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[Company Logo]
Filed pursuant to Rule 424(b)(4)
Registration No. 333-82485
6,000,000 Shares
PlanetRx.com, Inc.
Common Stock
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This is an initial public offering of shares of common stock of
PlanetRx.com, Inc. All of the 6,000,000 shares of common stock are being sold
by PlanetRx.com in an underwritten public offering.
Prior to this offering, there has been no public market for the common
stock. The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PLRX".
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.
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Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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<TABLE>
<CAPTION>
Per
Share Total
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<S> <C> <C>
Initial public offering price............................ $16.00 $96,000,000
Underwriting discounts................................... $ 1.12 $ 6,720,000
Proceeds, before expenses, to PlanetRx.com............... $14.88 $89,280,000
</TABLE>
The underwriters may purchase up to an additional 900,000 shares from
PlanetRx.com at the initial price to public less the underwriting discount.
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The underwriters expect to deliver the shares against payment on October
13, 1999.
Goldman, Sachs & Co.
Hambrecht & Quist
Robertson Stephens
William Blair & Company
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Prospectus dated October 6, 1999.
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INSIDE FRONT COVER
The inside front cover includes:
Screen shot of the PlanetRx.com home page in the center of the inside front
cover, with the PlanetRx.com logo and the slogan "Health at Your Fingertips" in
the upper right corner of the inside front cover. In the upper left corner of
the inside front cover, there is a caption that reads:
"THE STORE
With over 27,000 products, PlanetRx.com offers one of the largest selections
of traditional and alternative healthcare-related products available on the
Internet."
On the left side of the page, there is a caption that reads:
"eCENTERS
eCenters are organized around specific chronic health conditions and
targeted demographic groups, such as women, seniors and children. eCenters
combine the content and products relevant to each group's needs."
On the left side of the inside front cover, there is a caption that reads:
"PERSONALIZED SHOPPING
Get e-mail reminders when it's time to fill your prescription or when your
favorite products go on sale. Easily reorder products from a convenient,
personal shopping list. Keep track of prescription purchases and store your
family's medical information, all in one convenient place."
On the right side of the inside front cover, there is a caption that reads:
"RESOURCES
Up-to-date, unbiased content in an easy-to-understand format so our
customers can make informed healthcare decisions. Information on over 100
disease categories. suggestions for alternative remedies, a drug interaction
tool, expert advice and more. And our pharmacists are available with answers to
your questions, 24 hours a day, seven days a week."
On the right side of the inside front cover, there is a caption that reads:
"COMMUNITY
A forum for sharing, including bulletin boards, chatrooms and moderated
discussion groups."
On the right side of the inside front cover, there is a caption that reads:
"PRESCRIPTIONS
PlanetRx.com is fully licensed to ship prescriptions to all U.S. states and
territories. Our pharmacy is staffed 24 hours a day, seven days a week. We are
able to ship each customer's prescription the same day it is filled."
PlanetRx.com has applied for trademarks for PlanetRx, PlanetRx.com, eCenter,
Healthy Reward and QuickClick Shopping. All other brand names or trademarks
appearing in this prospectus are the property of their respective holders.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding PlanetRx.com and the financial statements appearing
elsewhere in this prospectus. Unless otherwise indicated, this prospectus
assumes:
. the automatic conversion of PlanetRx.com's outstanding preferred stock
into 23,804,148 shares of common stock upon closing of the offering;
. the issuance of 849,150 shares of common stock upon the exercise and
conversion of all outstanding warrants to purchase 100,000 shares of our
series A preferred stock, warrants to purchase 16,000 shares of our
series B preferred stock and a purchase option for 700,000 shares of our
series B preferred stock;
. the exclusion of 1,882,750 shares of common stock reserved for issuance
under our 1998 Stock Plan, of which 1,326,050 shares were subject to
outstanding options as of June 30, 1999 with a weighted average exercise
price of $1.46 per share;
. the issuance of 10,338,810 shares of our common stock to Express Scripts,
Inc.; if the over-allotment option is not exercised, Express Scripts will
return to us, at no cost, that number of shares as is necessary to reduce
its ownership to 19.9% of our then outstanding stock;
. the exclusion of 1,940,184 shares of common stock reserved for issuance
in connection with our assumption of YourPharmacy.com options in
connection with the Express Scripts issuance at a weighted average
exercise price of $4.84 per share;
. a corporate reorganization in which we will become a wholly owned
subsidiary of a holding company; and
. no exercise of the underwriters' over-allotment option.
Our fiscal year ends on December 31st of each year. All references to our
fiscal year refer to the twelve-month period ending on December 31st of that
year.
PlanetRx.com
PlanetRx.com is a leading online healthcare destination for commerce,
content and community. Our e-commerce website, www.PlanetRx.com, launched on
March 18, 1999, provides a convenient, private and informative shopping
experience. We offer products in six categories: prescription drugs; non-
prescription drugs; personal care; beauty and spa; vitamins, herbs and
nutrition; and medical supplies. Upon the completion of this offering, we will
acquire the e-commerce operations of Express Scripts' YourPharmacy.com and
become the online pharmacy for Express Scripts, one of the three largest
pharmacy benefit managers in the U.S. with over 36 million covered lives. Under
the terms of our agreement, Express Scripts will actively promote us to its
members, who have the ability to use their insurance reimbursement plans to
order prescriptions online at PlanetRx.com for a minimal co-payment.
As individuals increasingly turn to the Internet to address their
healthcare needs, we believe that up-to-date information in an easy-to-
understand format is essential in making healthcare decisions. We provide in-
depth information on symptoms, treatments and alternative care for over 100
disease categories, enabling consumers to find answers to their critical
healthcare questions.
In addition, we own and operate a network of satellite websites that
provide both content and an extended community where people interested in
chronic health conditions can interact. These websites include diabetes.com,
depression.com, obesity.com and alzheimers.com. The satellite websites have the
same look and feel as our PlanetRx.com website.
The PlanetRx.com Market
Our market consists of prescription drugs, non-prescription drugs, personal
care products, beauty and spa products, vitamins, herbs and nutrition products
and medical supplies. Based on estimates from the National Association of Chain
Drugstores and Information Resources,
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Inc., we believe that the U.S. market for health and personal care products was
over $175 billion in 1999, of which prescription drugs comprised over $120
billion.
The PlanetRx.com Healthcare Destination
Our websites offer a convenient shopping experience, extensive product
selection, professionally-created content and online communities developed
around specific health-related topics. We believe that we offer one of the
largest selections of health and personal care products available on the
Internet, with over 27,000 stock keeping units (SKUs). Other key advantages of
our online store include:
. ability to fill and process non-cash prescriptions, which are directly
reimbursable by insurance companies for members of our affiliated
pharmacy benefit managers, and cash prescriptions;
. access 24 hours a day, seven days a week from anywhere Internet access is
available;
. direct shipping to the customer;
. online search capabilities for products and information;
. excellent customer service;
. order-tracking information;
. reliable and accessible healthcare information;
. online forums for consumer interaction; and
. personalized and confidential information for customers, such as health
answers, medical records and e-mail reminders.
We operate our own distribution center and pharmacy in Memphis, Tennessee.
Our pharmacy is staffed 24 hours a day, seven days a week with experienced
pharmacists who are members of the American Pharmaceutical Association. We are
licensed to ship prescription products in all U.S. states and territories.
The PlanetRx.com Strategy
Our strategy is to attract new customers, develop customer loyalty and
promote repeat purchases by:
. continuing to build our brand;
. continuing to build premier content and community websites to enhance
commerce and other revenue opportunities;
. maintaining an independent distribution center and pharmacy to retain
strict control over logistics and to provide excellent customer service;
. utilizing technology to improve the customer shopping experience;
. continuing to expand our product offerings; and
. developing strategic relationships, such as our pharmacy benefit manager
relationship with Express Scripts, to increase traffic to our store and
further e-commerce opportunities.
Limited Operating History
We were incorporated in Delaware on March 31, 1995 and only began
substantial operations in September 1998. We incurred net losses of $7,000 for
the year ended 1996, $137,000 for the year ended 1997, $4.1 million for the
year ended 1998 and $20.1 million for the six-month period ended June 30, 1999.
Corporate Information; Reorganization
Our corporate offices are located at 349 Oyster Point Blvd., Suite 201,
South San Francisco, CA 94080. Our telephone number is (650) 616-1500.
Information contained on our website does not constitute a part of this
prospectus.
Immediately prior to the closing of this offering, we will effect a
corporate reorganization under which the current PlanetRx.com, Inc. will become
a wholly owned subsidiary of a newly-formed holding company. Our current
stockholders will become stockholders of the holding company with the exact
same rights and obligations they had prior to the reorganization. Upon
completion of the reorganization, the holding company's corporate name will be
changed to "PlanetRx.com, Inc." and the current PlanetRx.com, Inc. will become
"PlanetRx.com Operating Co., Inc."
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The Offering
<TABLE>
<C> <S>
Shares offered.................................. 6,000,000 shares
Shares issued to Express Scripts in a private
placement...................................... 10,338,810 shares
Shares to be outstanding after the offering..... 50,832,358 shares
Use of proceeds................................. For general corporate
purposes, principally working
capital and capital
expenditures.
Proposed Nasdaq National Market symbol.......... "PLRX"
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 1995 Six Months Ended
(inception) to Year Ended December 31, June 30,
December 31, ---------------------------- ------------------
1995 1996 1997 1998 1998 1999
-------------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue:
e-commerce............. $ -- $ -- $ -- $ -- $ -- $ 622
Sponsorship............ -- -- -- -- -- 195
-------- -------- -------- -------- -------- --------
-- -- -- -- -- 817
-------- -------- -------- -------- -------- --------
Cost of net revenue:
e-commerce............. -- -- -- -- -- 694
Sponsorship............ -- -- -- -- -- 35
-------- -------- -------- -------- -------- --------
-- -- -- -- -- 729
-------- -------- -------- -------- -------- --------
Gross profit............ -- -- -- -- -- 88
-------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and sales.... -- -- -- 907 3 9,614
Product development.... 22 7 113 1,025 106 3,254
General and
administrative........ -- -- 23 541 2 2,366
Stock-based
compensation.......... -- -- -- 1,650 -- 4,308
-------- -------- -------- -------- -------- --------
Total operating
expenses............. 22 7 136 4,123 111 19,542
-------- -------- -------- -------- -------- --------
Operating loss.......... (22) (7) (136) (4,123) (111) (19,454)
Interest income......... -- -- -- 38 -- 399
Interest expense........ -- -- (1) (2) -- (1,046)
-------- -------- -------- -------- -------- --------
Net loss................ $ (22) $ (7) $ (137) $ (4,087) $ (111) $(20,101)
======== ======== ======== ======== ======== ========
Plus effect of
antidilution provisions
of Series B Preferred
Stock.................. -- -- -- -- -- (1,009)
-------- -------- -------- -------- -------- --------
Net loss available to
common shareholders.... $ (22) $ (7) $ (137) $ (4,087) $ (111) $(21,110)
======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share(1)...... $ (9.12) $ (8.35)
======== ========
Basic and diluted pro
forma net loss per
share (unaudited)(1)... $ (1.00) $ (1.04)
======== ========
Weighted average shares
used to compute basic
and diluted net loss
per share(1)........... 448 2,528
======== ========
Weighted average shares
used to compute
pro forma basic and
diluted net loss per
share (unaudited)(1)... 4,102 20,210
======== ========
</TABLE>
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<TABLE>
<CAPTION>
June 30, 1999
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As
Actual Adjusted(2)
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(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $62,688 $161,898
Working capital............................................ 71,712 164,853
Total assets............................................... 85,236 379,385
Borrowings and capital lease obligations, long-term........ 1,600 1,600
Total stockholders' equity................................. 78,995 367,044
</TABLE>
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(1) See Note 1 of Notes to the Financial Statements for an explanation of the
determination of the number of shares and share equivalents used in
computing per share and pro forma per share amounts.
(2) "As adjusted" reflects the application of the net proceeds from the sale of
6,000,000 shares of common stock offered by us at the initial public
offering price of $16.00 per share, after deducting the underwriting
discount and estimated offering expenses and excludes the exercise of the
underwriters' over-allotment option and reflects the issuance of 10,338,810
shares of common stock to Express Scripts in connection with our purchase
of assets and liabilities of YourPharmacy.com effective upon the completion
of this offering, under a contribution agreement. It also reflects the
exercise and conversion of all outstanding warrants to purchase 100,000
shares of our series A preferred stock, warrants to purchase 16,000 shares
of our series B preferred stock, the purchase option for 700,000 shares of
our series B preferred stock and the issuance in September 1999 of 371,103
shares of series D preferred stock. See "Use of Proceeds" and
"Capitalization".
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. If any of the following risks actually occur,
our business, financial condition or operating results could be materially
adversely affected and the trading price of our common stock could decline, and
could cause you to lose part or all of your investment.
Risks Related to Our Business
Our limited operating history makes forecasting future results difficult
We were incorporated on March 31, 1995 and only began substantial
operations in September 1998. Our PlanetRx.com website was launched on March
18, 1999. As a result of our limited operating history, it is difficult to
accurately forecast our revenues and we have limited meaningful historical
financial data upon which to base planned operating expenses. We base our
current and future expense levels on our operating plans and estimates of
future revenues and our expenses are to a large extent fixed. Our revenues and
operating results are difficult for us to forecast because we operate with
substantially no backlog. As a result, we may be unable to adjust our spending
in a timely manner to compensate for any unexpected revenue shortfall. This
inability could cause our net losses in a given quarter to be greater than
expected.
We have a history of losses and we anticipate future losses and negative cash
flow
Since our inception, we have incurred significant losses and negative cash
flow, and we expect operating losses and negative cash flow to continue for the
foreseeable future. We incurred net losses of $7,000 for the year ended 1996,
$137,000 for the year ended 1997, $4.1 million for the year ended 1998 and
$20.1 million for the six-month period ended June 30, 1999. As of June 30,
1999, we had an accumulated deficit of $25.4 million. We anticipate that our
losses will increase significantly from current levels because we expect to
incur additional costs and expenses related to:
. the development of the PlanetRx.com brand, marketing and other
promotional activities;
. the expansion of our inventory management and distribution operations at
our facilities in Memphis, Tennessee or in new facilities established
elsewhere;
. the continued development of the PlanetRx.com website, our computer
network and the systems that we use to process customers' orders and
payments;
. the expansion of our product offerings and the categories of the
products that we offer;
. the continued development of relevant, healthcare-related content on the
PlanetRx.com website;
. the development of marketing and distribution relationships with
strategic business partners;
. increases in our general and administrative functions to support our
growing operations; and
. the establishment and development of relationships in the healthcare
industry, particularly in the areas of reimbursement and managed care
with insurance companies and pharmacy benefit management companies.
Our ability to become profitable depends on our ability to generate and
sustain substantially higher revenues while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. See "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
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Online sales of prescription drugs, non-prescription drugs, personal care
products and medical supplies may not achieve market acceptance, which could
result in slower revenue growth, loss of revenues and increased operating
losses
If we do not attract and retain a high volume of online customers to our
website at a reasonable cost, our business and operating results will be
adversely affected. The online market for our products is in its infancy. We
may not be able to convert a large number of consumers from traditional
shopping methods to online shopping for prescription drugs, non-prescription
drugs, personal care products and medical supplies. Specific factors that could
prevent widespread consumer acceptance of the online sales of our products,
include:
. shipping charges and delivery times associated with online purchases;
. delays and other inefficiencies associated with processing orders for
prescription products covered by insurance;
. lack of reimbursement of customer prescriptions by some healthcare
payors;
. inability to serve the acute care needs of customers, including
emergency prescription drugs and other urgently needed products;
. pricing that does not meet customer expectations;
. customer concerns about the security of online transactions and the
privacy of their personal health information;
. product damage from shipping or shipments of wrong or expired products
from our suppliers, resulting in a failure to establish customers' trust
in buying our products online;
. delays in responses to customer inquiries; and
. difficulties in returning or exchanging products.
If we fail to establish the PlanetRx.com brand or attract repeat customers, we
may not be able to increase our revenues
We believe that we must continue to strengthen the PlanetRx.com brand,
particularly because of the early stage and competitive nature of the online
market for our products. If we fail to establish our brand quickly, we will be
at a competitive disadvantage and may lose the opportunity to build a critical
mass of customers. The development of our brand will depend largely on the
success of our marketing efforts and our ability to provide consistent, high
quality customer experiences. We cannot be certain that our brand promotion
activities will be successful, or will result in increased revenues. If we
achieve increased revenues, there can be no assurance that these revenues will
be sufficient to offset the expenditures incurred in building our brand.
In addition, due to our limited operating history, we have not established
a material amount of repeat business from regular customers. While our websites
are designed to encourage repeat business, we do not yet have sufficient
historical data on how successful this strategy will be. Therefore, it is
difficult to forecast what our revenues from repeat customers will be or our
overall revenue trends.
We expect our quarterly financial results to fluctuate
We expect our revenues and operating results to vary significantly from
quarter to quarter due to a number of factors, including:
. our ability to attract visitors to the PlanetRx.com website and to
convert those visitors into customers;
. our ability to satisfy customer demand, retain existing customers and
attract new customers at a reasonable cost;
. the frequency and size of any repeat customer orders;
. the nature and amount of publicity for us or our competitors;
. changes in the growth rate of Internet usage and online purchasing;
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. the mix of products sold by us;
. our ability to maintain adequate inventory levels;
. changes in our pricing policies or the pricing policies of our online
and traditional competitors;
. purchasing patterns, including holiday purchasing patterns and the
purchasing of seasonal products such as sunscreen and allergy
medications; and
. costs related to potential acquisitions of technologies or businesses.
We currently expect that a majority of our revenues for the foreseeable
future will come from orders of prescription drugs, non-prescription drugs,
personal care products and medical supplies on our PlanetRx.com website as well
as from sponsors on our satellite websites. The volume and timing of orders are
difficult to predict because the online market for these products is in its
infancy. Our operating expenses are largely based on anticipated revenue trends
and a high percentage of our expenses are fixed in the short term. As a result,
a delay in generating or recognizing revenue for any reason could cause
significant variations in our operating results from quarter to quarter and
could result in greater than expected operating losses.
Because our operating results fluctuate and are difficult to predict, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. In some future quarter, our
operating results may fall below the expectations of public market analysts and
investors. In this event, the price of our common stock may fall.
We may be unable to significantly expand our customer base because of limited
insurance reimbursement coverage for prescription drugs that we sell
We currently have limited access to insurance reimbursement coverage for
our prescription products. The majority of purchases in the prescription drug
market are paid for by third-party payors. Additionally, the inclusion of
prescription drugs in Medicare coverage, as is being considered in legislation
before the U.S. Congress, could harm our business. If Medicare is expanded to
provide government reimbursement for any prescription drugs that we sell, and
we are not allowed to participate as a provider under Medicare, we could lose
these sales. A disproportionate dependence on purchases of prescriptions
without reimbursement may limit our penetration of the prescription drug
market, and may thus have an adverse impact on our business.
Our relationship with Express Scripts, Inc. is complex and requires significant
cash payments for which we may receive no benefit
In August 1999, we entered into a series of agreements with Express
Scripts, Inc. and its wholly owned subsidiary, YourPharmacy.com. These
agreements involve many aspects of our business, including the sale of equity
securities, the operation of our respective websites, significant cash payments
to Express Scripts, and the inclusion of us as an authorized pharmacy in the
Express Scripts network. These arrangements are complex and will require
significant efforts to operate successfully. As a result, there are many risks
related to these arrangements, including some that we may not have foreseen.
In particular, we have committed to pay Express Scripts a minimum of
$14,650,000 annually for five years, with a potential five-year extension, plus
an incremental fee based on Express Scripts members' activity on our website.
Express Scripts has committed to actively promote us as Express Scripts' online
pharmacy; however, we do not control the choice of ads and the advertising may
not result in additional customers. If we are not successful in converting a
significant number of Express Scripts members into customers, we may not
receive any benefit from our cash payments to Express Scripts and our revenues
will be harmed.
Additionally, while our relationship with Express Scripts significantly
broadens our
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ability to provide prescription medication to consumers with insurance
reimbursement plans, it may not allow all of our potential customers to
purchase these medications from us and receive insurance reimbursement.
Due to Express Scripts' 19.9% ownership of our common stock post-offering,
it will be able to influence all matters requiring approval by our
stockholders, including the approval of mergers or other business combinations.
For more information about our relationship with Express Scripts, see
"Business -- Relationship with Express Scripts" and "Management -- Principal
Stockholders".
If we are not able to maintain existing contracts or obtain additional
contracts with insurance companies and pharmacy benefit managers, our customers
may not be able to obtain reimbursement for purchases of prescription products,
which would impair our ability to expand our customer base
To obtain reimbursement on behalf of our customers for the prescription
products that they purchase on our website, we need to obtain contracts with
numerous insurance companies and pharmacy benefit managers. Although we
currently have contracts with a limited number of insurance companies and
pharmacy benefit managers, most of these contracts are short-term and may be
terminated with less than 30 days' prior notice. Additionally, we do not
currently have contracts with any of the four largest pharmacy benefit
managers, which represent a significant portion of the reimbursed payments for
prescription drugs.
Our ability to obtain additional contracts with other insurance companies
and pharmacy benefit managers, or retain our existing contracts for an extended
period of time, is uncertain. Many of these companies are in the early stages
of evaluating the impact of the Internet and online pharmacies on their
businesses. Many of these companies may delay their decisions to contract with
online pharmacies or may decide to develop their own Internet capabilities that
may compete with us. In addition, many insurance companies have existing
contracts with chain drugstores and pharmacy benefit managers that have
announced their intentions to establish online pharmacies.
In addition, it is likely that some insurance companies and pharmacy
benefit managers will contract with only one or a limited number of online
pharmacies. If our online competitors obtain these contracts and we do not, we
would be at a competitive disadvantage.
Even if we are successful in gaining widespread access to insurance
reimbursement, each insurance application must be processed individually, which
will raise the costs of processing prescription orders and may delay our order
processing time, which may be harmful to our business. In addition, if
customers do not initially embrace our online insurance coverage procedure, we
may remain dependent on that portion of the market that is willing to pay cash
for their prescriptions.
We may not be able to compete successfully against current and future
competitors
We do business in a market that is highly competitive, and we expect
competition to intensify in the future. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could harm our net revenue and results of operations. We currently or
potentially compete with a variety of companies, many of which have
significantly greater financial, technical, marketing and other resources. Our
competitors include:
. various online stores that sell prescription drugs as well as over-the-
counter drug and health, wellness, beauty and personal care items;
. chain drugstores;
. independent drugstores and pharmacies;
. mass-market retailers;
. warehouse clubs; and
. pharmacy benefit managers that sell prescription drugs directly.
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Most traditional drugstores have operated for a longer period of time, have
greater financial resources, have established marketing relationships with
leading manufacturers and advertisers and have secured greater presence in
distribution channels. Some of these companies may also commence or expand
their presence on the Internet. We also compete with hospitals, HMOs and mail
order prescription drug providers, all of whom are or may begin offering
products and services, as well as healthcare related information similar to our
content, over the Internet. Finally, we are aware of numerous other smaller
entrepreneurial companies that are focusing significant resources on developing
and marketing products and services that will compete directly with those
offered at PlanetRx.com.
We may face a significant competitive challenge from alliances entered into
by our competitors. For instance, one of our direct online competitors,
drugstore.com, has recently entered into a relationship that gives them access
to a major pharmacy benefit manager. Our competitors may continue to gain
access to major pharmacy benefit managers, major HMOs or chain drugstores. The
combined resources of these partnerships could pose a significant competitive
challenge to PlanetRx.com and could prevent these pharmacy benefit managers,
HMOs or chain drugstores from also entering into relationships with us and
could limit our ability to penetrate the prescription drug market.
We believe the principal factors on which we will compete include:
. recognition of the PlanetRx.com brand;
. product selection;
. personalized services;
. convenience and ease of use;
. price;
. accessibility;
. customer service;
. quality of interactive tools;
. quality of content; and
. reliability and speed of fulfillment for products ordered.
We will have no control over how successful our competitors are in
addressing these factors. In addition, our online competitors can duplicate
many of the products or services and much of the content that we offer, with
little difficulty.
Our gross margins may be affected by downward price pressure on pharmaceutical
drugs
Third-party payors are increasingly challenging the price and cost-
effectiveness of medical products and services. While we may be successful in
gaining widespread access to insurance reimbursement, the efforts of third-
party payors to contain costs will place downward pressures on gross margins
from sales of prescription drugs. We cannot be certain that our products or
services will be considered cost effective or that adequate third-party
reimbursement will be available to enable us to maintain price levels
sufficient to realize adequate profit margins on prescription drugs. Our
failure to realize adequate profit margins on prescription drugs would harm our
business.
We depend on a limited number of suppliers and third-party carriers; if they do
not perform, we will not be able to effectively ship orders
To generate the significant customer traffic, volume of purchases and
repeat purchases that we believe are crucial to obtaining sufficient revenues,
we must develop and maintain customer trust in the timing and accuracy of our
product deliveries. We purchase a substantial majority of our prescription and
over-the-counter products from one vendor, McKesson. We have a multi-year
agreement with McKesson that requires us to purchase 80% of our prescription
drugs, non-prescription drugs, home healthcare products, sundries and health
and beauty aids from McKesson. However, if McKesson were unwilling or unable to
supply products to us in sufficient quantities and in a timely manner, we may
not be able to secure alternative suppliers on acceptable terms in a timely
manner, or at all. Although our agreement with McKesson has a multi-year term,
it can be terminated by us or by McKesson upon 60 days' notice.
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In addition to McKesson, we use other suppliers, particularly with respect
to our other product categories. These suppliers may not continue to sell
products to us on existing terms and we may not be able to establish new or
extend current fulfillment terms on a timely or acceptable basis or at all.
Negotiating and implementing relationships with additional vendors or
distributors may take substantial time and resources. If we cannot develop and
maintain relationships with vendors that allow us to obtain sufficient
quantities of products on acceptable commercial terms, our business may be
harmed.
We also rely on third-party carriers for product shipments, including
shipments to and from our distribution facilities. We are therefore subject to
the risks, including employee strikes and inclement weather, associated with
our carriers' ability to provide delivery services to meet our fulfillment and
shipping needs. Failure to deliver products to our customers in a timely and
accurate manner would harm our reputation and our business and results of
operations.
If we fail to provide updated healthcare
content and other features that consumers demand, we will not be able to
attract or retain customers, which would result in slower revenue growth
If we fail to update and improve our healthcare content and interactive
tools in a timely and efficient manner, we may not be able to attract or retain
customers. We must continue to provide professionally created healthcare
content, interactive tools and other features that consumers demand. This will
require the expenditure of significant funds and demand a material amount of
time of senior management. In addition, we must also anticipate and respond
quickly to consumer preferences and demands regarding healthcare information.
Pharmacy or prescription processing errors could produce liability and
significant negative publicity
Mistakes relating to the dispensation of prescription drugs could produce
liability and negative publicity that would be adverse to our business.
Pharmacies occasionally make mistakes relating to prescriptions, dosage and
other aspects of the medication dispensing process. We expect that sales of
pharmaceutical products will account for a significant percentage of our
revenues. Because we distribute these products directly to the customer, we are
the most visible participant in the medication distribution chain. While we do
carry product liability insurance, it may be insufficient to cover potential
claims.
