
not-for-profit group of physicians, hospitals and health services created
by healthcare providers who serve the communities of metro Atlanta. They
are committed to high-quality healthcare and the community's well being.
Wake Forest University Baptist Medical Center - Wake Forest University
Baptist Medical Center is a world-renowned academic medical center/tertiary
care hospital in Winston-Salem, NC. U.S. News & World Report ranks it among
America's Best Hospitals in ten specialties.
Traditional Media. We have also established additional affiliate relationships
with 22 traditional ABC, NBC, and CBS media outlets from leading broadcast
companies such as Cox, Hubbard, and Granite Broadcasting, and, via our agreement
with GO, are featured on the web sites of over 100 ABC affiliates participating
in the network's LocalNet service. There are many areas of overlap with
television and print that allow for collaboration in the delivery of quality
health content to an audience. Late breaking news, daily syndicated articles and
other timely relevant content can be distributed as an information feed in
multiple formats. For example, network television affiliates carry local,
relevant information directly to local audiences. Similarly, by distributing
content at the affiliate level, drkoop.com can be the leading syndicate of
Internet-ready health content and editorial-based, breaking health news. The
content that resides on our website can also be distributed through newspapers,
trade journals, periodicals, and a variety of other print media. By aligning
drkoop.com and our notable leaders in the healthcare field, Dr. C. Everett Koop
and Dr. Nancy Snyderman, with high profile media entities, we have the
opportunity to build brand awareness of drkoop.com. Links from traditional media
websites to our website create additional channels for generating traffic to the
drkoop.com website. Examples of traditional media programs include:
Local Broadcasting. Central to our strategy is a belief that since all
healthcare is delivered locally, we can further both our involvement in our
users' lives and solidify our financial relationship with our local
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hospital partners by implementing a multi-brand affiliate strategy with
hospitals and television stations at a local level. This strategy will be
complementary to any network and/or national advertising relationships into
which we enter in the future. We have entered into 1, 2, or 3 year agreements
with 22 network-affiliated television stations. drkoop.com provides the station
with Internet health content, and the station provides both local promotion of
drkoop.com and daily prompting of the station's viewers to drkoop.com following
relevant health stories on the station's local newscasts. In 2000, we expect to
expand our relationship with stations to include delivery of original content, a
shared video cooperative, inclusion of station news stories as broadband content
on drkoop.com, and the commencement of training initiatives for local medical
journalists. Additionally, advertising opportunities will be afforded to
hospital and non-hospital advertising clients of drkoop.com as we feature more
ad messages within the station inventory granted our company.
As of January of 2000, those stations included the following ABC, CBS, and
NBC affiliates:
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Albany GA WALB Jacksonville WTLV
Albuquerque KOB Knoxville WATE
Atlanta WSB Lexington WKYT
Austin KEYE Memphis WMC
Buffalo WKBW Minneapolis KSTP
Cleveland WOIO Nashville WKRN
Denver KUSA Phoenix KPNX
Ft. Wayne WPTA Salt Lake KTVX
Jackson WLBT San Jose KNTV
Seattle KOMO
Tampa WFTS
Toledo WTOL
Winston-Salem WXLV
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ABC Affiliates. drkoop.com's multi-year agreement with Infoseek for the GO
Network Internet properties provides that the websites of all ABC affiliates who
participate in the network's Local Net Internet service, currently 100 stations,
will be linked to drkoop.com. ABC will also provide details to all of its
affiliates regarding how they can participate as a full drkoop.com affiliate in
their local news coverage and promotion. ABC affiliates receive first right of
negotiation for participation in this program.
International Affiliates. In December 1999, drkoop.com entered into a content
and tools syndication arrangement with Medweb Limited, a company based in
Melbourne, Australia. The drkoop.com content and tools are expected to form the
backbone of the Medweb health information Web site. Medweb expects to provide
health information services to Australian physicians and consumers. We are
seeking additional international licensing opportunities.
Revenue Opportunities
Our operating strategy is presently comprised of three primary means of
generating revenue:
. advertising and sponsorships;
. content syndication; and
. electronic commerce.
Advertising and sponsorships. The healthcare industry spends billions of
dollars every year to market products and services to consumers. Jupiter
Communications projects that the on-line health advertising segment will grow
from $100 million in 1999 to $700 million in 2004. We believe that health
portals and other vertically focused websites are uniquely positioned to attract
a significant share of these advertising expenditures. By identifying users
interested in a particular health-related topic or who desire to address a
particular health condition, we believe we can sell advertising in a highly
targeted manner.
Merchants can purchase advertising on our website in two ways. Banner
advertising is generally sold based on the number of impressions received by the
advertisement and its position on the website. This type of advertising
frequently encourages the user to move to other web pages, which describe the
advertiser's product and solicit a direct response from the user. Sponsorships
are contracts that typically grant advertisers rights to promote their products
on a specific portion of the website. Online advertising for health products is
highly competitive with many Internet initiatives seeking healthcare marketing
dollars.
Sponsorships, which range from 3 to 50 months, are designed to support broad
marketing objectives, including brand awareness, product introductions, research
and transactions, generally on an exclusive basis. Accordingly, sponsorships are
sold based on their duration, the portion of the website sponsored and the
number of impressions delivered. Some of our advertisers and sponsors include
Warner Lambert, Johnson & Johnson, Vitamin Shoppe, Drug Emporium, Nutrisystems,
Selfcare.com, more.com, Pfizer, Biogen, Schering Plough, SmithKline Beecham and
Lifescape.com.
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One form of direct response advertising involves pre-screening and identifying
potential participants in clinical trials. In 1997, approximately $19 billion
was spent by the private sector on human health research and development in the
United States alone, according to the Pharmaceutical Manufacturers Association.
A significant portion of these costs are incurred in the later stages of
clinical development, where large numbers of subjects are enrolled into studies
designed to provide the bulk of the safety and efficacy data needed to obtain a
product license from the FDA. The identification and enrollment of qualified
individuals into these studies is usually a time-consuming and expensive
process.
We have implemented the drkoop.com Clinical Research Center, a portion of our
website designed to help educate consumers about clinical trials: what they are;
what to expect; and how to find and enroll in an appropriate trial if the
individual and their physician believe that this is a viable therapy option.
When this feature is fully developed, consumers will be able to search a
database of clinical trials by geography and by disease. We believe that on-line
pre-screening will reduce the number of inappropriate contacts and result in
only qualified people being referred to the clinical trial sponsors. drkoop.com
expects to derive a per respondent advertising fee for this recruitment service.
Content Syndication. We license our content and certain interactive tools
through a broad variety of affiliated websites. The majority of the licensed
content is provided by third parties and is not produced by us. The primary
source of content syndication revenue is our Community Partner Program. Under
the Community Partner Program, we develop co-branded Internet pages and software
consisting of visual icons containing links back to the drkoop.com website for
local healthcare organizations, such as hospitals and payor organizations.
Licensing fees are typically determined based on the channel for which the
content will be used. Content syndication agreements generally stipulate that
all content provided by drkoop.com must retain a legend indicating "Provided by
drkoop.com" and is subject to an acceptable use policy that defines how and
where the content may be used. Editorial content and/or content control
generally remain the exclusive right of the drkoop.com network. We believe that
by allowing other high-traffic websites and portals to offer our content we will
gain broad exposure of our brand and drive high volumes of traffic to the
drkoop.com website, thereby allowing us to generate more advertising and e-
commerce revenues. While we expect to also generate significant revenues from
certain of our syndication programs, this revenue source is expected to become a
smaller proportion of our overall revenues as our audience continues to grow.
International Network. We intend to expand into targeted International markets
during the Year 2000. The expansion will be achieved through partnerships with
local content providers as well as providing syndicated and original content
from the drkoop.com Web site. In December 1999, drkoop.com entered into a
content and tools syndication arrangement with a company based in Australia.
E-Commerce. Data provided by Jupiter Communications indicates that U.S.
consumers are expected to spend $10 billion on health-related products online in
2004, up from $200 million in 1999. The study also indicated that online
pharmaceutical sales are expected to approximate $4.5 billion of the $10 billion
spent on line in 2004, with nutriceuticals generating $1.7 billion in sales and
personal care and over-the-counter products generating $2.3 billion and $600
million respectively. We provide users with the ability to access e-commerce
opportunities provided by outside parties in numerous locations throughout the
drkoop.com website. For example, users can access prescription refill services
through pages relevant to a particular condition. We also plan to offer the
drkoop.com Health Store, a section of the website which aggregates all of the e-
commerce opportunities found throughout the site into one comprehensive
storefront that users can navigate to find the specific products or services
offered by outside parties. E-commerce interfaces on drkoop.com, whether in the
drkoop.com Health Store or in other locations within the website's general
content, are being designed to be informative and easy to use.
We currently offer two primary categories of products and services which users
can purchase from third parties through our website:
On-line Pharmacy Products. According to industry statistics, the retail
prescription drug market in 1997 accounted for approximately $89.1 billion
in sales generated by 2.6 billion prescriptions. Over-the-counter
medications and the other health and beauty aids accounted for $26.8
billion and $26.9 billion in retail sales, respectively, in 1997. Due to
the convenience, privacy, cost-savings and selection that can be offered to
consumers via the Internet, we believe that the on-line pharmacy will
become a major factor in retail pharmacy sales and will capture a
significant
9
<PAGE>
portion of these sales in the near future. Moreover, direct deliveries of
prescription drugs to the home via mail accounts for a significant
proportion of all prescription drug sales. We expect that this distribution
channel will expand to include other products traditionally associated with
retail pharmacy stores.
Our personal drugstore provides links to approximately 20 traditional and
on-line pharmacies where users can order prescription refills and other
pharmacy products over the Internet. We are also offering e-commerce anchor
tenant positions to online and traditional pharmacies on a category-
exclusive basis to allow consumers to link to their online stores. We
receive an annual rental fee for these anchor tenant positions. We
currently have contracts with Drug Emporium, a traditional and online
drugstore merchant, and Vitamin Shoppe, an online vitamin and supplement
company. We have created four anchor tenant positions on the Health Channel
of the GO.com Network. As of December 1999 we had placed Drug Emporium and
more.com as anchor tenants. We intend to place selfcare.com as an anchor
tenant in 2000.
Health and Wellness Products. Consumers spend an estimated $60 billion
annually on nutraceuticals, over-the-counter drugs and health and beauty
aids, according to a report released by Cyber Dialogue in 1999. These
products are considered staples of traditional brick and mortar stores and
providing these types of products for purchase online is a natural
extension of the online distribution model. We currently provide users of
our Web site the opportunity to purchase health and wellness products from
selfcare.com, our anchor tenant and sponsor of our conditions and concerns
center.
Insurance. The individual health insurance market is estimated to be an
$85 billion per year industry, according to AM Best. In the past decade,
the AMA estimates that the number of Americans without health insurance
increased from 32 million to 43.4 million. Our website provides access to
an insurance center consisting of comparisons of different insurance plans
designed to assist users in determining their individual health coverage
needs and coverage options. This service is designed to provide useful,
consumer-oriented information and to enable the purchase of insurance
coverage through various links with qualified insurers.
Our current insurance partners include:
. Quotesmith.com, an on-line insurance website where users can obtain
instant quotes from 127 leading insurance companies. We have
implemented a co-branded version of their instant quote system.
. HealthExtras, the sponsor of the drkoop.com Personal Insurance
Center and a provider of disability and supplemental medical
insurance.
. GE Capital Life Assurance Company of New York which provides long-
term care insurance.
Sales
As of December 31, 1999, we had a direct sales organization consisting of 16
sales professionals with an average of 10 years of sales experience. We have
geographically-based sales representatives with extensive healthcare backgrounds
calling on large integrated health systems and payors in major metropolitan
areas selling drkoop.com's Community Partner Program. We also have sales
representatives with pharmaceutical backgrounds who call directly on
pharmaceutical companies. In addition, one of our sales representatives with an
insurance background calls on payors for enrollment in our insurance commerce
initiative. Further, members of management and the sales force call on portals
and other websites to establish affiliate relationships.
Marketing and Public Relations
We employ a variety of methods to promote the drkoop.com brand to attract user
traffic and affiliate relationships. Our public relations staff oversees a
comprehensive public relations program targeting consumer, trade and healthcare
media. In addition, we also conduct media outreach programs consisting of public
service announcements and other promotional activities targeting radio,
broadcast, and print media on a national and local basis.
Advertising. Media purchasing is a significant component to the brand awareness
and customer acquisition strategy for drkoop.com. We believe that click-through
banner advertising has been the accepted means to drive traffic across the
Internet for several years. We believe that we must continue to promote
drkoop.com to the mass Internet audience through banner advertising as funding
permits, in order to attract first time users. Depending on the source, we can
use a banner advertisement to direct a user to our homepage or to a place in the
website
10
<PAGE>
that contains topical information of interest to them. We also intend to pursue
general advertising through conventional media if and when funding permits.
Public awareness campaigns are a significant part of the user generation plans
for drkoop.com. By strategically aligning drkoop.com with health-related
initiatives and charity organizations, we believe we will be able to reach a
large audience to help raise awareness for specific causes or organizations. By
creating opportunities for users to participate in awareness campaigns, we
believe we can raise money for organizations and charities, and at the same time
drive new registered users to drkoop.com.
Public Relations. As a well-recognized, trusted spokesperson on America's
health, we believe that Dr. C. Everett Koop is in a unique position to raise
consumer awareness of health-related issues and our company. Since the launch of
our website, Dr. C. Everett Koop has participated in several industry events
that have dramatically raised our visibility in the Internet health market. We
expect Dr. C. Everett Koop to continue to raise awareness of our company's
mission to empower consumers with information and services to better manage
their personal healthcare and our initiatives to serve them, by participating in
public relations and public service activities.
In response to increasing emphasis on ethics and privacy standards in the
eHealth space, drkoop.com allied with other industry leaders in late 1999 to
form the Hi-Ethics (Healthcare Internet Ethics) coalition. This group is
striving to self-regulate privacy and other standards for eHealth companies in
areas such as content, advertising, and connectivity.
Competition
A large number of Internet companies compete for users, advertisers, e-commerce
transactions and other sources of on-line revenue. The number of Internet
websites offering users health content, products and services is vast and
increasing at a rapid rate. In addition, traditional media and healthcare
providers compete for consumers' attention both through traditional means as
well as through new Internet initiatives. We believe that competition for
healthcare consumers will continue to increase as the Internet grows as a
communication and commercial medium.
We compete directly for users, advertisers, e-commerce merchants, syndication
partners and other affiliates with numerous Internet and non-Internet
businesses, including:
. health-related on-line services or websites targeted at consumers
such as accesshealth.com, ahn.com, betterhealth.com, drweil.com,
healthcentral.com, healthgate.com, intelihealth.com, mayohealth.org;
mediconsult.com, onhealth.com, thriveonline.com and webmd.com;
. on-line and Internet portal companies, such as America Online, Inc.;
Microsoft Network; Yahoo! Inc.; Excite, Inc.; Lycos Corporation and
GO.com;
. electronic merchants and conventional retailers such as CVS, Rite
Aid Corporation, Walgreens, Advanced Paradigm, Express Scripts, Inc.
and Merck-Medco, that provide healthcare goods and services
competitive to those available from links on our website;
. hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payors such as Columbia/HCA
Healthcare Corporation, Kaiser Permanente and VHA Inc., which offer
healthcare information through the Internet; and
. other consumer affinity groups, such as the American Association of
Retired Persons, SeniorNet and ThirdAge Media, Inc., which offer
health-related content to special demographic groups.
We believe that competition in our industry is based primarily on:
. the quality and market acceptance of health content;
. brand recognition; and
. the quality and market acceptance of new enhancements to current
content, features and tools.
Our competitive position in our market as compared to our competitors
is difficult to characterize due principally to the variety of current and
potential competitors and the emerging nature of the market.
11
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Additional many of our competitors are likely to enjoy substantial competitive
advantages compared to our company, including:
. the ability to offer a wider array of on-line products and services;
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger customer and user bases; and
. substantially greater financial, technical and other resources.
To be competitive, we must have access to adequate capital and respond promptly
and effectively to the challenges of technological change, evolving standards
and our competitors' innovations by continuing to enhance our products and
services, as well as our sales and marketing channels. Increased competition
could result in a loss of our market share or a reduction in our prices or
margins, any of which could adversely affect our business. Competition is likely
to increase significantly as new companies enter the market and current
competitors expand their services and consolidate with one another.
Technology
A component of our strategy is to apply existing technologies in novel ways to
deliver content and provide services to our users. The various features of the
drkoop.com network are implemented using a combination of commercially available
and proprietary software components. We favor licensing and integrating "best of
breed" commercially available technology from industry leaders. We reserve
internal development of software for those components that are either
unavailable on the market or that have major strategic advantages when developed
internally. We believe that this component style approach is more manageable,
reliable, and scaleable than single-source solutions. In addition, the emphasis
on commercial components speeds development time, which is an advantage when
competing in a rapidly evolving market. Consistent with our preference for off-
the-shelf software components, we rely primarily on industry-standard Microsoft
operating systems, development, and infrastructure components including NT,
Internet Information Server, Microsoft Site Server, Visual Interdev, and others.
We have also created a content management and development system and specialized
applications, one example of which is the drug interaction application built
upon the Multum commercial database.
Operating Infrastructure
The drkoop.com website is based on a technical operating infrastructure, the
drkoop.com web platform, which is designed to be highly scaleable and reliable.
The drkoop.com web platform consists of several subsystems, including a
scaleable web cluster used to service user requests for web pages. The web
cluster is controlled by a hardware cluster manager which continuously monitors
the performance and availability of the individual servers within the web
cluster. In the event of an individual server failure or when a server requires
maintenance, the hardware cluster manager automatically distributes incoming
requests to other available servers without disrupting the user's experience.
The drkoop.com web platform consists of readily available, off-the-shelf,
computer systems, including dual Intel Pentium servers in a fully redundant
configuration. The drkoop.com web platform was designed using a proprietary
architecture deploying primarily Microsoft technology running the Windows/NT
Operating System. Other Microsoft web enabling technologies used in the
drkoop.com web platform include:
. Microsoft Membership and Personalization Server--software that captures
user data and enables the drkoop.com experience to be customized for
each user;
. Microsoft SQL Server--database software used to store user data and
content; and
. Microsoft Internet Information Server--software which enables pages to
be displayed to the user.
drkoop.com is in the process of migrating off of the Microsoft infrastructure to
allow for greater scalability and reliability. The new infrastructure products
are primarily SUN/iPlanet based products.
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Our data center is maintained offsite by a third party and provides us with
multiple backbone connections to the Internet and a fault-tolerant network
design. In addition, electricity for running the drkoop.com web platform is
protected by uninterruptible power systems including back-up diesel generators.
We have an operations and disaster recovery plan, and drkoop.com is backed up
nightly to an off-site storage facility. We do not maintain a back-up data
center.
Employee Resources
As of February 29, 2000, we had 185 full-time employees. None of our employees
are represented by a union. We believe that our relationship with our employees
is good.
Item 2: Properties
Our headquarters are located in Austin, Texas. We currently lease approximately
80,000 square feet, of which approximately 30,000 square feet is subleased to an
unrelated company, under a lease expiring in 2006. We also lease approximately
265 square feet in New York, 775 square feet in Malvern, PA, and 462 square feet
in Torrance, CA, under leases which expire in 2000, 2000, and 2001,
respectively. We believe that our existing facilities are adequate to meet our
needs for the immediate future and that future growth can be accommodated by
leasing additional or alternative space near our current facilities.
Item 3: Legal Proceedings
On April 12, 1999, a civil complaint was filed as Agrawal v. drkoop.com, Inc.,
Donald W. Hackett and John F. Zaccaro in the District Court of Travis County,
Texas, 126 Judicial District, Case No. 99-04294. Plaintiff alleged causes of
action including fraud, constructive fraud, promissory estoppel, negligent
misrepresentation, breach of contract, conversion, stock fraud, defamation and
misrepresentation. This matter was resolved in February 2000.
In January 1999, we entered into a strategic technology relationship with
HealthMagic, Inc. which included a long-term fully paid license to use a broad
range of Internet technologies, such as a web-based personal medical record,
personalization tools, and security and authentication features. Under this
arrangement, HealthMagic was to develop, implement, and support these
technologies for us, thereby permitting internal resources to address other
needs. However, the relationship never produced satisfactory results and
drkoop.com is currently involved in settlement discussions with HealthMagic,
Inc. ("HealthMagic") regarding possible legal claims that HealthMagic and
drkoop.com have against each other arising out of a Software Sale, License and
Development Agreement executed by drkoop.com and HealthMagic on January 20,
1999. As of the date of this filing, neither HealthMagic nor drkoop.com have
filed complaints regarding this matter. In the opinion of management, the
ultimate disposition of this matter will not have a material adverse effect on
the consolidated financial position or liquidity of drkoop.com.
We are also involved in other claims and disputes which are incidential to the
regular conduct of our business and are not presently believed to be material.
Item 4: Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock has been traded on The Nasdaq Stock Market under the symbol
"KOOP" since June 8, 1999. The following table sets forth the high and low sales
prices of our Common Stock for the periods indicated and are as reported by
Nasdaq.
<TABLE>
<CAPTION>
Quarter High Low
------- ------- -------
<S> <C> <C>
Second Quarter 1999... $17.44 $10.44
Third Quarter 1999.... 36.88 14.19
Fourth Quarter 1999... 19.00 11.88
</TABLE>
As of February 29, 2000, there were approximately 213 stockholders of record of
our Common Stock, although we believe that there are a significantly larger
number of beneficial owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock, and anticipate that we
will retain our earnings, if any, to finance the growth of our business.
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 7, 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 December 31, 1999, 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, except to the extent used to pay
compensation in the ordinary course of business.
Changes in Securities
During the year ended December 31, 1999, we issued the following equity
securities in transactions exempt from registration under the Securities Act of
1933:
. On January 11, 1999 we issued stock purchase warrants to acquire a total
of 12,555 shares of common stock to a stockholder at a price of $4.78 per
share. The terms of the relationship and the warrants are more fully
described in the notes to the financial statements provided in this
Report of Form 10-K.
. On January 29, 1999, we received $3.5 million in cash and acquired 10% of
the outstanding stock of HealthMagic, Inc., a subsidiary of Adventist
Health System Sunbelt Healthcare Corporation, in exchange for 2,615,677
shares of our Series C convertible preferred stock, which was converted
into an equivalent number of shares of common stock upon the completion
of our initial public offering. The parties also entered into related
agreements which provide for registration rights and specific transfer
restrictions. The terms of this relationship are more fully described
in the notes to the financial statements provided in this Report
on Form 10-K.
. On April 9, 1999, we issued warrants to purchase 775,000 shares of common
stock to GO.com, formerly Infoseek Corporation, and Buena Vista Internet
Group at an exercise price of $8.60 per share. The terms of the
relationship and the warrants (including the consideration and terms of
exercise) are more fully described in the notes to financial statements
provided with this Report on Form 10-K. This issuance was exempt from
registration by operation of Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
. On July 1, 1999, we issued warrants to purchase up to 5,890,995 shares of
common stock to America Online, Inc. in connection with the establishment
of a business relationship. The terms of the relationship and the
warrants (including the consideration and terms of exercise) are more
fully described in the notes to financial statements provided with this
Report on Form 10-K and in our Report on Form 8-K dated July 6, 1999.
This issuance was exempt
14
<PAGE>
from registration by operation of Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
15
<PAGE>
Item 6: Selected Financial Data
The following selected financial data should be read in conjunction with the
Financial Statements and the accompanying Notes to such statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. The statements of operations
data for the years ended December 31, 1999 and 1998 and for the period from
Inception (July 17, 1997) through December 31, 1997 and the balance sheet data
at December 31, 1999 and 1998, are derived from our audited financial statements
included elsewhere in this Form 10-K. The balance sheet data at December 31,
1997 are derived from our audited financial statements. Historical results are
not indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
Period From
Inception
Year Ended Year Ended (July 17, 1997)
December 31, December 31, thru,
1999 1998 Dec 31, 1997
------------- ------------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................................ $ 9,431 $ 43 $ -
-------- -------- ------
Operating expenses:
Production, content and product development........ 9,361 4,448 461
Sales and marketing................................ 45,563 2,008 -
General and administrative......................... 9,500 2,597 161
Deferred stock compensation........................ 2,486 107 -
-------- -------- ------
Total operating expenses............................ 66,910 9,160 622
-------- -------- ------
Loss from operations................................ (57,479) (9,117) (622)
Other income, net................................... 1,344 34 -
-------- -------- ------
Net loss............................................ (56,135) (9,083) (622)
Accretion of redeemable securities to fair value.... (17,255) (14,325) -
Dividend to preferred Stockholders.................. (9,147) - -
-------- -------- ------
Loss attributable to common Stockholders............ $(82,537) $(23,408) $ (622)
======== ======== ======
Basic and diluted net loss per common share......... $(3.97) $(2.86) $(0.09)
======== ======== ======
Weighted average shares outstanding used in basic
and diluted net loss per common share calculation... 20,814 8,175 6,750
======== ======== ======
Pro forma basic and diluted net loss per
common shares....................................... $ (2.27) $ (0.75)
======== ========
Weighted average shares used in computing
pro forma basic and diluted net loss per
common share calculation............................ 24,690 12,113
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998 1997
------- -------- ------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $35,706 $ - $ 8
Working capital (deficiency)............... 46,302 (2,905) (649)
Total assets............................... 99,720 380 43
Convertible notes payable to stockholder... - 451 -
Leases payable............................. 1,078 - -
Mandatorily redeemable
convertible (Series B) preferred stock..... - 18,406 -
Stockholders' equity (deficit)............. 71,317 (20,994) (614)
</TABLE>
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Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations of
our company should be read in conjunction with the information set forth under
"Selected Financial Data" and our financial statements and the notes to those
statements included elsewhere in this Report on 10-K as well as the following
section titled "Risk Factors That May Affect Future Results and Safe Harbor
Statement." This Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Actual results may differ materially from those
indicated in the forward-looking statements.
Overview
Our company operates drkoop.com, an Internet-based consumer health network. Our
network consists of a consumer-focused interactive Web site that provides users
with comprehensive health information and services, as well as affiliate
relationships with portals, other Web sites, healthcare organizations and
traditional media outlets. Our Web site, www.drkoop.com, is a health portal
that integrates dynamic health content on a wide variety of subjects,
interactive communities and tools as well as opportunities to purchase health
related products and services on-line.
Our company was founded in July 1997 as Personal Medical Records, Inc. During
1997 our primary operating activities related to the development of software for
Dr. Koop's Personal Medical Record System. In early 1998 we changed our primary
emphasis to the development of the software and hardware infrastructure for the
drkoop.com website, licensing and creating content, negotiating relationships
with strategic partners, recruiting personnel and raising capital. We launched
the drkoop.com web site in July 1998. Subsequent to the launch of the website,
we have focused on broadening the content and functionality of the website,
attracting an audience to the drkoop.com network, and creating revenue from
advertising, sponsorship and electronic commerce arrangements as well as
licensing our content and tools.
We derive our revenues primarily from advertising and sponsorship arrangements
and content subscription and software licensing fees. Additionally, we generate
lesser 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 our
audience.
Advertising revenues are derived primarily from short-term advertising contracts
in which we typically guarantee 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 our Web site view an advertisement. We recognize
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. We have utilized a combination of third party
firms and in-house staff for the sales and insertion of advertisements on the
drkoop.com Web site. Advertising rates, measured on a cost per thousand
impressions basis, are dependent on whether the impressions are for general
rotation throughout the drkoop.com Web site or for target audiences and
properties within specific areas of the Web site or co-branded content carried
by our partners. The short-term nature of many advertising arrangements and the
involvement of third parties which report sales to us after a time log have made
banner advertising revenues difficult to forecast.
Sponsorship revenues are derived from long-term contracts generally ranging from
three to fifty months in which we commit to provide sponsors enhanced
promotional opportunities that go beyond traditional banner advertising.
Sponsorships are designed to support broad marketing objectives, including
branding, awareness, product introductions, research and transactions.
Sponsorship arrangements typically include the delivery of a guaranteed minimum
number of impressions and the design and implementation of customized pages on
the Web site 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, we may provide initial site design consulting and engineering
services that require the development and implementation of specific Web site
enhancements prior to launching a co-branded site. Revenues and related costs
for initial site design and engineering services are recognized under contract
accounting.
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Content subscription and software licensing fees are facilitated through our
Community Partnership Program ("CPP") and from the sale of calculators.
We have also begun to license our content and brand in select foreign countries,
beginning first with English language markets such as Australia. Subscriptions
to our Community Partnership Program generally vary from one to three years.
Under this program, we develop co-branded Internet pages and software consisting
of visual icons containing embedded links back to our drkoop.com Web site 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 into 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 both calculators
and under the Health Links program independent of the Community Partnership
Program.
Contract research organizations offer comprehensive clinical trial services
which are the basis for obtaining regulatory approval for drugs and medical
devices. The identification and enrollment of qualified individuals into these
studies is usually a time consuming and expensive process. We created a
Clinical Research Center, a portion of our website designed to educate consumers
about clinical trials, including how to find and enroll in an appropriate trial
if the individual and their physician believe that it is a viable therapy
option. We expect to receive transaction fee revenues for assisting contract
research organizations in the identification and enrollment of qualified
individuals into studies.
We have begun to generate electronic commerce revenues through alliances with
certain retailers of pharmaceuticals, health and wellness products and through
insurance companies that sell insurance products and services to our audience.
We do not provide any of the goods or services offered. We receive compensation
in the form of transaction fees or anchor tenant rental fees form third parties
who have entered into preferred provider arrangements with us. Revenues from our
share of the proceeds from the commerce partner's transactions are recognized by
us upon notification from the commerce partner of sales attributable to users
from the drkoop.com website. E-commerce revenues were nominal for the year
ended December 31, 1999.
On April 9, 1999, we entered into agreements with GO.com, formerly Infoseek
Corporation, and the Buena Vista Internet Group, units of The Walt Disney
Company, under which drkoop.com became the exclusive provider of health and
related content on three Web sites of the GO Network: GO.com Health Center on
GO.com, formerly Infoseek, ESPN.com Training Room and the Family.com Health
Channel. Under the GO.com, formerly Infoseek agreement, We are also the premier
health content provider for ABCnews.com. In addition, we are the exclusive
pharmacy and drugstore, health insurance and clinical trials partner in the
GO.com Health Center. Under these agreements, users on the GO Network are able
to access various health information, services, interactive tools and commerce
opportunities through a co-branded Web site served by us. In the event we elect
not to provide specific content, content may be obtained from a third party. The
term of both agreements is for three years, however, each of the parties may
elect to terminate the relationship after two years. We have agreed to pay
GO.com, formerly Infoseek, and the Buena Vista Internet Group $57.9 million in
total consideration consisting of cash and warrants to purchase 775,000 shares
of common stock at an exercise price of $8.60 per share over the full three year
term. The cash portion of this obligation is payable as approximately $16.2
million in the first year of the agreements, $18.2 million in the second year of
the agreements and $21.3 million in the third year. None of the warrants are
exercisable prior to one year after issuance. The warrants have been recorded at
a fair value of $2.89 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; 0.5 volatility; risk-free interest rate of
5.0% and a legal life of 3 years. We are recognizing the costs associated with
the agreements ratably based on page view obligations of Infoseek and BVIG over
the term of the agreements. During 1999 we recorded $7.2 million in expense
related to these contracts.
Effective July 1, 1999, drKoop.com and America Online, Inc. ("AOL") signed a
four-year Interactive Services Agreement (the "ISA") pursuant to which we were
designated as AOL's premier provider of healthcare content. The ISA obligates
the Company to make carriage payments aggregating $89.0 million in cash.
Concurrently, drkoop.com and AOL entered into a four-year Development and
Services Agreement ("DSA") pursuant to which we are to provide specified
software development services to AOL for the term of the agreement and in return
AOL is to pay us $8 million. In addition, we provided
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<PAGE>
AOL immediately vested warrants (the "time warrants") to purchase drkoop.com,
Inc. common stock and the right to earn additional warrants based on performance
(the "performance warrants").
The immediately vested time warrants allow AOL to purchase 1,570,932 shares of
our common stock for a purchase price of $15.94 per share (the market price on
July 1, 1999). The immediately vested warrants may be exercised at any time on
or after June 30, 2000 and on or prior to June 30, 2008, subject to limited
exceptions relating to a change in control of drkoop.com or the early
termination of the Agreement between AOL and drkoop.com. The immediately vested
warrants have been recorded at a fair value of $10.49 per share which was
calculated using the Black-Scholes option-pricing model with the following
weighted average assumptions: zero dividend yield; 0.5 volatility; risk-free
interest rate of 5.7% and a legal life of 9 years. We are recognizing the costs
associated with the ISA and the immediately vested time warrants, reduced by the
fees earned under the DSA, ratably over the term of the ISA. During 1999, the
Company recorded $12.1 million of net expense related to these contracts.
As noted above, we provided AOL the ability to earn additional performance
warrants, as follows:
. Warrants to purchase up to 1,570,932 shares of drkoop.com common stock for
a purchase price of $20.00 per share. These warrants are not exercisable, and
will not become exercisable unless the AOL relationship delivers to
drkoop.com during the four years of the Agreement traffic objectives,
measured in page views, at or above agreed upon levels. Accordingly, one-
fourth of these warrants (i.e., 392,733 warrants) could become vested in each
of the next four years if those performance objectives are met. Any warrants
that become vested will be exercisable at any time on or prior to June 30,
2008.