If a regulatory body alleges that we have engaged in the practice of medicine,
we may be subject to significant liabilities
The practice of medicine requires licensing under applicable state law. It
is not our intent to practice medicine and we have structured our websites and
our business to avoid violation of state licensing requirements. However, a
state regulatory authority could at some time allege that some portion of our
business violates these statutes. An allegation that we practice medicine could
result in significant liabilities. Further, any liability based on a
determination that we engaged in the unlawful practice of medicine may be
excluded from coverage under the terms of our general liability insurance
policy.
Information provided by our pharmacists or on our PlanetRx.com website or
satellite websites may result in liability or negative publicity
In the event that our websites or our pharmacists provide erroneous or
misleading information to our customers, we may be subject to liability or
negative publicity that could have an adverse impact on our business. Our
pharmacists are required by law to offer counseling to our customers about
medication, dosage, delivery systems, common side effects and other information
deemed to be significant by the pharmacists. Our pharmacists may have a duty to
warn customers regarding any potential adverse effects of a prescription drug
if the warning could reduce or negate these effects. This counseling is in part
accomplished through e-mail, our toll-free telephone service and inserts
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included with the prescription, which may increase the risk of miscommunication
because the customer is not personally present or may not have provided all
relevant information to the pharmacist. In addition, information we provide
through our Ask the Pharmacist service on our websites may subject us to
liability to the extent that it contains any inaccuracies.
We also post product and health-related information on our PlanetRx.com
website and related satellite websites. Moreover, because visitors to our
satellite sites post content unedited by us, this content could give rise to
liability for us. This creates the potential for claims to be made against us
for negligence, personal injury, wrongful death, product liability,
malpractice, invasion of privacy or other legal theories based on our product
or service offerings. To the extent that our content is perceived as promoting
one product over another, our reputation could be harmed. Because online
pharmacies are in an early stage of development, the amount of negative
publicity that we or the online pharmacy industry receive could be
disproportionate in relation to the negative publicity received by traditional
pharmacies.
Although we carry general liability, product liability and professional
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to protect us from all liability that may be imposed. In
addition, we could face severe negative publicity if we are sued on these or
other grounds, which could hurt the PlanetRx.com brand and prevent us from
attracting and retaining customers. We cannot be certain that we will be able
to maintain general liability, product liability and professional liability
insurance in the future on acceptable terms or with adequate coverage against
potential liabilities.
We may be unable to accommodate increased consumer traffic on our website,
which would limit our ability to increase sales
If we fail to accommodate increased traffic on our website, our business
may be seriously harmed. Our commerce revenues depend on the number of
customers who use our website to purchase products. We depend on the
satisfactory performance, reliability and availability of our websites,
transaction processing systems, network infrastructure, customer support
center, distribution and shipping systems.
We will be required to add additional software and hardware and further
develop and upgrade our existing technology, transaction-processing systems,
network infrastructure and distribution facilities to accommodate increased
traffic on our websites and increased sales volume. Our inability to scale our
systems may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service or impaired quality and speed of
order fulfillment. We may be unable to effectively upgrade and expand our
transaction-processing systems to accommodate increases in the use of our
websites.
We may suffer systems failures on our websites which could result in negative
publicity and reduce the volume of products sold
From time to time, we have experienced temporary system interruptions in
connection with dramatically increased traffic on our website in response to
promotional activities. Although these interruptions have not significantly
harmed our operations, any system failure that results in the unavailability of
our websites or reduced order fulfillment performance could result in negative
publicity and reduce the volume of products sold, which would negatively affect
our business. The satisfactory performance, reliability and availability of our
websites, transaction processing systems and network infrastructure are
critical to our reputation and our ability to attract and retain customers and
to maintain adequate customer service levels.
In addition, because we outsource some aspects of our system, the cause of
system interruptions may be outside of our control, and therefore we may not be
able to correct any problem in a timely manner or at all. For example, we rely
substantially on Exodus
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Communications to maintain our servers, and Cybercash to handle many of the
elements of our transaction processing.
Our growth and changing operations have placed a significant burden on our
management system and resources, and any inability to manage this growth could
result in higher operating costs and lower gross margins
We have expanded our operations rapidly since our inception and the launch
of our PlanetRx.com website in March 1999. The number of our employees
increased from three on June 30, 1998 to 154 on June 30, 1999. Additionally,
many of our senior management have joined us within the last twelve months. We
intend to hire additional personnel in order to pursue existing and potential
market opportunities. Our growth has placed, and our anticipated future
operations will continue to place, a significant strain on our management
systems and resources, which could result in slower revenue growth, increased
operating costs and lower gross margins. Our ability to successfully offer
products and services and implement our business strategy in a rapidly evolving
market requires an effective planning and management process. We also expect
that we will need to continue to improve our transaction-processing,
operational, financial and managerial controls and reporting systems and
procedures as we grow.
Many of our senior management have no prior management experience at public
companies, and many of our executive officers have no prior management
experience in the healthcare industry. We cannot be certain that our current
and planned personnel, systems, procedures and controls will be adequate to
support our future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that our management will be
able to successfully identify, manage and exploit existing and potential market
opportunities.
If we are unable to attract and train adequate numbers of customer service
personnel, we may not be able to provide sufficient customer service
Our business depends in part on our ability to maintain superior customer
service. If we are unable to attract and train adequate numbers of customer
service personnel, our efforts to establish our brand may be harmed and our
business results may be impaired. We will need to commit significant additional
financial resources to attract and train customer service personnel in order to
provide our customers with high quality customer service.
We may be unable to expand the breadth and depth of our product offerings in a
cost-effective and timely manner
It is important to our future success to expand the breadth and depth of
our product offerings. For example, we recently introduced the sale of branded
cosmetics and salon hair care products on our PlanetRx.com website. Expansion
of our product categories and product offerings in this manner will require
significant additional expenditures and could strain our management, financial
and operational resources. For example, we may need to incur significant
marketing expenses, develop relationships with new suppliers or manufacturers,
or comply with new regulations. We cannot be certain that we will be able to
expand our product categories or offerings in a cost-effective or timely
manner, or that we will be able to offer every product in demand by our
customers. Furthermore, any new product offering that is not favorably received
by consumers could damage our reputation. The lack of market acceptance of new
products or our inability to generate satisfactory revenues from expanded
product offerings to offset their costs could harm our business.
If we do not successfully expand our distribution operations, we may not be
able to meet customer demand, which would result in loss of customers and
revenues
If we do not successfully expand our distribution operations on an ongoing
basis to accommodate increases in demand, we will not
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be able to fulfill our customers' orders in a timely manner, which would harm
our business. All of our distribution operations are handled at our facilities
in Memphis, Tennessee. Any future expansion may cause disruptions in our
business and may be insufficient to meet our ongoing distribution requirements.
We may be unable to meet our future capital requirements, which would impair
our ability to fund our operations
We require substantial working capital to fund our operations. We expect
that funds from operations and the proceeds of this offering will be sufficient
to fund our operations for the next twelve months, but we cannot assure you
that we will be able generate sufficient funds from our operations after that
time, in which case, we may need to raise additional funds. However, we cannot
be sure that additional financing would be available to us on favorable terms
or at all.
If we raise funds by issuing equity, equity-related or debt securities,
these securities may have rights, preferences and privileges that are senior to
our existing common stock. In addition, the issuance of these securities may
cause immediate and substantial dilution to our existing stockholders.
We face the risk of inventory theft and diversion, which could result in
increased operating costs
Many of our products are valuable, and their small size and packaging
render them particularly susceptible to theft and diversion in the course of
fulfillment and distribution. If the security measures we use at our
distribution center and during the distribution process do not prevent
significant inventory theft and diversion, our gross profit margins and results
of operations may be harmed.
If our online security measures fail, we could incur significant liabilities
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information, such as prescription or health
condition information, we could be subject to liability, including lawsuits.
This would be costly, divert the attention of our management and cause
significant harm to our reputation.
We are exposed to risks associated with credit card fraud, which may reduce
collections and discourage online transactions
If we fail to adequately control fraudulent credit card transactions, our
revenues and results of operations would be harmed because we do not carry
insurance against this risk. Under current credit card practices, we are liable
for fraudulent credit card transactions because we do not obtain a cardholder's
signature.
If one or more of our pharmacy licenses is not renewed, we may not be able to
ship our products into markets into which we currently deliver our products
We currently hold pharmacy licenses that allow us to ship into all U.S.
states and territories, and these licenses generally must be renewed on an
annual basis. If one or more of these licenses is not renewed, for whatever
reason, our business and reputation would be significantly harmed.
Government regulation of the health care and pharmacy industries may expose us
to risks that we may be fined or exposed to civil or criminal liability,
receive negative publicity or be prevented from shipping products into one or
more states
Our business is subject to extensive federal, state, and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter
drugs. Many of these regulations are new and subject to varying
interpretations, which makes the task of assuring compliance difficult.
Noncompliance with one or more of these regulations could result in substantial
fines and other monetary penalties, exclusion from participation in some
networks, and/or criminal sanctions which could adversely affect our business.
See "Business -- Government Regulation" for examples of the laws and
regulations most likely to affect our business.
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Our facilities, systems and operations are vulnerable to natural disasters and
other unexpected problems
Fire, flood, power loss, telecommunica-tions failure, break-ins,
earthquakes, tornadoes and similar events could damage our communications
hardware and other computer hardware operations, which are located in South San
Francisco, California and our distribution center and pharmacy, which are
located in Memphis, Tennessee. This could cause interruptions or delays in our
business, loss of data or render us unable to accept and fulfill customer
orders. In addition, computer viruses, electronic break-ins or other similar
disruptions could harm our websites. We have no formal disaster recovery plan
and our insurance may not adequately compensate us for losses that may occur
due to failures or interruptions in our systems.
The loss of any of our key personnel, or our failure to attract and retain
other highly qualified personnel in the future, could result in an inability to
manage ourgrowing operations
The loss of the services of one or more of our key personnel could
seriously disrupt our business. We depend on the continued services and
performance of our senior management and other key personnel, particularly
William J. Razzouk, Chief Executive Officer and Chairman of the Board. Our
future success also depends upon the continued service of our executive
officers and on our ability to attract and retain key sales, marketing and
support personnel, as well as pharmacists and software developers. Competition
for these individuals is intense, and we may not be able to attract, assimilate
or retain additional highly qualified personnel in the future. Many of our
senior management joined us within the last twelve months, including Mr.
Razzouk and Steve Valenzuela, our Chief Financial Officer. Our future success
depends on the ability of these officers to effectively work together with our
original management team. Except for Mr. Razzouk, none of our officers or key
employees is bound by an employment agreement. Our relationships with these
officers and key employees are at will. We do not have "key person" life
insurance policies covering any of our employees.
We may be unable to protect the intellectual property rights upon which our
business relies, which could harm our competitiveness and cause customer
confusion
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success. We rely
on trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to
protect our proprietary rights. These legal protections afford only limited
protection for our intellectual property and trade secrets. We have filed
applications for United States trademark registrations for, among others,
"PlanetRx.com." We may be unable to secure this registration. It is also
possible that our competitors or others will adopt service names similar to
ours, thereby impeding our ability to build brand identity and possibly leading
to customer confusion. In addition, there could be potential trade name or
trademark infringement claims brought by owners of other registered trademarks
or trademarks that incorporate variations of the term PlanetRx.com. Any claims
or customer confusion related to our trademark, or our failure to obtain
trademark registration, would negatively affect our business.
Effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which we will sell our products and
services online. Furthermore, the relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of our trademarks and other proprietary rights.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets and domain names and to determine
the validity and scope of the
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proprietary rights of others. If third parties prepare and file applications in
the United States that claim trademarks used or registered by us, we may oppose
those applications and be required to participate in proceedings before the
United States Patent and Trademark Office to determine priority of rights to
the trademark, which could result in substantial costs to us. Any litigation or
adverse priority proceeding could result in substantial costs and diversion of
resources and could seriously harm our business and operating results. Our
means of protecting our proprietary rights may not be adequate, and our
competitors could independently develop similar technology.
We may not be able to acquire new domain names or maintain our existing ones
Our strategy is dependent, in part, on our ability to use our satellite
websites and domain names to increase revenues. We believe that operating
satellite websites with names like "diabetes.com" that consumers can easily
locate and that provide useful information will attract consumers to these
websites and, by having links to the PlanetRx.com website, will increase
traffic and revenue opportunities. We currently hold the Internet domain name
"PlanetRx.com," as well as various other related names, including
arthritis.com, diabetes.com and cancer.com. Domain names generally are
regulated by Internet regulatory bodies. The regulation of domain names in the
U.S. and in foreign countries is subject to change. Regulatory bodies could
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names, which could
result in the creation of domain names similar to ours. As a result, we may be
unable to acquire or maintain the "PlanetRx.com" domain name or our other
domain names in all of the countries in which we conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights.
We may face costly product liability claims by consumers
The products we carry, including prescription drugs, non-prescription drugs
and dietary supplements, are particularly susceptible to product liability
claims. Any claim of product liability by a consumer against us, regardless of
merit, could be costly financially and could divert the attention of our
management. It could also create negative publicity, which would harm our
business. Although we maintain product liability insurance, it may not be
sufficient to cover a claim if one is made.
We may be found to infringe proprietary rights of others, which could result in
significant liabilities
Third parties may claim infringement by us with respect to past, current or
future proprietary rights. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any infringement claim, whether
meritorious or not, could be time-consuming, result in costly litigation or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
If we engage in any acquisitions, we will incur a variety of costs, and the
anticipated benefits of the acquisition may never be realized
If appropriate opportunities present themselves, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any material acquisitions and no material acquisition is currently
being pursued. If we do undertake any transaction of this sort, the process of
integrating an acquired business, technology, service or product may result in
unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, the anticipated benefits of any acquisition may fail
to be realized. Future acquisitions could result
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in potentially dilutive issuances of equity securities, the incurrence of debt,
contingent liabilities and/or amortization expenses related to goodwill and
other intangible assets, which could adversely affect our business, results of
operations and financial condition.
In addition, recent proposed changes in the Financial Accounting Standards
Board rules for merger accounting may affect our ability to make acquisitions
or be acquired. For example, elimination of the "pooling" method of accounting
for mergers could increase the amount of goodwill that we would be required to
account for if we merge with another company, which would have an adverse
financial impact on our future operating results. Further, accounting rule
changes that reduce the availability of write-offs for in-process research and
development costs in connection with an acquisition could result in the
capitalization and amortization of these costs and negatively impact results of
operations in future periods.
Year 2000 issues could affect our business
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with these year 2000 requirements. Our business
is dependent on the operation of numerous systems that could potentially be
impacted by year 2000 related problems. If our suppliers' systems, or third-
party software that we rely on, are not year 2000 compliant, or if our efforts
to make our systems year 2000 compliant are not successful, then our critical
systems will fail and our business will be harmed. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000".
We are controlled by officers, directors and entities affiliated with them
Based upon shares outstanding as of September 3, 1999, executive officers,
directors and entities affiliated with them will, in the aggregate,
beneficially own approximately 34.2% of our outstanding common stock following
the completion of this offering. These stockholders, if acting together, would
be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
Antitakeover provisions applicable to us could preclude an acquisition, even if
an acquisition would be beneficial to our stockholders
Provisions of our certificate of incorporation, bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. See "Description of Capital Stock".
Risks Related to Regulation of Internet Commerce
If we are required to charge taxes on purchases, we may have to increase
prices, which could lead to a loss of sales, or could result in increased net
losses
We do not collect sales or other similar taxes in respect of goods sold by
PlanetRx.com, except from purchasers located in California and Tennessee.
However, one or more additional states may seek to impose sales tax collection
obligations on out-of-state companies which engage in or facilitate online
commerce, and a number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. These proposals, if adopted, could substantially impair the
growth of e-commerce, and could adversely affect our ability to derive
financial benefit from our commercial activities. Additionally, the imposition
of these taxes would force online retailers to manage a more complex
transaction processing system.
Government regulation of the Internet and data transmission over the Internet
could affect our operations
Our customers regularly provide us with confidential information, such as
personal
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health information and credit card numbers. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. A recent session of the United States Congress resulted in
legislation governing children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. Laws governing the Internet, however, remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing intellectual property, privacy, libel and taxation apply to the
Internet. In addition, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business online. The adoption or modification of laws or regulations
relating to the Internet could adversely affect our business.
Risks Related to this Offering
Our stock price may be volatile which could result in losses for investors
The market price for our common stock is likely to be highly volatile,
particularly as the market for Internet-related stocks has experienced extreme
price and volume fluctuations in recent months. We expect our stock price to be
subject to wide fluctuations as a result of a variety of factors, including
factors beyond our control. These include:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new products or services
by us or our competitors;
. publicity about our company, our products and services, our competitors,
or e-commerce in general;
. changes in our financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the economic performance and/or market valuations of other
Internet, online commerce or retail companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock;
and
. potential litigation.
Because of this volatility, it is likely that we will fail to meet the
expectations of our stockholders or of securities analysts at some time in the
future, and our stock price may decline as a result.
Future sales of shares could affect our stock price
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Based on shares outstanding as of September 3, 1999, upon
completion of this offering, we will have outstanding 51,020,009 shares of
common stock, assuming no exercise of the underwriters' over-allotment option.
Other than the shares of common stock sold in this offering, 19,500 shares will
be eligible for sale in the public market immediately. Substantially all of our
stockholders, including Express Scripts, will be subject to agreements with the
underwriters or us that restrict their ability to transfer their stock for 180
days from the date of this prospectus. After these agreements expire, an
additional 21,471,488 shares will be eligible for sale in the public market
assuming no exercise of options. See "Shares Eligible for Future Sale" for a
further description regarding shares that will become eligible for sale at
future dates after this offering.
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New stockholders will incur immediate dilution as a result of this offering
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate
substantial dilution. In addition, we have issued options to acquire common
stock at prices significantly below the initial public offering price. To the
extent that these outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. See "Dilution" for a more
detailed description of how new stockholders will incur dilution.
We have broad discretion to use the proceeds from this offering
Our management can use the proceeds from this offering in ways with which
the stockholders may not agree. We cannot predict that the proceeds will be
invested to yield a favorable return. See "Use of Proceeds" for how we
generally intend to use the proceeds from this offering.
We do not intend to pay any dividends
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future. See
"Dividend Policy".
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates", "believes", "plans",
"expects", "future", "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
Internet use. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described in
the preceding pages and elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered by us
hereby a public offering price of $16.00 per share are estimated to be
$88,080,000, after deducting the underwriting discount and estimated offering
expenses payable by us, ($101,472,000 if the underwriters' over-allotment
option is exercised in full). We have no specific plan for the net proceeds of
this offering, however, we may use these proceeds for working capital and
general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary technologies or businesses. However, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in interest-
bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis,
. on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into 23,433,045 shares of common
stock, the issuance in September 1999 and conversion of all shares of
Series D preferred stock into 371,103 shares of common stock, and the
issuance of 849,150 shares of common stock upon the exercise and
conversion of all outstanding warrants to purchase 100,000 shares of
our series A preferred stock, warrants to purchase 16,000 shares of our
series B preferred stock and the purchase option for 700,000 shares of
our series B preferred stock upon the closing of this offering and
. on an as adjusted basis as to give effect to the issuance of 10,338,810
shares of common stock to Express Scripts in connection with our
purchase of assets and liabilities of YourPharmacy.com, which will be
effective upon the closing of this offering under the contribution
agreement, and the receipt and application of the net proceeds from the
sale by us of 6,000,000 shares of common stock at the initial public
offering price of $16.00 and assumes no exercise of the underwriters'
over-allotment option. See "Underwriting".
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Borrowings and capital lease obligations, long-
term.......................................... $ 1,600 $ 1,600 $ 1,600
-------- -------- --------
Stockholders' equity:
Preferred stock: $0.0001 par value, 28,000,000
shares authorized, 23,135,364 shares issued
and outstanding, actual; 28,000,000 shares
authorized, none issued and outstanding, pro
forma, 5,000,000 shares authorized, none
issued and outstanding as adjusted........... 2 -- --
Common stock: $0.0001 par value, 42,000,000
shares authorized, 9,840,250 shares issued
and outstanding actual; 42,000,000 shares
authorized, 34,493,548 shares issued and
outstanding, pro forma(1); 100,000,000 shares
authorized, 50,832,358 shares issued and
outstanding as adjusted(1)................... 1 3 4
Additional paid-in capital..................... 121,682 132,812 409,730
Notes receivable from stockholders............. (35) (35) (35)
Deferred stock-based compensation.............. (17,292) (17,292) (17,292)
Accumulated deficit............................ (25,363) (25,363) (25,363)
-------- -------- --------
Total stockholders' equity.................... 78,995 90,125 367,044
-------- -------- --------
Total capitalization.......................... $ 80,595 $ 91,725 $368,644
======== ======== ========
</TABLE>
- --------
(1) Excludes 1,882,750 shares reserved for issuance under our 1998 stock
option plan, of which 1,326,050 shares were subject to outstanding options
as of June 30, 1999 at a weighted average exercise price of $1.46 per
share. Excludes options to purchase 1,940,184 shares of our common stock to
be granted to employees of YourPharmacy.com effective on the closing of
this offering at a weighted average exercise price of $4.84 per share.
Reflects the filing of an amended and restated certificate of incorporation
to provide for authorized capital stock of 100,000,000 shares of common
shares and 5,000,000 shares of undesignated preferred stock effective upon
the closing of the offering. See "Management -- Stock Plans", "Certain
Transactions" and Note 7 of Notes to Financial Statements.
22
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$85,903,000 or $2.49 per share of common stock. Pro forma data in this section
assumes the automatic conversion of all outstanding shares of preferred stock
into 23,433,045 shares of common stock, the issuance in September 1999 and
conversion of all shares of Series D preferred stock into 371,103 shares of
common stock, and the issuance of 849,150 shares of common stock upon the
exercise and conversion of all outstanding warrants and the purchase option for
preferred stock as of June 30, 1999. Pro forma data excludes 1,882,750 shares
reserved for issuance under our 1998 stock plan, of which 1,326,050 shares were
subject to outstanding options at a weighted-average exercise price of $1.46
per share. To the extent outstanding options are exercised, there will be
further dilution to new investors. Pro forma data also excludes options to
purchase 1,940,184 shares of our common stock to be granted to employees of
YourPharmacy.com effective on the closing date of this offering at a weighted
average exercise price of $4.84 per share. See "Management--Stock Plans",
"Related Party Transactions", Notes 1 and 7 of Notes to Financial Statements
and "Unaudited Pro Forma Consolidated Financial Data--Overview". "Net tangible
book value" per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities and divided by the total number
of shares of common stock outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of shares of common stock in this offering and the net tangible book value per
share of common stock immediately after the completion of this offering, after
giving effect to the issuance of 10,338,810 shares of common stock to Express
Scripts in connection with our purchase of selected assets and liabilities of
YourPharmacy.com which will be effective upon the closing of this offering,
under the contribution agreement and the sale of the 6,000,000 shares of common
stock offered by us at the initial public offering price of $16.00 per share,
and after deducting the underwriting discount and estimated offering expenses
payable by us, our pro forma net tangible book value at June 30, 1999 would
have been $168,681,000 or approximately $3.32 per share of common stock. This
represents an immediate increase in net tangible book value of $0.83 per share
to existing stockholders and an immediate dilution of $12.68 per share to new
investors of common stock. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $16.00
Pro forma net tangible book value per share before the offering.. $2.49
Increase per share attributable to new investors................. 0.83
-----
Pro forma net tangible book value per share after the offering..... 3.32
------
Dilution per share to new investors................................ $12.68
======
</TABLE>
The following table sets forth, as of June 30, 1999, the differences
between the number of shares of common stock purchased from PlanetRx.com, the
total cash paid and the average price per share paid by existing holders of
common and preferred stock, by assumed exercise of all outstanding warrants and
the purchase option, by Express Scripts and by the new investors, before
deducting the underwriting discount and estimated offering expenses payable by
PlanetRx.com, at the initial public offering price of $16.00 per share.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Average Cash
--------------------- ----------------------- Price
Number Percentage Amount Percentage Per Share
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 33,273,295 65.5% $ 83,955,000 43.9% $ 2.52
Assumed exercise of
warrants and purchase
option................. 849,150 1.7 3,630,000 1.9 4.27
Series D stockholder.... 371,103 0.7 7,500,000 3.9 20.21
Express Scripts(1)...... 10,338,810 20.3 -- 0.0 0.00
New investors........... 6,000,000 11.8 96,000,000 50.3 16.00
---------- ----- ------------ -----
Totals................ 50,832,358 100.0% $191,085,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Simultaneous with the close of this offering, we will issue 10,338,810
shares of common stock to Express Scripts in connection with our purchase
of selected assets and liabilities of YourPharmacy.com. These shares will
represent 19.9% of our outstanding stock after this offering, assuming the
over-allotment option is exercised. If the over-allotment option is not
exercised, Express Scripts will return to us, at no cost, that number of
shares necessary to reduce its ownership to 19.9% of our then outstanding
stock.
23
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, the Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations data set forth below for each of the three years in the period ended
December 31, 1998 and the balance sheet data as of December 31, 1997 and 1998
have been derived from our audited financial statements appearing elsewhere in
this prospectus. The statement of operations data for the period from March 31,
1995 (inception) to December 31, 1995 and the balance sheet data as of December
31, 1995 and 1996 are derived from audited financial statements not included in
this prospectus. The statement of operations data for the six months ended
June 30, 1998 and 1999 and the balance sheet data as of June 30, 1999 have been
derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited statements have been prepared on substantially the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the financial position and results of operations for the
period. The historical results are not necessarily indicative of results that
may be expected for any future period.
<TABLE>
<CAPTION>
March 31, 1995 Year Ended Six Months
(inception) to December 31, Ended June 30,
December 31, ---------------------------- ------------------
1995 1996 1997 1998 1998 1999
-------------- -------- -------- -------- -------- --------
(unaudited)
Statement of Operations
Data: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
e-commerce............. $ -- $ -- $ -- $ -- $ -- $ 622
Sponsorship............ -- -- -- -- -- 195
-------- -------- -------- -------- -------- --------
-- -- -- -- -- 817
-------- -------- -------- -------- -------- --------
Cost of net revenue:
e-commerce............. -- -- -- -- -- 694
Sponsorship............ -- -- -- -- -- 35
-------- -------- -------- -------- -------- --------
-- -- -- -- -- 729
-------- -------- -------- -------- -------- --------
Gross profit............ -- -- -- -- -- 88
-------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and sales.... -- -- -- 907 3 9,614
Product development.... 22 7 113 1,025 106 3,254
General and
administrative........ -- -- 23 541 2 2,366
Stock-based
compensation.......... -- -- -- 1,650 -- 4,308
-------- -------- -------- -------- -------- --------
Total operating
expenses.............. 22 7 136 4,123 111 19,542
-------- -------- -------- -------- -------- --------
Operating loss.......... (22) (7) (136) (4,123) (111) (19,454)
Interest income......... -- -- -- 38 -- 399
Interest expense........ -- -- (1) (2) -- (1,046)
-------- -------- -------- -------- -------- --------
Net loss................ $ (22) $ (7) $ (137) $ (4,087) $ (111) $(20,101)
======== ======== ======== ======== ======== ========
Plus effect of
antidilution provisions
of Series B Preferred
Stock.................. -- -- -- -- -- (1,009)
-------- -------- -------- -------- -------- --------
Net loss available to
common shareholders.... $ (22) $ (7) $ (137) $ (4,087) $ (111) $(21,110)
======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share(1)...... $ -- $ -- $ -- $ (9.12) $ -- $ (8.35)
======== ======== ======== ======== ======== ========
Basic and diluted pro
forma net loss per
share (unaudited)(1)... $ (1.00) $ (1.04)
======== ========
Weighted average shares
used to compute basic
and diluted net loss
per share(1)........... -- -- -- 448 2,528
======== ======== ======== ======== ========
Weighted average shares
used to compute pro
forma basic and diluted
net loss per share
(unaudited)(1)......... 4,102 20,210
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1995 1996 1997 1998 1999
---- ---- ---- ------ -----------
(unaudited)
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 5 $ 5 $ 15 $ 935 $62,688
Working capital (deficit).................. 3 1 (19) 581 71,712
Total assets............................... 7 7 36 5,707 85,236
Borrowings and capital lease obligations,
long-term................................. -- -- 10 2 1,600
Total stockholders' equity (deficit)....... 5 3 (8) 3,469 78,995
</TABLE>
- -------
(1) See Note 1 of Notes to the Financial Statements for an explanation of the
determination of the number of shares and share equivalents used in
computing per share and pro forma per share amounts.