. Warrants to purchase up to an additional 2,749,131 shares of drkoop.com
common stock are not exercisable, and will not become exercisable unless the
AOL relationship delivers specified usage of a new interactive software tool
to be developed by drkoop.com and jointly deployed by drkoop.com and AOL. The
warrant specifies four performance hurdles, measured by usage of the new
tool, which if accomplished will result in 392,733, 392,733, 785,466 and
1,178,199 warrants becoming vested and exercisable. The exercise price of
these warrants will be established at the time they become vested and will be
calculated as 80%, 75%, 70% and 65% of fair market value at such time. Any
warrants that become vested will be exercisable at any time on or prior to
June 30, 2008.
The Company has not recorded any costs during 1999 associated with the
performance based warrants as none of the performance targets had been obtained.
Since inception, we have incurred significant losses and negative cash flow, and
as of December 31, 1999 we had an accumulated deficit of $75.7 million. We have
not achieved profitability and expect to continue to incur operating losses for
the foreseeable future as we fund operating and capital expenditures in the
areas of expansion of our network, advertising, distribution, 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 on-line network which will, in
turn, allow us the opportunity to sell advertising designed to reach those
consumers. Our business model also assumes that those users will access
important healthcare needs through electronic commerce and that local healthcare
participants will affiliate with us. This business model is not yet proven and
we cannot assure you that we will ever achieve or sustain profitability or that
our operating losses will not increase in the future or conform to expectations
of the public markets.
We have a very limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets such as the Internet market. In view of the rapidly evolving
nature of our business and our limited operating history, we believe that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. Please see "Risk Factors
That May Affect Future Results and Safe Harbor Statement" below.
19
<PAGE>
Results of Operations
Comparison of the years ended December 31, 1999 and 1998
Revenues. Revenues were $9.4 million and $43,000 for the years ended December
31, 1999 and 1998, respectively. The increase in revenue is due to one full
year of sales in 1999 compared to the beginning of sales in the fourth quarter
of 1998 due to the fact that our Web site, www.drkoop.com, was launched in July
1998.
Revenue from content subscription and software licenses totaled $1.7 million or
18% of total revenue for the year ended December 31, 1999 as compared to $27,000
or 63% of total revenue for the year ended December 31, 1998. The increase in
content subscription and software license revenue is primarily attributable to
the continued expansion of the Community Partner Program ("CPP"), resulting in
the addition of 33 new contracts during the year ended December 31, 1999 and
bringing the total number of CPP contracts to 34 as of December 31, 1999,
compared to one partner as of December 31, 1998. All content subscription
revenue is considered recurring revenue.
Advertising and sponsorship revenues totaled $7.7 million or 81% of total
revenues for the year ended December 31, 1999 as compared to $15,000 or 35% for
the year ended December 31, 1998. Advertising and sponsorship revenues for the
year ended December 31, 1999 include: (i) recurring revenues from sponsorship
agreements of $3.4 million, or 36% of total revenues; (ii) $3.8 million, or 40%
of total revenues, which were derived from non-recurring short-term advertising
and sponsorship arrangements; and (iii) related services revenues of $522,000,
or 6% of total revenues. Advertising and sponsorship revenues for 1998 were
attributable to short term advertising arrangements. The increase in advertising
and sponsorship revenues was primarily due to a full year of sales and an
increase in the number of advertising arrangements combined with an increase in
traffic to our Web site resulting in a higher number of impressions delivered.
Other revenues totaled $60,000 or less than 1% of total revenues, for the year
ended December 31, 1999, as compared to $1,000, or 2% of total revenues for the
year ended December 31, 1998. Other revenues for 1999 consist primarily of
fees paid for successful screenings of potential clinical trials participants
and e-commerce transactions.
In total, barter revenues represented $527,000, or 6%, of total revenues for the
year ended December 31, 1999. Content subscription and software license barter
revenue totaled $110,000 and advertising and sponsorship barter revenue totaled
$417,000 for the year ended December 31, 1999. During 1999 we recorded
equivalent amounts as expense related to these barter transactions. There were
no barter revenues recorded in 1998.
Production, content and product development expenses. Production, content and
product development expenses consist primarily of salaries and benefits,
consulting fees and other costs related to content acquisition and licensing,
software development, application development and Web site operations expense.
Production, content and product development expense increased by $4.9 million,
or 110%, from $4.4 million for the year ended December 31, 1998 to $9.4 million
for the year ended December 31, 1999. 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 an
increase in content licensing expenditures required as our Web site has
continued to develop and expand. We believe that in order to remain
competitive, significant investments in content development and operating
infrastructure will be required; therefore, we expect that production, content
and product development expenses will continue to increase in absolute dollars
for the foreseeable future.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries and related costs, portal fees, web-based advertising, commissions,
general advertising and other related expenses. Sales and marketing expense
increased by $43.6 million, from $2.0 million to $45.6 million for the years
ended December 31, 1998 and 1999, respectively. The primary reasons for the
increases were costs associated with the distribution agreements with major
portals, totaling $20.3 million for the year ended December 31, 1999 as compared
to $0 for the same periods in 1998, and online and offline advertising and
promotion expenses for the drkoop.com Web site totaled $17.6 million for the
year ended December 31, 1999 as compared to $1.1
20
<PAGE>
million for the year ended December 31, 1998. Additionally, we experienced
significant growth in the numbers of sales and marketing personnel, resulting in
increased salary and related expenses of approximately $4.2 million for the year
ended December 31, 1999 as compared to $719,000 for the year ended December 31,
1998. We anticipate that sales and marketing expenses will continue to increase
in absolute dollars in the foreseeable future as we continue to hire additional
personnel and increase expenditures for distribution, advertising, brand
promotion, public relations and other marketing activities.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including executive, finance, accounting, investor relations, human resources,
facilities and fees for professional services. General and administrative
expenses increased by $6.9 million, or 266% from $2.6 million to $9.5 million
for the years ended December 31, 1998 and 1999, respectively. The primary
reasons for the increases were the addition of personnel, increased professional
fees and the amortization of the intangible asset of $1.2 million. We
anticipate that general and administrative expenses will continue to increase in
absolute dollars for the foreseeable future, although at a slower rate than the
other expense categories.
Deferred stock compensation expense. We have recorded non-cash deferred stock
compensation of $3.5 million and $1.5 million during the years ended December
31, 1999 and 1998, respectively, for the difference between the exercise price
and the fair market value of certain stock options granted by us to our
employees. Deferred stock compensation is amortized over the four-year vesting
period of such options. Of the total deferred stock compensation recorded, $2.5
million was amortized during the year ended December 31, 1999 and $107,000 was
amortized during the year ended December 31, 1998.
Net interest income. Net interest income includes interest income for 1999 of
approximately $1.46 million derived primarily from interest received on
deposited cash balances and interest expense totaling approximately $120,000
related to our financing obligations, particularly the convertible notes payable
prior to conversion at the initial public offering and capital leases
obligations for computer equipment. Net interest income amounted $34,000 for
the year ended December 31, 1998 derived from interest received on deposited
cash balances with no interest expense. The increase was due to higher average
net cash and cash equivalents balances resulting from the investment of the
proceeds from our IPO completed in June 1999.
Income tax. We have incurred net losses to date. As of December 31, 1999 and
1998, we had net operating loss carryforwards of $63.0 million and $9.2 million,
respectively, for financial reporting purposes. We have recorded a valuation
reserve equal to the amount of the carryforward due to the uncertain realization
of these tax benefits.
Comparison of the year ended December 31, 1998 to the period from Inception
(July 17, 1997) through December 31, 1997
Revenues. For the year ended December 31, 1998, we recorded revenues of $43,000,
with $27,000, or 63% of revenues, attributable to content subscription and
software licenses and $16,000, or 37% of revenues, attributable to advertising
and other revenues; no revenues were recognized for the period from Inception
(July 17, 1997) to December 31, 1997.
Production, content and product development expense. Production, content and
product development expenses consist primarily of salaries and benefits,
consulting fees and other costs related to content acquisition and licensing,
software development, application development and website operations expense.
Production, content and product development expense increased by $4.0 million,
or 865%, to $4.4 million for the year ended December 31, 1998 as compared to
$461,000 for the period ended December 31, 1997. This increase was primarily
attributable to increases in personnel and related costs to provide the
infrastructure necessary to launch the drkoop.com website in July 1998, as well
as costs for product development work on the PMR.
Sales and marketing expense. Sales and marketing expenses consist primarily of
salaries and related costs, web-based advertising, commissions, general
advertising and other related expenses. We did not have any sales and marketing
expense during the period ended December 31, 1997. During the year ended
December 31, 1998, we incurred costs of $2.0 million as we built a direct sales
organization comprised of 11 sales professionals. During 1998 we also
implemented a variety of approaches to promote the drkoop.com brand to attract
new users, including advertising on the Internet, public relations campaigns and
event marketing
21
<PAGE>
General and administrative expense. General and administrative expenses consist
primarily of salaries and related costs for general corporate functions,
including executive, finance, accounting, human resources, facilities and fees
for professional services. General and administrative expenses increased by $2.4
million to $2.6 million for the year ended December 31, 1998 as compared to
$161,000 for the period ended December 31, 1997. The increase in general and
administrative expenses was primarily attributable to salaries and related
expenses associated with hiring personnel and increased professional fees and
facility-related expenses to support the growth of our operations.
Administrative personnel headcount, including executive management, went from
one person at December 31, 1997 to nine people at December 31, 1998.
Deferred stock compensation expense. We have recorded non-cash deferred stock
compensation of $1.5 million and $0 during the years ended December 31, 1998 and
1997, respectively, for the difference between the exercise price and the fair
market value of certain stock options granted by us to our employees. Deferred
stock compensation is amortized over the four-year vesting period of such
options. Of the total deferred stock compensation, $107,000 was amortized during
the year ended December 31, 1998 and $0 was amortized during the year ended
December 31, 1997.
Interest income. Interest income includes interest income from the investment of
cash and cash equivalents.
Income Taxes. We have incurred net losses to date. As of December 31, 1998, we
had a net operating loss carryforward of $9.2 million for financial reporting
purposes. We have recorded a valuation reserve equal to the amount of the
net deferred tax assets due to the uncertain realization of these tax benefits.
22
<PAGE>
Selected Quarterly Results
The following table sets forth certain unaudited quarterly results of operations
for the period from Inception (July 17, 1997) to December 31, 1997 and for the
three month periods ended March 1998 through December 31, 1999. We believe that
this information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Report on Form 10-K and believe
that all necessary adjustments (consisting only of normal recurring adjustments)
have been included in the amounts stated below and present fairly the results of
such periods when read in conjunction with the audited consolidated financial
statements and notes thereto. The quarterly financial information presented
herein should not be relied upon as an indication of future quarterly
performance.
<TABLE>
<CAPTION>
(Dollars in thousands)
Period Three Months Ended
From ----------------------------------------------
Inception March 31, June 30, September 30, December 31,
(July 17, 1997) 1998 1998 1998 1998
to December
31, 1997
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues ................. $ -- $ -- $ -- $ -- $ 43
-------- -------- -------- -------- --------
Operating expenses:
Production, content and
product development ...... 461 284 672 1,847 1,645
Sales and marketing ...... -- 166 181 646 1,015
General and administrative 161 259 562 870 906
Amortization of deferred
stock compensation(1) .... -- -- -- -- 107
-------- -------- -------- -------- --------
Total operating expenses.. 622 709 1,415 3,363 3,673
-------- -------- -------- -------- --------
Loss from operations ..... (622) (709) (1,415) (3,363) (3,630)
Interest income........... -- -- 14 13 7
-------- -------- -------- -------- --------
Net loss ................. $ (622) $ (709) $ (1,401) $ (3,350) $ (3,623)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues ................. $ 404 $ 1,019 $ 2,910 $ 5,098
-------- -------- -------- --------
Operating expenses:
Production, content and
product development ...... 1,035 2,110 2,390 3,826
Sales and marketing ...... 2,048 8,010 18,585 16,920
General and administrative 1,104 1,740 2,247 4,409
Amortization of deferred
Stock compensation(1) .... 481 592 839 574
-------- -------- -------- --------
Total operating expenses . 4,668 12,452 24,061 25,729
-------- -------- -------- --------
Loss from operations ..... (4,264) (11,433) (21,151) (20,631)
Interest income (expense) (31) 67 551 757
-------- -------- -------- --------
Net loss ................. $ (4,295) $(11,366) $(20,600) $(19,874)
======== ======== ======== ========
</TABLE>
This item is a non-cash stock compensation charge incurred in connection with
the June 1999 IPO.
<PAGE>
Liquidity and Capital Resources
Until our initial public offering in June 1999, which raised net proceeds of
$88.5 million, we financed our operations primarily through equity sales and
convertible notes payable debt financing. At December 31, 1999 we had $35.7
million in cash and cash equivalents and working capital of $46.3 million. Due
to our plan to grow our business and incur operating losses, these funds were
further reduced during the first quarter of 2000.
Cash used in operating activities was $52.7 million and $6.8 million for the
years ended December 31, 1999 and 1998, respectively. The cash used in
operating activities for these years was attributable to funding net operating
losses and, for the 1999 period also reflected increases in accounts receivable
and in prepaid and other assets. The increase in prepaid expenses is primarily
the result of prepayments required under the terms of various portal and content
contracts. These items were offset by amounts for non-cash charges for
depreciation and amortization and increases in accounts payable and accrued
liabilities and deferred credit and deferred revenue in 1999. Cash provided by
operating activities of $44,000 for the period from Inception (July 17, 1997) to
December 31, 1997 was primarily the result of payables financing used to offset
the net loss for the period.
Cash used in investing activities was $9.7 million and $335,000 for the years
ended December 31, 1999 and 1998, respectively. Net cash used for investing
activities for these periods consisted primarily of capital expenditures for
computer equipment, software and furniture and fixtures.
Cash provided by financing activities was $98.1 million and $7.1 million for the
years ended December 31, 1999 and 1998, respectively. During 1999 cash
provided by financing activities resulted primarily from proceeds from our
initial public offering for which we received approximately $88.5 million in net
proceeds and, to a lesser extent, proceeds from the issuance of Series C
Convertible Preferred Stock for $3.5 million, the issuance of convertible notes
payable resulting in $5.8 million of proceeds, and the exercise of stock options
resulting in $345,000 of proceeds. The $7.1 million in proceeds received
during 1998 was from the issuance of preferred stock for $6.6 million combined
with the issuance of a convertible note payable for $500,000.
As of December 31, 1999, our primary source of liquidity was $35.7 million
of cash and cash equivalents on hand. As of December 31, 1999 we had no bank
credit facilities.
Our operations generated a negative cash flow during the years ended
December 31,1999 and 1998, and we expect a significant use of cash during the
upcoming Year 2000 as we fulfill our payment obligations under the portal
agreements with GO and AOL totaling $13.7 and $24.3 million, respectively, as
well as procurement of content and continuation of marketing efforts for the
drkoop.com Web site. We will require additional debt or equity financing during
2000, the amount and timing depending in large part on our spending program and
our portal payments. If additional funds are raised through the issuance of
equity securities, our 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 us. If such financing is not available when
required or is not available on acceptable terms, we may be unable to develop or
enhance our products and services, take advantage of business opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition and results of operations. We also
could breach payment obligations to third parties including portals, or
otherwise fail to satisfy business obligations of our company. Please see "Risk
Factors That May Affect Future Results and Safe Harbor Statement" below.
Impact of the Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, computer systems and/or software used by many companies and governmental
agencies may need to be upgraded to comply with such Year 2000 requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
24
<PAGE>
We have operated and evaluated our internal IT and non-IT systems since January
1, 2000, and have not identified any errors or experienced any system
malfunctions. We have not been informed of any Year 2000 problems experienced by
any of our vendors or other third parties on whom our operations rely. We will
continue to monitor our systems to assess whether we are at risk for any Year
2000 compliance issues. The costs associated with correcting our non-compliant
IT systems and non-IT systems have not been material.
However, it is our opinion that it is too soon to conclude that there will not
be any problems arising from the Year 2000 problem, particularly with respect to
third parties. We are continuing to monitor our operations, our significant
vendors and other third parties for Year 2000 problems. We do not believe at
this time that potential Year 2000 issues will materially affect our business,
although no assurance can be given that this will be the case.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements".
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 us. The adoption of SAB 101 is not expected to
have a material impact on us.
25
<PAGE>
Risk Factors That May Affect Future Results and Safe Harbor Statement
Investors are cautioned that this Form 10-K contains forward-looking statements
that involve risks and uncertainties, including the following: (i) our 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) our
plans and results of operations will be affected by our ability to manage our
growth and working capital; (iii) our business is highly competitive and the
entrance of new competitors or the expansion of the operations by existing
competitors in our markets could adversely affect our plans and results of
operations; and (iv) the risk factors identified below are not represented to be
a comprehensive list.
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 December 31, 1999 we had an accumulated deficit of $75.7 million. We have
not achieved profitability and expect to continue to incur operating losses for
the foreseeable future as we fund operating and capital expenditures in 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 on-line network which will, in turn, allow us
the opportunity to sell advertising designed to reach those consumers. Our
business model also assumes that those users will access important healthcare
needs through electronic commerce and that local healthcare participants will
affiliate with us. This business model is not yet proven and we cannot assure
you that we will ever achieve or sustain profitability or that our operating
losses will not increase in the future 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 no have access to sufficient committed capital to meet our
projected operating needs for at least the next twelve months. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 on-line content, services and e-commerce opportunities;
. maintain our current, and develop new, affiliate relationships;
. attract a large number of advertisers who desire to reach our users;
. respond effectively to the offerings of competitive providers of health
information on the Internet;
. continue to develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
We also depend on the growing use of the Internet for advertising, commerce and
communication, and on general economic conditions. We cannot assure you that our
business strategy will be successful or that we will successfully address these
risks or difficulties. If we fail to address adequately any of these risks or
difficulties our business would likely suffer. See "Management's Discussion and
Analysis of Financial
26
<PAGE>
Condition and Results of Operations" above and our financial statements for
detailed information on our extremely limited operating history and the
qualifications included in the report of our independent accountants relating to
our ability to continue as a going concern.
Our need for additional financing is uncertain as is our ability to raise
further financing if required.
We will need to raise additional funds to finance our business and to respond to
business contingencies which may include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. develop new or enhance existing editorial content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders. We cannot assure you that additional
financing will be available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable terms, our ability to
fund our operations, comply with payment obligations to third parties including
portals, take advantage of unanticipated opportunities, develop or enhance
editorial content, features or services, or otherwise respond to competitive
pressures would be significantly limited. See above for "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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.
Important factors which could cause our results to fluctuate materially include:
. our ability to attract and retain users;
. our ability to attract and retain advertisers and sponsors and maintain
advertiser and sponsor satisfaction;
. traffic levels on our Internet site;
. our ability to attract and retain customers and maintain customer
satisfaction for our existing and future e-commerce offerings;
. new Internet sites, services or products introduced by us or our competitors;
. the level of Internet and other on-line services usage;
. our ability to upgrade and develop our systems and infrastructure and attract
new personnel in a timely and effective manner;
. our ability to successfully integrate operations and technologies from any
acquisitions, joint ventures or other business combinations or investments;
and
. technical difficulties or system downtime affecting the operation of our Web
site.
Our revenues for the foreseeable future will remain dependent on user traffic
levels, advertising and e-commerce activity on drkoop.com and the level of
affiliate subscriptions. In particular, we are dependent on the sale of
advertising by third parties which has recently been below expectations. 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. In
addition, we plan to increase our sales and marketing operations, obtain broader
distribution
27
<PAGE>
for our service, expand and develop content and upgrade and enhance our
technology and infrastructure development in order to support our growth.
Many of the expenses associated with these activities--for example, personnel
costs, portal fees, and technology and infrastructure costs--are relatively
fixed in the short-term. We may be unable to adjust spending quickly enough to
offset any unexpected revenue shortfall, in which case our results of operations
and liquidity would suffer materially.
We must establish, maintain and strengthen our brand in order to attract users
to our network and generate advertising, sponsorship and e-commerce revenue.
In order to expand our audience of users and increase our on-line traffic, we
must establish, maintain and strengthen our brand. For us to be successful in
establishing our brand, healthcare consumers must perceive us as a trusted
source of health information, and advertisers, merchants and manufacturers must
perceive us as an effective marketing and sales channel for their products and
services. We expect that we will need to increase substantially our marketing
budget in our efforts to establish brand recognition and brand loyalty. Our
business could be materially adversely affected if our marketing efforts are not
productive or if we cannot strengthen our brand.
In addition, a key element 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 could
materially adversely impact our business. In addtion, if our relationship with
Dr. C. Everett Koop terminates for any reason, we would need to change the name
of our website and devote substantial resources towards building anew marketing
and brand strategy.
Key elements of our marketing and brand building strategies are dependent on our
relationship with Dr. C. Everett Koop.
A key element of our strategy is to associate our company with former U.S.
Surgeon General C. Everett Koop, Chairman of the Board of our company and a
person who we believe is viewed by consumers as a trustworthy and credible
leader in the healthcare field. We are a party to an amended and restated
agreement, dated August 30, 1999, 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 the amendment and
extension of the Koop agreement, we granted Dr. C. Everett Koop options to
purchase 214,400 shares of common stock for an exercise price of $17.88 per
share. The Koop agreement is exclusive and for a term of five years, subject to
automatic renewal for additional five-year terms unless it is terminated by
either party within 120 days of the end of each term. If the Koop Agreement is
terminated other than due to a breach or default by us, we will have the right
on a non-exclusive basis for three years following the end of the term to
rebrand and sell approved products bearing the name, image or likeness of Dr. C.
Everett Koop. If we default in our obligations and do not promptly cure the
default, Dr. C. Everett Koop may terminate the Koop agreement, no rebranding
period will apply and we would lose all rights to use Dr. C. Everett Koop's name
and likeness on the 90th day after such termination. Dr. C. Everett Koop may
also terminate the Koop agreement upon a change in control of our company.
If our agreement with Dr. C. Everett Koop were terminated prior to the end of
its current term or not renewed at the end of its current term, we would need to
change the name of our website and devote substantial resources towards building
a new marketing and brand strategy. Without our ability to use Dr. C. Everett
Koop's name and likeness or Dr. C. Everett Koop's participation in our business,
we may not be able to continue to attract a significant amount of user traffic
and advertisers to our Web site. 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 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.
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We have committed significant financial and marketing resources to expand our
network; if we are unable to earn revenues in excess of these commitments, our
business will suffer.
In order to expand our network, we have entered into a number of long-term
portal agreements which involve the payment of significant funds for prominent
or exclusive carriage of our health information and services. These transactions
are premised on the assumption that the traffic we obtain from these
arrangements will permit us to earn revenues in excess of the payments made to
partners. This assumption is not yet proven, and if we are unsuccessful in
generating sufficient resources to offset these expenditures, we will likely be
unable to operate our business. On April 9, 1999 we entered into agreements with
Infoseek Corporation and the Buena Vista Internet Group, a unit of The Walt
Disney Company, under which we will be the exclusive provider of health and
related content on three Web sites of the Go Network. Under the Infoseek
agreement, drkoop.com will also be the premier health content provider for
ABCnews.com. The term of these agreements is for three years for total
consideration of approximately $57.9 million, including warrants to purchase
shares of our common stock. Additionally, on July 1, 1999 we entered into
agreements with America Online, Inc. under which we will be the premier health
content provider across five AOL brands: America Online, CompuServe, AOL.COM,
Netscape Netcenter and Digital City. The term of the agreement is for four years
for cash payments of $89 million, plus fully vested and performance-based
warrants to purchase shares of our common stock.
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 will likely increase the fees charged by high quality
content providers. The addition of new features will also require that we
continue to improve the technology underlying our Web site. These requirements
are significant, and we may fail to execute on them quickly and efficiently. If
we fail to expand the breadth of our offerings quickly, or these offerings fail
to achieve market acceptance, our business will suffer significantly.
Our business model relies on Internet advertising and sponsorship activities
which may not be effective or profitable marketing media.
Our future is highly dependent on increased use of the Internet as an
advertising medium. We expect to derive a substantial 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.
Various pricing models are used to sell advertising on the Internet. It is
difficult to predict which, if any, will emerge as the industry standard,
thereby making it difficult to project our future advertising rates and
revenues. Our advertising revenues could be adversely affected if we are unable
to adapt to new forms of Internet advertising. Moreover, "filter" software
programs are available that limit or prevent advertising from being delivered to
an Internet user's computer. Widespread adoption of this software could
adversely affect the commercial viability of Internet advertising.
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In order to execute our growth plan we must attract, retain and motivate highly
skilled employees, and we face significant competition from other Internet and
new media companies in doing so.
Our ability to execute our growth plan and be successful also depends on our
continuing ability to attract, retain and motivate highly skilled employees. In
addition to Dr. C. Everett Koop, Chairman of the Board, we depend on the
continued services of key board members, our senior management and other
personnel, particularly Donald W. Hackett, President and Chief Executive
Officer. As we continue to grow, we will need to hire additional personnel in
all operational areas. Competition for personnel throughout the Internet and
related new-media industry is intense. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be adversely affected.
Due to the factors noted above and the other risks discussed in this section,
you should not rely on quarter-to-quarter comparisons of our results of
operations as indicators of future performance. It is possible that in some
future periods our operating results may be below the expectations of public
market analysts and investors. In this event, the price of our common stock may
underperform or fall. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We depend on third-party relationships, many of which are short-term or
terminable, to generate advertising and provide us with content.
We depend, and will continue to depend, on a number of third-party relationships
to increase traffic on drkoop.com and generate advertising and other revenues.
Outside parties on which we depend include unrelated Web site operators that
provide links to drkoop.com, providers of health content and portals which
provide us with carriage and ad serving. Many of our arrangements with third-
party Internet sites and other third-party service providers are not exclusive
and are short-term or may be terminated at the convenience of either party. We
cannot assure you that third parties regard our relationship with them as
important to their own respective businesses and operations. They may reassess
their commitment to us at any time in the future and may develop their own
competitive services or products.
We intend to produce only a portion of the 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. As health-related content grows on the Internet, we
believe that there will be increasing competition for the best product
suppliers, which may result in a competitor acquiring a key supplier on an
exclusive basis, or in significantly higher content prices. Such an outcome
could make the drkoop.com network less attractive or useful for an end user
which could reduce our advertising and e-commerce revenues.
We cannot assure you that we will be able to maintain relationships with third
parties that supply us with content, 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 Web
site will achieve market acceptance or commercial success. Accordingly, we
cannot assure you that our existing relationships will result in sustained
business partnerships, successful product or service offerings or the generation
of significant revenues for us.
We have recently experienced and are currently experiencing rapid growth in our
business, and our inability to manage this growth could harm our business.
We have experienced and are currently experiencing a period of significant
growth. This growth has placed, and the future growth we anticipate in our
operations will continue to place, a significant strain on our resources. As
part of this growth, we will have to implement new operational and financial
systems and procedures and controls, expand, train and manage our employee base,
and maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial staffs. If we are unable to manage our growth
effectively, our business, results of operations and financial condition could
be adversely affected.
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Any future acquisitions we make of companies or technologies may result in
disruptions to our business and/or the distraction of our management, due to
difficulties in assimilating acquired personnel and operations.
We may acquire or make investments in complementary businesses, technologies,
services or products if appropriate opportunities arise. From time to time we
engage in discussions and negotiations with companies regarding our acquiring or
investing in such companies' businesses, products, services or technologies, and
we regularly engage in such discussions and negotiations in the ordinary course
of our business. Some of those discussions also contemplate the other party
making an investment in our company. We cannot assure you that we will be able
to identify future suitable acquisition or investment candidates, or if we do
identify suitable candidates, that we will be able to make such acquisitions or
investments on commercially acceptable terms or at all. If we acquire or invest
in another company, we could have difficulty in assimilating that company's
personnel, operations, technology and software. In addition, the key personnel
of the acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in integrating the acquired products,
services or technologies into our operations. These difficulties could disrupt
our ongoing business, distract our management and employees, increase our
expenses and adversely affect our results of operations. Furthermore, we may
incur indebtedness or issue equity securities to pay for any future
acquisitions. The issuance of equity securities would be dilutive to our
existing stockholders.
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 Web site. We must
continue to expand and adapt our network infrastructure to accommodate
additional users, increase transaction volumes and changing consumer and
customer requirements. We may not be able to accurately project the rate or
timing of increases, if any, in the use of our Web site or to expand and upgrade
our systems and infrastructure to accommodate such increases. Our systems may
not accommodate increased use while maintaining acceptable overall performance.
Service lapses could cause our users to instead use the on-line services of our
competitors.
Many of our service agreements, such as those with our Community Partners,
contain performance standards. If we fail to meet these standards, our customers
could terminate their agreements with us or require that we refund part or all
of the license fees. The loss of any of our service agreements and/or associated
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 Web site or which is
accessed from our Web site.
Because users of our Web site access health content and services relating to a
condition they may have or may distribute our content to others, third parties
may sue us for defamation, negligence, copyright or trademark infringement,
personal injury or other matters. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought, sometimes successfully, against on-line services in the past. 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 Web site through links to other Web sites
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. Federal
registrations are pending for the trademark "drkoop.com," as well as other
services and
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trademarks which incorporate the Dr. Koop name. Our right to use the Dr. Koop
name is granted to us under an agreement with Dr. C. Everett Koop. If we lose
our right to use the Dr. Koop name, we would be forced to change our corporate
name and adopt a new domain name. These changes could confuse current and
potential customers and would adversely impact our business. We also rely on a
variety of technologies that are licensed from third parties, including our
database and Internet server software, which is used in the drkoop.com Web site
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, and investors should not buy our common stock
expecting to receive dividends.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future. Investors should not purchase our common stock with the expectation of
receiving cash dividends.
We are subject to anti-takeover provisions in our charter and in our contracts
that could delay or prevent an acquisition of our company, even if such an
acquisition would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation, our bylaws, Delaware law
and 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 Web
site, 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 if we are unable to
successfully implement our business model, our business will be materially
adversely affected.
The Internet industry is highly competitive and changing rapidly, and we may not
have the resources to compete adequately.
The number of Internet Web sites 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 on-line
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:
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. health-related on-line services or Web sites targeted at consumers, such as
accesshealth.com, ahn.com, betterhealth.com, drweil.com, healthcentral.com,
healthgate.com, intelihealth.com, mayohealth.org; mediconsult.com,
onhealth.com, thriveonline.com and webmd.com;
. on-line and Internet portal companies, such as America Online, Inc.;
Microsoft Network; Yahoo! Inc.; Excite, Inc.; Lycos Corporation and GO which
commonly distribute multiple sources of health data;
. electronic merchants and conventional retailers that provide health goods and
services competitive to those available from links on our Web site;
. hospitals, HMOs, managed care organizations, insurance companies and other
healthcare providers and payors which offer healthcare information through
the Internet; and
. other consumer affinity groups, such as the American Association of Retired
Persons, SeniorNet and ThirdAge Media, Inc. which offer health-related
content to specific demographic groups.
Many of these potential competitors are likely to enjoy substantial competitive
advantages compared to our company, including:
. the ability to offer a wider array of on-line products and services;
. larger production and technical staffs;
. greater name recognition and larger marketing budgets and resources;
. larger customer and user bases; and
. substantially greater financial, technical and other resources.
To be competitive, we must respond promptly and effectively to the challenges of
technological change, evolving standards and our competitors' innovations by
continuing to enhance our products and services, as well as our 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 on-line, covering areas such as:
. the regulation of medical devices;
. the practice of medicine and pharmacology and the sale of controlled products
such as pharmaceuticals on-line;
. the regulation of government and third-party cost reimbursement; and
. the regulation of insurance sales.
FDA Regulation of Medical Devices. Some computer applications and software are
considered medical devices and are subject to regulation by the United States
Food and Drug Administration. We do not
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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.
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 Web site 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
Web site purchase prescription pharmacy products from certain of our e-commerce
partners. The fee is not based on the value of the sales transaction. Federal
and state "anti-kickback" laws prohibit granting or receiving referral fees in
connection with sales of pharmacy products that are reimbursable under federal
Medicare and Medicaid programs and other reimbursement programs. Although there
is uncertainty regarding the applicability of these regulations to our e-
commerce revenue strategy, we believe that the service fees we receive from our
e-commerce partners are for the primary purpose of marketing and do not
constitute payments that would violate federal or state "anti-kickback" laws.
However, if our program were deemed to be inconsistent with federal or state
law, we could face criminal or civil penalties. Further, we would be required
either not to accept any transactions which are subject to reimbursement under
federal or state healthcare programs or to restructure our compensation to
comply with any applicable anti-kickback laws or regulations. In addition,
similar laws in several states apply not only to government reimbursement but
also to reimbursement by private insurers. If our activities were deemed to
violate any of these laws or regulations, it could cause a material adverse
affect on our business, results of operations and financial condition.
State Insurance Regulation. In addition, we market insurance on-line, offered by
unrelated third parties, and receive referral fees from those providers in
connection with this activity. The use of the Internet in the marketing of
insurance products is a relatively new practice. It is not clear whether or to
what extent state insurance licensing laws apply to our activities. If we were
required to comply with such licensing laws, compliance could be costly or not
possible. This could have a material adverse effect on our business.