24
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
In August 1999, PlanetRx.com entered into a series of agreements with
Express Scripts, Inc. and its wholly owned subsidiary, YourPharmacy.com, Inc.
Effective upon the closing of the offering under the contribution agreement,
PlanetRx.com will issue 19.9% of our outstanding stock to Express Scripts
assuming the over-allotment option is exercised and in exchange we will acquire
selected assets and liabilities of YourPharmacy.com Inc. Additionally under
other agreements in the series, Express Scripts members will be able to use
their reimbursement plan to fill prescriptions online at PlanetRx.com and
Express Scripts will promote the Company as Express Scripts' Internet pharmacy.
The acquisition will be accounted for using the purchase method of accounting
and, accordingly, the purchase price will be allocated to the tangible and
intangible assets acquired and the liabilities assumed at their respective fair
values at the date the acquisition is consummated. The purchase price will
consist of the quantity of shares issued upon the closing of the initial public
offering (including shares issued pursuant to the underwriters' over-allotment
option) to enable Express Scripts to own 19.9% of the Company's outstanding
common stock at the price per share issued in the initial public offering, the
fair value of 1.9 million options to purchase our common stock issued in
exchange for outstanding YourPharmacy.com, Inc. options and direct acquisition
costs. Accordingly, for purchase accounting purposes, changes associated with
the underwriters' over-allotment option may change the computation of the
purchase price.
For the purpose of preparing the unaudited pro forma consolidated financial
data, the estimated purchase price of $193.5 million was comprised of (i) the
assumed issuance of 10,115,214 shares of Common Stock at a price per share of
$16.00, (ii) the assumed issuance of 223,596 shares of Common Stock at a
preliminary price per share of $16.00 assuming the over-allotment is exercised,
(iii) the assumption of 1,940,184 options and a price per share of $16.00, and
(iv) estimated direct acquisition costs of $4.7 million. The allocation of the
purchase price in the unaudited pro forma consolidated financial data resulted
in an excess purchase consideration over tangible net liabilities of $194.1
million which has been allocated to goodwill with an estimated useful life of 5
years. The following unaudited pro forma consolidated financial data reflects
the effects of the contribution agreement as if the acquisition occurred on
February 2, 1998, the YourPharmacy.com inception date. The consolidated pro
forma statement of operations data may not be indicative of the results of
operation had the acquisition actually occurred on February 2, 1998, nor do
they purport to indicate the future results of PlanetRx.com.
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
----------------- ----------------
(in thousands, except per share
data)
<S> <C> <C>
Pro Forma Consolidated Statement of
Operations Data:
Net revenue:
e-commerce................................. $ -- $ 622
Sponsorship................................ -- 195
-------- --------
-- 817
-------- --------
Cost of net revenue:
e-commerce................................. -- 694
Sponsorship................................ -- 35
-------- --------
-- 729
-------- --------
Gross profit................................ -- 88
-------- --------
Operating expenses:
Marketing and sales........................ 907 10,091
Product development........................ 1,621 4,677
General and administrative................. 1,436 4,132
Stock-based compensation................... 1,650 4,308
Amortization of goodwill................... 35,596 19,416
-------- --------
Total operating expenses.................. 41,210 42,624
-------- --------
Operating loss.............................. (41,210) (42,536)
Interest income............................. 38 399
Interest expense............................ (2) (1,046)
-------- --------
Net loss.................................... $(41,174) $(43,183)
Plus effect of antidilution provisions of
Series B Preferred Stock................... -- (1,009)
-------- --------
Net loss available to common shareholders... $(41,174) $(44,192)
======== ========
Basic and diluted net loss per share
unaudited(1)............................... $ (3.04) $ (1.45)
======== ========
Weighted average shares used to compute
basic and diluted net loss per share
(unaudited)(1)............................. 13,535 30,549
======== ========
</TABLE>
- --------
(1) See Note 1 of Notes to Unaudited Pro Forma Consolidated Financial Data for
a description of the method used to compute basic and diluted net loss per
share.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. These statements refer to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "expects", "anticipates", "intends", "plans" and
similar expressions. Our actual results could differ materially from those
anticipated in such forward-looking statements. Factors that could contribute
to these differences include, but are not limited to, the risks discussed in
the section titled "Risk Factors" in this prospectus.
Overview
PlanetRx.com
PlanetRx.com is a leading online healthcare destination for commerce,
content and community. Our e-commerce website, www.PlanetRx.com, which we
launched on March 18, 1999, provides a convenient, private and informative
shopping experience for health and personal care products. We offer products in
six categories: prescription drugs; non- prescription drugs; personal care;
beauty and spa; vitamins, herbs and nutrition; and medical supplies. Our
eCenters, located within the PlanetRx.com website, incorporate content that
addresses a variety of health-related topics. In addition, we own and operate a
network of satellite websites targeting specific healthcare conditions by
providing relevant content and a destination for online communities. These
condition-specific websites, which include diabetes.com, depression.com,
obesity.com and alzheimers.com, are linked to the PlanetRx.com website.
From our inception through the launch of our PlanetRx.com website, we did
not generate any sales and our operating activities consisted mainly of
developing our business model, constructing our websites and transaction
processing system, researching and developing health-related content,
recruiting and training employees, gaining necessary funding, negotiating
advertising contracts with several of the major Internet portals, building our
pharmacy and distribution center and establishing the PlanetRx.com brand name.
Since launching our PlanetRx.com website, we have continued these
activities and, in addition, increased the breadth of our product offerings,
expanded our online information resources, developed new services such as
online communities, community message boards and support groups and identified
and executed strategic partnerships.
To date, we have entered into a number of intellectual property
acquisitions and strategic agreements and have focused on increasing the number
of visitors to our websites and increasing our sales volume. In December 1998,
we issued approximately 198,000 shares of common stock to an employee for
services rendered in connection with the acquisition and transfer of domain
names. We recorded the estimated fair value of the stock of $614,000 as a
prepaid asset, and reclassified such amount to intangible assets upon the
transfer of such names in January 1999. The fair value of the stock will be
amortized as stock-based compensation expense over the estimated useful life,
which is deemed to be two years. In June 1999, we issued approximately 342,000
shares of common stock to a company affiliated with an employee for additional
domain names. We recorded the estimated fair value of the stock of $3.8 million
as an intangible asset. The fair value of the stock will be amortized as stock-
based compensation expense over the estimated useful life, which is deemed to
be two years. We are currently incorporating these domain names into the
PlanetRx.com community.
In May 1999, we entered into a strategic alliance with a major
pharmaceutical company. Under the terms of the agreement, this pharmaceutical
company is the exclusive therapeutic disease state management sponsor within
our diabetes.com community. We plan to enter into similar agreements with other
third parties in connection with the expansion of other PlanetRx.com
communities.
In December 1998, we entered into a three-year marketing agreement with
AOL.
27
<PAGE>
Under the terms of the agreement, AOL will provide us with advertising
featuring us as an online pharmacy in exchange for $15.0 million over the three
year term. We paid $1.2 million and $3.0 million during the year ended
December 31, 1998 and the six months ended June 30, 1999, respectively. We
recognized $1.5 million in advertising expense during the six months ended June
30, 1999 under this agreement.
In August 1999, we entered into a series of agreements with Express
Scripts, Inc. and its wholly owned subsidiary, YourPharmacy.com, Inc. Under the
contribution agreement, effective upon the closing of the initial public
offering we will issue 19.9% of our outstanding stock to Express Scripts,
assuming the underwriter's over-allotment option is exercised, in exchange for
selected assets and liabilities of YourPharmacy.com. In addition, under the
other agreements, Express Scripts members will be able to use their
reimbursement plan to fill prescriptions with PlanetRx.com and Express Scripts
will promote us as Express Scripts' Internet pharmacy.
The acquisition will be accounted for using the purchase method of
accounting and, accordingly, the purchase price will be allocated to the
tangible and intangible assets acquired and the liabilities assumed at their
respective fair values at the date the acquisition is consummated. The purchase
price will consist of the quantity of shares issued upon the closing of the
initial public offering (including shares issued pursuant to the underwriters'
over-allotment option) to enable Express Scripts to own 19.9% of our
outstanding common stock at the price per share issued in the initial public
offering, the fair value of 1,940,184 options to purchase our common stock
issued in exchange for outstanding YourPharmacy.com options, and direct
acquisition costs. Accordingly, for purchase accounting purposes, changes
associated with the underwriters' over-allotment option may change the
computation of the purchase price.
For the purpose of preparing the unaudited pro forma consolidated financial
data, the estimated purchase price of $193.5 million was comprised of (i) the
assumed issuance of 10,115,214 shares of our common stock at a price per share
of $16.00, (ii) the assumed issuance of 223,596 shares of our common stock at a
preliminary price per share of $16.00 assuming the over-allotment is exercised,
(iii) the assumption of 1,940,184 options at a price per share of $16.00 and
(iv) estimated direct acquisition costs of $4.7 million. The allocation of the
purchase price resulted in an excess purchase consideration over tangible net
liabilities of $194.1 million which has been allocated to goodwill with an
estimated useful life of 5 years.
This preliminary amount will be amortized over a five-year period using a
straight-line basis. We expect to amortize approximately $9.7 million of the
remainder in 1999, $38.8 million in 2000, 2001, 2002 and 2003, and $29.2
million in 2004, if the fair value assumptions we used in the calculation of
the preliminary purchase price are consistent with the actual fair values on
the acquisition dates. Effective upon the closing of this offering, we will be
obligated to pay five annual payments of $14.7 million to Express Scripts in
connection with the series of agreements. We may be obligated to pay additional
incremental amounts based on Express Scripts' member activity on the
PlanetRx.com website.
In September 1999, we entered into a three-year sponsorship and a three-
year content license agreement with iVillage, Inc. Under the terms of the
agreements, we will be provided with a specific number of advertising
impressions featuring us as the exclusive online full service pharmacy devoted
to health and wellness needs and rights to certain online content. In
consideration, we have agreed to pay approximately $22.5 million over a
three-year term. In addition, to further enhance the strategic relationship
between iVillage and us, we issued 371,103 shares of series D preferred stock
to iVillage for aggregate consideration of $7.5 million.
Net Revenue
e-commerce. e-commerce net revenue consists of product sales and charges to
28
<PAGE>
customers for outbound shipping and is net of allowances for product returns
and promotional discounts. We recognize e-commerce revenue when products are
shipped.
Sponsorship. Sponsorship net revenue includes payments from third parties
in exchange for our identification of those parties within the sponsored
website areas. Sponsorship revenue is recognized ratably over the related
period.
Cost of Net Revenue
e-commerce. Cost of e-commerce net revenue consists primarily of the costs
of products sold to customers and costs of outbound and inbound shipping. Our
e-commerce gross margins will fluctuate in the future and will be affected by
promotional discounts, mix of products sold and sales allowances.
Sponsorship. Cost of sponsorship net revenue consists primarily of amounts
paid to the former owners of Internet domain names that have been incorporated
into some of our PlanetRx.com communities. These amounts are typically a
percentage of sponsorship revenue generated in connection with the
corresponding community and are generally capped at a specific dollar amount.
Cost of sponsorship net revenue may also include Internet access fees and
online hosting charges.
Operating Expenses
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, costs of product distribution,
including order processing, credit card commission fees, equipment and
supplies, as well as payroll related expenses.
Product Development. Product development expenses consist primarily of
payroll-related expenses for website development and information technology
personnel, Internet access fees, online hosting charges and costs associated
with creating and purchasing editorial and licensed content.
General and Administrative. General and administrative expenses consist
primarily of payroll-related expenses for executive and administrative
personnel, corporate facility expenses, professional services expenses, travel
and other general corporate expenses.
Stock-Based Compensation. We recorded total deferred stock-based
compensation of $4.6 million for the year ended December 31, 1998 and $16.6
million for the six months ended June 30, 1999 in connection with stock options
granted during these periods. Our resulting amortization of deferred stock-
based compensation totaled $888,000 for the year ended December 31, 1998 and
$3.0 million for the six months ended June 30, 1999. The amortization expense
relates to options awarded in all operating expense categories. We will
continue to amortize the remaining balance of deferred compensation of $17.3
million until the fiscal year ending December 31, 2004. In addition to the
amortization of deferred stock-based compensation, we recorded stock
compensation expense of $765,000 and $1.3 million associated with stock,
options and warrants in exchange for services for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively. We recorded
additional deferred stock based compensation of $10.2 million in connection
with 1,673,900 stock options granted to our employees in July and August 1999.
Income Taxes. At December 31, 1998, we had a fully reserved tax asset of
$1.1 million. We have incurred losses from inception through June 30, 1999 and
believe, based upon the history of such losses and other factors, that the
weight of available evidence indicates that it is more likely than not that we
will not be able to realize our deferred tax assets and thus a full valuation
reserve has been recorded through June 30, 1999. See Note 3 of Notes to
Financial Statements.
Results of Operations
Six Months Ended June 30, 1998 and 1999
Net Revenue
We commercially launched our PlanetRx.com website on March 18, 1999. Prior
to our launch, we generated no net revenue. Net revenue for the period ended
June 30, 1999 was $817,000. Of this amount, $622,000, or 76%,
29
<PAGE>
was e-commerce revenue and $195,000, or 24%, was sponsorship revenue. Included
in our net revenues of $817,000 is approximately $121,000 or 15% which is
derived from shipping and handling charges. From time to time, we offer
discounted or free shipping to our customers as a part of our promotional
strategy. As such, shipping and handling charges could differ materially from
period to period, both in absolute dollars and as a percentage of net revenues.
Cost of Net Revenue
Our cost of net revenue for the period ended June 30, 1999 was $729,000.
Our gross margin for the six months ended June 30, 1999 was 11%. Prior to our
commercial launch of our PlanetRx.com website on March 18, 1999, we generated
no costs of net revenue.
e-commerce. Our cost of net revenue resulting from e-commerce for the six
months ended June 30, 1999 was $694,000 resulting in a negative gross margin
for the period. The negative gross margin is primarily a result of promotional
sales discounts. We intend to continue to offer various discounts as part of
our strategy to attract customers. As such, we may continue to experience
negative gross margins resulting from e-commerce in the future. We expect the
cost of e-commerce revenues to increase in absolute dollars to the extent that
our sales volume increases.
Sponsorship. Our cost of net revenue resulting from sponsorship for the
period ended June 30, 1999 was $35,000. Our gross margin for sponsorship
revenue was 82% during the six months ended June 30, 1999. We expect that the
cost of sponsorship revenue will increase in absolute dollars to the extent
that our sponsorship revenue increases.
Operating Expenses
Marketing and Sales. Marketing and sales expenses increased from $3,000
during the six months ended June 30, 1998 to $9.6 million during the six months
ended June 30, 1999. This increase is related to costs experienced after the
launch of our PlanetRx.com website relating to marketing and promotional
campaigns as well as costs related to order processing and distribution and
growth in head count. We expect that as our commerce revenue increases and as
we continue to focus on aggressively marketing the PlanetRx.com brand, our
marketing and sales expenses will increase in both absolute dollars and as a
percentage of net revenue.
Product Development. Product development expenses increased from $106,000
during the six months ended June 30, 1998 to $3.3 million during the six months
ended June 30, 1999. This increase is related to the expansion of our websites
and system development and increased headcount related thereto. We believe that
continued investment in product development is critical to attaining our
strategic objectives and, as a result, we expect product development expenses
to increase in absolute dollars.
General and Administrative. General and administrative expenses increased
from $2,000 during the six months ended June 30, 1998 to $2.4 million during
the six months ended June 30, 1999. This increase is related to increased
headcount, professional services and facilities expenses. We expect general and
administrative expenses to increase in absolute dollars as we expand our staff
and incur additional costs related to the anticipated growth of our business.
Interest Income and Expense
Interest income consists of earnings on our cash and cash equivalents and
interest expense consists of interest associated with our borrowings and
capital lease obligations. As of June 30, 1999 the balance outstanding under
the borrowings was $1.6 million. We had no substantial interest bearing assets
or liabilities during the six months ended June 30, 1998.
Interest expense includes prepaid debt issuance costs associated with a
warrant and purchase option issued during 1999 in connection with one of our
financing arrangements. The warrant and purchase option provide for the
purchase of up to 716,000 shares of our series B preferred stock for $5.00 per
share. During the six months ended June 30, 1999, we recorded $1.8 million as
the fair value of
30
<PAGE>
the warrant and purchase option and recognized non-cash interest expense of
$906,000 for the six months ended June 30, 1999. See Note 6 of Notes to
Financial Statements.
Fiscal Years Ended December 31, 1997 and 1998
Net Revenue and Cost of Net Revenue
Prior to the launch of our PlanetRx.com website on March 18, 1999, we did
not generate any net revenue, nor did we incur any related cost of net revenue.
Operating Expenses
Marketing and Sales. Marketing and sales expenses increased from $0 during
the year ended December 31, 1997 to $907,000 during the year ended December 31,
1998. These expenses consisted primarily of the costs of recruiting marketing
and sales personnel which were incurred after July 1, 1998.
Product Development. Product development expenses increased from $113,000
during the year ended December 31, 1997 to $1.0 million during the year ended
December 31, 1998. The increase is related to increased development activities
and increased headcount to develop content and technology for our websites.
General and Administrative. General and administrative expenses increased
from $23,000 during the year ended December 31, 1997 to $541,000 during the
year ended December 31, 1998. Prior to July 1, 1998, general and administrative
expenses primarily consisted of facilities expenses and professional services
to support the development staff. During the remainder of the year ended
December 31, 1998, we began to build our administrative staff and incurred
increased general business expenses in connection with our company-wide
expansion.
Interest Income and Expense
As of December 31, 1998, the balance outstanding under our note payable was
$600,000. We had no substantial interest bearing assets and only minor interest
bearing liabilities during the year ended December 31, 1997.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock and common stock which through June 30,
1999, totaled $83.8 million, net of issuance costs of $141,000.
Net cash used in operating activities was $15.2 million during the six
months ended June 30, 1999 and $2.0 million during the year ended December 31,
1998. Net cash used in operating activities for each of these periods primarily
consisted of net losses as well as increases in prepaid expenses, partially
offset by increases in accounts payable, accrued expenses and depreciation and
amortization.
Net cash used in investing activities was $2.4 million during the six
months ended June 30, 1999 and $2.9 million during the year ended December 31,
1998. Net cash used in investing activities for each of these periods primarily
consisted of purchases of equipment and systems, including computer equipment
and fixtures and furniture.
Net cash provided by financing activities was $79.4 million during the six
months ended June 30, 1999 and $5.9 million during the year ended December 31,
1998. Net cash provided by financing activities during the six months ended
June 30, 1999 primarily consisted of net proceeds of $77.8 million from the
issuance of convertible preferred stock. Net cash provided by financing
activities for the year ended December 31, 1998 primarily consisted of proceeds
of $5.2 million from the issuance of convertible preferred stock. As of June
30, 1999 and December 31, 1998, we had $8.0 million and $1.0 million,
respectively, available under various financing instruments that expire through
January 2000.
As of June 30, 1999, we had $62.7 million of cash and cash equivalents. As
of that date, our principal commitments consisted of obligations outstanding
under operating leases, a line of credit and marketing and advertising
agreements. Although we have no material commitments for capital expenditures,
we anticipate a substantial increase in our capital expenditures and lease
commitments consistent
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with anticipated growth in operations, infrastructure and personnel.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next twelve
months. We may need to raise additional funds prior to the expiration of such
period. If we raise additional funds through the issuance of equity, equity-
related or debt securities, such securities may have rights, preferences or
privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
Year 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. For example, we are dependent on the financial institutions involved
in processing our customers' credit card payments and a third party that hosts
our servers. We are also dependent on telecommunications vendors to maintain our
network and the United States Postal Service and other third-party carriers to
deliver orders to customers.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to continue these tests through the end of 1999. Since inception, we have
internally developed substantially all of the systems for the operation of our
websites. These systems include the software used to provide our websites'
search, customer interaction, and transaction-processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software for use in our accounting, database and security systems. The failure
of such software or systems to be year 2000 compliant could have a material
negative impact on our corporate accounting functions and the operation of our
websites. As part of the assessment of the year 2000 compliance of these
systems, we have sought assurances from these vendors that their software,
computer technology and other services are year 2000 compliant. To date,
approximately 47% of these vendors have responded to our requests, and none of
these respondents have indicated that they have year 2000 compliance issues. We
are continuing to solicit responses to our requests, and we expect that we will
complete this assessment prior to December 31, 1999. Each of these vendors
supplies us with software that is significant to our over-all operations.
Despite the responses we have received from these vendors, we cannot assure you
that the software they provide us will not experience year 2000 problems and
cause significant disruptions to our operations. Based upon the results of this
assessment, we will develop and implement, if necessary, a remediation plan
with respect to third-party software, third-party vendors and computer
technology and services that may fail to be year 2000 compliant, including
replacing any third-party software and vendors that we believe to not be year
2000 compliant. We expect to complete any required remediation prior to
December 31, 1999. Costs incurred to date in connection with year 2000
compliance issues have been immaterial, and, at this time, the expenses
associated with this assessment and potential remediation plan that may be
incurred in the future cannot be determined. Therefore, we have not developed a
budget for these expenses. The failure of our software and computer systems and
of our third-party
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suppliers, carriers and other service providers to be year 2000 complaint would
have a material adverse effect on us.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet are carefully reviewing and attempting to
remediate issues relating to year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of year 2000 issues. A significant disruption in the
ability of consumers to reliably access the Internet or portions of it or to
use their credit cards would have an adverse effect on demand for our services
and would have a material adverse effect on us.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our suppliers, carriers and other service
providers are unable to achieve year 2000 compliance because we currently do
not believe that such a plan is necessary. The cost of developing and
implementing such a plan, if necessary, could be material. Any failure of our
systems, our vendors' systems or the Internet to be year 2000 compliant could
have material adverse consequences for us. These consequences could include
difficulties in operating our websites effectively, taking product orders,
making product deliveries or conducting other fundamental parts of our
business, such as our internal accounting, database and security systems.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software developed or
obtained for internal use including the requirements to capitalize specified
costs and amortization of such costs. We adopted SOP 98-1 effective January 1,
1999 and do not expect the adoption to have a material effect on our results of
operations, financial position and cash flows.
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-
Up Activities". Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, commencing some new operation or organizing a new entity. Under SOP
98-5, the cost of start-up activities should be expensed as incurred. We
adopted SOP 98-5 effective January 1, 1999 and we do not expect the adoption to
have a material effect on our results of operations, financial position and
cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" (SFAS 133). SFAS 133 is effective for all fiscal quarters
beginning with the quarter ending June 30, 2000. SFAS 133 establishes
accounting and reporting standards of derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging activities.
We will adopt SFAS 133 in our quarter ending June 30, 2000 and do not expect
such adoption to have an impact on our results of operations, financial
position and cash flows.
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BUSINESS
PlanetRx.com
PlanetRx.com is a leading online healthcare destination for commerce,
content and community. Our e-commerce website, www.PlanetRx.com, which we
launched on March 18, 1999, provides a convenient, private and informative
shopping experience for health and personal care products. We offer products in
six categories: prescription drugs; non-prescription drugs; personal care;
beauty and spa; vitamins, herbs and nutrition; and medical supplies. Our
eCenters, located within the PlanetRx.com website, incorporate content that
addresses a variety of health-related topics. In addition, we own and operate a
network of satellite websites targeting specific healthcare conditions by
providing relevant content and a destination for online communities. These
condition-specific websites, which include diabetes.com, depression.com,
obesity.com and alzheimers.com, are linked to the PlanetRx.com website.
Industry Background
The Growth of the Internet and Online Commerce
The Internet is a significant medium for communication and commerce,
enabling millions of people to share information and conduct business
electronically. International Data Corporation estimates the following:
. 142 million users worldwide accessed the Internet at the end of 1998,
and this number is expected to increase to approximately 502 million
users by the end of 2002; and
. worldwide business-to-consumer sales over the Internet will increase
from approximately $15 billion in 1998 to approximately $115 billion by
2002.
The unique characteristics of the Internet provide a number of advantages
for online retailers. Without the physical constraints faced by traditional
retailers, online retailers are able to carry a larger number of products at a
lower cost and with greater merchandising flexibility. Additionally, they can
assist the consumer's purchase decision by providing relevant information and
enabling consumers to shop at their convenience by remaining open 24 hours a
day, seven days a week. Online retailers can also provide personalized services
and use direct marketing efforts based on information provided by customers.
While the Internet provides the ability to display professionally-created
content, it can also be used to create forums where Internet users with similar
interests and concerns can interact with each other. Often the most relevant
information to Internet users is generated by other users. However, most
websites, including those of most online retailers, do not provide a forum for
users to interact in a community environment and to access content created by
others. As a result, we believe that there is a significant unfulfilled demand
for these online communities, especially in connection with health and
wellness.
The PlanetRx.com Market
Our market consists of prescription drugs, non-prescription drugs, personal
care products, beauty and spa, vitamins, herbs and nutrition and medical
supplies. Based on estimates from the National Association of Chain Drugstores
and Information Resources, Inc., we believe the U.S. market for health and
personal care products will exceed $175 billion in 1999, of which prescription
drugs comprised over $120 billion. We believe that the aging of the U.S.
population will continue to drive increased demand for these products.
To date, these products have been sold primarily through chain drugstores
such as CVS, Eckerd, RiteAid and Walgreen's, mass market retailers such as
Kmart, Target and Wal-Mart, supermarkets, warehouse clubs, mail-order companies
and independent drugstores and pharmacies. However, a significant number of
consumers are beginning to use the Internet to shop for healthcare products.
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In addition to online shopping for healthcare products, people are
increasingly using the Internet as a source for health and medical information.
Cyber Dialogue estimates that the number of adults in the United States
searching online for health and medical information will grow from
approximately 17.1 million during the twelve month period ended July 1998 to
approximately 33.5 million during the twelve month period ending July 2000.
Prescription Drugs. This segment includes prescription medication for
chronic illnesses, such as diabetes, depression and arthritis. We believe that
online demand for these chronic illness products will increase as the Internet-
enabled baby boomer generation ages and as new and improved drugs are
introduced to the market.
Non-Prescription Drugs. This segment includes over-the-counter remedies
(such as cough, cold, allergy and pain relief medications), first aid and other
products related to the body's health needs.
Personal Care. This segment includes products related to hair, body and eye
care, shaving, oral hygiene and feminine needs.
Beauty and Spa. This segment includes cosmetics, fragrances and a variety
of skin care products. Some of the factors driving consumer demand for beauty
and spa products include regular and seasonal new product introductions, as
well as changing fashion trends.
Vitamins, Herbs and Nutrition. This segment includes vitamins, herbs,
nutritional supplements, homeopathy and other natural products. We believe that
consumers are increasingly interested in nutrition, wellness and alternative
medicines and that supplemental product information is important to these
consumers in making purchasing decisions.
Medical Supplies. This segment includes medical diagnostic kits, such as
home pregnancy and AIDS tests, and medical supplies, such as glucose strips for
diabetics, that are complementary to prescriptions. Many people with chronic
conditions who take regular prescriptions also use medical supply products.
Limitations on Traditional Channels of Distribution
We believe that the use of the Internet to research and purchase
healthcare-related products is growing as a result of the limitations of
traditional channels for prescription drugs, non-prescription drugs, personal
care products and medical supplies. These limitations include the following:
Inconvenience. We believe that many consumers find the experience of
shopping at traditional drugstores and pharmacies to be time-consuming and
inconvenient due to factors such as store location and layout, as well as hours
of operation, lack of privacy and level of customer service.
Limited Selection. Consumers appreciate the opportunity to select from a
variety of products to meet their particular needs. At most traditional stores,
though, the number of SKUs and the amount of product inventory is limited.
Traditional store-based retailers are constrained by the physical space
available in the store, inventory carrying costs and the need to allocate
inventory dollars to popular products, thereby limiting selection for
consumers.
Insufficient Information. Traditional drugstores and pharmacies often lack
readily available and detailed information useful to consumers in making their
purchase decisions. Moreover, consumers' access to physicians and pharmacists
to meet these information needs is increasingly limited.
Lack of Community. We believe that consumers of healthcare products desire
to share their experiences with, and to learn from the experiences of, others.
The traditional retail store does not provide a forum for this type of
interaction.
Due to these limitations, we believe there is a significant market
opportunity for an online store that offers convenient access to prescription
drugs, non-prescription drugs, personal care products and medical supplies and
that provides relevant information and the ability to interact with others in a
community environment.
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The PlanetRx.com Solution
PlanetRx.com is a leading online healthcare destination for commerce,
content and community. We address the limitations of traditional drugstores and
pharmacies through a combination of an extensive product selection, excellent
customer service, professionally-created content and the development of online
communities focused on health-related topics. The key components of our
solution include:
Convenient Shopping Experience. We provide consumers with an intuitive,
easy-to-use shopping interface that is available 24 hours a day, seven days a
week. We allow consumers to shop quickly and conveniently from anywhere
Internet access is available. For example, a customer can store his or her
prescription history and other relevant medical information, as well as create
personalized shopping lists for quick and easy reordering.
Extensive Selection. We offer an extensive selection of healthcare-related
products that would be impractical to stock in most traditional stores. We
offer both traditional drugstore items as well as a broad selection of health,
beauty and wellness products, including alternative-care products. We believe
that we offer one of the largest selections of drugstore products available on
the Internet, offering over 27,000 SKUs.
Reliable and Accessible Source of Information. We provide a broad array of
reliable healthcare resources that helps consumers find answers to their
critical healthcare questions and make informed purchasing decisions. Consumers
can either access our information through our PlanetRx.com or satellite
websites or can contact us directly by phone or e-mail. Our content is
maintained and updated by our in-house editorial team and periodically reviewed
by a Healthcare Advisory Board comprised of medical and pharmacy experts.
Online Communities. We believe that the ability of people to share their
experiences and to support one another is increasingly important to the
management of their medical conditions. To meet this need, we provide
interactive forums hosted on our satellite websites organized around specific
chronic health conditions. Our satellite websites have the same look and feel
as the PlanetRx.com website and can be accessed directly or through the
PlanetRx.com website. These websites include diabetes.com, depression.com,
obesity.com and alzheimers.com. We provide professionally-created content,
including links to experts and articles about each of these conditions, and
forums where users can interact. Our websites allow consumers to quickly link
to the relevant product and purchase it on PlanetRx.com.
In addition, eCenters on the PlanetRx.com website are one-stop guides for
specific healthcare conditions and demographic groups. For example, our Women's
Health eCenter provides information on menopause, breast cancer, osteoporosis
and pregnancy, as well as related information on prescriptions and alternative
care for these conditions.
The PlanetRx.com Strategy
Our objective is to become the leading Internet healthcare destination for
commerce, content and community. We intend to attract new customers, develop
customer loyalty and promote repeat purchases by implementing the following
strategies:
Continue to Build Our Brand. Through our advertising and promotional
activities, we are developing PlanetRx.com as a pervasive brand that targets
purchasers of health and personal care products and identifies us as a premier
healthcare destination on the Internet. To date, in addition to having used a
range of traditional media such as print and radio, we have promoted our site
on a variety of major Internet destinations including AOL, Yahoo!, iVillage,
HealthCentral.com, Women.com and XOOM.com. We plan to complement these efforts
with appropriate levels of television advertising and additional online
promotional activities.
Continue to Build Premier Content and Community Websites. As part of our
commitment to consumers, we endeavor to provide a secure and private forum in
which to communicate and share ideas. We will continue
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to develop our network of satellite destination sites, such as diabetes.com,
and eCenters, such as our Weight Loss eCenter, all of which provide a wealth of
information to, and a forum for, consumers with similar health concerns. We
believe that this combination of content and community will attract repeat
users.
Maintain an Independent Distribution Center and Pharmacy. We maintain our
own distribution center, which is only minutes away from our primary supplier,
McKesson, and our primary shipping agents, FedEx and the USPS Priority Air
center. Moreover, we operate our own pharmacy with licensed pharmacists and are
licensed to ship prescription products in all U.S. states and territories. By
operating our own distribution center and pharmacy, we are able to maintain
strict control over logistics, provide excellent customer service and offer
reliable and prompt delivery.
Utilize Technology to Improve the Customer Shopping Experience. We intend
to use technology to continuously enhance our product and service offerings and
take advantage of the unique characteristics of online retailing. Among other
technology objectives, we intend to develop features that enhance the look and
feel of our websites and further customize the shopping experience.
Additionally, we intend to strengthen our Internet infrastructure by building
our own data center and leasing additional capacity to maintain speed and
reliability.
Continue to Expand Product Offerings. We intend to focus on providing
consumers with a wide product selection to meet their health-related needs. We
expect to increase the breadth and differentiation of our product selection,
including both mass market and prestige products. For example, we have recently
introduced branded cosmetics and salon hair care products for sale on our
website.
Continue to Develop Strategic Relationships to Further Revenue
Opportunities. We will continue to develop strategic relationships in order to
increase our revenue opportunities and build our reputation as a leading online
healthcare destination. For example, we will seek to develop relationships or
partner with:
. pharmacy benefit managers and managed care organizations to increase
payment alternatives for our prescription drug customers, such as our
relationship with Express Scripts;
. pharmaceutical manufacturers to sponsor our various satellite sites
focused on chronic conditions;
. hospital organizations in order to market directly to their patient and
doctor populations;
. companies that are working on providing direct links between doctors'
offices and pharmacies to facilitate the delivery of electronic
prescriptions; and
. content and commerce portals and online service providers to drive
traffic to our website, such as our current relationships with AOL,
Yahoo! and iVillage.
The PlanetRx.com Healthcare Destination
Consumers visiting our website can purchase a wide variety of healthcare-
related products; receive relevant, personalized information addressing their
healthcare concerns; and interact with other consumers on a broad range of
health issues.
Commerce
Convenience and Personalization. We strive to offer a personalized and
convenient shopping experience for our customers. Advantages of our online
store include:
. access 24 hours a day, seven days a week from anywhere Internet access is
available;
. direct shipping to the customer;
. online search capabilities for products and information;
. the ability to store product preferences in the My Shopping List area of
the PlanetRx.com website, which allows customers to quickly purchase or
reorder these products;
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. the ability to store a customer's prescription history, as well as those
of family members, in a secure and confidential environment; and
. the ability to view order-tracking information on our website.
Selection. Because we do not have the same inventory and shelf-space
limitations as traditional retail stores, we are able to offer a significantly
greater number of SKUs than are generally available in a traditional drugstore.
We believe that we offer one of the largest selections of traditional and
alternative healthcare-related products available on the Internet, offering
over 27,000 SKUs in the following market segments:
. prescription drugs;
. non-prescription drugs;
. personal care;
. beauty and spa;
. vitamins, herbs and nutrition; and
. medical supplies.
Customer Communication and Privacy. We provide personalized information to
our customers on a confidential basis through:
. e-mail reminders to our customers when their supply of a prescription or
non-prescription product is about to run out, allowing them to order a
replacement product or a prescription refill;
. useful newsletters and notices of special offers and new product
announcements;
. timely and high-quality customer service through our customer service
department;
. a high level of privacy when purchasing products that reveal personally-
sensitive aspects of their health, and features such as Ask the
Pharmacist where consumers can ask questions that they would otherwise be
uncomfortable asking in a traditional drugstore or pharmacy; and
. a secure environment for the storage of a customer's medical, purchasing
and payment information.
Content
As individuals increasingly turn to the Internet to address their
healthcare needs, we believe that up-to-date, unbiased content in an easy-to-
understand format is essential to informed healthcare decisions. Our websites
provide in-depth information on over 100 disease categories helping consumers
find answers to critical healthcare questions. We provide information on
symptoms, diagnosis, treatments and alternative care for many conditions. Our
content includes material developed internally as well as material licensed
from outside sources, such as iVillage, Reuters News and drkoop.com. The
information is maintained and updated by our in-house editorial team and
periodically reviewed by our Healthcare Advisory Board comprised of medical and
pharmacy experts.
Package Information. We are developing the capability to allow consumers to
view almost every product on our website in an expanded format where all
package information, including ingredients, directions and warnings, can be
read next to an enlarged photograph of the product.
Drug and Interaction Information. We provide information to help consumers
understand generic drug alternatives and dangerous drug interactions. Consumers
can access our extensive drug information library directly at the PlanetRx.com
website.
Ask the Pharmacist. Our Ask the Pharmacist service provides personalized
responses by e-mail to help ensure that each customer understands the correct
usage, possible side effects and expected beneficial outcomes of a prescription
or non-prescription medication. We strive to answer consumers' inquiries within
24 hours of receipt.
Health Answers. Through our Health Answers feature, users can search for
information on common healthcare conditions and can link to products for their
well being, including drug therapies, alternative treatments and self care and
prevention.
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Community
As usage of the Internet continues to grow, users seek from the Internet
the same opportunity for expression, interaction, sharing, support and
recognition they seek in the everyday world. This is especially true in the
healthcare context. We provide forums, such as bulletin boards, chat rooms and
moderated discussion groups, where users can discuss a variety of health-
related topics.
We currently have 16 eCenters on the PlanetRx.com website organized around
specific chronic health conditions and targeted demographic groups, such as
women, seniors and children. This enables us to focus on the needs of a
particular group, combining the content and commerce relevant to each group's
health needs. For example, our Women's Health eCenter provides information on
menopause, breast cancer, osteoporosis and pregnancy, as well as additional
information related to prescriptions and alternative care for these conditions.
In addition to our eCenters, we have a network of satellite websites
designed to provide an extended community for people interested in chronic
healthcare conditions. These sites are built around intuitive domain names for
chronic healthcare conditions and have the same look and feel as the
PlanetRx.com website. Today, diabetes.com, depression.com, obesity.com,
alzheimers.com, cholesterol.com and weightloss2000.com are operational, and we
expect to launch an additional five satellite websites in calendar year 1999.
These sites have in-depth content and clinical information and provide links to
experts and articles about each of these conditions. They also contain product
links to both traditional and alternative medicines so that consumers can
quickly link to the relevant product and purchase it on the PlanetRx.com
website.
We will continue to enter into strategic relationships with pharmaceutical
manufacturers to sponsor our various satellite sites focused on chronic
conditions. For example, a major pharmaceutical company is the exclusive
therapeutic disease state management sponsor for diabetes.com. Under the terms
of a multi-year agreement, the disease state management sponsor is responsible
for supplying content to the satellite website related to a particular disease,
and we receive guaranteed minimum payments and content for the website. Disease
state management programs are designed to improve patient outcomes through
education and drug compliance. The disease state management sponsor provides
information about a particular disease, including treatment, care, products and
alternatives, thus enabling those afflicted with the disease to better manage
their condition.
Listed below are our domain names:
<TABLE>
<S> <C>
acne.com infertility.com
aids.com nursing.com
alzheimers.com obesity.com
anorexia.com osteopathy.com
arthritis.com parkinsons.com
birth.com pharmacist.com
cancer.com physicians.com
cholesterol.com podiatry.com
depression.com pollenwatch.com
diabetes.com prenatal.com
epilepsy.com rxnet.com
fertility.com sportsdoc.com
hepatitis.com stroke.com
hypertension.com weightloss2000.com
impotence.com
</TABLE>
Relationship with Express Scripts, Inc.
In August 1999, we entered into a strategic relationship with Express
Scripts, Inc. and its wholly owned subsidiary, YourPharmacy.com, Inc. Express
Scripts is a leading full-service pharmacy benefit manager. Pharmacy benefit
managers coordinate the distribution of outpatient pharmaceuticals. Under the
terms of the agreements, we have agreed to acquire the e-commerce operations of
the YourPharmacy.com business and Express Scripts has agreed to exclusively
co-brand and co-market us as the online pharmacy for Express Scripts and its
members. Co-branding includes placing our name, logo and other information
about us on Express Scripts' website and marketing and sales materials. Co-
marketing includes Express Scripts promoting us as their online pharmacy
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in their marketing and sales activities. The agreements, which have an initial
term of five years, may be extended for an additional five years and will
become effective upon completion of this offering. Simultaneous with the
closing of this offering, we will issue common stock to Express Scripts which
will represent 19.9% of our outstanding stock after this offering, assuming the
over-allotment option is exercised. If the over-allotment option is not
exercised, Express Scripts will return to us, at no cost, that number of shares
as is necessary to reduce its ownership to 19.9% of our then outstanding stock.
We will also assume options granted to employees of YourPharmacy.com which will
convert into options to purchase approximately 1.9 million shares of our common
stock. Additionally, we will be included in the Express Scripts network as an
authorized pharmacy for a minimum of ten years.
Under the agreements, customers who are covered under an Express Scripts
pharmacy benefit plan will generally be able to fill prescriptions at our
website and will be entitled to insurance reimbursement. However, any plan
sponsor may specifically exclude reimbursement for prescriptions purchased from
us. In addition, Express Scripts has agreed to promote us as Express Scripts'
online pharmacy to fill prescriptions and market other health and wellness
products to Express Scripts' plan members for five years, with a potential
five-year extension. Express Scripts may allow other Internet pharmacies,
including the online operations of traditional drugstores, if requested by its
members or for competitive reasons, into its networks, but Express Scripts
cannot co-market or co-brand any Internet pharmacy other than us during the
term of the agreements. Under the terms of the agreements we will pay Express
Scripts a minimum of $14,650,000 annually for five years, plus incremental fees
based on Express Scripts members' activity on our website. We believe that the
potential benefits of our relationship with Express Scripts may include
additional revenue and traffic generated by Express Scripts' plan members who
may visit our website, the pharmacy benefit coverage provided by Express
Scripts, and the co-promotion and co-branding activities both companies will
undertake. We expect that Barrett A. Toan, Express Scripts' chief executive
officer, will become a member of our board of directors after the completion of
this offering.
As part of the relationship, we agreed to certain exclusivity provisions
that preclude us from operating as a pharmacy benefit manager.
Our Pharmacy
The PlanetRx.com pharmacy is staffed 24 hours a day, seven days a week with
experienced pharmacists. The pharmacists' goal is to provide our customers with
the best personal care supplemented by a high degree of support. In addition to
being licensed, each of our pharmacists is trained to provide excellent personal
service for our customers. All of our pharmacists are members of the American
Pharmaceutical Association. Our pharmacy is licensed to ship prescription
products in all U.S. states and territories. In addition, we are certified by
the National Association of Boards of Pharmacy's Verified Internet Pharmacy
Practice Sites program. This program aims to set the standards for Internet
pharmacies as well as to inform the public of those websites that have agreed to
comply with such standards. Our pharmacy is located within our distribution
facility in Memphis, Tennessee, enabling each customer's prescription to be
shipped the same day it is filled.
Filling Prescriptions
We only accept prescriptions that we can verify as being written by
licensed healthcare providers. We do not prescribe medications or give medical
advice. Our focus is on dispensing medications and providing information to our
customers.
Accepting Prescriptions. Our customers can initiate the prescription
process by ordering online from our pharmacy. The customer can direct their
physicians to call or fax their prescriptions to us or we can contact their
physician directly to obtain prescription information. Additionally, our
customers can easily transfer an existing prescription from their current
pharmacy to PlanetRx.com.
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Verifying Prescriptions. Our pharmacists are required to verify the
validity and completeness of prescription drug orders utilizing the same
methodology as traditional drugstore pharmacists. This may include contacting
the physician or another retail pharmacist. Once the prescription is verified,
the order generally is filled and shipped the same day.
Drug Utilization Review. To use our prescription drug services, all
customers are asked to provide our pharmacists with information regarding drug
allergies, current medical conditions and other medications they are taking.
Our pharmacists use an extensive
database to crosscheck every prescription received against the information we
receive from the customer for any drug allergies, therapeutic overlap,
overuse/underuse, and drug/food or drug/drug interactions.
Consultation. Our pharmacists are available to answer questions by phone
24 hours a day, seven days a week. As required by law, we make follow-up phone
calls to customers to offer them consultation on new prescriptions. In
addition, our pharmacy provides a package insert with a toll-free number that
gives the customer information as to dosage instructions, potential drug
interactions and storage.
Payment
Customers may pay for their prescriptions either by credit card or
electronic check or by entering insurance information that shows that they are
covered by a managed care organization, insurance plan or pharmacy benefit
manager with whom we have a contract. To date, most of the prescriptions filled
have been for customers who pay for the entire amount of the prescription.
Marketing and Promotion
Our marketing and promotion strategy is designed to build brand
recognition, drive customer traffic to our online store, add new customers,
build strong customer loyalty, encourage repeat purchases and develop
additional revenue opportunities.
Our advertising and promotion campaigns target both online and offline
audiences. To date, our online advertising efforts have been concentrated on
leading Internet portals, health-related websites, and other high traffic
websites.
We have used traditional off-line marketing and promotion efforts,
including network and cable television advertising, national radio advertising,
special product promotions and promotional press releases. We intend to further
intensify our advertising efforts through traditional media channels to
continue building our brand recognition.
In December 1998, we entered into a three-year agreement with AOL. Users
searching for health-related information who click on specific content areas
and health-related keywords within AOL are directly linked to our PlanetRx.com
website. In February 1999, we entered into an agreement with Yahoo! to
advertise in their health directory.
In June 1999, as part of our branding effort, we entered into an agreement
with News America Incorporated, one of the world's largest media companies and
operator of the Fox Entertainment Group. This agreement provides that, in
exchange for an equity position, News America Incorporated provides us with a
combination of cash and future television and other traditional media
advertising.
In September 1999, we entered into a three-year sponsorship agreement with
iVillage Inc. under which we will become iVillage's exclusive online retailer
for prescription drugs, over-the-counter medications and vitamins. In addition,
we entered into a content license agreement for access to iVillage health,
wellness, beauty and fitness content. iVillage also made an equity investment
in PlanetRx.com, in which we issued 371,103 shares of series D preferred stock
for aggregate consideration of $7.5 million in cash.
We are also the preferred pharmacy partner for the Women.com store and the
Netcentives ClickReward program. In addition,
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we currently advertise on XOOM.com and HealthCentral.com. We have also created
an affiliate program, which encourages website owners to become part of our
registered affiliate network and earn a fee on non-prescription products, based
on the volume of customers and related revenue generated via their link to our
website. We intend to continue to use these types of programs to drive traffic
to our website and to increase the growth rate of repeat customer purchases.
To create value for our customers, and to encourage initial and repeat
purchases, we utilize aggressive online promotions. Using our technology, we
have the ability to create and change web pages frequently to highlight product
specials and special promotions. We notify our customer base via e-mail of
upcoming promotions and encourage them to Tell A Friend, which is a promotion
that rewards customers for referrals. We also target other mail lists with our
promotions. We believe this provides us with an excellent opportunity to
increase traffic on our websites and promote repeat purchases while adding new
customers.
Merchandising
We believe that the breadth and depth of our product selection, combined
with the flexibility of our online store and our range of helpful and useful
shopping services, enables us to pursue an effective merchandising strategy.
Key elements of this strategy include:
Convenient and Fast Access to a Wide Variety of Products. Our easy-to-use
online store and advanced search capabilities allow our customers to browse our
extensive product selections by brand, product type, product categories and
price, as well as by any combination of these attributes. For example, our
customers can easily search for all pain relievers or for specific products,
such as Tylenol for Children, without having to consult with store personnel or
to search through traditional store aisles and shelves.
Extensive Product Information. A key part of our merchandising strategy is
to provide our customers with extensive information to help them make informed
purchase decisions. In addition, we combine product manufacturer information
with editorial information to assist our customers in their product selection
and purchase decision.
Product Promotions. We feature multiple promotions on our store and
continually update and rotate our promotions. We also notify our customers of
product promotions via e-mail.
Product Samples. From time to time we provide free non-prescription product
samples to our customers, and often do so with new products to introduce our
customers to them. We intend to offer manufacturers the opportunity to provide
free non-prescription samples to our customers as a means of introducing new
products.
Distribution and Order Fulfillment
We believe that operating our own distribution center and pharmacy is
critical to our strategy of providing quality customer service. Our
distribution center and pharmacy is located in Memphis, Tennessee.
Our primary supplier, McKesson, is also located in Memphis, allowing us to
maintain reasonable inventory levels based on just-in-time deliveries.
The location of our distribution center allows us to take advantage of
FedEx's major hub operations and the USPS Priority Mail Air Center, which are
also located near our distribution center. This allows us to take orders and
make same day shipments for orders received up to 11pm Central Standard Time
(CST) for FedEx, and 7pm CST for USPS. We believe the majority of our orders
can reach 95% of the United States in two to three days.
We offer a variety of shipping options, including next-day delivery for
orders received during the business week. We ship to anywhere in the United
States served by FedEx or the USPS. Priority orders are flagged and expedited
through our fulfillment processes. For prescription products, our goal is to
ship the product as soon as the prescription has been
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verified and our pharmacists have completed a drug utilization review.
Customer Service
We strive to provide excellent customer service and support for our
customers. Our Customer Care Associates are trained on-site in our call-center
training facility and are available 24 hours a day, seven days a week, to
answer customer phone calls or respond to customer e-mails. We have an easy to
use Help Desk area on the PlanetRx.com website, providing detailed pages on
frequently asked questions, how to find information, how to order, how to pay,
and our policies on privacy and security.
Operations and Technology
We have implemented a wide range of secure, scalable services and systems
for the PlanetRx.com website and our satellite websites, as well as for our
distribution center. These services and systems include: website management,
advanced searching tools, customer account management, transaction processing,
order management, pharmacy services and operations, store and catalog,
inventory control, purchasing, community message boards, OnLine Analytical
Processing, payment services and a variety of marketing applications. A subset
of these systems form the core set of software applications that we use for
accepting and validating our customer orders, organizing, placing and managing
orders with our vendors, receiving product and assigning it to customer orders,
and managing shipment of products to customers.
We have developed proprietary technologies to augment those that we have
licensed from vendors, such as Microsoft, IBM and Sun Microsystems. To date, we
have focused our internal development efforts on creating and enhancing our
proprietary software. Our core merchandise catalog, customer interaction, order
collection, fulfillment and back-end systems are all proprietary to
PlanetRx.com. Our software platform and architecture are integrated with
relational database servers such as IBM UDB as well as Microsoft SQL server.
Our system is designed to include an open application-programming interface
that provides real-time connectivity to our distribution center systems for
both pharmacy and non-pharmacy products. These systems include a perpetual
inventory system, real-time order tracking system, executive information system
and inventory replenishment system. The employment of multiple web servers,
application servers, and database servers, allows our systems to be resilient
and redundant. Our Internet servers use SSL to help conduct secure
communications and transactions.
Our systems infrastructure is hosted at Exodus Communications in Santa
Clara, California, which utilizes communication infrastructure from multiple
providers and provides 24 hour monitoring and engineering support. To further
enhance our systems reliability, we have recently begun to establish our own
data center in our Memphis distribution facility.
We incurred $1.0 million in product development expenses for the year ended
December 31, 1998 and $3.3 million during the six month period ended June 30,
1999. We anticipate that we will continue to devote significant resources to
product development in the future as we add new features and functionality to
our websites and enhance our distribution system.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the health and personal care categories are
intensely competitive and are also highly fragmented, with no clear dominant
leader in any of our market segments. Our competitors can be divided into
several groups:
. chain drugstores, such as Walgreen's, RiteAid, CVS and Eckerd;
. mass market retailers such as Wal-Mart, Kmart and Target;
. supermarkets, such as Safeway, Albertson's and Kroger;
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. warehouse clubs;
. online retailers of health, beauty, wellness, personal care and/or
pharmaceutical products, such as drugstore.com and CVS/Soma.com;
. mail order pharmacies, such as Express Scripts and Merck-Medco;
. Internet-portals and online service providers that feature shopping
services such as AOL, Yahoo!, Excite@Home and Lycos; and
. cosmetics departments at major department stores, such as Nordstrom,
Macy's and Bloomingdale's and hair salons.
Most of these competitors operate within one or more of our market
segments.
We believe that the following are principal competitive factors in our
market:
. recognition of the PlanetRx.com brand;
. product selection;
. personalized services;
. convenience and ease of use;
. price;
. accessibility;
. customer service;
. quality of search tools;
. quality of content; and
. reliability and speed of fulfillment for products ordered.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially more resources to their website and systems development
than we can. In addition, larger, well-established and well-financed entities
may acquire, invest in or form joint ventures with online competitors or
drugstore retailers as the use of the Internet and other online services
increases. Some of our competitors may be able to secure products from vendors
on more favorable terms, fulfill customer orders more efficiently and adopt
more aggressive pricing or inventory availability policies than we can. These
retailers also enable customers to see and feel products in a manner that is
not possible over the Internet. Traditional store-based retailers can also sell
products to address immediate, acute care needs, which we and other online
sites cannot address.
Government Regulation
Our business is subject to extensive federal, state and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter
drugs. For example, under the Omnibus Budget Reconciliation Act of 1990 and
related state and local regulations, our pharmacists are required to offer
counseling to our customers about medication, dosage, delivery systems, common
side effects, adverse effects or interactions and therapeutic
contraindications, proper storage, prescription refill, and other information
deemed significant by the pharmacists. We are also subject to federal, state
and local licensing and registration regulations with respect to, among other
things, our pharmacy operations and the pharmacists we employ.
The practice of medicine requires licensing under applicable state law. It
is not our intent to practice medicine and we have tried to structure our
website and our business to avoid violation of state licensing requirements.