There is no established market for the consumer health e-commerce transactions
we facilitate.
We plan to develop relationships with retailers, manufacturers and other
providers to offer health products and services through direct links from our
Web site to their Web site. 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 on-line and the development of
relationships with retailers, manufacturers or other providers of such products
and services, and we cannot predict the rate at which consumers will elect to
engage in this form of commerce or the compensation that we will receive for
enabling these transactions.
Consumers may sue us if any of the products or services that are sold through
our Web site 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
Web site, 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:
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. inadequate development of the necessary infrastructure such as a reliable
network backbone;
. timely development of complementary products such as high speed modems;
. delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity; or
. increased government regulation.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it.
Our business is dependent on the continuous, reliable and secure operation of
our Web site and related tools and functions we provide.
We rely on the Internet and, accordingly, depend upon the continuous, reliable
and secure operation of Internet servers and related hardware and software.
Recently, several large Internet commerce companies have suffered highly
publicized system failures which resulted in adverse reactions to their stock
prices, significant negative publicity and, in certain instances, litigation. We
have also suffered service outages from time to time, although to date none of
these interruptions has materially adversely effected our business operations or
financial condition. To the extent that our service is interrupted, our users
will be inconvenienced, our commercial customers will suffer from a loss in
advertising or transaction delivery and our reputation may be diminished. Some
of these outcomes could directly result in a reduction in our stock price,
significant negative publicity and litigation. Our computer and communications
hardware are protected through physical and software safeguards. However, they
are still vulnerable to fire, storm, flood, power loss, telecommunications
failures, physical or software break-ins and similar events. We do not have full
redundancy for all of our computer and telecommunications facilities and do not
maintain a back-up data facility. Our business interruption insurance may be
inadequate to protect us in the event of a catastrophe. We also depend on third
parties to provide potential users with web browsers and Internet and on-line
services necessary for access to our Web site. In the past, our users have
occasionally experienced difficulties with Internet and other on-line services
due to system failures, including failures unrelated to our systems. Any
sustained disruption in Internet access provided by third parties could
adversely impact our business.
Growth of internet businesses may be impacted by privacy or security concerns
Recently, 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, drkoop.com
took immediate action such as designating a Chief Privacy Officer, launching a
new Privacy Center which explains to consumers issues regarding privacy on-line,
releasing a more detailed policy statement, removing personal data "cookies" on
all third party ads, and severing its business relationship with DoubleClick for
the use of its "Dart" third party ad server in lieu of using an in-house ad
serving solution. In December 1999, drkoop.com also formed 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 is
scheduled to ratify and release Privacy Policies related to content,
advertising, electronic commerce, and connectivity during the second quarter of
2000. While drkoop.com feels it has taken a leadership role in responding to
reported consumer concerns over privacy, we retain confidential customer
information in our database, and there is no way of telling whether or not usage
of medical 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. A material
security breach.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
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 remaining proceeds from our June 1999 initial
public offering.
Item 8: Financial Statements and Supplementary Data
Annual Financial Statements: See Part Four, Item 14(a)(1) of this Form 10-K.
Selected Quarterly Data: See Part Two, Item 6 of this Form 10-K.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
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PART III
Item 10: Directors and Executive Officer of the Registrant
The information regarding directors is incorporated herein by reference from the
section entitled "Election of Directors" of the Company's definitive Proxy
Statement (the "Proxy Statement") to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, for registrants' annual meeting of
Stockholders to be held on May 30, 2000. The Proxy Statement is anticipated to
be filed within 120 days after the registrant's fiscal year end of December 31,
1999.
Item 11: Executive Compensation
Information regarding executive compensation is incorporated herein by reference
from the Proxy Statement.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the Proxy Statement.
Item 13: Certain Relationships and Related Party Transactions
Information regarding certain relationships and related party transactions is
incorporated herein by reference from the Proxy Statement.
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K
(1) Financial Statements - See Index to Financial Statements and Financial
Statement Schedules on page F-1 of this Report on Form 10-K.
(2) Financial Statement Schedules - See Index to Financial Statements and
Financial Statement Schedules on page F-1 of this Report on Form 10-K.
All other schedules have been omitted because they are not applicable, not
required under the instructions, or the information requested is set forth in
the consolidated financial statements or related notes thereto.
(3) Exhibits
The exhibits filed as part of this report are listed under "Exhibits" at
subsection (C) of this Item 14
(b) Reports on Form 8-K
None
(c) Exhibits
Number Description
- ------ -----------
1.1** Form of Underwriting Agreement
3.1** Restated Certificate of Incorporation of drkoop.com, Inc., a Delaware
corporation, as currently in effect
3.2** Bylaws of drkoop.com, Inc., a Delaware corporation, as currently in
effect
3.3** Form of Bylaws of drkoop.com, Inc., a Delaware corporation, as in
effect after the closing of the offering made under this registration
statement
3.4** Form of Restated Certificate of Incorporation of drkoop.com, Inc., a
Delaware corporation, to be filed after the closing of the offering
made under this registration statement
3.5** Certificate of Amendment of Restated Certificate of Incorporation of
drkoop.com, Inc., a Delaware corporation
4.1** Specimen common stock certificate
10.1** Amended and Restated 1997 Stock Option Plan
10.2** 1999 Equity Participation Plan
10.3** Amended and Restated Registration Rights Agreement, dated as of
January 29, 1999
10.4** Employment Agreement dated January 27, 1999 by and between Company and
Susan M. Georgen-Saad
10.5** Employment Agreement dated August 1, 1997 by and between Company and
Donald W. Hackett
10.6** Employment Agreement dated August 1, 1997 by and between Company and
Robert C. Hackett, Jr.
10.7** Employment Agreement dated August 1, 1997 by and between Company and
Louis A. Scalpati
10.8** Employment Agreement dated January 15, 1999 by and between Company and
Dennis J. Upah
10.9+** Distribution Agreement dated April 9, 1999 by and between Company and
Infoseek Corporation
10.10+** Content Agreement dated March 30, 1999 by and between Company and the
Trustees of Dartmouth College
10.11+** D.A.R.T. Service Agreement dated November 15, 1998 by and between
Company and DoubleClick, Inc.
10.12+** Distribution Agreement dated April 9, 1999 by and between Company and
Buena Vista Internet Group
10.13** Software Sale, License and Development Agreement dated January 29,
1999 by and between Company and HealthMagic, Inc.
10.14+** Content License and Distribution Agreement dated March 10, 1999 by and
between Company and @Home Network
10.15** Tradename License Agreement dated January 5, 1999 by and between
Company and C. Everett Koop, M.D.
10.16** Consulting Letter Agreement dated October 1, 1997 by and between
Company and C. Everett Koop, M.D.
10.17+** License Agreement dated July 13, 1998 by and between Company and
Multum Information Services, Inc.
10.18+** Linking Agreement dated February 10, 1999 by and between Company and
Physicians' Online
10.19+** Content License Agreement dated December 11, 1998 by and between
Company and Excite, Inc. (terminated on March 1, 1999)
10.20+** Interim Linking Agreement dated January 28, 1999 by and between
Company and Quotesmith.com
10.21+** First Amendment to License Agreement dated March 25, 1999 by and
between Company and Multum Information Services, Inc.
10.22** Tradename License Agreement dated June 1, 1998 by and between Company
and Nancy Snyderman, M.D.
10.23 Reserved
10.24** Agreement for Sub-Sublease dated May 20, 1998 by and between Company
and The Software Atelier L.L.C.
10.25 Reserved
10.26+** Internet Advertising Sales Agreement dated October 16, 1998 by and
between Company and WinStar Interactive Media Sales, Inc.
10.27** Consulting Letter Agreement dated October 1, 1997 by and between
Company and John Zaccaro
10.28+** Sponsorship Agreement dated March 11, 1999 by and between Company and
Vitamin Shoppe Industries, Inc.
10.29+** Preferred Partner Agreement dated April 1999 by and between Company
and Salon Internet, Inc.
10.30** Master Community Partner Program Agreement dated January 29, 1999 by
and between Company and Adventist Health System Sunbelt Healthcare
Corporation
10.31 Reserved
10.32** Form of Community Partner Program Agreement
10.33** Form of Indemnification Agreement
10.34** 1999 Employee Stock Purchase Plan
10.35** Investment Agreement dated January 29, 1999 by and among Company,
Adventist Health System Sunbelt Healthcare Corporation and
HealthMagic, Inc.
10.36** Letter Agreement dated February 25, 1999 by and among Company,
Superior Consultant Holdings Corporation and Donald W. Hackett
10.37** Letter Agreement dated January 29, 1999 by and among Company, Superior
Consultant Holdings Corporation, Adventist Health System Sunbelt
Healthcare Corporation, HealthMagic, Inc. and Donald W. Hackett
10.38** Stock Restriction Agreement dated January 29, 1999 by and among
Company, HealthMagic, Inc. and Adventist Health System Sunbelt
Healthcare Corporation
10.39** Loan Agreement dated December 24, 1998 between Company and Neal
Longwill
10.40** Form of Loan Agreement between Company and accredited investors
10.41** Loan Agreement dated March 3, 1999 between Company and Adventist
Health System Sunbelt Healthcare Corporation
10.42** Warrant to Purchase Shares of Common Stock Issued to Infoseek
Corporation as of April 9, 1999
10.43** Agreement for Issuance and Sale of Stock between Company and Superior
Consultant Holdings Corporation dated April 28, 1998
10.44** Letter of Donald W. Hackett dated April 28, 1998 constituting a Voting
Agreement between Donald W. Hackett and Superior Consultant Holdings
Corporation
10.45** Option and Put Agreement dated April 28, 1998 between Company and
Superior Consultant Holdings Corporation
10.46** Service Agreement dated April 29, 1998 between Company and Superior
Consultant, Inc., a wholly owned subsidiary of Superior Consultant
Holdings Corporation
10.47** Warrant to Purchase Shares of Common Stock Issued to Buena Vista
Interactive Group as of April 9, 1999
10.48*** Netscape Agreement
10.49**** Amended Name & Likeness Agreement by and between Company and C.
Everett Koop, M.D.
10.50+****Interactive Services Agreement by and between Company and America
Online, Inc.
10.51+****Development and Services Agreement by and between Company and America
Online, Inc.
10.52**** Registration Rights Agreement by and between Company and America
Online, Inc.
10.53**** Warrant to Purchase 1,570,932 shares of Common Stock Issued to America
Online dated July 1, 1999.
10.54+****Performance Warrant to Purchase 1,570,932 shares of Common Stock
Issued to America Online dated July 1, 1999.
10.55+****Performance Warrant to Purchase 2,749,131 shares of Common Stock
Issued to America Online dated July 1, 1999.
10.56**** Lease Agreement by and between Company and Plaza 7000, Ltd.
23.1 Consent of Independent Accountants
23.2** Consent of Latham & Watkins (included in Exhibit 5.1)
24.1** Powers of Attorney
27.1 Financial Data Schedule
** Incorporated by reference from the Registrants Form S-1 (333-73459).
*** Incorporated by reference from the Registrants quarterly report on
Form 10-Q for the quarter and six months ended June 30, 1999, filed
August 13, 1999.
**** Incorporated by reference from the Registrants quarterly report on
Form 10-Q for the quarter and nine months ended September 30, 1999, filed
November 15, 1999.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit
with the Commission.
(b) Financial Statement Schedules.
36
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
/s/ DONALD HACKETT
By:_________________________
Donald Hackett
President and Chief Executive Officer
March 30, 2000
Date:_________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ DONALD W. HACKETT President, Chief Executive March 30, 2000
____________________________ Officer and Director
Donald W. Hackett (Principal Executive Officer)
/s/ SUSAN M. GEORGEN-SAAD Chief Financial Officer March 30, 2000
____________________________ (Principal Financial and
Susan M. Georgen-Saad Accounting Officer)
/s/ C. EVERETT KOOP
____________________________ Chairman of the Board March 30, 2000
C. Everett Koop, M.D.
/s/ JOHN F. ZACCARO
____________________________ Vice Chairman of the Board March 30, 2000
John F. Zaccaro
____________________________ Director March __, 2000
Mardian J. Blair
____________________________ Director March __, 2000
Richard D. Helppie, Jr.
____________________________ Director March __, 2000
Nancy L. Snyderman, M.D.
/s/ JEFFREY C. BALLOWE
____________________________ Director March 30, 2000
Jeffrey C. Ballowe
/s/ G. CARL EVERETT, JR.
____________________________ Director March 30, 2000
G. Carl Everett, Jr.
37
<PAGE>
drkoop.com, Inc.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants....................................................................... F-2
Balance Sheets at December 31, 1999 and 1998............................................................ F-3
Statements of Operations for the years ended December 31, 1999 and 1998, and for the period
from Inception (July 17, 1997) to December 31, 1997.................................................. F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1999 and 1998, and for the period from Inception (July 17, 1997) to
December 31, 1997.................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1999 and 1998, and for
the period from Inception (July 17, 1997) to December 31, 1997..................................... F-6
Notes to Financial Statements........................................................................... F-7
Report of Independent Accountants on Financial Statement Schedule....................................... S-1
Schedule II - Valuation and Qualifying Accounts......................................................... S-2
</TABLE>
F-1
<PAGE>
To the Board of Directors
and Stockholders of drkoop.com, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of drkoop.com, Inc.
(the "Company") at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999 and the period from Inception (July 17, 1997) to December
31, 1997, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained losses and negative cash flows
from operations since its inception. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Austin, Texas
February 15, 2000
F-2
<PAGE>
drkoop.com, Inc.
Balance Sheets
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------------
Assets 1999 1998
Current assets: ---- ----
<S> <C> <C>
Cash and cash equivalents $35,706 $ -
Trade accounts receivable, net of allowance for doubtful accounts
of $79 and $0 at December 31, 1999 and 1998, respectively 6,532 41
Other receivable (Note 7) 4,000 -
Prepaid and other assets 22,862 22
------- ---------
Total current assets 69,100 63
------- ---------
Property and equipment, net 10,435 306
Investment in affiliate 5,000 -
Intangible asset, net 2,778 -
Other assets 12,407 11
------- ---------
Total assets $99,720 $ 380
======= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable $ 8,197 $ 804
Accrued liabilities 8,711 520
Leases payable 473 -
Related party payables 2 1,193
Deferred credit (Note 7) 2,000 -
Deferred revenue 3,415 -
Convertible note payable to stockholder, net of discount of $49 at December 31, 1998 - 451
------- ---------
Total current liabilities 22,798 2,968
------- ---------
Leases payable, less current portion 605 -
Deferred credit 5,000 -
------- ---------
Total liabilities 28,403 2,968
------- ---------
Commitments and contingencies (Note 8)
Mandatorily redeemable convertible (Series B) preferred stock;
liquidation preference of $2,998 at December 31, 1998 - 18,406
Stockholders' equity (deficit):
Convertible preferred stock, par value $.001; 15,000,000 shares authorized;
Series A 750,000 shares designated; -0- and 619,102 shares issued
and outstanding at December 31, 1999 and 1998 - 1
Common stock, par value $.001; 75,000,000 and 15,000,000 shares authorized
at December 31, 1999 and 1998; 30,508,324 and 8,550,360 shares issued
and outstanding at December 31, 1999 and 1998 30 8
Additional paid-in capital 149,447 -
Deferred stock compensation (2,447) (1,425)
Accumulated deficit (75,713) (19,578)
------- ---------
Total stockholders' equity (deficit) 71,317 (20,994)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 99,720 $ 380
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
drkoop.com, Inc.
Statements of Operations
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
Inception
(July 17, 1997) to
Years Ended December 31, December 31,
------------------------ -------------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Revenues:
Content subscription and software license $ 1,700 $ 27 $ -
Advertising and sponsorship 7,671 15 -
Other 60 1 -
---------- ----------- --------
9,431 43 -
---------- ----------- --------
Operating expenses:
Production, content and product development 9,361 4,448 461
Sales and marketing 45,563 2,008 -
General and administrative 9,500 2,597 161
Amortization of deferred stock compensation 2,486 107 -
---------- ----------- --------
Total operating expenses 66,910 9,160 622
---------- ----------- --------
Loss from operations (57,479) (9,117) (622)
Interest income 1,344 34 -
---------- ----------- --------
Net loss (56,135) (9,083) (622)
Accretion of redeemable securitites to fair value (17,255) (14,325) -
Dividend to preferred stockholders (9,147) - -
---------- ----------- --------
Loss attributable to common stockholders $ (82,537) $ (23,408) $ (622)
========== =========== ========
Basic and diluted net loss per share attributable to
common stockholders $ (3.97) $ (2.86) $ (0.09)
========== =========== ========
Basic and diluted weighted average shares used in computing
net loss per share attributable to common stockholders 20,814 8,175 6,750
========== =========== ========
Pro forma basic and diluted net loss per share $ (2.27) $ (0.75)
========== ===========
Pro forma basic and diluted weighted-average shares used
in computing net loss per share 24,690 12,113
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
drkoop.com, Inc.