For example, we have included notices, where we have deemed appropriate,
advising our users that the data we provide on our website is not a substitute
for consultation with their personal physician. However, the application of
this area of the law to Internet services such as ours is novel and,
accordingly, a state regulatory authority could at some time allege that some
portion of our business violates these statutes. Any such allegation could harm
our business. Further, any liability based on a determination that we engaged
in
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the unlawful practice of medicine may be excluded from coverage under the terms
of our general liability insurance policy.
We are subject to requirements under the Controlled Substances Act and
federal Drug Enforcement Agency regulations, as well as related state and local
laws and regulations, relating to our pharmacy operations, including
registration, security, recordkeeping, and reporting requirements related to
the purchase, storage and dispensing of controlled substances, prescription
drugs, and some over-the-counter drugs. "Compendial standards" which can also
be called "official compendium" means the standards for drugs related to
strength, purity, weight, quality, labeling and packing contained in the
official Pharmacopeia of the United States, official National Formulary, or any
supplement to any of them. Under the Food, Drug and Cosmetic Act of 1938, a
drug recognized by the Homeopathic Pharmacopeia of the United States must meet
all compendial standards and labeling requirements contained therein, or it
will be considered adulterated (e.g., lacking appropriate strength, quality, or
purity; or containing poisonous or unsanitary ingredients) or misbranded (e.g.,
having a false or misleading label; or label containing inaccurate description
of contents). While homeopathic remedies account for less than one percent (1%)
of our revenues, we are still required to comply with the Food, Drug and
Cosmetic Act. The distribution of adulterated or misbranded homeopathic
remedies or other drugs is prohibited under the Food, Drug and Cosmetic Act,
and violations could result in substantial fines and other monetary penalties,
seizure of the misbranded or adulterated items, and/or criminal sanctions which
could adversely affect our business. We also are required to comply with the
Dietary Supplement Health and Education Act when selling dietary supplements
and vitamins.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focused on those who prescribe drugs online and on
pharmacies that fill invalid prescriptions, including those that are written
online. The committee requested that the General Accounting Office undertake a
formal review of a number of issues pertaining to online pharmacies, including
an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. Because we make every
effort only to fulfill valid prescriptions and we do not prescribe drugs, we
believe that our business will not be negatively affected by any regulations
that result from the investigations. However, we believe that any regulations
resulting from the investigations will likely result in increased reporting and
monitoring requirements.
The National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, has developed a program, the Verified Internet Pharmacy
Practice Sites, as a model for self-regulation for online pharmacies. We have
assisted the National Association of Boards of Pharmacy with the development of
the Verified Internet Pharmacy Practice Sites program and intend to comply with
its criteria for certification.
Legislation and regulations currently being considered at the federal and
state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and storage.
In addition, various state legislatures are considering new legislation related
to the regulation of nonresident pharmacies. The Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000.
Regulations have been proposed to implement these requirements, and we are
designing our applications to comply with the proposed regulations.
Although the Food and Drug Administration does not regulate the practice of
pharmacy, other than pharmacy compounding, which we do not currently engage in,
Food and Drug Administration regulations impact some of our product and service
offerings because the Food and Drug Administration regulates drug advertising
and promotion, including direct-to-consumer advertising, done by or on behalf
of drug manufacturers and marketers. As we
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expand our product and service offerings, more of our products and services
will likely be subject to Food and Drug Administration regulation.
The federal antikickback law prohibits the knowing and willful
solicitation, offer, payment, or receipt of "any remuneration (including any
kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash
or in kind" in return for referring an individual for healthcare services or
supplies for which payment may be made in whole or in part under any federally-
funded health care program. The statute extends both to physicians and non-
physicians alike. At the state level, laws and regulations that prohibit the
offer, payment, solicitation, or receipt of kickbacks in exchange for patient
referral may use terms such as "bribes", "rebates", "commissions" or "fee-
splitting" to describe the same prohibited conduct. Similarly, federal and
state self-referral laws exist, which are aimed at curtailing over-utilization
of health care services and supplies by generally prohibiting a physician who
(or whose family) has a financial relationship with a facility or entity for
health care services or supplies from referring patients to such a facility or
entity for healthcare services or supplies.
Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are also
subject to extensive regulation relating to the confidentiality and release of
patient records. Additional legislation governing the distribution of medical
records exists or has been proposed at both the state and federal level.
Intellectual Property
We rely on a combination of copyright, trademark, and trade secret laws and
our contractual obligations with employees and third parties to protect our
proprietary rights. We do not currently own any issued patents, and other
protection of our intellectual property is limited. Despite our efforts to
protect our proprietary rights, it may be possible for a third party to copy or
obtain and use our intellectual property without our authorization. In
addition, other parties may breach confidentiality agreements or other
protective contracts we have entered into, and we may not be able to enforce
our rights in the event of these breaches.
We have entered into confidentiality and invention assignment agreements
with our employees and consultants, and nondisclosure agreements with our
vendors and strategic partners to limit access to and disclosure of our
proprietary information. We cannot be certain that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prevent misappropriation of our technology. We have licensed in
the past, and expect that we may license in the future, some of our proprietary
rights, such as trademarks or copyrighted material, to third parties. While we
attempt to ensure that the quality of the PlanetRx.com products brand is
maintained by these licensees, we cannot assure that these licensees will not
take actions that might hurt the value of our proprietary rights or reputation.
We also rely on technologies that we license from third parties, such as
IBM and Microsoft, the suppliers of key database technology, the operating
system and specific hardware components for our service. We cannot be certain
that these third-party technology licenses will continue to be available to us
on commercially reasonable terms. The loss of such technology could require us
to obtain substitute technology of lower quality or performance standards or at
greater cost, which could harm our business.
We have filed applications for the registration of some of our trademarks
and service marks in the U.S., including PlanetRx, PlanetRx.com, eCenter,
HealthyReward and QuickClick Shopping. In addition, we are seeking patents for:
Tell-A-Friend, PlanetWhisper, DynamicStore and FloatingShoppingCart. We may be
unable to secure these registered marks or patents. It is also possible that
our competitors or others will use marks similar to ours, which could impede
our ability to build brand identity and lead to customer confusion. In
addition, there could be potential trade name or trademark infringement claims
brought by owners of other registered trademarks or
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trademarks that incorporate variations of the term PlanetRx.com or of the other
terms above. Any claims or customer confusion related to our trademarks, or our
failure to obtain trademark registration, would negatively affect our business.
Our efforts to protect our intellectual property rights may not prevent
misappropriation of our content. Our failure or inability to protect our
proprietary rights could substantially harm our business.
Charitable Contributions
We plan to donate 200,000 shares of our common stock to a foundation to be
established by us. This foundation will make grants to charitable
organizations. We intend to involve our employees in determining the
organizations to which proceeds from the sale of these shares will be devoted.
Employees
As of June 30, 1999, we had 154 full-time employees, 84 of whom were in
marketing and sales, 50 of whom were in product development and 20 of whom were
in general and administrative. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider our employee
relations to be good.
Facilities
Our principal executive offices are located in South San Francisco,
California, where we lease approximately 30,000 square feet under a lease that
expires in June 2002. We also lease an aggregate of approximately 35,000 square
feet for our distribution facilities in Memphis, Tennessee, under two leases
that expire in September and December 2003.
Legal Proceedings
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims
that we allegedly infringe third-party trademarks and other intellectual
property rights. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their ages and the positions held by
them, as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
William J. Razzouk................ 51 Chairman and Chief Executive Officer
Steve Valenzuela.................. 42 Vice President of Finance, Chief
Financial Officer and Secretary
James Chong....................... 42 Chief Technology Officer
Allan Goldman..................... 45 Vice President of Merchandising
John McAlpin...................... 40 Vice President of Distribution
Services
Matthew Naythons, M.D. ........... 53 Vice President of Editorial and
Publisher
Jay O'Connor...................... 37 Vice President of Marketing
Stephanie Schear.................. 32 Vice President of Sales and Business
Development
David Beirne(2)................... 36 Director
Terrence C. Burke(1).............. 58 Director
Christos M. Cotsakos(2)........... 50 Director
Michael Moritz(1)(2).............. 44 Director
</TABLE>
- --------
(1) Audit Committee Member
(2) Compensation Committee Member
William J. Razzouk has served as our Chairman and CEO since September 1998.
From August 1997 to May 1998, Mr. Razzouk was President and Chief Operating
Officer of Storage USA, a real estate investment trust. Mr. Razzouk was a
consultant to Advanta Corporation from October 1996 to April 1997. From
February 1996 to June 1996, Mr. Razzouk served as President and Chief Operating
Officer of America Online, Inc. From August 1983 to February 1996, Mr. Razzouk
worked at FedEx Corporation most recently as Executive Vice President of
Worldwide Customer Operations. Mr. Razzouk serves as a Director of Fritz
Companies, Inc. and Waste Connections, Inc. Mr. Razzouk received a B.A. in
Journalism and Marketing from the University of Georgia.
Steve Valenzuela has served as our Vice President of Finance and Chief
Financial Officer since March 1999 and was appointed Secretary in July 1999.
From August 1998 to April 1999, Mr. Valenzuela served as Vice President of
Finance and Chief Financial Officer at MSN-LinkExchange, an Internet company,
where he negotiated the sale of the company to Microsoft in November 1998. From
December 1993 to June 1998, Mr. Valenzuela was employed by Coherent, Inc., a
designer and manufacturer of laser products, most recently as Vice President of
Finance. From May 1987 to December 1993, Mr. Valenzuela worked at Tandem
Computers, Inc., a computer hardware and software company, most recently as
Controller. Mr. Valenzuela received a B.S. in Accounting from San Jose State
University and an M.B.A. from Santa Clara University.
James Chong has served as our Chief Technology Officer since January 1999.
From January 1988 to January 1999, Mr. Chong had various positions at Charles
Schwab and Co., a financial services company, most recently as Vice President,
Architecture and Planning. Mr. Chong studied Electrical Engineering at the
University of Southern California.
Allan Goldman has served as our Vice President of Merchandising since
December 1998. From March 1995 to July 1998, Mr. Goldman served as Senior Vice
President of Marketing and Merchandising for The Cosmetic Center, a retail
cosmetic company. From June 1988 to February 1995, Mr. Goldman served as Vice
President of Merchandising for Rite Aid
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Corporation. Mr. Goldman holds a B.S. in Health Science from James Madison
University.
John McAlpin has served as our Vice President of Distribution Services
since September 1998, and is responsible for managing the distribution center
located in Memphis, Tennessee, as well as our customer service operations.
From May 1997 to May 1998, Mr. McAlpin was Vice President of Technical
Operations at Skywire, Inc., a networking company. From May 1996 to May 1997,
Mr. McAlpin served as a Vice President at First Union Corporation. From
September 1989 to May 1996, Mr. McAlpin was a Managing Director of FedEx
Corporation's Logistics Services Division. Mr. McAlpin holds a B.S. in
Mechanical Engineering from the University of Memphis.
Matthew Naythons, M.D. has served as our Vice President of Editorial and
Publisher since January 1999. Dr. Naythons is the founder of Epicenter
Communications (1991), and its two online health subsidiaries, NetHealth and
NetMed (1996). After receiving his M.D. in 1972, Dr. Naythons served as an
emergency room physician in California. He also was a photojournalist for
Time, Newsweek, and National Geographic covering, among other stories, the
fall of Saigon, the Jonestown massacre and the Centers for Disease Control. In
1979, Dr. Naythons formed international medical teams which brought medical
care to refugees on the Thai-Cambodian border. Dr. Naythons holds a B.S. from
Muhlenberg College and an M.D. from Hahnemann University.
Jay O'Connor has served as our Vice President of Marketing since January
1999. From June 1992 to October 1998, Mr. O'Connor worked at Intuit, Inc., a
software company, where his roles included Director of Product Marketing for
Quicken.com and Group Product Manager for QuickBooks. From June 1988 to July
1990, he was a Project Manager at Kettler & Scott, Inc. Mr. O'Connor holds a
B.A. in History from Stanford University and an M.B.A. from the Harvard
Business School.
Stephanie Schear, a founder of PlanetRx.com, has served as our Vice
President of Business Development and Sales since September 1998. From June
1997 to September 1998, Ms. Schear was a Manager at Intel Corporation, where
she managed the eCommerce and Healthcare venture investments for Intel's
Corporate Business Development Group. From September 1995 to May 1997,
Ms. Schear was at Firefly, an Internet company, most recently as Vice
President of Business Development. From September 1991 to July 1994, Ms.
Schear was an Associate at Alex. Brown & Sons. Ms. Schear received a B.A. in
Economics and an M.A. in Economics from Brandeis University and an M.B.A. from
the Harvard Business School.
David Beirne has served as a director of PlanetRx.com since September
1998. He became a Managing Member of Benchmark Capital Management Co. II LLC,
which is the General Partner of Benchmark Capital Partners II, L.P., a venture
capital firm, in June 1997. Prior to joining Benchmark, Mr. Beirne founded
Ramsey/Beirne Associates, an executive search firm, and served as its Chief
Executive Officer from October 1987 to June 1997. Mr. Beirne is a director of
1-800-Flowers and Scient as well as several private companies. Mr. Beirne
holds a B.A. in Management from Bryant College.
Terrence C. Burke has served as a director of PlanetRx.com since October
1998. Currently retired, Mr. Burke was most recently Senior Executive Vice
President of Metra Health Inc., a healthcare company, from January 1995 until
October 1996. From October 1994 until January 1995, Mr. Burke was Senior Vice
President for Travelers Health Plans. From September 1992 until October 1994,
Mr. Burke served as Senior Vice President of Aetna Health Plans, Aetna
Corporation. Mr. Burke currently serves as a member of the Board of Directors
on several private companies. Mr. Burke holds a B.A. from the University of
Washington.
Christos M. Cotsakos has served as a director of PlanetRx.com, Inc. since
October 1998. Mr. Cotsakos is Chairman, Chief Executive Officer, and a
Director of E*TRADE Group, Inc. He joined E*TRADE in March 1996 as President
and Chief Executive Officer. From March 1992 to January 1996, he served as
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President, Chief Operating Officer, Co-Chief Executive Officer, and a Director
of AC Nielsen Inc. From December 1973 to March 1992, he held a number of senior
executive positions at FedEx Corporation. Mr. Cotsakos serves on the Board of
Directors of Critical Path, Digital Island, Fox Entertainment Group and
National Processing, as well as several private companies. Mr. Cotsakos holds a
B.A. from William Paterson College, an M.B.A. from Pepperdine University, and
is currently a fifth year Ph.D. candidate in economics at the University of
London.
Michael Moritz has served as a director of PlanetRx.com, Inc. since
September 1998. He has been a general partner of Sequoia Capital, a venture
capital firm, since 1986. Mr. Moritz serves as a director of Yahoo!, eToys, and
Flextronics International, as well as several private companies. Mr. Moritz
holds an M.A. from Oxford University and an M.B.A. from the Wharton School at
the University of Pennsylvania.
Recent Hiring of Executive Vice President and Chief Operating Officer
On October 1, 1999, we hired Michael A. Beindorff, 47, as our Executive
Vice President and Chief Operating Officer. Mr. Beindorff served as Executive
Vice President, Marketing and Product Management of VISA USA from 1995 until
joining us. From 1993 to 1995, he served as Senior Vice President, Marketing of
Rhodes Furniture, and from 1978 to 1992, he served in various capacities at the
Coca-Cola Company, including Vice President, Director, Global Advertising from
1991 to 1992.
Express Scripts Director
Our board of directors currently consists of five members. We have agreed
with Express Scripts that we will appoint a designee of Express Scripts to our
board of directors within five business days after the completion of this
offering. We have also agreed to include the director designated by Express
Scripts in the group of nominees that we recommend for election at each meeting
of our stockholders to elect directors. We expect that the director designated
by Express Scripts will be Barrett A. Toan. Mr. Toan, 51, was elected chief
executive officer of Express Scripts in March 1992, and president and a
director in October 1990. He has been an executive employee of Express Scripts
since May 1989.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors, including stock
compensation and loans. In addition, the compensation committee reviews and
makes recommendations on bonus and stock compensation arrangements for all of
our employees. As part of the foregoing, the compensation committee also
administers our 1999 Equity Incentive Plan, Employee Stock Purchase Plan and
1999 Director Stock Option Plan. The current members of the compensation
committee are Messrs. Beirne, Cotsakos and Moritz.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external
audits, including, among other things, our internal audit and control
functions, the results and scope of the annual audit and other services
provided by our independent auditors and our compliance with legal matters that
have a significant impact on our financial reports. The audit committee also
consults with our management and our independent auditors prior to the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of our financial affairs. In addition, the
audit committee has the responsibility to consider and recommend the
appointment of, and to review fee arrangements with, our independent auditors.
The current
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members of the audit committee are Messrs. Burke and Moritz.
Advisory Board
The advisory board provides guidance on specific healthcare-related issues,
including content and editorial review. The members of the advisory board
include:
J. Lyle Bootman, Ph.D. -- Dean, University of Arizona College of Pharmacy.
Michael Castleman -- Former Adjunct Professor, University of California,
Berkeley Graduate School of Journalism, and currently a writer for a
number of online health sites.
Walter Fitzgerald -- Associate Professor of Pharmacy Practice and
Pharmacoeconomics, University of Tennessee.
Dick Gourley -- Dean, University of Tennessee College of Pharmacy.
David Heber, M.D., Ph.D. -- Director, UCLA Center for Human Nutrition.
Mary Anne Koda-Kimble, PharmD. -- Dean, School of Pharmacy, University of
California, San Francisco.
Dean Ornish, M.D. -- President, Preventative Medicine Research Institute.
Swaid N. Swaid, M.D. -- Medical Director of HealthSouth Medical Center in
Birmingham, Alabama.
Bruce U. Weintraub, M.D. -- Associate Dean, Schools of Medicine,
University of California, San Francisco.
Director Compensation
Directors do not receive any cash fees for their service on the board of
directors or any board committee, but they are entitled to reimbursement for
all reasonable out-of-pocket expenses incurred in connection with their
attendance at board of directors and board committee meetings. From time to
time, those directors who are not employees of PlanetRx.com have received
grants of options to purchase shares of our common stock. Following this
offering, directors will receive automatic option grants under our 1999
Director Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors currently consists of
Messrs. Beirne, Cotsakos and Moritz. No interlocking relationship exists
between any member of our board of directors or our compensation committee and
any member of the board of directors or compensation committee of any other
company, and no such interlocking relationship has existed in the past.
Limitations on Directors' Liability and Indemnification
In July 1999, the board of directors authorized us to enter into
indemnification agreements with each of our directors and executive officers.
The form of indemnification agreement provides that we will indemnify our
directors and executive officers against any and all of their expenses incurred
by reason of their status as a director or executive officer to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
bylaws.
Our certificate of incorporation and bylaws each contain provisions
relating to the limitation of liability and indemnification of our directors
and officers. Our certificate of incorporation provides that our directors will
not be personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except liability for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174
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of the Delaware General Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of our
certificate of incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law. The foregoing provisions of our certificate
of incorporation are not intended to limit the liability of our directors or
officers for any violation of applicable federal securities laws.
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, our bylaws provide that
. we must indemnify our directors and officers to the fullest extent
permitted by the Delaware General Corporation Law;
. we may, in our discretion, indemnify other of our officers, employees
and agents as provided by the Delaware General Corporation Law;
. to the fullest extent permitted by the Delaware General Corporation Law,
we are required to advance all expenses incurred by our directors and
officers in connection with legal proceedings (subject to some
exceptions);
. the rights conferred in the bylaws are not exclusive;
. we are authorized to enter into indemnification agreements with our
directors, officers, employees and agents; and
. we may not retroactively amend our bylaw provisions relating to
indemnification.
Our bylaws provide that we must indemnify our directors to the fullest
extent permitted by Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware General Corporation Law.
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Executive Compensation
Summary Compensation Table
The following table sets forth information concerning compensation that was
earned during the fiscal year ended December 31, 1998 by our Chief Executive
Officer and each of our other most highly compensated officers, collectively
referred to below as the Named Executive Officers. This table sets forth the
total amount of compensation Messrs. Razzouk, McAlpin and Goldman earned in
1998 for the portions of the year they were our executive officers. Mr. Razzouk
and Mr. McAlpin joined us in September 1998. Mr. Goldman joined us in December
1998. See "Management -- Executive Officers and Directors".
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
------------------ Underlying
Name and Principal Position Salary($) Bonus($) Options(#)
- --------------------------- --------- -------- ------------
<S> <C> <C> <C>
William J. Razzouk.............................. $54,545 $47,879 1,809,000
Chief Executive Officer and Chairman
John McAlpin.................................... 33,750 0 200,000
Vice President of Distribution Services
Allan Goldman................................... 4,688 0 100,000
Vice President of Merchandising
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1998 to each of the Named Executive Officers. No
stock appreciation rights were granted to these individuals during such year.
Each of the options listed in the table is immediately exercisable. The shares
purchasable under the options may be repurchased by PlanetRx.com at the
original exercise price paid per share if the optionee ceases service before
vesting in such shares. The repurchase right generally lapses and the optionee
vests as to 25% of the option shares upon completion of 12 months of service
from the vesting start date and the balance in a series of equal monthly
installments over the next three years of service thereafter. The vesting start
date is the date on which the optionee begins to receive vesting credit for the
option. As of December 31, 1998, Mr. Razzouk was vested in 678,376 option
shares and Messrs. McAlpin and Goldman were not vested in any option shares.
The option shares will vest upon an acquisition of PlanetRx.com by merger or
asset sale, unless our repurchase right with respect to the unvested option
shares is transferred to the acquiring entity. The percentage of total options
granted to each Named Executive Officer is based on a total of 3,447,100
options and common shares granted to our employees under our 1998 Stock Plan
during the 12 months ended December 31, 1998.
The exercise price was equal to the fair market value of our common stock
as valued by our board of directors on the date of grant. In determining this
fair market value, the board of directors took into account the purchase price
paid by investors for shares of our preferred stock (taking into account the
liquidation preferences and other rights, privileges and preferences associated
with such preferred stock) and an evaluation by the board of directors of our
revenues, operating history and prospects. The exercise price may be paid in
cash, in shares of our common stock valued at fair market value on the exercise
date or through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by lending the
optionee sufficient funds to pay the exercise price for the
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<PAGE>
purchased shares, together with any federal and state income tax liability
incurred by the optionee in connection with such exercise.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange Commission
and does not represent our prediction of our stock price performance. The
potential realizable value at 5% and 10% appreciation is calculated by assuming
that the estimated fair market value on the date of grant appreciates at the
indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price. The initial public offering price is higher than the
estimated fair market value on the date of grant, and the potential realizable
value of the option grants would be significantly higher than the numbers shown
in the table if future stock prices were projected to the end of the option
term by applying the same annual rates of stock price appreciation to the
initial public offering price.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees Price Expiration ---------------------
Name Granted(#) in 1998 ($/Sh) Date 5%($) 10%($)
- ---- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William J. Razzouk...... 1,809,000 52.5% $0.025 10/05/08 $ 28,442 $ 72,077
John McAlpin............ 200,000 5.8 0.05 11/17/08 6,289 15,937
Allan Goldman........... 100,000 2.9 0.05 12/20/08 3,144 7,969
</TABLE>
In addition to the options listed in the table, stock options were granted
in 1999 to some of the Named Executive Officers and to other executive officers
under our 1998 Stock Plan for the following number of shares and at the
exercise prices indicated. Each of the options is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by us at the original
exercise price paid per share upon the optionee's cessation of service prior to
vesting in such shares. The repurchase right generally lapses as to 25% of the
shares upon completion of one year of service from the grant date and the
balance in a series of 36 monthly installments thereafter.
<TABLE>
<CAPTION>
Number of Securities Exercise Price
Name Underlying Options Granted ($/Sh)
- ---- -------------------------- --------------
<S> <C> <C>
William J. Razzouk.................... 300,000 $5.50
Allan Goldman......................... 50,000 0.05
75,000 2.00
50,000 5.50
John McAlpin.......................... 100,000 2.00
50,000 5.50
James Chong........................... 335,000 0.05
65,000 2.00
150,000 5.50
Jay O'Connor.......................... 325,000 0.05
Steve Valenzuela...................... 400,000 0.50
75,000 5.50
Stephanie Schear...................... 50,000 5.50
Matthew Naythons...................... 125,000 5.50
</TABLE>
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for each of the Named Executive Officers the
number of options exercised during the fiscal year ended December 31, 1998 and
the number and value of securities underlying unexercised options that are held
by the Named Executive Officers as of December 31, 1998. No stock appreciation
rights were exercised by the Named Executive Officers in fiscal year 1998, and
no stock appreciation rights were outstanding at the end of that year. The
options are immediately exercisable for all of the option shares, but any
shares purchased under those options will be subject to repurchase by
PlanetRx.com, at the original exercise price paid per share, if the optionee
ceases service with PlanetRx.com before vesting in such shares. The heading
"Vested" refers to shares that are no longer subject to repurchase; the heading
"Unvested" refers to shares subject to repurchase as of December 31, 1998.
"Value Realized" is equal to the fair market value of the purchased shares
on the option exercise date, less the exercise price paid for such shares.
"Value of Unexercised in-the-Money Options" is based on the fair market
value of our common stock as determined by our board of directors at the end of
1998 of $0.05 per share, less the exercise price payable or paid for such
shares. The fair market value of our common stock at the end of 1998 was
estimated by the board of directors on the basis of the purchase price paid by
investors for shares of our preferred stock (taking into account the
liquidation preferences and other rights, privileges and preferences associated
with the preferred stock) and an evaluation by the board of our revenues,
operating history and prospects. The initial public offering price is higher
than the estimated fair market value at fiscal year-end, and the value of
unexercised options would be higher than the numbers shown in the table if the
value were calculated by subtracting the exercise price from the initial public
offering price.
<TABLE>
<CAPTION>
Value of
Unexercised
Number of Securities in-the-Money
Underlying Unexercised Options at
Options at December 31, December 31,
Shares 1998(#) 1998($)
Acquired on Value ------------------------ ---------------
Name Exercise(#) Realized($) Vested Unvested Vested Unvested
- ---- ----------- ----------- ---------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
William J. Razzouk...... 1,809,000 $ 0 0 0 $0 $0
John McAlpin............ 0 0 0 200,000 0 0
Allan Goldman........... 0 0 0 100,000 0 0
</TABLE>
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<PAGE>
Stock Plans
1999 Equity Incentive Plan
Share Reserve. Our board of directors adopted our 1999 Equity Incentive
Plan on July 7, 1999. Our stockholders also approved this plan. We have
reserved 6,000,000 shares of our common stock for issuance under the
1999 Equity Incentive Plan. Any shares not yet issued under our 1998 Stock Plan
on the date of this offering will also be available under the 1999 Equity
Incentive Plan. On January 1 of each year, starting with the year 2000, the
number of shares in the reserve will automatically increase by the lesser of 5%
of the total number of shares of common stock that are outstanding at that time
or 2,000,000 shares. In general, if options or shares awarded under the 1999
Equity Incentive Plan or the 1998 Stock Plan are forfeited, then those options
or shares will again become available for awards under the 1999 Equity
Incentive Plan. We have not yet granted any options under the 1999 Equity
Incentive Plan.