Statements of Changes in Stockholders' Equity (Deficit)
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at Inception (July 17, 1997) - $ - - $ -
Issuance of common stock in July 1997 to founders for
cash and other consideration - - 6,750 7
Net loss incurred during development stage - - - -
------ ------ ------ ------
Balance at December 31, 1997 - - 6,750 7
Issuance of Series A preferred stock for cash 526 1 - -
Issuance of Series A preferred stock for services 93 - - -
Issuance of options to Series B stockholders - - - -
Issuance of common stock upon conversion of
stockholder note payable - - 1,800 1
Payment received on amounts receivable from
common stockholders - - - -
Deferred stock compensation - - - -
Amortization of deferred stock compensation - - - -
Issuance of warrant to convertible note holder - - - -
Accretion of redeemable securities to fair value - - - -
Net loss incurred during development stage - - - -
------ ------ ------ ------
Balance at December 31, 1998 619 1 8,550 8
Issuance of Series C preferred stock for cash and
investment 2,616 3 - -
Conversion of preferred stock to common stock (3,235) (4) 7,250 7
Issuance of warrants - - - -
Issuance of stock options for services - - - -
Issuance of stock under option and anti-dilution agreements - - 1,345 1
Conversion of notes payable into common stock - - 917 1
Issuance of common stock IPO, net of issuance costs of $1.7 million - - 10,781 11
Exercise of stock options - - 1,665 2
Deferred stock compensation - - - -
Amortization of deferred stock compensation - - - -
Dividend payable to preferred stockholder - - - -
Accretion of redeemable securities to fair value - - - -
Net loss - - - -
------ ------ ------ ------
Balance at December 31, 1999 - $ - 30,508 $ 30
====== ====== ====== ======
<CAPTION>
Additional Deferred
Paid-in Stock
Capital Compensation
----------- ------------
<S> <C> <C>
Balance at Inception (July 17, 1997) $ - $ -
Issuance of common stock in July 1997 to founders for
cash and other consideration 2 -
Net loss incurred during development stage - -
----------- ------------
Balance at December 31, 1997 2 -
Issuance of Series A preferred stock for cash 624 -
Issuance of Series A preferred stock for services 112 -
Issuance of options to Series B stockholders 1,918 -
Issuance of common stock upon conversion of
stockholder note payable 215 -
Payment received on amounts receivable from
common stockholders - -
Deferred stock compensation 1,532 (1,532)
Amortization of deferred stock compensation - 107
Issuance of warrant to convertible note holder 49 -
Accretion of redeemable securities to fair value (4,452) -
Net loss incurred during development stage - -
----------- ------------
Balance at December 31, 1998 - (1,425)
Issuance of Series C preferred stock for cash and
investment 12,497 -
Conversion of preferred stock to common stock 35,657 -
Issuance of warrants 18,269 -
Issuance of stock options for services 1,664 -
Issuance of stock under option and anti-dilution agreements 9,146 -
Conversion of notes payable into common stock 6,290 -
Issuance of common stock IPO, net of issuance costs of $1.7 million 88,475 -
Exercise of stock options 343 -
Deferred stock compensation 3,508 (3,508)
Amortization of deferred stock compensation - 2,486
Dividend payable to preferred stockholder (9,147) -
Accretion of redeemable securities to fair value (17,255) -
Net loss - -
----------- ------------
Balance at December 31, 1999 $ 149,447 $ (2,447)
=========== ============
<CAPTION>
Amounts
Receivable
from Common Accumulated
Stockholders Deficit Total
------------ ------------ -----
<S> <C> <C> <C>
Balance at Inception (July 17, 1997) $ - $ - $ -
Issuance of common stock in July 1997 to founders for
cash and other consideration (1) - 8
Net loss incurred during development stage - (622) (622)
--------- --------- -------
Balance at December 31, 1997 (1) (622) (614)
Issuance of Series A preferred stock for cash - - 625
Issuance of Series A preferred stock for services - - 112
Issuance of options to Series B stockholders - - 1,918
Issuance of common stock upon conversion of
stockholder note payable - - 216
Payment received on amounts receivable from
common stockholders 1 - 1
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 107
Issuance of warrant to convertible note holder - - 49
Accretion of redeemable securities to fair value - (9,873) (14,325)
Net loss incurred during development stage - (9,083) (9,083)
--------- --------- -------
Balance at December 31, 1998 - (19,578) (20,994)
Issuance of Series C preferred stock for cash and
investment - - 12,500
Conversion of preferred stock to common stock - - 35,660
Issuance of warrants - - 18,269
Issuance of stock options for services - - 1,664
Issuance of stock under option and anti-dilution agreements - - 9,147
Conversion of notes payable into common stock - - 6,291
Issuance of common stock IPO, net of issuance costs of $1.7 million - - 88,486
Exercise of stock options - - 345
Deferred stock compensation - - -
Amortization of deferred stock compensation - - 2,486
Dividend payable to preferred stockholder - - (9,147)
Accretion of redeemable securities to fair value - - (17,255)
Net loss - (56,135) (56,135)
--------- -------- -------
Balance at December 31, 1999 $ - $ (75,713) $ 71,317
========= ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
drkoop.com, Inc.
Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Period from
Inception
Years Ended December 31, (July 17, 1997) to
------------------------------- December 31,
1999 1998 1997
-------------- ------------- ------------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (56,135) $ (9,083) $ (622)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,200 64 7
Amortization of deferred stock compensation 2,486 107 -
Provision for doubtful accounts 79 - -
Interest accretion on convertible notes payable 95 - -
Stock issued for services 277 112 2
Changes in operating assets and liabilities:
Accounts receivable (6,570) (45) -
Other receivable (4,000) - -
Prepaids and other assets (18,108) (29) -
Accounts payable 7,393 746 58
Accrued liabilities 7,385 458 62
Related party payables (1,191) 872 537
Deferred revenue 3,415 - -
Deferred credit 7,000 - -
-------------- ------------- ------------------
Cash provided by (used in) operating activities (52,674) (6,798) 44
-------------- ------------- ------------------
Investing Activities:
Purchase of property and equipment (9,726) (335) (42)
-------------- ------------- ------------------
Cash used in investing activities (9,726) (335) (42)
-------------- ------------- ------------------
Financing Activities:
Proceeds from issuance of preferred stock 3,500 6,625 -
Proceeds from issuance of convertible notes payable 5,775 500 -
Proceeds from exercise of stock options 345 - -
Repayment of stockholder payable - 1 -
Proceeds from issuance of common stock, net 88,486 - 5
-------------- ------------- ------------------
Cash provided by financing activities 98,106 7,126 5
-------------- ------------- ------------------
Increase (decrease) in cash and cash equivalents 35,706 (7) 7
Cash and cash equivalents at beginning of period - 7 -
-------------- ------------- ------------------
Cash and cash equivalents at end of period $ 35,706 $ - $ 7
============== ============= ==================
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-6
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements
1. Organization and Basis of Presentation
drkoop.com, Inc. (the "Company"), a Delaware corporation, operates an Internet-
based consumer healthcare network, consisting of an interactive Web site
providing consumers with healthcare information and services, as well as
affiliate relationships with portals, other Web sites, local healthcare
organizations and traditional media outlets.
The Company has sustained losses and negative cash flows from operations since
its inception. The Company's ability to meet its obligations in the ordinary
course of business is dependent upon its ability to raise additional financing
through public or private equity financings, establish profitable operations,
enter into collaborative or other arrangements with corporate sources, or secure
other sources of financing to fund operations. During 1998, the Company
received cash and services of approximately $6.7 million through the issuance of
preferred stock. In January 1999, the Company received approximately $4.3
million through transactions which included the issuance of preferred stock,
convertible debt and warrants. Additionally, in March 1999 the Company received
loan commitments of $5.5 million from a preferred stockholder and new investors.
The loan commitments were fully drawn down and the cash was used principally to
finance working capital requirements prior to its initial public offering.
Effective June 11, 1999 the Company completed an initial public offering of
10,781,250 shares, including the underwriter's over allotment, at $9 per share.
Offering proceeds, net of aggregate expenses to the Company (including
underwriters' discount) totaled approximately $88.5 million. Upon closing of the
initial public offering, each outstanding share of the Company's convertible
Series A and C preferred stock and mandatorily redeemable convertible (Series B)
preferred stock were automatically converted into shares of common stock. The
conversion resulted in the issuance of 8,594,835 shares of common stock,
including the issuance of 1,345,185 shares of common stock to satisfy in full a
purchase option and related anti-dilution adjustment rights. An additional
916,908 shares of common stock was issued upon conversion of certain convertible
notes payable.
Management intends to raise working capital through additional equity and/or
debt financings in the upcoming year. However, there can be no assurance that
such financings can be successfully completed on terms acceptable to the
Company. The matters discussed above raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The Company has a limited operating history and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in the new
and rapidly evolving markets for Internet products and services. These risks
include the failure to develop and extend the Company's on-line service brands,
the rejection of the Company's services by Internet consumers, vendors and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its on-line services, as well as other risks and uncertainties. In
the event that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
2. Summary of Significant Accounting Policies
Cash Equivalents
Highly liquid investments with original maturities of three months or less are
considered to be cash equivalents.
F-7
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three to seven years. Upon disposal, the Company removes the asset and the
accumulated depreciation from its records and recognizes the related gain or
loss in the results of operations. Capital leases are recorded at the lower of
the fair market value of the asset or the present value of the future minimum
lease payments. The related assets are depreciated on the straight line basis
over the term of the lease.
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
contracts in which the Company typically guarantees a minimum number of
impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Advertising revenues are recognized at the lesser of (i) the
ratio of impressions delivered over the total guaranteed impressions or (ii) the
straight-line rate over the term of the contract, provided that no significant
obligations remain and collection of the resulting receivable is probable.
Company obligations typically include the guarantee of a minimum number of
impressions or times that an advertisement appears in pages viewed by the users
of the Company's website.
The Company has entered into revenue sharing arrangements whereby it is entitled
to revenue sharing for advertising revenue derived from advertisements delivered
on partner sites which display the Company's content. The Company recognizes
advertising revenue under revenue sharing arrangements as the related
impressions or pages are delivered, based on information obtained from our
partner, provided that no significant obligations remain and collection of the
resulting receivable is probable. Advertising revenues earned under these
revenue sharing arrangements from partner websites are recorded net of
commissions as the commissions are not contractual obligations of the Company.
Revenues derived from advertising arrangements where the Company contracts
directly with the advertiser are recorded at the gross contract amount and
commissions paid to obtain these advertisements are recorded as selling expense.
Sponsorship revenues are derived principally from contracts ranging from three
to fifty months in which we commit to provide sponsors enhanced promotional
opportunities that go beyond traditional banner advertising. Sponsorships are
designed to support broad marketing objectives, including branding, awareness,
product introductions, research and transactions, frequently on an exclusive
basis. Sponsorship agreements typically include the delivery of a guaranteed
minimum number of impressions and the design and development of customized pages
on the web-site that enhance the promotional objectives of the sponsor. Costs
associated with the creation of the customized pages are minimal and expensed as
incurred. Sponsorship revenues are recognized at the lesser of the ratio of
impressions delivered over the total guaranteed impressions or the straight line
rate over the term of the contract, provided that no significant obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of impressions
or times that an advertisement appears in pages viewed by the users of our web-
site. 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 Web site 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 license revenues are derived from contracts
under the Dr. Koop Community Partner Program with local affiliates such as
healthcare providers and third party payor organizations. Sales of software
licenses to Community Partner Program affiliates are recognized as revenue upon
shipment of the software, provided that the portion of the contract allocated to
the software license is based upon vendor specific objective evidence of fair
value, and collectibility is probable. Content subscription revenue is
recognized ratably over the term of the Community Partner Program contract,
generally ranging from twelve to thirty-six months. Software licenses are also
sold as a stand-alone product independent of the Community Partnership Program.
F-8
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
The Company reports revenue from the sale of software licenses for various
interactive tools. Revenue from software licenses is recognized upon product
shipment and acceptance by the customer, as the Company has fulfilled all
obligations related to the license.
Revenues from barter transactions are recorded at the estimated fair value of
the advertisements, goods or services received or the estimated fair value of
the advertisements given, whichever is a more clearly evident measure of fair
value of the transaction. Revenue from barter transactions is recognized as
income when advertisements are delivered on the Company's websites. Barter
expense equal to the revenue recognized, is reported when the Company's
advertisements are run on other companies' websites, which is typically in the
same period when the related barter revenue is recognized. For the years ended
December 31, 1999 and 1998, barter transactions represented 6% and 0% of total
revenues from continuing operations, respectively.
Transactional revenues are derived primarily from sales of pharmacy and
insurance products. The Company earns transaction fees and recognizes revenue at
the time the related referred sale occurs.
Production, Content and Product Development Expense
Production, content and product development expenses consist primarily of
salaries and benefits, consulting fees and other costs related to content
acquisition and licensing, software development, application development and
website operations. These costs are equivalent to cost of revenue and are
expensed as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" issued by the
Financial Accounting Standards Board requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
To date, costs incurred following the establishment of technological
feasibility, but prior to general release, have been insignificant.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 31, 1999 and 1998 and the period from inception to December 31,
1997 were $17,600,000, $1,140,000 and $0 respectively.
Fair Value of Financial Instruments
Cash equivalents, accounts receivable, prepaid expense, accounts payable,
accrued expenses and deferred revenue are reported at cost which approximates
fair value due to the short-term maturity of these instruments.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, trade accounts receivable
and other receivables. The Company's cash and cash equivalents are maintained in
federally insured financial institutions and quality financial institutions and
issuers. The Company has not experienced any losses on these accounts to date.
Concentrations of credit risk related to accounts receivables are limited
because of the Company's expanding customer base and the credit worthiness of
its major customers making up the majority of the accounts receivable balance.
Long-Lived Assets
The Company's long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these
F-9
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
events occur, the Company measures impairment by comparing the carrying value of
the long-lived asset to the estimated discounted future cash flows expected to
result from use of the assets and their eventual disposition. If the sum of the
expected discounted future cash flows is less than the carrying amount of the
assets, the Company would recognize an impairment loss. The Company determined
that, as of December 31, 1999, there had been no impairment in the carrying
value of its long-lived assets.
Deferred Charges
Deferred charges consist of prepaid fees and warrant expense associated with the
Company's portal agreements (Note 8). The charges are being amortized into sales
and marketing expense over the term of the agreements.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
SFAS No. 123, the Company accounts for its employee stock-based compensation in
accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees."
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized and
measured using enacted tax rates in effect for the year in which the differences
are expected to be realized. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized. The
primary sources of temporary differences are depreciation of equipment,
furniture and fixtures.
Investment in Affiliate
Investments in affiliated entities, for which the Company does not have the
ability to exercise significant influence, are accounted for under the cost
method of accounting. The Company periodically evaluates its investments
accounted for under the cost method of accounting for impairment and as of
December 31, 1999 such investments were recorded at the lower of cost or
estimated net realizable value.
Earnings (Loss) Per Share
In accordance with SFAS No. 128, basic net loss per common share has been
computed using the weighted-average number of shares of common stock outstanding
during the period. Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
computed using the weighted-average number of common and common stock equivalent
shares outstanding during the period. Common equivalent shares are excluded from
the computation if their effect is antidilutive. Because the Company has
incurred net losses since inception, the effect of all common stock equivalent
shares (20,814,101 common equivalent shares as of December 31, 1999) are anti-
dilutive; therefore basic and diluted loss per share are equivalent.
As a result of the Company's initial public offering in June 1999, all
convertible and convertible redeemable preferred stock and convertible notes
payable converted into common stock. Additional shares were issued subsequent
to December 31, 1998 to satisfy in full a purchase option and anti-dilutuon
right held by a stockholder from the date of issuance. Accordingly, the Company
has presented 1999 and 1998 pro forma loss per share based on the weighted
average number of shares of common stock outstanding and preferred stock on an
"as if" converted basis outstanding during each period. The Company believes
that this is a more meaningful presentation of earnings per share for periods
prior to its initial public offering.
The numerator in the pro forma net loss per share calculation is equivalent to
net loss. The denominator in the pro forma net loss per share calculation is
comprised of the following weighted average shares (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Weighted average number of common shares outstanding............. 20,814 8,175
Effect of convertible securities:
Convertible preferred stock...................................... 3,010 3,120
Common stock issued to satisfy purchase option and anti-dilution
right held by stockholders..................................... 596 816
Convertible notes payable and interest payable................... 270 2
------ ------
Shares used in pro forma calculations........................ 24,690 12,113
====== ======
</TABLE>
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. The
Company currently reports no components of other comprehensive income (loss) for
the periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the financial statements and accompanying notes. Actual results could
differ from the estimates.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements".