Administration. The compensation committee of our board of directors
administers the 1999 Equity Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation
of our 1999 Equity Incentive Plan. The committee has the discretion to
determine who will receive an award, what type of award it will be, how many
shares will be covered by the award, what the vesting requirements will be (if
any), and what the other features and conditions of each award will be. The
compensation committee may also reprice outstanding options and modify
outstanding awards in other ways.
Eligibility. The following groups of individuals are eligible to
participate in the 1999 Equity Incentive Plan:
. employees;
. members of our board of directors who are not employees; and
. consultants.
Types of Award. The 1999 Equity Incentive Plan provides for the following
types of award:
. incentive stock options to purchase shares of our common stock;
. nonstatutory stock options to purchase shares of our common stock;
. restricted shares of our common stock;
. stock units; and
. stock appreciation rights.
Options. An optionee who exercises an incentive stock option may qualify
for favorable tax treatment under Section 422 of the Internal Revenue Code of
1986. On the other hand, nonstatutory stock options do not qualify for such
favorable tax treatment. The exercise price for incentive stock options granted
under the 1999 Equity Incentive Plan may not be less than 100% of the fair
market value of our common stock on the option grant date. In the case of
nonstatutory stock options, the minimum exercise price is 85% of the fair
market value of our common stock on the option grant date. Optionees may pay
the exercise price by using:
. cash;
. shares of common stock that the optionee already owns;
. a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
. an immediate sale of the option shares through a broker designated by
us; or
. a loan from a broker designated by us, secured by the option shares.
Options vest at the time or times determined by the compensation committee.
In most cases, our options vest over the four-year period following the date of
grant. Options generally expire 10 years after they are granted, except that
they generally expire earlier if the optionee's service terminates earlier. The
1999 Equity Incentive Plan provides that no participant may receive options
covering more than 2,000,000 shares in the same year, except that a newly hired
employee may receive options covering up to 2,500,000 shares in the first year
of employment.
Restricted Shares. Restricted shares may be awarded under the 1999 Equity
Incentive Plan in return for:
. cash;
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<PAGE>
. a full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
. services already provided to us; and
. in the case of treasury shares only, services to be provided to us in
the future.
Restricted shares vest at the time or times determined by the compensation
committee.
Change in Control. If a change in control of PlanetRx.com occurs, an option
or restricted stock award under the 1999 Equity Incentive Plan will generally
become fully vested. However, if the surviving corporation assumes the option
or award or replaces it with a comparable award, then vesting accelerates only
to the extent determined by the compensation committee. In the event of an
involuntary termination of the optionee or participant within twelve months
following a change in control, the vesting of an option or restricted stock
award will accelerate in full. A change in control includes:
. a merger of PlanetRx.com after which our own stockholders own 50% or
less of the surviving corporation (or its parent company);
. a sale of all or substantially all of our assets;
. a proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
. an acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to PlanetRx.com (such as a holding
company owned by our stockholders).
Amendments or Termination. Our board may amend or terminate the 1999 Equity
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the amendment unless applicable law requires
it. The 1999 Equity Incentive Plan will continue in effect indefinitely, unless
the board decides to terminate the plan earlier.
Employee Stock Purchase Plan
Share Reserve and Administration. Our board of directors adopted our
Employee Stock Purchase Plan on July 7, 1999. Our stockholders also approved
this plan. Our Employee Stock Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code. We have reserved 1,000,000 shares of
our common stock for issuance under the plan. On January 31 of each year,
starting with the year 2000, the number of shares in the reserve will
automatically be increased by the lesser of 2% of the total number of shares of
our common stock outstanding or 750,000 shares. The plan will be administered
by the compensation committee of our board of directors.
Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months
per year. Eligible employees may begin participating in the Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts
six months. Offering periods start on May 1 and November 1 of each year.
However, the first offering period will start on the effective date of this
offering and end on April 30, 2000.
Amount of Contributions. Our Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on April 30, and October
31 of each year. Each participant may purchase up to 2,500 shares on any
purchase date (5,000 shares per year), but the value of the shares purchased in
any calendar year (measured as of the beginning of the applicable offering
period) may not exceed $25,000.
Purchase Price. The price of each share of common stock purchased under our
Employee Stock Purchase Plan will be 85% of the lower of:
. the fair market value per share of common stock on the date immediately
before the first day of the applicable offering period, or
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<PAGE>
. the fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
. the price per share to the public in this offering, or
. the fair market value per share of common stock on the purchase date.
Other Provisions. Employees may end their participation in the Employee
Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with PlanetRx.com. If a change in control of
PlanetRx.com occurs, our Employee Stock Purchase Plan will end and shares will
be purchased with the payroll deductions accumulated to date by participating
employees, unless the plan is assumed by the surviving corporation or its
parent. Our board of directors may amend or terminate the Employee Stock
Purchase Plan at any time. If our board increases the number of shares of
common stock reserved for issuance under the plan (except for the automatic
increases described above), it must seek the approval of our stockholders.
1999 Director Stock Option Plan
Share Reserve. Our board of directors adopted our 1999 Director Stock
Option Plan on July 7, 1999. Our stockholders also approved this plan. We have
reserved 400,000 shares of our common stock for issuance under the plan. In
general, if options granted under the 1999 Director Stock Option Plan are
forfeited, then those options will again become available for grants under the
plan. The 1999 Director Stock Option Plan will be administered by the
compensation committee of our board of directors, although all grants under the
plan are automatic and non-discretionary.
Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Director Stock Option Plan.
Each non-employee director who first joins our board after the effective date
of this offering will receive an initial option for 25,000 shares. That grant
will occur when the director takes office. The initial options vest over four
years.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a
director after that meeting will automatically be granted an annual option for
10,000 shares of our common stock. However, a new non-employee director who is
receiving the 25,000-share initial option will not receive the 10,000-share
annual option in the same calendar year. The annual options vest in equal
monthly installments over the one-year period following the date of grant.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the option
grant date. A director may pay the exercise price by using cash, shares of
common stock that the director already owns, or an immediate sale of the option
shares through a broker designated by us. The non-employee directors' options
have a 10-year term, except that they expire one year after a director leaves
the board (if earlier).
Amendments or Termination. Our board may amend or terminate the 1999
Director Stock Option Plan at any time. If our board amends the plan, it does
not need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Director Stock Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.
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<PAGE>
RELATED PARTY TRANSACTIONS
Since March 31, 1995, we have issued and sold securities to the following
persons who are executive officers, directors or principal stockholders of
PlanetRx.com. These figures reflect activity through June 30, 1999. These
figures also reflect the conversion to common stock of each share of series A,
series B and series C preferred stock that will be effective upon the closing
of our initial public offering. Each share of series A preferred stock is
convertible into one share of common stock, each share of series B preferred
stock is convertible into approximately 1.0463 shares of common stock and each
share of series C preferred stock is convertible into approximately 1.0084
shares of common stock. The per share purchase price for our series A preferred
stock was $0.50. The per share purchase price for our series B preferred stock
was $5.00. The per share purchase price for our series C preferred stock was
$8.755.
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred Common Total Shares
Investor(1) Stock Stock Stock Stock as Converted
- ----------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
William J. Razzouk(2).... -- -- -- 1,809,000 1,809,000
Steve Valenzuela(3)...... -- -- -- 400,000 400,000
Michael Bruner(4)........ 2,000 -- -- 2,000,000 2,002,000
James Chong(5)........... -- -- -- 335,000 335,000
Allan Goldman............ -- -- -- -- --
John McAlpin(6).......... -- -- -- 200,000 200,000
Matthew Naythons,
M.D.(7)................. -- -- -- 690,000 690,000
Jay O'Connor(8).......... -- -- -- 325,000 325,000
Stephanie Schear(9)...... -- -- -- 1,280,000 1,280,000
David Beirne(10)......... 5,050,000 100,000 228,441 -- 5,384,989
Michael Moritz(11)....... 5,000,000 100,000 228,441 -- 5,334,989
Christos M.
Cotsakos(12)............ 100,000 510,000 113,627 100,000 848,194
Terrence C. Burke(13).... -- -- -- 100,000 100,000
Funds affiliated with
Benchmark Capital(14)... 5,000,000 100,000 228,441 -- 5,334,989
Funds affiliated with
Sequoia Capital(15)..... 5,000,000 100,000 228,441 -- 5,334,989
</TABLE>
- --------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Reflects the exercise on October 8, 1998 of options to purchase our common
stock.
(3) Reflects the exercise on March 31, 1999 of options to purchase our common
stock.
(4) On September 15, 1998, Mr. Bruner was a party to a recapitalization by
PlanetRx.com whereby Mr. Bruner's original shares in PlanetRx.com were
exchanged into his current shares of common stock.
(5) Reflects the exercise on January 11, 1999 of options to purchase our
common stock.
(6) Reflects the exercise on January 11, 1999 of options to purchase our
common stock.
(7) Reflects a grant of 198,000 shares in December 1998 for services rendered
in connection with the acquisition of domain names by PlanetRx.com, a
grant of 342,000 shares in June 1999 to a company affiliated with Dr.
Naythons in connection with the acquisition of additional domain names and
the exercise on February 12, 1999 of options to purchase 150,000 shares of
our common stock.
(8) Reflects the exercise on February 19, 1999 of options to purchase our
common stock.
(9) Reflects the purchase of shares of common stock pursuant to a stock
purchase agreement dated September 15, 1998.
(10) Consists of 5,000,000 shares of series A preferred stock, 100,000 shares
of series B preferred stock and 228,441 shares of series C preferred stock
held by Benchmark Capital Partners II, L.P. and 50,000 shares of series A
preferred stock held by Ramsey/Beirne Associates. Mr. Beirne is a Managing
Member of Benchmark Capital Management Co. II LLC, which
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<PAGE>
is the General Partner of Benchmark Capital Partners II, L.P., and
Chairman of Ramsey/Beirne Associates.
(11) Consists of:
. 4,531,500 shares of series A preferred stock, 90,630 shares of series
B preferred stock and 207,036 shares of series C preferred stock held
by Sequoia Capital VIII;
. 57,500 shares of series A preferred stock, 1,150 shares of series B
preferred stock and 2,627 shares of series C preferred stock held by
Sequoia International Technology Partners VIII;
. 300,000 shares of series A preferred stock, 6,000 shares of series B
preferred stock and 13,707 shares of series C preferred stock held by
Sequoia International Technology Partners VIII (Q);
. 100,000 shares of series A preferred stock, 2,000 shares of series B
preferred stock and 4,568 shares of series C preferred stock held by
CMS Partners, LLC; and
. 11,000 shares of series A preferred stock, 220 shares of series B
preferred stock and 503 shares of series C preferred stock held by
Sequoia 1997. Each of the entities listed in this note are affiliated
with Sequoia Capital. Mr. Moritz is a general partner of SC VIII
Management, LLC, the general partner of Sequoia Capital VIII, Sequoia
International Technology Partners VIII and Sequoia International
Technology Partners VIII (Q). CMS Partners is an affiliated side fund
of Sequoia Capital VIII.
(12) Includes 100,000 shares of common stock, 100,000 shares of series A
preferred stock and 8,567 shares of series C preferred stock held by the
Cotsakos Revocable Trust u/a/d 9/3/87; 10,000 shares of series B
preferred stock held by Christos M. Cotsakos C/F Suzanne R. Cotsakos CA
UTMA; and 500,000 shares of series B preferred stock and 105,060 shares
of series C preferred stock held by the E*TRADE Group, Inc. Mr. Cotsakos
is Chairman and Chief Executive Officer of the E*TRADE Group, Inc.
(13) Mr. Burke also has a warrant to purchase 100,000 shares of series A
preferred stock.
(14) Consists of 5,000,000 shares of series A preferred stock, 100,000 shares
of series B preferred stock and 228,441 shares of series C preferred
stock held by Benchmark Capital Partners II, L.P. as nominee for
Benchmark Capital Partners II, L.P., Benchmark Founders' Fund II, L.P.,
Benchmark Founders Fund II-A, L.P. and Benchmark Members' Fund II, L.P.
(15) Consists of:
. 4,531,500 shares of series A preferred stock, 90,630 shares of series
B preferred stock and 207,036 shares of series C preferred stock held
by Sequoia Capital VIII;
. 57,500 shares of series A preferred stock, 1,150 shares of series B
preferred stock and 2,627 shares of series C preferred stock held by
Sequoia International Technology Partners VIII;
. 300,000 shares of series A preferred stock, 6,000 shares of series B
preferred stock and 13,707 shares of series C preferred stock held by
Sequoia International Technology Partners VIII (Q);
. 100,000 shares of series A preferred stock, 2,000 shares of series B
preferred stock and 4,568 shares of series C preferred stock held by
CMS Partners, LLC; and
. 11,000 shares of series A preferred stock, 220 shares of series B
preferred stock and 503 shares of series C preferred stock held by
Sequoia 1997.
In addition, we have granted options to our executive officers. See
"Management -- Option Grants in Last Fiscal Year".
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Series A Financing
On September 15, 1998, we issued an aggregate of 10,100,000 shares of
series A preferred stock at a per share purchase price of $0.50 to investors,
including entities affiliated with Benchmark Capital and Sequoia Capital.
Series B Financing
On January 15, 1999, we issued an aggregate of 5,200,000 shares of series B
preferred stock at a per share purchase price of $5.00 to investors, including
entities affiliated with Benchmark Capital, Sequoia Capital and E*TRADE Group.
Series C Financing
Between June 3 and June 18, 1999, we issued an aggregate of 6,776,364
shares of series C preferred stock at a per share purchase price of $8.775 to
investors, including entities affiliated with Benchmark Capital, Sequoia
Capital and E*TRADE Group.
Series D Financing
On September 3, 1999, we issued an aggregate of 371,103 shares of series D
preferred stock at a per share purchase price of $20.21 to iVillage, Inc.
Change in Conversion Price
On June 30, 1999, PlanetRx.com filed a restated certificate of
incorporation whereby each share of series B preferred stock is convertible
into approximately 1.0463 shares of common stock and each share of series C
preferred stock is convertible into approximately 1.0084 shares of common
stock. The original conversion price for the series B preferred stock was
$5.00. The original conversion price for the series C preferred stock was
$8.755. The conversion price of the series B preferred stock was adjusted to
$4.79 and the conversion price of the series C preferred stock was adjusted to
$8.682 to reflect dilution that occurred after the closing of the series C
financing.
Employment Agreements with Executive Officers
In November 1998, we entered into an employment agreement with William J.
Razzouk, our Chairman and Chief Executive Officer, pursuant to which he was
granted an option to purchase 1,809,000 shares of common stock, one-third of
which was immediately vested, and the balance of which vests monthly over 48
months. Upon a change of control, if Mr. Razzouk is not employed by the
acquiring company in substantially the same position and job title, Mr. Razzouk
would be entitled to a cash payment equal to his base salary plus his most
recently paid bonus and his options would become fully vested.
Loans to Executive Officers
On September 15, 1998, we advanced $31,936 to Stephanie Schear, one of our
officers, for the purchase of PlanetRx.com common stock pursuant to a stock
purchase agreement dated September 15, 1998. The principal balance of this
note, together with interest accrued and unpaid to date, is due and payable in
September 2003. Interest will accrue under the note on any unpaid principal
balance at the rate of 5.54% per annum, compounded annually. The amount of this
full recourse note is currently outstanding, plus accrued interest.
Acquisition of Domain Names
In December 1998, we issued 198,000 shares of common stock to Dr. Matthew
Naythons for services rendered in connection with the acquisition and transfer
of domain names, including aids.com, birth.com, cancer.com, cholesterol.com,
depression.com, diabetes.com, obesity.com, nursing.com, pharmacist.com and
physicians.com. In June 1999, we issued 342,000 shares of common stock to a
company affiliated with Dr. Naythons for the acquisition of additional domain
names, including acne.com, alzheimers.com, alzheimers.net, anorexia.com,
epilepsy.com, fertility.com, hepatitis-b.com, hepatitis-c.com, hepatitis.com,
hypertension.com, impotence.com, infertility.com, osteopathy.com,
parkinsons.com, podiatry.com, pollenwatch.com, prenatal.com, rxnet.com,
sportsdoc.com and stroke.com. In connection with these acquisitions, we entered
into revenue sharing arrangements based upon revenues earned from these domain
names with companies affiliated with Dr. Naythons.
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These revenue sharing arrangements are capped at an aggregate amount of
$500,000 over the terms of the agreements.
Warrant to Ramsey/Beirne Associates
On November 18, 1998, we granted to Ramsey/Beirne Associates a warrant to
purchase 50,000 shares of our series A preferred stock in exchange for
services. David Beirne, a director of PlanetRx.com, is chairman of
Ramsey/Beirne Associates.
Warrant and Option Grants
In the past, we have granted options to our executive officers and
directors. We intend to grant additional options to our directors and officers
in the future. Additionally, we have granted warrants to three of our
directors. See "Management -- Option Grants in Last Fiscal Year" and
"Management -- Director Compensation".
Corporate Reorganization
Immediately prior to the closing of this offering, we will effect a
corporate reorganization under which the current PlanetRx.com, Inc. will become
a wholly owned subsidiary of a newly-formed holding company. Our current
stockholders will become stockholders of the holding company with the exact
same rights and obligations they had prior to the reorganization. Upon
completion of the reorganization, the holding company's corporate name will be
changed to "PlanetRx.com, Inc." and the current PlanetRx.com, Inc. will become
"PlanetRx.com Operating Co., Inc."
Indemnification and Limitation of Director and Officer Liability
We have entered into an Indemnification Agreement with each of our
executive officers and directors. See "Management -- Limitations on Directors'
Liability and Indemnification".
We believe that the transactions set forth above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, and will continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of PlanetRx.com's
common stock as of September 3, 1999 and as adjusted to reflect the sale of the
common stock offered in this prospectus for:
. each person who is known by us to beneficially own more than 5% of our
common stock;
. each of our Named Executive Officers,
. each of our directors; and
. all of our directors and executive officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares.
The percentage of beneficial ownership for the following table is based on
34,681,199 shares of common stock outstanding as of September 3, 1999 assuming
conversion of all outstanding shares of preferred stock into common stock, and
exercise of all outstanding warrants and similar purchase rights, and
51,020,009 shares of common stock outstanding after the completion of this
offering, assuming no exercise of the underwriters' over-allotment option, and
the issuance of 10,338,810 shares of our common stock to Express Scripts.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Common stock subject to options currently
exercisable within 60 days of June 30, 1999 are deemed outstanding for purposes
of computing the percentage ownership of the person holding such option but are
not deemed outstanding for purposes of computing the percentage ownership of
any other person. Except where indicated, and subject to community property
laws where applicable, the persons in the table below have sole voting and
investment power with respect to all common stock shown as beneficially owned
by them.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Shares Beneficially Owned
Beneficially ------------------------
Owned Before Before After
Name of Beneficial Owner(1) Offering Offering Offering
- --------------------------- ---------------- ---------- ----------
<S> <C> <C> <C>
Named Executive Officers and
Directors
William J. Razzouk(2)........... 2,109,000 6.0% 4.1%
John McAlpin.................... 300,000 * *
Allan Goldman................... 275,000 * *
David Beirne(3)................. 5,384,989 15.5 10.6
Terrence C. Burke............... 200,000 * *
Christos M. Cotsakos(4)......... 848,194 2.5 1.7
Michael Moritz(5)............... 5,334,989 15.4 10.5
Other 5% Stockholders
Michael Bruner.................. 2,002,000 5.8 3.9
Entities affiliated with
Benchmark Capital(6)........... 5,334,989 15.4 10.5
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
Entities affiliated with Sequoia
Capital(7)..................... 5,334,989 15.4 10.5
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Markas Holding B.V.............. 2,825,878 8.2 5.5
Locatellikade, 1
Parnassustoren
1076 AZ Amsterdam
The Netherlands
News America Incorporated....... 1,727,698 5.0 3.4
1211 Avenue of the Americas
New York, New York 10036
Express Scripts, Inc.(8)........ 0 * 19.9
13900 Riverport Drive
St. Louis, Missouri 63043
All executive officers and
directors as a group (12
persons)(9).................... 17,947,172 50.0 35.2
</TABLE>
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- --------
* Represents beneficial ownership of less than 1%.
(1) Unless otherwise indicated, the address of each of the individuals listed
in the table is c/o PlanetRx.com, Inc., 349 Oyster Point Road, Suite 201,
South San Francisco, California 94080.
(2) Includes 25,000 shares owned by Katherine W. Razzouk, 25,000 shares owned
by Matthew J. Razzouk and 25,000 shares owned by Thomas E. Razzouk, Mr.
Razzouk's children.
(3) Includes 50,000 shares held by Ramsey/Beirne Associates, 5,000,000 shares
of series A preferred stock, 100,000 shares of series B preferred stock and
228,441 shares of series C preferred stock held by Benchmark Capital
Partners II, L.P. as nominee for Benchmark Capital Partners II, L.P.,
Benchmark Founders' Fund II, L.P., Benchmark Founders' Fund II-A, L.P. and
Benchmark Members' Fund II, L.P. Mr. Beirne serves as chairman of
Ramsey/Beirne Associates, is a managing member of Benchmark Capital
Management Co. II, LLC, the general partner of Benchmark Capital Partners
II, L.P., Benchmark Founders' Fund II, L.P., Benchmark Founders' Fund II-A,
L.P. and Benchmark Members' Fund II, L.P. and is a director of
PlanetRx.com. He disclaims beneficial ownership of the shares held by
Ramsey/Beirne Associates and the Benchmark funds, except to the extent of
his pecuniary interest therein.
(4) Includes 100,000 shares of common stock, 100,000 shares of series A
preferred stock and 8,567 shares of series C preferred stock held by the
Cotsakos Revocable Trust u/a/d 9/3/87 and 10,000 shares of series B
preferred stock held by Christos M. Cotsakos C/F Suzanne R. Cotsakos CA
UTMA, as well as 500,000 shares of series B preferred stock and
105,060 shares of series C preferred stock held by the E*TRADE Group, Inc.
Mr. Cotsakos is chairman and chief executive officer of the E*TRADE Group,
Inc. and a director of PlanetRx.com. He disclaims beneficial ownership of
the shares held by E*TRADE Group, Inc.
(5) Includes: 4,531,500 shares of series A preferred stock, 90,630 shares of
series B preferred stock and 207,036 shares of series C preferred stock
held by Sequoia Capital VIII;
. 57,500 shares of series A preferred stock, 1,150 shares of series B
preferred stock and 2,627 shares of series C preferred stock held by
Sequoia International Technology Partners VIII;
. 300,000 shares of series A preferred stock, 6,000 shares of series B
preferred stock and 13,707 shares of series C preferred stock held by
Sequoia International Technology Partners VIII (Q);
. 100,000 shares of series A preferred stock, 2,000 shares of series B
preferred stock and 4,568 shares of series C preferred stock held by CMS
Partners, LLC; and
. 11,000 shares of series A preferred stock, 220 shares of series B
preferred stock and 503 shares of series C preferred stock held by
Sequoia 1997. Mr. Moritz is a general partner of Sequoia Capital and a
director of PlanetRx.com. He disclaims beneficial ownership of the
shares held by the entities except to the extent of his proportionate
interest therein.
(6) Consists of 5,000,000 shares of series A preferred stock, 100,000 shares of
series B preferred stock and 228,441 shares of series C preferred stock
held by Benchmark Capital Partners II, L.P.
(7) Consists of: 4,531,500 shares of series A preferred stock, 90,630 shares of
series B preferred stock and 207,036 shares of series C preferred stock
held by Sequoia Capital VIII;
. 57,500 shares of series A preferred stock, 1,150 shares of series B
preferred stock and 2,627 shares of series C preferred stock held by
Sequoia International Technology Partners VIII;
. 300,000 shares of series A preferred stock, 6,000 shares of series B
preferred stock and 13,707 shares of series C preferred stock held by
Sequoia International Technology Partners VIII (Q);
. 100,000 shares of series A preferred stock, 2,000 shares of series B
preferred stock and 4,568 shares of series C preferred stock held by CMS
Partners, LLC; and
. 11,000 shares of series A preferred stock, 220 shares of series B
preferred stock and 503 shares of series C preferred stock held by
Sequoia 1997.
(8) Includes 10,338,810 shares of our common stock which will be issued to
Express Scripts at the close of this offering in connection with the
acquisition of the e-Commerce operations of YourPharmacy.com, Inc. Assumes
the exercise of the over-allotment option granted to the underwriters. If
the over-allotment option is not exercised, Express Scripts will return to
us, at no cost, that number of shares as is necessary to reduce its
ownership to 19.9% of our then outstanding stock.
(9) Includes options immediately exercisable for 1,240,000 shares.
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DESCRIPTION OF CAPITAL STOCK
General
Upon the closing of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.0001 par value, and 5,000,000
shares of preferred stock, $0.0001 par value. The following summary of our
common stock and preferred stock does not purport to be complete and is subject
to, and qualified in its entirety by, our certificate of incorporation and
bylaws and by the provisions of applicable law.
Common Stock
As of June 30, 1999, there were 9,840,250 shares of common stock
outstanding that were held of record by approximately 107 stockholders. There
will be shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and assuming no exercise after June 30,
1999, of outstanding options) after giving effect to the sale of the shares of
common stock to the public offered hereby and the conversion of our preferred
stock into common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
See "Dividend Policy". In the event of the liquidation, dissolution or winding
up of PlanetRx.com, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and nonassessable,
and the shares of common stock to be issued upon completion of this offering
will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority to issue the preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of PlanetRx.com without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of
common stock, including the loss of voting control to others. At present, we
have no plans to issue any of the preferred stock.
Warrants
As of June 30, 1999, there is one warrant outstanding to purchase 100,000
shares of series A preferred stock at $0.50 per share, which expires on October
31, 2000, and one warrant outstanding to purchase 16,000 shares of series B
preferred stock at $5.00 per share, which expires on the earlier of January 15,
2009 or one year after the effective date of this offering.
Upon the closing of this offering, all warrants described herein will
become exercisable for common stock at the rate of one share of common stock
for each share of series A preferred stock and 1.0463 shares of common stock
for each share of series B preferred stock underlying the warrants.
Other Purchase Rights
In January 1999, in conjunction with a new credit facility, we granted a
purchase option for up to 700,000 shares of series B preferred stock at $5.00
per share. These series B shares are
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convertible into 732,410 shares of common stock.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Certificate of Incorporation and Bylaws
The certificate of incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of our capital stock. These provisions of the
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and in the policies formulated by the
board of directors and to discourage transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit fluctuations
in the market price of our shares that could result from actual or rumored
takeover attempts. These provisions also may have the effect of preventing
changes in our management.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, unless the stockholders adopt an amendment to the contrary, our stock is
no longer listed on a national securities exchange, or the stockholders consent
to such combination, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date that the interested stockholder became an interested
stockholder, unless:
. prior to becoming an interested stockholder, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66-2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder except pursuant to
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the exercise, exchange or conversion of securities exercisable for,
exchangable for or convertible into stock of such composition, pursuant
to merger of a parent and a subsidiary, or pursuant to an exchange offer
by the company to purchase stock made on the same terms to all holders
of said stock;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Registration Rights
After this offering, the holders of 34,159,402 shares of common stock will
be entitled to rights with respect to the registration of these shares under
the Securities Act. Under the terms of our agreement with the holders of these
registrable securities, if we proposed to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of that registration and are entitled to include shares of their
registrable common stock therein. Additionally, holders of 34,159,402 shares of
common stock are also entitled to demand registration rights pursuant to which
they may require us to file a registration statement under the Securities Act
at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect that registration. Further, the
holders of these demand rights may require us to file additional registration
statements on Form S-3. We have also agreed to register half of the shares
issued to Express Scripts, Inc. All of these registration rights are subject to
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares included in that registration and our
right not to effect a requested registration within six months following an
offering of our securities, including this offering.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is Boston EquiServe,
L.P.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, we will have 51,020,009 shares of
common stock outstanding, assuming the issuance of shares of common stock
offered in this prospectus, the issuance of 10,338,810 shares of common stock
to Express Scripts and no exercise of options after September 3, 1999. Of these
shares, the shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares held by our affiliates, as that term is defined under the Securities
Act, may generally only be sold in compliance with the limitations of Rule 144
described below.
Sales of Restricted Shares
Of the 51,020,009 shares of common stock outstanding upon completion of
this offering, 45,020,009 shares of common stock are deemed restricted shares
under Rule 144. The number of shares of common stock available for sale in the
public market is limited by restrictions under the Securities Act and lock-up
agreements under which the holders of such shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the
date of this prospectus without the prior written consent of Goldman, Sachs &
Co. On the date of this prospectus, 19,500 shares in addition to the shares
offered hereby will be eligible for sale. Beginning 180 days after the date of
this prospectus, or earlier with the consent of Goldman, Sachs & Co.,
21,471,488 restricted shares will become available for sale in the public
market subject to the limitations of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock
(approximately 510,200 shares after giving effect to this offering) and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 of the
Securities Act are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is
not our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell
such shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion
of counsel that a proposed sale of shares comes within the terms of Rule 144 of
the Securities Act prior to effecting a transfer of such shares.
Prior to this offering, there has been no public market for our common
stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through an offering of our equity
securities.
Options
As of September 3, 1999, there were a total of 2,801,050 shares of common
stock subject to outstanding options under our 1998 Stock Plan, of which none
were vested. In addition, upon completion of this offering, we will assume
options granted to employees of YourPharmacy.com, which will convert into
options to purchase approximately 1,940,184 shares of our common stock.
However, all of these shares are subject to lock-up agreements. Immediately
after the completion of the offering, PlanetRx.com intends to file registration
statements on Form S-8 under the Securities Act to register all of the shares
of common stock issued or
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reserved for future issuance under the 1998 Stock Plan and issued outside the
1998 Stock Plan and the assumed YourPharmacy.com options. On the date 180 days
after the effective date of the offering, a total of 343,950 shares of common
stock subject to outstanding options will be vested. After the effective dates
of the registration statements on Form S-8, shares purchased upon exercise of
options granted pursuant to the 1998 Stock Plan, shares granted outside the
1998 Stock Plan and shares purchased upon exercise of the assumed
YourPharmacy.com options generally would be available for resale in the public
market. Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. We intend to file one
or more registration statements on form S-8 under the Securities Act to
register all shares of common stock subject to outstanding stock options and
common stock issued or issuable pursuant to our 1998 Stock Plan. We expect to
file the registration statement covering shares offered pursuant to the 1998
Stock Plan and the 1999 Equity Incentive Plan approximately 30 days after the
closing of this offering. Such registration statements are expected to become
effective upon filing. Shares covered by these registration statements will
thereupon be eligible for sale in the public markets, subject to the lock-up
agreements, if applicable.
Lock-up Agreements
Our officers, directors and substantially all of our stockholders have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days after the date of the offering. Goldman, Sachs & Co., however, may in
its sole discretion, at any time without notice, release all or any portion of
the shares subject to lock-up agreements. In addition, persons and entities
associated or affiliated with the representatives of the underwriters have
agreed not to sell or otherwise dispose of any of their shares for a period of
three years after the date of the offering. See "Underwriting".
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LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
PlanetRx.com by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. Robert V. Gunderson, Jr., a partner of Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, serves as our Assistant
Secretary. As of the date of this prospectus, Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP beneficially owned an aggregate of 25,000
shares of our common stock. Legal matters in connection with this offering will
be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of PlanetRx.com, Inc. as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998 and
the financial statements of YourPharmacy.com, Inc. as of December 31, 1998 and
for the period from February 2, 1998 (inception) through December 31, 1998
included in this prospectus has been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the Common Stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to PlanetRx.com and the
Common Stock offered in this offering, reference is made to the registration
statement and to the attached exhibits and schedules. Statements made in this
prospectus concerning the contents of any document referred to herein may only
be summaries of such documents. With respect to each such document filed as an
exhibit to the registration statement, reference is made to the exhibit for a
more complete description of the matter involved. The registration statement
and the attached exhibits and schedules may be inspected without charge at the
public reference facilities maintained by the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
registration statement may be obtained from the Securities and Exchange
Commission upon payment of prescribed fees. Reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission may also be inspected without charge at a website
maintained by the Securities and Exchange Commission at http://www.sec.gov.
70
<PAGE>
PLANETRX.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PlanetRx.com, Inc. Financial Statements
Report of Independent Accountants............................................... F-2
Balance Sheets.................................................................. F-3
Statements of Operations........................................................ F-4
Statements of Stockholders' Equity (Deficit).................................... F-5
Statements of Cash Flows........................................................ F-6
Notes to Financial Statements................................................... F-7
Pro Forma Consolidated Financial Data
Overview........................................................................ F-26
Pro Forma Consolidated Balance Sheet............................................ F-28
Pro Forma Consolidated Statements of Operations................................. F-29
Notes to Pro Forma Consolidated Financial Data.................................. F-30
YourPharmacy.com, Inc., a Wholly-owned Subsidiary of Express Scripts, Inc.
Report of Independent Accountants............................................... F-32
Balance Sheets.................................................................. F-33
Statements of Operations........................................................ F-34
Statements of Changes in Stockholders' Deficit.................................. F-35
Statements of Cash Flows........................................................ F-36
Notes to Financial Statements................................................... F-37
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of PlanetRx.com, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of PlanetRx.com, Inc. (the
"Company"), at December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting 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.
PricewaterhouseCoopers LLP
San Francisco, California
June 18, 1999,
except for Note 9,
which is as of
July 8, 1999
F-2
<PAGE>
PLANETRX.COM, INC.
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
----- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 15 $ 935 $ 62,688
Inventories....................................... -- 18 1,612
Prepaid expenses and other current assets......... -- 1,864 12,053
----- ------- --------
Total current assets............................ 15 2,817 76,353
Property and equipment, net........................ 19 2,809 4,493
Intangible assets, net............................. -- -- 4,222
Other assets....................................... 2 81 168
----- ------- --------
$ 36 $ 5,707 $ 85,236
===== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 1 $ 1,600 $ 3,736
Accrued expenses.................................. 26 28 523
Deferred revenue.................................. -- -- 375
Borrowings, current............................... -- 600 --
Capital lease obligations, current................ 7 8 7
----- ------- --------
Total current liabilities....................... 34 2,236 4,641
Borrowings, long-term.............................. -- -- 1,600
Capital lease obligations, long-term............... 10 2 --
----- ------- --------
44 2,238 6,241
----- ------- --------
Commitments and contingencies (Note 5)
Stockholders' equity (deficit):
Preferred Stock: issuable in series, $0.0001 par
value; 28,000 shares authorized; 316, 11,039 and
23,135 actual shares issued and outstanding,
respectively (liquidation value of $90,907)...... -- 1 2
Common Stock: $0.0001 par value; 42,000 shares
authorized; 2,800, 6,592 and 9,840 shares issued
and outstanding, respectively.................... -- -- 1
Additional paid-in capital........................ 158 11,438 121,682
Notes receivable from stockholders................ -- (35) (35)
Deferred stock-based compensation................. -- (3,682) (17,292)
Accumulated deficit............................... (166) (4,253) (25,363)
----- ------- --------
Total stockholders' equity (deficit)............ (8) 3,469 78,995
----- ------- --------
$ 36 $ 5,707 $ 85,236
===== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PLANETRX.COM, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue:
e-commerce.................. $ -- $ -- $ -- $ -- $ 622
Sponsorship................. -- -- -- -- 195
-------- -------- -------- -------- --------
-- -- -- -- 817
-------- -------- -------- -------- --------
Cost of net revenue:
e-commerce.................. -- -- -- -- 694
Sponsorship................. -- -- -- -- 35
-------- -------- -------- -------- --------
-- -- -- -- 729
-------- -------- -------- -------- --------
Gross profit................. -- -- -- -- 88
-------- -------- -------- -------- --------
Operating expenses:
Marketing and sales......... -- -- 907 3 9,614
Product development......... 7 113 1,025 106 3,254
General and administrative.. -- 23 541 2 2,366
Stock-based compensation.... -- -- 1,650 -- 4,308
-------- -------- -------- -------- --------
Total operating expenses.. 7 136 4,123 111 19,542
-------- -------- -------- -------- --------
Operating loss............... (7) (136) (4,123) (111) (19,454)
Interest income.............. -- -- 38 -- 399
Interest expense............. -- (1) (2) -- (1,046)
-------- -------- -------- -------- --------
Net loss..................... $ (7) $ (137) $ (4,087) $ (111) $(20,101)
======== ======== ======== ======== ========
Plus effect of antidilution
provisions of Series B
Preferred Stock............. -- -- -- -- (1,009)
-------- -------- -------- -------- --------
Net loss available to common
shareholders................ $ (7) $ (137) $ (4,087) $ (111) $(21,110)
======== ======== ======== ======== ========
Basic and diluted net loss
per share................... $ -- $ -- $ (9.12) $ -- $ (8.35)
======== ======== ======== ======== ========
Basic and diluted pro forma
net loss per share
(unaudited)................. $ (1.00) $ (1.04)
======== ========
Weighted average shares used
to compute basic and diluted
net loss per share.......... -- -- 448 -- 2,528
======== ======== ======== ======== ========
Weighted average shares used
to compute pro forma basic
and diluted net loss per
share (unaudited)........... 4,102 20,210
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PLANETRX.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Notes Deferred Total
Receivable Stock- Stock-
Preferred Stock Common Stock Additional from based Accum- holders'
---------------- ------------- Paid-in Stock- Compen- ulated Equity
Shares Amount Shares Amount Capital holders sation Deficit (Deficit)
-------- ------- ------ ------ ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 54 $ -- 2,800 $ -- $ 27 $ -- $ -- $ (22) $ 5
Issuance of Series A
Preferred Stock at
$0.50.................. 10 -- -- -- 5 -- -- -- 5
Net loss................ -- -- -- -- -- -- -- (7) (7)
-------- ------- ----- ----- -------- ----- -------- -------- --------
Balance at December 31,
1996................... 64 -- 2,800 -- 32 -- -- (29) 3
Issuance of Series A
Preferred Stock at
$0.50.................. 222 -- -- -- 111 -- -- -- 111
Issuance of Series A
Preferred Stock for
services............... 30 -- -- -- 15 -- -- -- 15
Net loss................ -- -- -- -- -- -- -- (137) (137)
-------- ------- ----- ----- -------- ----- -------- -------- --------
Balance at December 31,
1997................... 316 -- 2,800 -- 158 -- -- (166) (8)
Issuance of Series A
Preferred Stock at
$0.50, net of issuance
costs of $37........... 10,474 1 -- -- 5,198 -- -- -- 5,199
Issuance of Series A
Preferred Stock for
services............... 149 -- -- -- 188 -- -- -- 188
Issuance of Series A
Preferred Stock
warrants for services.. -- -- -- -- 339 -- -- -- 339
Issuance of Series A
Preferred Stock in
connection with
warrants exercised..... 100 -- -- -- 50 -- -- -- 50
Issuance of Common Stock
and options for
services............... -- -- 263 -- 847 -- -- -- 847
Issuance of Common Stock
for cash in connection
with stock option
exercises.............. -- -- 2,109 -- 53 -- -- -- 53
Issuance of Common Stock
for notes receivable
from stockholders...... -- -- 1,420 -- 35 (35) -- -- --
Deferred stock-based
compensation........... -- -- -- -- 4,570 -- (4,570) -- --
Amortization of stock-
based compensation..... -- -- -- -- -- -- 888 -- 888
Net loss................ -- -- -- -- -- -- -- (4,087) (4,087)
-------- ------- ----- ----- -------- ----- -------- -------- --------
Balance at December 31,
1998................... 11,039 1 6,592 -- 11,438 (35) (3,682) (4,253) 3,469
Issuance of Series A
Preferred Stock for
services (unaudited)... 20 -- -- -- 77 -- -- -- 77
Issuance of Series A
Preferred Stock in
connection with a
warrant exercise
(unaudited)............ 100 -- -- -- 50 -- -- -- 50
Issuance of Series B
Preferred Stock at
$5.00, net of issuance
costs of $43
(unaudited)............ 5,200 -- -- -- 25,957 -- -- -- 25,957
Issuance of Series C
Preferred Stock at
$8.755, net of issuance
costs of $61
(unaudited)............ 5,919 1 -- -- 51,765 -- -- -- 51,766
Issuance of Series C
Preferred Stock for
advertising
(unaudited)............ 857 -- -- -- 7,500 -- -- -- 7,500
Issuance of Common Stock
for intellectual
property (unaudited)... -- -- 342 -- 3,762 -- -- -- 3,762
Issuance of Common Stock
and options for
services (unaudited)... -- -- -- -- 1,027 -- -- -- 1,027
Issuance of Common Stock
for cash in connection
with stock option
exercises, net
(unaudited)............ -- -- 2,865 1 595 -- -- -- 596
Issuance of Common Stock
for services in
connection with stock
option exercises
(unaudited)............ -- -- 41 -- 21 -- -- -- 21
Issuance of Series B
Preferred Stock
purchase option and
warrant for financing
(unaudited)............ -- -- -- -- 1,842 -- -- -- 1,842
Deferred stock-based
compensation
(unaudited)............ -- -- -- -- 16,639 -- (16,639) -- --
Amortization of stock-
based compensation
(unaudited)............ -- -- -- -- -- -- 3,029 -- 3,029
Effect of antidilution
provisions of Series B
Preferred Stock
(unaudited)............ -- -- -- -- 1,009 -- -- (1,009) --
Net loss (unaudited).... -- -- -- -- -- -- -- (20,101) (20,101)
-------- ------- ----- ----- -------- ----- -------- -------- --------
Balance at June 30, 1999
(unaudited)............ 23,135 $ 2 9,840 $ 1 $121,682 $ (35) $(17,292) $(25,363) $ 78,995
======== ======= ===== ===== ======== ===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PLANETRX.COM, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------------- ---------------
1996 1997 1998 1998 1999
----- ----- ------- ----- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (7) $(137) $(4,087) $(111) $(20,101)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization......... 1 8 139 5 697
Interest expense related to purchase
option and warrant................... -- -- -- -- 906
Amortization of deferred stock-based
compensation......................... -- -- 888 -- 3,029
Amortization of intellectual
property............................. -- -- -- -- 154
Issuance of Preferred Stock and
warrant for services................. -- 15 527 -- 77
Issuance of Common Stock for
services............................. -- -- 233 48 1,027
Stock option exercises for services... -- -- -- -- 21
Changes in operating assets and
liabilities:
Inventories.......................... -- -- (18) -- (1,594)
Prepaid expenses and other current
assets.............................. -- -- (1,250) (10) (2,366)
Other assets......................... -- (2) (79) 1 (87)
Accounts payable..................... -- 1 1,600 -- 2,136
Accrued expenses..................... 1 22 2 (21) 495
Deferred revenue..................... -- -- -- -- 375
----- ----- ------- ----- --------
Net cash used in operating
activities......................... (5) (93) (2,045) (88) (15,231)
----- ----- ------- ----- --------
Cash flows from investing activities:
Purchases of property and equipment... -- (3) (2,929) (6) (2,381)
----- ----- ------- ----- --------
Net cash used in investing
activities......................... -- (3) (2,929) (6) (2,381)
----- ----- ------- ----- --------
Cash flows from financing activities:
Proceeds from Preferred Stock,
including warrant exercises, net..... 5 111 5,248 105 77,773
Proceeds from the exercise of Common
Stock options........................ -- -- 53 -- 595
Proceeds from borrowings.............. -- -- 600 -- 1,000
Principal payments on capital lease
obligations.......................... -- (5) (7) (4) (3)
----- ----- ------- ----- --------
Net cash provided by financing
activities......................... 5 106 5,894 101 79,365
----- ----- ------- ----- --------
Increase in cash and cash equivalents.. -- 10 920 7 61,753
Cash and cash equivalents at beginning
of period............................. 5 5 15 15 935
----- ----- ------- ----- --------
Cash and cash equivalents at end of
period................................ $ 5 $ 15 $ 935 $ 22 $ 62,688
===== ===== ======= ===== ========
Supplemental cash flow information:
Cash paid for interest................ $ -- $ 1 $ 2 $ -- $ 146
===== ===== ======= ===== ========
Supplemental non-cash financing
activity:
Property and equipment acquired under
capital leases....................... $ -- $ 21 $ -- $ -- $ --
===== ===== ======= ===== ========
Issuance of Common Stock for notes
receivable from stockholders......... $ -- $ -- $ 35 $ -- $ --
===== ===== ======= ===== ========
Issuance of Common Stock in exchange
for services, a prepaid asset in
1998, and reclassified to intangible
asset in 1999........................ $ -- $ -- $ 614 $ -- $ 614
===== ===== ======= ===== ========
Issuance of purchase option and
warrant for Series B Preferred Stock
for financing........................ $ -- $ -- $ -- $ -- $ 1,842
===== ===== ======= ===== ========
Effect of antidilution provision of
Series B Preferred Stock............. $ -- $ -- $ -- $ -- $ 1,009
===== ===== ======= ===== ========
Issuance of Series C Preferred Stock
for advertising...................... $ -- $ -- $ -- $ -- $ 7,500
===== ===== ======= ===== ========
Issuance of Common Stock in exchange
for intellectual property............ $ -- $ -- $ -- $ -- $ 3,762
===== ===== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
The Company
PlanetRx.com, Inc. (the "Company"), is an online healthcare destination for
commerce, content and community. Its e-commerce website, www.PlanetRx.com, was
launched on March 18, 1999. The Company offers products in six categories:
prescription drugs; non-prescription drugs; personal care; beauty and spa;
vitamins, herbs and nutrition; and medical supplies. Headquartered in South San
Francisco, California, the Company operates its own pharmacy and distribution
center in Memphis, Tennessee. The Company was incorporated in the State of
Delaware on March 31, 1995 ("Inception") and was in the development stage
through December 31, 1998.
Unaudited interim results
The interim financial statements as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999, together with the financial data and other
information for those periods disclosed in these notes to the financial
statements, are unaudited. In the opinion of management, the interim financial
statements have been prepared on the same basis as the audited financial
statements and reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the results of interim
periods. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for any future periods.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash and cash equivalents. Any
such investments are carried at cost plus accrued interest, which approximates
fair value. The Company deposits cash and cash equivalents with high credit
quality financial institutions.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consists primarily of prepaid
advertising costs.
Inventories
Inventories, of which all are finished goods, are carried at the lower of
cost or market determined using weighted average cost.
Property and equipment
Property and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives
F-7
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
of the related assets, generally three years. Leasehold improvements and assets
held under capital leases are amortized over the term of the lease or estimated
useful lives, whichever is shorter.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. The Company
assesses the impairment of its long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable.
Intangible assets
Intangible assets relate to the Company's acquisition of certain
intellectual property rights. Intangible assets, which have been acquired to
date, are amortized using the straight-line method over the estimated useful
lives which are deemed to be two years.
Revenue recognition
The Company recognizes e-commerce revenue when the related products are
shipped to customers. Outbound shipping charges are included in net sales when
the products are shipped. The Company records an allowance for estimated
returns, in the period of sales. The Company recognizes sponsorship revenue
ratably over the related period.
Product development
Product development expenses are expensed as incurred through December 31,
1998 and June 30, 1999.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of
Position 93-7 "Reporting on Advertising Costs." As such, the Company expenses
the cost of communicating advertising in the period in which the advertising
space or airtime is used. Internet advertising expenses are recognized based on
the terms of the individual agreements, but generally over the greater of the
ratio of the number of impressions received over the total number of contracted
impressions, or on a straight-line basis over the term of the contract. There
was no advertising expense for the two years ended December 31, 1997 and the
six months ended December 31, 1998. Advertising expenses totaled $266,000 for
the year ended December 31, 1998, and $4,954,000 for the six months ended June
30, 1999.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
compensation expense is based on the difference, as of the date of the grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging
F-8
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".
The Company amortizes stock-based compensation recorded in connection with
certain stock option grants over the vesting periods of the related options.
Recapitalization and exchange
In September 1998, the Company amended its Certificate of Incorporation to
effect a stock exchange whereby all of its then outstanding shares of Common
Stock were exchanged for Series A Preferred Stock ("Series A") at an exchange
ratio of 500-for-1. In connection with the recapitalization, the Company's
founders immediately exchanged shares of 1,600,000 Series A for restricted
Common Stock. At such time, generally twenty-five percent of the shares vested
immediately with the remaining seventy-five percent vesting monthly over a
three-year period. All references in the financial statements to the number of
shares and to the per share amounts available to then Common and Preferred
stockholders have been retroactively adjusted to reflect the recapitalization
and exchange.
Stock split
In November 1998, the Company approved a two-for-one stock split for Common
and Preferred Stock. Share information for the three years ended December 31,
1998 has been retroactively adjusted to reflect the stock split.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents. Credit risk
related to cash and cash equivalents is managed by the Company by only
maintaining these accounts with high quality financial institutions.
Additionally, during the six months ended June 30, 1999, one customer accounted
for 15% of revenue.
Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents,
borrowings, capital lease obligations and accounts payable, and are carried at
cost, which approximates their fair value due to their short-term maturities.
Income taxes
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided for the amount of
deferred tax assets that, based on available evidence, are not expected to be
realized.
Pro forma stockholders' equity (unaudited)
Pro forma stockholders' equity is computed including (1) the exercise and
conversion of all outstanding warrants to purchase 100,000 shares of Series A,
warrants to purchase 16,000 shares of
F-9
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
Series B and purchase rights to purchase 700,000 shares of Series B into
approximately 849,000 shares of Common Stock, and (2) the automatic conversion
of the pro forma outstanding shares of Series A, Series B and Series C
Preferred Stock into approximately 11,159,000, 5,441,000 and 6,833,000 shares,
respectively, of Common Stock. The Company plans to effect, upon the closing
of its initial public offering, the authorization of 100,000,000 shares of
Common Stock and 5,000,000 share of undesignated Preferred Stock.
At June 30, 1999, the pro forma effects of these transactions are as
follows (in thousands):
<TABLE>
<CAPTION>
Pro Forma
Stockholders' Equity
June 30, 1999 at June 30, 1999
------------- --------------------
<S> <C> <C>
Preferred Stock........................... $ 2 $ --
Common Stock.............................. 1 3
Additional paid-in capital................ 121,682 125,312
-------- --------
$121,685 $125,315
======== ========
</TABLE>
Net loss per common share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") and
SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS
No. 128 and SAB 98, basic net loss per share is computed by dividing the net
loss available to common stockholders for the period by the weighted average
number of shares of Common Stock outstanding during the period. The
calculation of diluted net loss per share gives effect to common stock
equivalents, however, potential common shares are excluded if their effect is
antidilutive. Potential common shares are composed of Common Stock subject to
repurchase rights and incremental shares of Common Stock issuable upon the
exercise of stock options and warrants and upon conversion of Series A, B and
C Preferred Stock.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss....................... $ (7) $ (137) $(4,087) $ (111) $(20,101)
Plus effect of antidilution
provisions of Series B
Preferred Stock, see Note 6... -- -- -- -- (1,009)
------- ------- ------- ------- --------
Net loss available to common
shareholders.................. $ (7) $ (137) $(4,087) $ (111) $(21,110)
======= ======= ======= ======= ========
Denominator:
Weighted average common
shares........................ 2,800 2,800 3,706 2,800 8,766
Weighted average unvested
common shares subject to
repurchase.................... (2,800) (2,800) (3,258) (2,800) (6,238)
------- ------- ------- ------- --------
Denominator for basic and
diluted calculation........... -- -- 448 -- 2,528
======= ======= ======= ======= ========
Net loss per share:
Basic and diluted.............. $ -- $ -- $ (9.12) $ -- $ (8.35)
======= ======= ======= ======= ========
</TABLE>
F-10
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
The following table sets forth common stock equivalents (potential common
stock) that are not included in the diluted net loss per share calculation
above because to do so would be antidilutive for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
----------------- ------------
1996 1997 1998 1998 1999
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Weighted average effect of Common Stock
equivalents:
Series A Preferred Stock................. 55 169 3,645 519 11,159
Series B Preferred Stock................. -- -- -- -- 5,020
Series C Preferred Stock................. -- -- -- -- 1,057
Preferred Stock warrants................. -- -- 9 -- 193
Purchase option.......................... -- -- -- -- 253
Unvested Common Shares subject to
repurchase.............................. 2,800 2,800 3,258 2,800 6,238
Stock options............................ -- -- 138 -- 1,575
----- ----- ----- ----- ------
2,855 2,969 7,050 3,319 25,495
===== ===== ===== ===== ======
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999 is computed using the weighted average number of
Common Shares outstanding, including the exercise of all outstanding warrants
and the purchase option at June 30, 1999, and the assumed conversion of the
Company's Series A, B and C Preferred Stock into shares of the Company's Common
Stock effective upon the closing of the Company's initial public offering, as
if such change in conversion rate and conversion occurred on January 1, 1998 or
at the date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares used to compute basic and
diluted net loss per share of 3,654,000 and 17,682,000 for the year ended
December 31, 1998 and the six months ended June 30, 1999, respectively. The
calculation of pro forma diluted net loss per share excludes Common Stock
subject to repurchase rights and incremental common shares issuable upon the
exercise of stock options.
Comprehensive income
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. During the period from Inception through December 31,
1998 and the six months ended June 30, 1999, the Company has not had any
significant transactions that are required to be reported in comprehensive
income.
Segment information
The Company complies with the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Company
identifies its operating segments based on business activities and management
responsibility. The Company operates in a single business segment providing
online services in the United States.
F-11
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company adopted the
provisions of SOP 98-1 in its fiscal year beginning January 1, 1999, and does
not expect the adoption to have a material effect on the Company's results of
operations, financial position and cash flows.
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-
Up Activities". Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, commencing some new operation or organizing a new entity. Under SOP
98-5, the cost of start-up activities should be expensed as incurred. The
Company adopted the provisions of SOP 98-5 in its fiscal year beginning January
1, 1999, and does not expect the adoption to have a material effect on the
Company's results of operations, financial position and cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters
beginning with the quarter ending June 30, 2000. SFAS 133 establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company will adopt SFAS 133 in its quarter ending June 30, 2000 and does
not expect such adoption to have an impact on the Company's results of
operations, financial position or cash flows.