In SAB 101, the SEC staff expresses it views regarding the appropriate
recognition of revenue with regard to a variety of circumstances, some of which
are of particular relevance to the Company. The adoption of SAB 101 is not
expected to have a material impact on the Company's financial statements.
3. Prepaid and Other Assets
Prepaid and other assets are comprised of the following (in thousands):
F-10
<PAGE>
<TABLE> drkoop.com, Inc.
Notes to the Financial Statements (Continued)
<CAPTION>
December 31,
----------------
1999 1998
------- ------
<S> <C> <C>
Prepaid portal expense.............................. $16,088 $ -
Prepaid warrant expense............................. 5,578 -
Prepaid content expense............................. 436 18
Employee receivables................................ 230 --
Other............................................... 530 4
------- -------
Total............................................... $22,862 $ 22
======= =======
</TABLE>
4. Other Assets
Other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Prepaid warrant expense, non-current................ $11,773 $ -
Deposits............................................ 384 11
Pledged certificate of deposit...................... 250 -
------- -------
Total............................................... $12,407 $ 11
======= =======
</TABLE>
The pledged certificate of deposit represents the security deposit for the lease
of the Company's facilities. The certificate of deposit is held by a third
party and is restricted as to use until expiration of the respective lease
agreement.
5. Property and Equipment, Net
Property and equipment are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- ------
<S> <C> <C>
Computer equipment.................................... $ 3,046 $ 318
Software.............................................. 6,391 7
Furniture and fixtures................................ 1,366 40
Leasehold improvements................................ 1,182 12
------- -----
11,985 377
Accumulated depreciation.............................. (1,550) (71)
------- -----
$10,435 $ 306
======= =====
</TABLE>
Depreciation expense of $1,479,000, $64,000 and $7,000 for the years ended
December 31, 1999 and 1998, and the period from Inception (July 17, 1997) to
December 31, 1997, respectively, is included in the statements of operations.
6. Accrued Expenses
Accrued liabilities are comprised of the following (in thousands):
F-11
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ -----
<S> <C> <C>
Marketing and promotion.................................. $2,626 $ -
Legal expenses........................................... 2,545 -
Accrued content and services expense..................... 1,279 6
Employee compensation.................................... 1,032 420
Other.................................................... 1,229 94
------ -----
Total.................................................... $8,711 $ 520
====== =====
</TABLE>
7. Deferred Credit
On July 1, 1999, the Company entered into a software licensing and distribution
agreement with America Online, Inc. ("AOL"). The agreement requires the
delivery of software and other services over the four year term of the agreement
for total fees to be paid to the Company of $8,000,000, of which $4,000,000 was
received as of to December 31, 1999. Payment terms of the agreement required
AOL to remit one half of the payment on contract execution, and the remaining
balance on or before January 1, 2000. The Company is amortizing the credit
resulting from this transaction as a reduction of the sales and marketing
expense related to the Interactive Services Agreement ("ISA") with AOL (Note 8)
over the term of the contract and had amortized $1,000,000 as of December 31,
1999.
8. Commitments and Contingencies
Leases
The Company leases office space and certain equipment. With the exception of
the office space lease, which contains an acceleration clause, all leases are
classified as capital leases. No leases contain restrictions on the Company's
activities concerning dividends, additional debt or further leasing.
Assets under capital leases, which are included in property and equipment, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Computer equipment.............................. $ 891 $ -
Leasehold improvements.......................... 300 -
------ -------
1,191 -
------ -------
Accumulated depreciation........................ (120) -
------ -------
Net assets under capital lease.................. $1,071 $ -
====== =======
</TABLE>
Future minimum lease payments at December 31, 1999, by year and in aggregate for
capital leases and other operating leases having non-cancelable lease terms in
excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
2000............................................... $ 590 $ 736
2001............................................... 384 757
2002............................................... 179 777
2003............................................... 44 797
2004............................................... - 818
Thereafter......................................... - 1,478
------ ------
Total minimum lease payments......................... 1,197 $5,363
Amount representing interest......................... (119)
------
Present value of minimum lease payments.............. $1,078
======
</TABLE>
F-12
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
Rental expense for the years ended December 31, 1999, 1998 and the period from
Inception (July 17, 1997) to December 31, 1997 was $591,000, $131,000 and
$12,000, respectively.
Portal Agreements
GO.com and Buena Vista
On April 9, 1999, the Company entered into agreements with GO.com and the Buena
Vista Internet Group, a unit of The Walt Disney Company, under which the Company
will be the exclusive provider of health and related content on three Web sites
of the Go Network: GO.com Health Center, ESPN.com Training Room and the
Family.com Health Channel. Under the GO.com agreement, the Company will be also
the premier health content provider for ABCnews.com.
In addition, the Company will be the exclusive pharmacy and drugstore, health
insurance and clinical trials partner in the GO.com Health Center. Under these
agreements, users on the Go Network will be able to access various health
information, services, interactive tools and commerce opportunities through a
co-branded Web site served by the Company.
In the event the Company elects not to provide specific content, GO.com and
Buena Vista Internet Group may obtain content from a third party.
The term of both agreements is for three years, however, each of the parties may
elect to terminate the relationship after two years. The Company will pay GO.com
and the Buena Vista Internet Group $57,900,000 in total consideration consisting
of cash and warrants to purchase 775,000 shares of common stock at an exercise
price of $8.60 per share over the full three year term. The cash portion of this
obligation is payable as approximately $16,200,000 in the first year of the
agreements, $18,200,000 in the second year of the agreements and $21,300,000 in
the third year. None of the warrants are exercisable prior to one year after
issuance. The Company recognized total expense of $7,200,000 for the year ended
December 31, 1999.
The warrants have been recorded at a fair value of $2.89 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; 0.5
volatility; risk-free interest rate of 5.0% and a legal life of 3 years. The
Company is recognizing the costs associated with the warrants ratably over the
term of the 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
obligates the Company to make carriage payments aggregating $89,000,000 in cash.
In addition, the Company provided AOL immediately vested warrants (the "time
warrants") to purchase drkoop.com, Inc. common stock and the right to earn
additional warrants based on performance (the "performance warrants"). As of
December 31, 1999, the outstanding commitment under this agreement was
$65,000,000.
The immediately vested time warrants allow AOL to purchase 1,570,932 shares of
the Company's common stock for a purchase price of $15.94 per share (the opening
price on July 1, 1999). The immediately vested warrants may be exercised at any
time on or after June 30, 2000 and on or prior to June 30, 2008, subject to
limited exceptions relating to a change in control of drkoop.com or the early
termination of the ISA between AOL and drkoop.com. The immediately vested
warrants have been recorded at a fair value of $10.49 per share which was
calculated at the time of issuance using the Black-Scholes option-pricing
F-13
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
model with the following weighted average assumptions: zero dividend yield; 0.50
volatility; risk-free interest rate of 5.7% and a legal life of 9 years. The
Company is recognizing the costs associated with the ISA and the immediately
vested time warrants ratably over the term of ISA. The Company recognized total
carriage and warrant expense of $12,125,000 for the year ended December 31,
1999.
As noted above, the Company provided AOL the ability to earn additional
performance warrants, as follows:
. Warrants to purchase up to 1,570,932 shares of the Company's common stock for
a purchase price of $20.00 per share. These warrants will not become
exercisable unless the AOL relationship delivers to drkoop.com, during the
four years of the ISA, traffic objectives, measured in page views, at or
above agreed upon levels. Accordingly, one-fourth of these warrants (i.e.,
392,733 warrants) could become vested in each of the next four years if those
performance objectives are met. Any warrants that become vested will be
exercisable at any time on or prior to June 30, 2008.
. Warrants to purchase up to an additional 2,749,131 shares of the Company's
common stock will not become exercisable unless the AOL relationship delivers
specified usage of a new interactive software tool to be developed by
drkoop.com and jointly deployed by drkoop.com and AOL. The warrant specifies
four performance hurdles, measured by usage of the new tool, which if
accomplished will result in 392,733, 392,733, 785,466 and 1,178,199 warrants
becoming vested and exercisable. The exercise price of these warrants will be
established at the time they become vested and will be calculated as 80%,
75%, 70% and 65% of fair market value at such time. Any warrants that become
vested will be exercisable at any time on or prior to June 30, 2008.
The Company has currently not recorded any costs associated with the performance
warrants. All of the warrants include customary ancillary provisions, including
anti-dilution adjustments for stock splits, stock dividends and similar
structural changes. None of the warrants may be transferred prior to December
8, 1999, or if the related warrants have not vested. A change in control
transaction involving drkoop.com could result in an acceleration of the vesting
of these warrants.
The parties also entered into a registration rights agreement which could
require that drkoop.com register any shares of common stock issued to AOL upon
exercise of any warrant for resale under the Securities Act of 1933, although
these rights are subordinated to the rights previously granted in the Amended
and Restated Registration Rights Agreement dated January 29, 1999.
Legal Matters
On April 12, 1999, a civil complaint was filed against the Company in the
District Court of Travis County, Texas, 126 Judicial District, Case No.
99-04294. In the lawsuit, plaintiff attempts to allege causes of action
including fraud, constructive fraud, promissory estoppel, negligence
misrepresentation, breach of contract, conversion, stock fraud, defamation and
misrepresentation. The suit was settled in February 2000.
In January 1999, we entered into a strategic technology relationship with
HealthMagic, Inc. which included a long-term fully paid license to use a broad
range of Internet technologies, such as a web-based personal medical record,
personalization tools, and security and authentication features. Under this
arrangement, HealthMagic was to develop, implement, and support these
technologies for us, thereby permitting internal resources to address other
needs. However, the relationship never produced satisfactory results and
drkoop.com is currently involved in settlement discussions with HealthMagic,
Inc. ("HealthMagic") regarding possible legal claims that HealthMagic and
drkoop.com have against each other arising out of a Software Sale, License and
Development Agreement executed by drkoop.com and HealthMagic on January 20,
1999. As of the date of this filing, neither HealthMagic nor drkoop.com have
filed complaints regarding this matter. In the opinion of management, the
ultimate disposition of this matter will not have a material adverse effect on
the consolidated financial position or liquidity of drkoop.com
In January 1999, we entered into a strategic technology relationship with
HealthMagic, Inc. which included a long-term fully paid license to use a broad
range of Internet technologies, such as a web-based personal medical record,
personalization tools, and security and authentication features. Under this
arrangement, HealthMagic was to develop, implement, and support these
technologies for us, thereby permitting internal resources to address other
needs. However, the relationship never produced satisfactory results and
drkoop.com is currently involved in settlement discussions with HealthMagic,
Inc. ("HealthMagic") regarding possible legal claims that HealthMagic and
drkoop.com have against each other arising out of a Software Sale, License and
Development Agreement executed by drkoop.com and HealthMagic on January 20,
1999. As of the date of this filing, neither HealthMagic nor drkoop.com have
filed complaints regarding this matter. In the opinion of management, the
ultimate disposition of this matter will not have a material adverse effect on
the consolidated financial position or liquidity of drkoop.com.
We are also involved in other claims and disputes which are incidential to the
regular conduct of our business and are not presently believed to be material.
F-14
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
9. Convertible Notes Payable to Stockholders
On December 24, 1998, the Company issued a convertible note payable to a
stockholder in the amount of $800,000, of which $500,000 was received at closing
and $300,000 was received on January 11, 1999. The note, which was payable
December 24, 1999, bore interest at 6% and was subordinated to senior
indebtedness of the Company, if any. The principal and accrued interest of the
note was converted, at the option of the holder, into 171,966 shares of common
stock upon the closing of the Company's initial public offering.
In connection with the convertible note payable, the Company issued stock
purchase warrants to acquire the number of Series C preferred stock shares
equating to twenty percent of the face amount of the note divided by the
exercise price. At December 31, 1998, warrants to acquire 20,927 shares of a
total of 33,482 shares were deemed outstanding based upon the cash received as
of that date. Warrants for the remaining 12,555 shares were deemed outstanding
upon funding of the remaining $300,000 in January 1999. The exercise price is
$4.78 per share, subject to anti-dilution provisions, and is equivalent to the
share price for the sale of Series C preferred stock completed subsequent to
December 31, 1998.
On March 3, 1999, the Company issued a convertible note payable to a stockholder
in the amount of $2,000,000, the proceeds of which were received on March 30,
1999. The note, which was payable March 5, 2000, bore interest at 7%, and was
subordinated to all senior indebtedness of the Company, if any. The principal
and accrued interest of the note was converted, at the option of the holder,
into 273,072 shares of common stock at the closing of the Company's initial
public offering.
On March 5, 1999, the Company entered into loan agreements with new investors,
whereby those investors were irrevocably obligated to loan the Company up to
$3,500,000 at an interest rate of 7% per annum. The Company exercised the loan
obligations in April and May 1999, receiving $3,500,000 in proceeds. Upon the
closing of the Company's initial public offering, borrowings under these
agreements plus accrued interest were converted into 471,870 shares of common
stock at a conversion price of $7.43 per share.
10. Income Taxes
The Company did not incur any income taxes for the years ended December 31,
1999, 1998 and for the period from Inception (July 17,1997) to December 31, 1997
as a result of operating loss.
As of December 31, 1999 and 1998, the Company had federal net operating loss
carryforwards of approximately $62,956,000 and $9,189,000, respectively. These
net operating loss and tax credit carryforwards will expire from 2012 through
2018 if not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of the Company's deferred taxes as of December 31, 1999
and 1998, and the period from Inception (July 17, 1997) to December 31, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
Period from
Inception
Year ended (July 17, 1997)
December 31, to December 31,
1999 1998 1997
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Depreciable assets............ $ (127) $ (3) $ 1
Tax carryforwards............. 23,067 3,045 142
Accrued liabilities........... 1,141 247 68
-------- ------- ----------
Net deferred tax assets.......... 24,081 3,289 211
-------- ------- ----------
Valuation allowance for net
deferred tax asset.............. (24,081) (3,289) (211)
-------- ------- ----------
Net deferred taxes............... $ - $ - $ -
======== ======= ==========
</TABLE>
F-15
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
The Company has established valuation allowances equal to the net deferred tax
assets due to uncertainties regarding the realization of deferred tax assets
based on the Company's lack of earnings history. The valuation allowance
increased by approximately $20,792,000 and $3,078,000 during the years ended
December 31, 1999 and 1998 respectively.
The Company's provision for income taxes differs from the expected tax benefit
amount computed by applying the statutory federal income tax rate of 34% to
income before income taxes as a result of permanent differences and the increase
in the valuation allowance.
The following is a reconciliation of the amount of the income tax benefit that
would result from applying the statutory income tax rate to pretax loss and the
reported amount of income tax benefit (in thousands):
<TABLE>
<CAPTION>
Period from
Inception
December 31, (July 17, 1997) to
1999 1998 December 31, 1997
---- ---- ------------------
<S> <C> <C> <C>
Tax benefit at statutory rate of 34% $(19,086) $ (3,088) $ (211)
Permanent differences 32 10 1
State tax benefit (1,738) - -
Net increase in valuation allowance 20,792 3,078 210
-------- -------- -------
$ - $ - $ -
======== ======== =======
</TABLE>
11. Mandatorily Redeemable Convertible (Series B) Preferred Stock
The Company has authorized various classes of preferred stock, up to a maximum
of 15,000,000 shares. As of December 31, 1998, the Company had designated
13,781,145 shares as $.001 par value Series B Convertible Non-Voting Preferred
Stock. On April 28, 1998, the Company issued 3,850,597 shares of Series B to
Superior Consultant Holdings Corporation ("Superior") for consideration of
$6,000,000. In the event that the Company's board of directors elected to
declare a dividend on the shares of common stock, Superior was entitled to
receive dividends as if the Series B shares had been converted to common stock.
In the event of any liquidation, dissolution or winding up of the Company, the
holders of each share of Series B then outstanding were entitled to receive a
liquidation preference over common stockholders and preferred stockholders other
than Series A holders. At December 31, 1998, this liquidation preference was
$2,998,408, which is equivalent to $0.78 per share plus an amount in cash equal
to all accumulated and unpaid dividends thereon. Each share of Series B was
converted into 1.029 shares of common stock upon the closing of the Company's
initial public offering.
At the date of closing, Superior was granted an option to purchase up to
3,962,265 shares of common stock, or the number of shares of preferred stock
convertible into 3,962,265 shares of common stock. The exercise price per share
was to be a price, subject to adjustment for dilution, equal to 70% of the fair
market value per share of common stock into which each share of preferred stock
is convertible. The option was scheduled to expire on April 28, 2000. Upon
completion of the Company's initial public offering, Superior agreed to
terminate the provisions of the option agreement in exchange for 1,210,665
shares of common stock, valued at approximately $8,200,000 (an additional
134,520 shares, valued at approximately $900,000 were issued to the Series C
holder pursuant to antidilution protection provisions). These amounts have been
reflected as dividends to preferred stockholders.
Superior was granted a right to require the Company to repurchase the Series B
shares, or the shares of common stock into which the Series B shares may have
been converted, for the current fair market price per share. The put option was
exercisable during each of the 90-day periods following April 28, 2000 and April
28, 2001, however, with the conversion of the Series B shares into common stock
at the closing of the Company's initial public offering, this put option
expired.
The Company allocated the $6,000,000 million of proceeds as follows: $4,100,000
to the Series B stock and $1,900,000 to the options based on the fair values
determined as of the closing date using the Black-Scholes valuation model with
the following weighted average assumptions: zero dividend yield; 0.5 volatility;
risk free interest rate of 5.9%; and expected life of 2 years. The Company
recognized accretion of value on the mandatorily redeemable convertible
preferred stock to redemption value (fair value) over the
F-16
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
period between the closing date and the redemption dates as defined by the
agreement. The per share redemption value was $4.78 as of December 31, 1998.
In conjunction with the January 1999 equity financing (Note 12), Superior
received voting rights on an as-if converted to common stock basis and
additional anti-dilution rights similar to those granted to preferred Series C
stockholders.
12. Capital Stock
The authorized capital stock of the Company consists of 75,000,000 shares of
common stock, par value $0.001 per share, and 15,000,000 shares of preferred
stock, par value $0.001 per share.
Series A Preferred Stock
The Company designated 750,000 shares of its authorized preferred stock as
Series A 8% convertible preferred stock. From March 1, 1998 through April 6,
1998, the Company issued 619,102 Series A preferred shares for $742,923
including 104,505 shares issued to three members of an officer's immediate
family for $125,400. Each share of Series A is senior to all other preferred
stock and common stock and is convertible into 1.085 shares of common stock.
Conversion is automatic in the event of an initial public offering. Holders of
Series A shares have the right to vote on all matters, except the election of
directors, with the number of votes equal to the number of shares into which the
Series A is convertible. Series A shares have a cumulative dividend, which are
payable when and if declared, prior to any class or series of the Company's
equity, at the per annum rate of 8%, or $0.096 per share. Dividends are
cumulative and accrue on each share from the date of issuance. In the event of
any liquidation, dissolution or winding up of the Company, the holders of each
share of Series A then outstanding have a liquidation preference over other
preferred and common stockholders. The liquidation preference of $790,639 at
December 31, 1998 is equivalent to $1.20 per share plus an amount equal to all
accumulated and unpaid dividends thereon which totaled $47,716 at December 31,
1998. Upon the closing of the Company's initial public offering, all outstanding
shares of Series A preferred stock converted into 671,708 shares of common
stock.
Series C Preferred Stock
The Company designated 3,000,000 shares of its authorized preferred stock as
Series C convertible preferred stock. On January 29, 1999, the Company received
$3,500,000 in cash and a license to certain Internet technology, and acquired
10% of the outstanding stock of HealthMagic, Inc. ("HealthMagic"), a subsidiary
of Adventist Health System Sunbelt Healthcare Corporation ("Adventist"), in
exchange for 2,615,677 shares of Series C convertible preferred stock.
HealthMagic is a supplier of applications to Internet companies. The Company has
recorded its 10% investment in HealthMagic using the cost method of accounting
valuing it at $5,000,000 based on a discounted cash flow analysis. The Company
also established a technology relationship with HealthMagic, a supplier of
applications to Internet companies, whereby the Company contributed certain
technology, which the Company had assigned a zero value, and received from
HealthMagic a license to use a broad range of Internet technologies, including a
web-enabled personal medical record, personalization tools, security and
authentication features. HealthMagic will develop, implement and support these
technologies for the Company. The Company has capitalized $4,000,000 related to
the HealthMagic technology license. The fair value of this license was
determined using the cost method and is being amortized on a straight-line basis
over a three-year period, based on the economic life of the technology. For the
year ended December 31, 1999, the Company recorded amortization expense of
$1,222,000 related to this asset.
Upon the closing of the Company's initial public offering, each share of Series
C converted into one share of common stock.
F-17
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
Series B and Series C stockholders were given certain anti-dilution protections
as a result of this transaction. In connection with these provisions, Series B
stockholders received 21,982 shares of Series C preferred stock and Series C
stockholders received 134,520 shares of Series C preferred stock.
The Company also entered into selected agreements with HealthMagic and Adventist
which provide for registration rights and specified transfer restrictions.
These agreements call for the appointment of an Adventist representative to the
Company's board of directors, and for the Company to appoint a representative to
HealthMagic's board of directors.
13. Stock Option Plans
The Company has established the 1997 Stock Option Plan under which 11,250,000
shares of common stock are reserved for issuance. During 1999, the Company
established the 1999 Equity Participation Plan and the 1999 Bonus Plan under
which an additional 3,906,413 shares of common stock are reserved for issuance.
Under these plans, incentive options can be issued to employees, officers and
directors of the Company at an exercise price not less than 100% of the fair
market value of the Company's common stock at the date of grant as determined by
the board of directors or by a committee of the board appointed to administer
the plans. Incentive stock options to a stockholder that owns greater than 10%
of the Company's outstanding stock may be granted at a price per share not less
than 110% of the fair market value of the Company's common stock at the date of
grant. Non-statutory stock options can be issued to employees, officers,
directors or consultants of the Company at exercise prices determined by the
board of directors or by a committee of the board appointed to administer the
plans but not less than 85% of the fair market value of the Company's common
stock at the date of grant. The plans provide that options are exercisable no
later than ten years from the date of grant. Generally 25% of the options
granted are exercisable after one year, and then ratably over the remaining
three years.
Option activity under the plans for the years ended December 31, 1999 and 1998,
and the period of Inception (July 17,1997) to December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Options Exercise
Authorized Outstanding Price
---------- ------------ --------
<S> <C> <C> <C>
Inception (July 17, 1997) - - -
Options authorized........... 3,750,000 2,851,500 0.02
---------- ---------- -----
Balance, December 31, 1997... 3,750,000 2,851,500 $0.02
Options authorized........... 7,500,000 - -
Options granted.............. - 6,822,012 0.13
Options canceled............. - (69,180) 0.10
Options exercised............ - - -
---------- ---------- -----
Balance, December 31, 1998... 11,250,000 9,604,332 $0.10
Options authorized........... 3,906,413 - -
Options granted.............. - 3,642,561 7.51
Options canceled............. - (362,637) 6.00
Options exercised............ - (1,665,179) 0.21
---------- ---------- -----
Balance, December 31, 1999... 15,156,413 11,219,077 $2.30
========== ========== =====
</TABLE>
At December 31, 1999, 1998 and 1997, 7,185,844, 5,421,232 and 1,970,250 options
were vested, respectively.
F-18
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
During 1999, 1998 and the period from inception (July 17, 1997) to December
31,1997, the Company issued stock options under the Plans, with the following
weighted average fair values:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ----------------------------------
Number Number
Outstanding at Weighted-Average Exercisable at
December 31, Remaining Weighted-Average December 31, Weighted-Average
Exercise Prices 1999 Contractual Life Exercise Price 1999 Exercise Price
- ------------------ ------------- ---------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.01- 0.16 8,008,513 8.13 $ 0.12 5,255,255 $ 0.12
1.67- 4.78 1,018,398 9.02 3.87 120,964 4.19
7.43- 9.00 1,884,169 9.36 8.83 83,263 7.61
14.94-17.88 308,000 9.54 17.09 38,233 17.72
---------- ---------
$0.01-$17.88 11,219,080 8.49 $ 2.30 5,497,715 $ 0.40
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock option plan
and employee stock purchase plan, which are described below. Had compensation
cost for the Company's stock option plans been determined based on the fair
market value at the grant dates for awards under the Plan consistent with the
method provided by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net loss would have been increased to the following pro forma amounts
for the periods ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Year Ended Period from
December 31, Inception
-------------------- (July 17, 1997) to
1999 1998 December 31, 1997
--------- -------- -----------------------
<S> <C> <C> <C>
Net loss: As reported......... $(56,135) $(9,083) $(622)
Pro forma................. $(58,326) $(9,142) $(629)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the periods ended December 31, 1999, 1998 and
the period from Inception (July 17, 1997) through December 31, 1997:
<TABLE>
<CAPTION>
Employee Stock
Employee Stock Options Purchase Plan
------------------------- ---------------
1999 1998 1997 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Dividend yield ............................. - - - -
Expected volatility......................... 100% 0.0% 0.0% 100%
Risk-free rate of return.................... 5.2% 5.9% 5.9% 5.0%
Weighted average expected life (in years)... 3.6 3.6 3.1 0.7
</TABLE>
During 1999, the Company issued options under the 1997 Stock Option Plan, the
1999 Equity Participation Plan and 1999 Bonus Option Plan with the following
weighted average fair values:
Options Weighted Average
Granted Fair Value
----------- ----------------
At fair value................. 2,183,750 $ 9.12
Below fair value.............. 1,244,411 $ 6.06
Above fair value.............. 214,400 $14.94
14. Concentrations of Credit Risk and Major Customers
The Company maintains its cash and cash equivalent balances in high credit
quality financial institutions and has not experienced any material losses to
date.
F-19
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
At December 31, 1999 and 1998, the financial instruments which subject the
Company to significant concentrations of credit risk consist principally of cash
and cash equivalents and trade and other receivables.
For the years ending December 31, 1999 and 1998 and the period from Inception
(July 17, 1997) through December 31, 1997, individual customers constituting 10%
or more of revenues were as follows:
<TABLE>
<CAPTION>
Period from
Inception
Year ended December 31, (July 17, 1997)
----------------------- to December 31,
1999 1998 1997
-------- -------- ----------------
<S> <C> <C> <C>
Customer A.................. 13% 0% 0%
Customer B.................. 12% 0% 0%
Customer C.................. 1% 63% 0%
Customer D.................. 0% 23% 0%
Customer E.................. 0% 12% 0%
</TABLE>
Trade receivables to major customers were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
---- ----
<S> <C> <C>
Customer C......................... 0% 67%
Customer D......................... 0% 25%
Customer F......................... 29% 0%
Customer G......................... 17% 0%
Customer H......................... 10% 0%
</TABLE>
15. Related Party Transactions
Related party payables are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
----- ------
<S> <C> <C>
Accounts payable to stockholder for consulting
services......................................... $ 2 $1,032
Stockholder note payable.......................... - -
Other payables to employees and stockholders...... - 161
---- ------
$ 2 $1,193
==== ======
</TABLE>
On March 16, 1998, the Company issued 1,800,360 shares of common stock to its
stockholder/CEO in exchange for cancellation of a $216,043 note payable. The
conversion price was established by the board of directors based on their
assessment of the fair market value of the common stock at the date of
conversion.
The Company has a purchase commitment with Superior Consultant Holdings Corp.
whereby the Company is obligated to purchase a minimum of $3.0 million in
management consulting, information technology or outsourcing services from
Superior by September 30, 1999, or pay the difference in cash. As of December
F-20
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
31, 1999 and 1998, the Company had purchased approximately $479,000 and
$1,575,000, respectively, of such services from Superior.
In January 1999 the Company entered into a name and likeness agreement with a
stockholder whereby the Company required to pay the stockholder 2% of revenues
derived from sales of current products and up to 4% of revenues derived from
sales of new products during the five-year term of the agreement. During 1999
and 1998, the Company accrued royalty fees of $41,000 and $855, respectively, to
this stockholder. Effective August 30, 1999, the Company amended and restated
its agreement with the stockholder. This amendment made the following principal
changes to the agreement:
. The term was extended for an additional five years;
. The obligation to make any payments to the stockholder based on the
revenues of the Company was completely eliminated; and
. As the sole compensation for the modifications made in the agreement and
the services to be provided over its full term, the stockholder was
granted options to acquire 214,400 shares of the Company's common stock
at an exercise price of $17.88 per share (the public trading price at
the time of grant). The options vest at the rate of approximately 8,900
shares per month.
The option grants are recorded at a fair value of $7.76 per warrant which is
calculated at the time of issuance using the Black-Scholes option-pricing model
with the following weighted average assumptions: zero dividend yield; 0.60
volatility; risk-free interest rate of 5.4%; and a legal life of 5 years. The
Company is recognizing the costs associated with the option grants ratably over
the vesting period of the option grants.
The Company also entered into a consulting agreement with this stockholder
whereby the Company pays the stockholder $11,250 per month relating to his
services as Chief Medical Officer. Total payments to this stockholder during
1999 were $150,000.
During 1998, the Company paid a stockholder professional fees of $95,000 related
to speaking engagements, and director's fees of $83,333.
The Company paid a board member $137,500 and $83,333 during 1999 and 1998,
respectively, for corporate governance consulting services.
The Company entered into a name and likeness agreement, effective June 1, 1998,
with a director whereby the director received options to purchase 183,750
shares at an exercise price of $0.16 per share. The Company recorded deferred
stock compensation in the amount of $28,664 related to the option grant.
F-21
<PAGE>
drkoop.com, Inc.
Notes to the Financial Statements (Continued)
16. Supplemental Cash Flows Information
<TABLE>
<CAPTION>
Period from
Year Ended Inception
December 31, (July 17, 1997) to
---------------------- December 31,
1999 1998 1997
------------ ------- -----------------
(in thousands)
<S> <C> <C> <C>
Supplemental Disclosure of Cash and Noncash Investing and
Financing Activities:
Cash paid for interest....................................... $ 25 $ - $ -
======= ======= =====
Conversion of related party payable to common stock.......... $ - $ 216 $ -
======= ======= =====
Issuance of notes receivable from common stockholders........ $ - $ - $ 1
======= ======= =====
Deferred stock compensation related to options granted....... $ 3,508 $ 272 $ -
======= ======= =====
Accretion of redeemable securities to fair value............. $17,255 $14,324 $ -
======= ======= =====
Issuance of preferred stock for investment in affiliate...... $ 5,000 $ - $ -
======= ======= =====
Issuance of preferred stock for intangible asset............. $ 4,000 $ - $ -
======= ======= =====
Obligation to issue common stock pursuant to option
cancellation agreement.................................... $ 9,147 $ - $ -
======= ======= =====
Issuance of warrants......................................... $18,240 $ - $ -
======= ======= =====
Acquisition of assets under capital lease.................... $ 1,078 $ - $ -
======= ======= =====
</TABLE>
F-22
<PAGE>
To the Board of Directors
and Stockholders of drkoop.com, Inc.
In connection with our audits of the financial statements of drkoop.com, Inc. as
of December 31, 1999 and 1998, and for the two years ended December 31, 1999 and
for the period from Inception (July 17, 1997) through December 31, 1997, we have
also audited the financial statement schedule listed in the index included on
page F-1 of this report on Form 10-K.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
Austin, Texas
February 15, 2000
S-1
<PAGE>
SCHEDULE II
drkoop.com, Inc.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Deductions/
Balance at Charged Write-offs Balance at
Beginning to Costs Charged to End of
Year Ended of Period and Expenses Allowance Period
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
(in thousands)
Allowance for Doubtful Accounts:
December 31, 1999................. $ - $ 100 $ (21) $ 79
====== ======= ===== =======
December 31, 1998................. $ - $ - $ - $ -
====== ======= ===== =======
December 31, 1997................. $ - $ $ - $ -
====== ======= ===== =======
Valuation Allowance for Deferred
Tax Asset:
December 31, 1999................. $3,289 $20,792 $ - $24,081
====== ======= ===== =======
December 31, 1998................. $ 211 $ 3,078 $ - $ 3,289
====== ======= ===== =======
December 31, 1997................. $ - $ - $ - $ 211
====== ======= ===== =======
</TABLE>
S-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-80175) of drkoop.com, Inc. of our report dated
February 15, 2000 appearing in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DRKOOP.COM,
INC.'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 0 35,706
<SECURITIES> 0 0
<RECEIVABLES> 41 10,532
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 63 69,100
<PP&E> 377 11,985
<DEPRECIATION> (71) (1,550)
<TOTAL-ASSETS> 380 99,720
<CURRENT-LIABILITIES> 2,968 22,798
<BONDS> 0 0
18,406 0
1 0
<COMMON> 8 30
<OTHER-SE> (21,003) 71,287
<TOTAL-LIABILITY-AND-EQUITY> 380 99,720
<SALES> 43 9,431
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 9,160 66,910
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 34 1,344
<INCOME-PRETAX> (9,083) (56,135)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,083) (56,135)
<EPS-BASIC> (3) (4)
<EPS-DILUTED> (3) (4)
</TABLE>