NOTE 2--BALANCE SHEET COMPONENTS (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
----- ------ --------
<S> <C> <C> <C>
Prepaid expenses and other current assets:
Prepaid advertising.............................. $ -- $1,250 $10,763
Prepaid debt issuance costs...................... -- -- 900
Prepaid (intellectual property).................. -- 614 --
Other............................................ -- -- 390
----- ------ -------
$ -- $1,864 $12,053
===== ====== =======
Property and equipment, net:
Computer equipment and software.................. $ 3 $2,406 $ 4,289
Equipment under capital leases................... 21 21 21
Furniture and fixtures........................... 4 435 906
Leasehold improvements........................... -- 86 122
----- ------ -------
28 2,957 5,338
Less: Accumulated depreciation and amortization.. (9) (148) (845)
----- ------ -------
$ 19 $2,809 $ 4,493
===== ====== =======
</TABLE>
F-12
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
Depreciation expense for the three years ended December 31, 1998 and for
the six months ended June 30, 1998 and 1999 was $1,000, $8,000, $139,000,
$5,000 and $697,000, respectively. Accumulated depreciation of assets under
capital leases totaled $5,000, $12,000 and $16,000 at December 31, 1997 and
1998 and June 30, 1999, respectively. The equipment under capital leases
collaterizes the related lease obligations.
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ --------
<S> <C> <C> <C>
Accrued expenses:
Compensation and benefits........................... $ -- $ 28 $378
Advertising......................................... -- -- 110
Other............................................... 26 -- 35
------ ------ ----
$ 26 $ 28 $523
====== ====== ====
</TABLE>
NOTE 3--INCOME TAXES:
At December 31, 1997 and 1998, the Company had approximately $166,000 and
$2.6 million, respectively, of federal and state net operating loss
carryforwards available to offset future taxable income which expire in varying
amounts beginning in 2018 and 2006, respectively. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than
50%, as defined, over a three year period.
The Company has incurred losses from Inception through the year ended
December 31, 1998. Management believes that, based on the history of such
losses and other factors, the weight of available evidence indicates that it is
more likely than not that the Company will not be able to realize its deferred
tax assets and thus a full valuation reserve has been recorded at December 31,
1997 and 1998.
Deferred tax assets and liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 68 $ 1,066
Accruals and reserves...................................... -- (3)
----- -------
68 1,063
Less valuation allowance................................... (68) (1,063)
----- -------
$ -- $ --
===== =======
</TABLE>
NOTE 4--BORROWINGS:
Notes payable
At December 31, 1998, the Company had a demand note payable for $600,000
with a financing institution. The note bore interest at 10.0% per annum with
principal and accrued interest due on
F-13
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
April 1, 1999. In January 1999, the Company entered into another demand note
payable for $1.0 million with the same financing institution. The note bore
interest at 10.0% per annum with principal and accrued interest due on April 1,
1999. Upon the signing of the below mentioned line of credit, the Company
consolidated the above mentioned demand notes under the terms of that
agreement.
Line of credit
In January 1999, the Company entered into a $7.0 million line of credit
under a Loan and Security Agreement with the same financing institution. The
line of credit expires in January 2000. Each draw down must be in increments of
at least $1.0 million. Interest will accrue from the date of each draw down at
a rate of 11.0% per annum. Accrued interest will be payable in 18 equal monthly
installments followed by 18 equal installments of principal plus accrued
interest from the date of each draw down. Equipment, inventory, general
intangibles, and other assets of the Company are pledged as collateral for this
agreement. At June 30, 1999, the Company had $1.6 million outstanding under the
line of credit.
Equipment financing arrangement
In January 1999, the Company entered into a $2.0 million capital lease
credit facility with a financing institution. The credit facility expires in
January 2000. Interest will accrue from the date of each draw down at a rate of
8.25% per annum. The arrangement allows for principal and accrued interest to
be paid in 42 equal monthly installments from the date of each draw down. At
June 30, 1999, no amounts were outstanding under this credit facility.
Equipment lease line and line of credit
In November 1998, the Company entered into an aggregate $1.0 million
equipment lease line and line of credit under a Loan and Security Agreement
with a bank. The line of credit is not to exceed $600,000. Interest will accrue
from the date of each draw down at a rate per annum equal to the bank's prime
rate and is payable monthly through May 9, 1999. Amounts outstanding on May 9,
1999 are payable thereafter in 24 equal monthly principal installments, plus
accrued interest of one-half percent plus the bank's prime rate per annum. The
equipment lease line expired in May 1999. The line of credit expires in
November 1999 and accrues interest at a rate per annum equal to the bank's
prime rate. At December 31, 1998 and June 30, 1999, there were no amounts
outstanding under this agreement.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through December 2001. The
terms of the facility leases provide for rental payments on a graduated scale.
The Company recognizes rent expense on a straight-line basis over the lease
period. Rent expense under these leases was $0, $39,000 and $111,000 for the
three years ended December 31, 1998 and $18,000 and $476,000 for the six months
ended June 30, 1998 and 1999, respectively.
F-14
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
Future minimum lease payments under noncancelable operating and capital
leases at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ended December 31, Leases Leases
----------------------- ------- ---------
<S> <C> <C>
1999........................................................ $ 9 $ 380
2000........................................................ 2 422
2001........................................................ -- 422
----- ------
Total minimum lease payments................................ 11 $1,224
======
Less: Amount representing interest.......................... (1)
-----
Present value of capital lease obligations.................. 10
Less: Current portion....................................... (8)
-----
Long-term portion of capital lease obligations............ $ 2
=====
</TABLE>
Advertising agreement
In December 1998, the Company entered into a three year marketing agreement
with a web portal company. Under the terms of the agreement, the Company will
be provided with a specific number of advertising impressions featuring it as
an online full service pharmacy devoted to health and wellness needs. In
consideration, the Company has agreed to pay approximately $15.0 million over a
three year term. The Company will recognize these fees as marketing and sales
expenses over the greater of (i) the ratio of the number of impressions
delivered over the total number of contracted impressions, or (ii) a straight-
line basis over the term of the contract. The Company paid an initial
installment to the web portal company of approximately $1.2 million prior to
the start of the Internet advertising. Such amount is included in prepaid
expenses and other current assets in the balance sheet at December 31, 1998.
During the six months ended June 30, 1999, the Company paid $3.0 million and
recognized $1.5 million in advertising expense in connection with the
agreement.
Other commitments
At June 30, 1999, the Company had additional commitments for online
advertising, promotion programs and employment agreements. Future minimum
commitments under the noncancelable agreements are approximately $2.8 million,
$558,000 and $100,000 in the years ended December 31, 1999, 2000 and 2001,
respectively.
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
for contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
F-15
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
NOTE 6--STOCKHOLDERS EQUITY (DEFICIT):
Preferred Stock
Preferred Stock at June 30, 1999 consists of the following, which reflects
the Certificate of Incorporation as amended as of June 1999 (in thousands):
<TABLE>
<CAPTION>
Cash Proceeds
Shares and Advertising
---------------------- Liquidation Services Net of
Series Authorized Outstanding Amount Issuance Costs
------ ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
A........................ 14,000 11,159 $ 5,580 $ 6,061
B........................ 7,000 5,200 26,000 25,957
C........................ 7,000 6,776 59,327 59,266
------ ------ ------- -------
Total................... 28,000 23,135 $90,907 $91,284
====== ====== ======= =======
</TABLE>
The holders of Series A, B and C Preferred Stock ("Preferred Stock") have
various rights and preferences as follows:
Voting
Each share of Preferred Stock has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes
together as one class with the Common Stock.
Dividends
Holders of Series A, B and C are entitled to receive noncumulative
dividends at the per annum rate of $0.04, $0.40 and $0.70 per share,
respectively, or if greater, an amount equal to that paid on any other shares
when and if declared by the Board of Directors. No dividends on Preferred or
Common Stock have been declared by the Board from Inception through December
31, 1998.
Liquidation
In the event of liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's Preferred and Common Stock own less than 50% of the resulting
voting power of the surviving entity, the holders of Series A, B and C are
entitled to receive an amount of $0.50, $5.00 and $8.755 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of Common Stock. If the assets of Company
are insufficient to permit the above preferential distributions, the assets
will be distributed ratably among Series A, B and C proportional to the
preferential amounts. The remaining assets, if any, shall be distributed to the
holders of Common Stock.
Conversion
Each share of Preferred Stock is convertible into Common Stock, at the
option of the holder, according to a conversion ratio, subject to adjustment
for dilution. The initial conversion price per share for Series A, B and C
shall be $0.50, $5.00 and $8.755, respectively. At June 30, 1999, the
conversion prices per share for Series A, B and C were $0.50, $4.779 and
$8.682, respectively. Each share of Series A, B and C automatically converts
into the number of shares of Common Stock
F-16
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
into which such shares are convertible at the then effective conversion ratio
upon the closing of a initial public offering of Common Stock with gross
proceeds of at least $15.0 million. In addition, each share of Series A, B and
C shall automatically convert into shares of Common Stock upon the majority
vote of Preferred Stock voting together as a single class on an as-converted
basis. At June 30, 1999, the per share conversion ratios for Series A, B and C
were 1.0000, 1.0463 and 1.0084, respectively.
In June 1999, upon the change of the conversion ratio of Series B, the
Company recorded $1.0 million associated with the then outstanding Series B
stock, warrants and purchase option. The change of the conversion ratio was
valued using the difference of the fair value of the Preferred Stock in January
and June of 1999, and a calculation of potential incremental Common Shares of
approximately 274,000.
Series A Preferred Stock for services
During 1997, the Company issued approximately 30,000 shares of Series A
Preferred Stock to non-employees in exchange for services previously rendered.
The Company recorded the estimated fair value of the stock of $15,000 as
general and administrative expense.
During 1998, the Company issued 149,000 shares of Series A Preferred Stock
to non-employees and a company affiliated with a member of the Board of
Directors of the Company in exchange for services previously rendered. The
Company recorded the estimated fair value of the stock of $188,000 as stock-
based compensation expense.
During 1999, the Company issued 20,000 shares of Series A Preferred Stock
to a non-employee for services previously rendered. The Company recorded the
estimated fair value of the stock of $77,000 as stock-based compensation
expense.
Warrants for Series A Preferred Stock
In October 1998, the Company issued warrants to purchase 300,000 shares of
Series A Preferred Stock for $0.50 per share to Directors of the Company in
exchange for services previously rendered. At December 31, 1998 and June 30,
1999, 200,000 and 100,000 of such warrants were outstanding, respectively. The
warrants were exercisable on the date of grant and expire in October 2000. The
Company recorded the fair value of the warrants of approximately $339,000,
using the Black-Scholes pricing model, at the date of issuance as stock-based
compensation expense. Common Stock issuable upon the exercise and conversion of
the warrant at June 30, 1999 was 100,000 shares.
Series B Preferred Stock purchase option and warrant for financing
In January 1999, the Company issued a purchase option for up to 700,000
shares of Series B Preferred Stock at $5.00 per share in conjunction with the
$7.0 million line of credit. The purchase option expires upon a completed
initial public offering or merger event. At June 30, 1999, this purchase option
remained outstanding, and related to it, the Company recorded prepaid debt
issuance costs of $1.8 million using the Black-Scholes pricing model and
recognized non-cash interest expense of $900,000 for the six months ended June
30, 1999. The remaining prepaid debt issuance costs will be amortized over the
term of the agreement. Common stock issuable upon the exercise and conversion
of the purchase option at June 30, 1999 was approximately 732,000 shares.
F-17
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
In January 1999, the Company issued a warrant to purchase 16,000 shares of
Series B Preferred Stock at $5.00 per share in conjunction with the equipment
financing arrangement. The warrant expires in January 2009 or one year after a
completed initial public offering, whichever is shorter. At June 30, 1999, the
warrant remained outstanding. The Company recorded prepaid debt issuance costs
of $42,000 using the Black-Scholes pricing model and recognized non-cash
interest expense of $6,000 during the six months ended June 30, 1999. The
remaining prepaid debt issuance costs will be amortized over the term of the
agreement. Common Stock issuable upon the exercise and conversion of the
warrant at June 30, 1999 was approximately 17,000 shares.
Series C Preferred Stock for advertising
In June 1999, in conjunction with the sale of Series C Preferred Stock, the
Company issued approximately 1,714,000 shares of Series C Preferred Stock to a
third-party for $7.5 million in cash and $7.5 million for future advertising
services. The services may be utilized within a two-year period. At June 30,
1999, the Company recorded the value of the future services as prepaid
advertising. The Company will recognize advertising expense during the period
in which the services are provided based upon the rate card value of such
services.
Common Stock
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 42,000,000 shares of $0.0001 par value Common Stock. A portion
of the shares sold are subject to the right of repurchase by the Company
subject to vesting, generally over a four year period.
Founder Stock Agreements
Certain Common Stock was issued to founders of the Company and is subject
to repurchase in the event of voluntary termination or involuntary termination
with cause. On September 15, 1998, generally twenty-five percent of the shares
vested immediately with the remaining seventy-five percent vesting monthly over
a three-year period. In the event of termination without cause, a substantial
sale of the Company's assets, or a merger, all remaining shares would
immediately vest. As of December 31, 1998 and June 30, 1999, approximately
3,097,000 and 2,532,000 shares, respectively, of outstanding Common Stock were
subject to repurchase by the Company at $0.025.
Notes receivable from stockholders
At December 31, 1998 and June 30, 1999, the Company held full-recourse
notes receivable from stockholders of the Company totaling $35,000 for
purchases of the Company's Common Stock. The notes bear interest at 5.54% per
annum. The principal and accrued interest are due five years from the
anniversary of the notes.
Common Stock and options for services
During 1998, the Company issued 65,000 shares of Common Stock to a non-
employee for services previously rendered. The Company recorded the estimated
fair value of the stock and recognized $133,000 as stock-based compensation
expense.
During 1998, the Company issued 198,000 shares of Common Stock to an
employee of the Company for services rendered in connection with the
acquisition and transfer of certain domain names. The Company recorded the
estimated fair value of the stock of $614,000 as a prepaid asset,
F-18
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
and reclassified such amount to intangible assets upon the transfer of such
rights in January 1999. The fair value of the stock will be amortized as stock-
based compensation expense over the estimated useful life, which is deemed to
be two years. During the six months ended June 30, 1999, the Company amortized
$154,000 as stock-based compensation expense.
During 1998 and the six months ended June 30, 1999, the Company granted
approximately 38,000 and 108,000 options, respectively, to purchase Common
Stock to members of the Health Advisory Board in exchange for services
rendered. The options originally vested over four years. In the quarter ended
June 30, 1999, the Company amended the options to become fully vested. Until
their acceleration, these options were subject to variable plan accounting,
with fair value remeasurements at the end of each quarterly reporting period.
During the year ended December 31, 1998, the Company recorded deferred stock-
based compensation expense related to these grants of $116,000. Of this amount,
$5,000 was amortized as stock-based compensation expense in the year ended
December 31, 1998. During the six months ended June 30, 1999, but before the
acceleration of the vesting of these options, the Company recorded additional
deferred stock-based compensation expense of $356,000. During the six months
ended June 30, 1999, the Company recognized a total of $1.2 million, including
the effect of the acceleration, as stock-based compensation expense, of which
$471,000 was recorded as amortization of the deferred amount and $709,000 was
charged as period expense.
During 1998, the Company granted approximately 50,000 options to purchase
Common Stock to non-employees for services previously rendered. The options
were fully vested upon grant date. The Company recorded stock-based
compensation expense of $100,000, using the Black-Scholes pricing model.
During 1999, the Company granted approximately 36,000 options to purchase
Common Stock to non-employees for services previously rendered. The options
were fully vested upon grant date. The Company recorded stock-based
compensation expense of $193,000, using the Black-Scholes pricing model. Of the
36,000 options that were granted, 21,000 were exercised with additional
services previously rendered. The Company recorded stock-based compensation
expense of $8,000 in connection with these exercises.
During 1999, the Company granted options to purchase approximately 18,000
shares of Common Stock to non-employees in exchange for services rendered. The
options originally vested over two years. In June 1999, the Company amended the
options to become fully vested. These options were subject to variable plan
accounting until June 1999 when the options became fully vested, and
accordingly, the Company periodically remeasured the fair value of such options
and recognized stock-based compensation expense as the options vested. For the
six months ended June 30, 1999, the Company recorded the estimated fair value
of the options and recognized stock-based compensation expense of $125,000,
using the Black-Scholes pricing model. The options granted were exercised with
additional services previously rendered. The Company recorded stock-based
compensation expense of $13,000 in connection with these exercises.
Common Stock for intellectual property
During 1999, the Company issued 342,000 shares of Common Stock to a company
affiliated with an employee of the Company for additional domain names. The
Company recorded the estimated fair value of the stock of $3.8 million as an
intangible asset. The fair value of the stock will
F-19
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
be amortized as stock-based compensation expense over the estimated useful
life, which is deemed to be two years. During the six months ended June 30,
1999, the Company recognized no amortization expense.
Reserved shares
The Company has reserved shares of Common Stock for future issuance as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Conversion of Series A................................ 11,039 11,159
Conversion of Series B................................ -- 5,441
Conversion of Series C................................ -- 6,833
Exercise of stock options under the 1998 Stock Plan... 4,861 7,161
Exercise of outstanding warrants...................... 200 117
Exercise of purchase option........................... -- 732
Outstanding and undesignated.......................... 25,900 10,557
------ ------
42,000 42,000
====== ======
</TABLE>
The shares reserved above for the conversion of Preferred Stock include the
impact of the antidilution rights discussed in Note 6.
NOTE 7 -- EMPLOYEE BENEFIT PLANS:
401(k) Savings Plan
The Company has a savings plan (the "Savings Plan") which qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the Savings Plan, participating employees may
defer a percentage (not to exceed 25%) of their eligible pretax earnings up to
the Internal Revenue Service's annual contribution limit. All employees on the
United States payroll of the Company are eligible to participate in the Plan.
The Company will determine its contributions, if any, based on its current
profits and/or retained earnings; however, no contributions have been made
since the inception of the Savings Plan.
Stock Plan
In October 1998, the Company adopted the 1998 Stock Plan, which was amended
in February 1999 (the "1998 Plan"). The Plan provides for the granting of
direct stock grants and stock options to employees, outside directors, and
consultants of the Company. Options granted under the 1998 Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. At December 31, 1998 and June 30,
1999, the Company has reserved 4,861,000 and 7,161,000 shares of Common Stock
for issuance under the 1998 Plan, respectively.
The 1998 Plan provides that the options shall be exercisable over a period
not to exceed ten years from the date of the grant; however, in the case of an
ISO granted to a person owning more than 10% of the combined voting power of
all classes of the stock of the Company, the term of the option will be five
years from the date of the grant.
F-20
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
In accordance with the 1998 Plan, the stated exercise price shall not be
less than 85% of the estimated fair value of the shares on the date of grant as
determined by the Board of Directors, provided, however, that (i) the exercise
price of an ISO and NSO shall not be less than 100% and 85% of the estimated
fair value of the shares on the date of grant, respectively, and (ii) the
exercise price of an ISO and NSO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant,
respectively.
Options are exercisable immediately and are subject to a repurchase right
by the Company at the original issuance price which lapses over a maximum
period of five years. To date, options granted generally vest ratably monthly
over four years; 25% one year after date of grant and remaining options
thereafter vest in equal monthly installments over the following 36 months. At
December 31, 1998 and June 30, 1999, there were approximately 1,456,000 and
3,983,000 shares subject to repurchase, respectively.
Stock plan activity
The following summarizes stock option activity under the 1998 Plan (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding
------------------------
Options Weighted
Available Number of Average
for Grant Options Exercise Price
--------- --------- --------------
<S> <C> <C> <C>
Shares authorized....................... 4,861 -- $ --
Options granted......................... (3,184) 3,184 $ 0.03
Options exercised....................... -- (2,109) $ 0.03
Options canceled........................ -- -- $ --
Shares granted.......................... (263) -- $ 0.05
------ ------
Balance at December 31, 1998.............. 1,414 1,075 $ 0.05
Shares authorized....................... 2,300 -- $ --
Options granted......................... (3,367) 3,367 $ 0.76
Options exercised....................... -- (3,008) $ 0.21
Options canceled........................ 108 (108) $(0.48)
Unvested shares repurchased............. 102 -- $ 0.03
------ ------
Balance at June 30, 1999.................. 557 1,326 $ 1.46
====== ======
</TABLE>
The weighted-average grant-date fair value of options granted during the
year ended December 31, 1998 and the six months ended June 30, 1999 was $0.01
and $0.13, respectively.
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Outstanding Price
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05 1,075 9.89 years $0.05 1,075 $0.05
</TABLE>
At December 31, 1998, the Company had no options vested and exercisable.
F-21
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
The following table summarizes the information about stock options
outstanding and exercisable as of June 30, 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Outstanding Price
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05 115 9.46 years $0.05 115 $0.05
$0.50 328 9.74 years $0.50 328 $0.50
$2.00 883 9.95 years $2.00 883 $2.00
----- -----
1,326 9.85 years $1.46 1,326 $1.46
===== =====
</TABLE>
At June 30, 1999, the Company had 50,000 options vested and exercisable.
Fair value disclosures
The Company applies the measurement principles of APB No. 25 in accounting
for its 1998 Plan. Had compensation expense for options granted for the year
ended December 31, 1998 and the six months ended June 30, 1999 (unaudited) been
determined based on the fair value at the grant dates as prescribed by SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
Net loss available to common stockholders:
As reported....................................... $(4,087) $(21,110)
======= ========
Pro forma......................................... $(4,091) $(21,125)
======= ========
Net loss per share:
As reported....................................... $ (9.12) $ (8.35)
======= ========
Pro forma......................................... $ (9.13) $ (8.36)
======= ========
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
Risk-free interest rates............................. 4.8% 4.5%
Expected lives (in years)............................ 4 years 4 years
Dividend yield....................................... 0 % 0 %
Expected volatility.................................. 0 % 0 %
</TABLE>
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding paragraph, the
above results may not be presentative of future periods.
F-22
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
Deferred stock-based compensation
In connection with certain stock option grants to employees and Health
Advisory Board members from October 1998 through December 31, 1998 and the six
months ended June 30, 1999 the Company recognized deferred stock-based
compensation totaling $4.6 million and $16.6 million, respectively, which is
being amortized over the vesting periods of the related options. Stock-based
compensation expense recognized from amortization of the deferred amounts
during the year ended December 31, 1998 and for the six months ended June 30,
1999 totaled approximately $888,000 and $3.0 million, respectively.
NOTE 8--SPONSORSHIP AGREEMENT:
In May 1999, the Company entered into a strategic alliance with a
pharmaceutical company. Under the terms of the agreement, the company is the
exclusive therapeutic disease state management sponsor within the Company's
diabetes.com community.
NOTE 9--SUBSEQUENT EVENTS:
1999 Director Stock Option Plan
In July 1999, the Board of Directors adopted and stockholders approved the
1999 Director Stock Option Plan ("Director Plan") which will become effective
immediately prior to the effective date of the initial public offering. The
Director Plan reserves a total of 400,000 shares of the Company's Common Stock
for issuance thereunder. Members of the board who are not employees of the
Company, are eligible to participate in the Director Plan. The option grants
under the Director Plan are automatic and nondiscretionary, and the exercise
price of the options must be 100% of the fair market value of the common stock
on the date of grant. Each eligible director who first becomes a member of the
board will initially be granted an option to purchase 25,000 shares on the date
such director first becomes a director. Immediately following each annual
meeting of the Company, beginning in 2000, each eligible director will
automatically be granted an additional option to purchase 10,000 shares if such
director has served continuously as a member of the board for at least the
preceding six months. The term of such options is ten years, provided that they
will terminate twelve months following the date the director ceases to be a
director or a consultant of the Company (twelve months if the termination is
due to death or disability). Options will vest, if applicable, as determined by
individual grant terms.
1999 Equity Incentive Plan
In July 1999, effective immediately prior to the effective date of the
initial public offering, the Board of Directors adopted and the stockholders
approved, the 1999 Equity Incentive Plan (the "1999 Plan") and reserved
6,000,000 shares of the Company's Common Stock, plus the aggregate number of
shares available under the 1998 Plan, for issuance thereunder. In January 2000,
and every year thereafter until the year 2005, shares reserved for issuance
will automatically increase by a number equal to the lesser of 5% of the total
number of Common Stock outstanding or 2,000,000 shares. The 1999 Plan
authorized the award of options, restricted stock awards and stock bonuses (the
"Awards"). No person will be eligible to receive more than 2,000,000 shares in
any calendar year pursuant to Awards under the 1999 Plan other than a new
employee of the Company who will be eligible to receive no more than 2,500,000
shares in the calendar year in which such
F-23
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
employee commences employment. Options granted under the 1999 Plan may be
either incentive stock options ("ISO") or nonqualified stock options ("NSO").
ISOs may be granted only to Company employees (including officers and directors
who are also employees). NSOs may be granted to Company employees, outside
directors, and consultants of the Company.
Options under the 1999 Plan may be granted for periods of up to ten years
and at prices no less than 85% of the estimated fair value of the shares on the
date of grant as determined by the Board of Directors, provided, however, that
(i) the exercise price of an ISO may not be less than 100% of the estimated
fair value of the shares on the date of grant, and (ii) the exercise price of
an ISO granted to a 10% shareholder may not be less than 110% of the estimated
fair value of the shares on the date of grant.
Employee Stock Purchase Plan
In July 1999, the Board of Directors and stockholders adopted the Employee
Stock Purchase Plan (the "ESPP"), which will become effective immediately prior
to the effective date of the initial public offering. The ESPP reserves
1,000,000 shares of common stock for issuance thereunder. On each September 1
beginning in 2000, the aggregate number of shares reserved for issuance under
the ESPP will be increased automatically to the lesser of 2% of the total
number of common shares outstanding or 750,000 shares. Employees generally will
be eligible to participate in the ESPP if they are customarily employed by the
Company for more than 20 hours per week and more than five months in a calendar
year and are not (and would not become as a result of being granted an option
under the ESPP) 5% stockholders of the Company. Under the ESPP, eligible
employees may select a rate of payroll deduction up to 15% of their W-2 cash
compensation subject to certain maximum purchase limitations. The first
offering period is expected to begin on the first business day on which price
quotations for the Company's common stock are available on The Nasdaq National
Market. Depending on the effective date, the first Purchase Period may be more
or less than six months long. Offering periods thereafter will begin on May 1
and November 1. Purchases will occur on April 30 and October 31, or the last
day of trading prior to these dates. The price at which the Common Stock is
purchased under the ESPP is 85% of the lesser of the fair market value of the
Company's Common Stock on the date before the first day of the applicable
offering period or on the last day of that purchase period.
Stock Option Grants (Unaudited)
In July and August 1999, the Company granted incentive stock options to
employees to purchase 1,673,900 shares of Common Stock at exercise prices
ranging between $2.00 and $5.50 per share. In connection with such option
grants, the Company recorded unearned compensation totaling $10,203,000 which
is being amortized over the four year vesting period of the related options.
Express Scripts Agreement (Unaudited)
In August 1999, the Company entered into a series of agreements with
Express Scripts, Inc. and its wholly owned subsidiary, YourPharmacy.com, Inc.
Effective upon the closing of the initial public offering, the Company will
issue 19.9% of our outstanding stock to Express Scripts, Inc. (ESI) after this
offering, assuming the over-allotment option is exercised. Under the terms of
the series of agreements,
F-24
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1998 and 1999
is unaudited)
(Continued)
the Company will acquire certain assets and certain liabilities of
YourPharmacy.com, Inc. Additionally, ESI members will be able to use their
reimbursement plan to fill prescriptions online at PlanetRx.com and ESI will
promote the Company as ESI's exclusive Internet pharmacy. In connection with
the promotion of its website, the Company has committed to pay $14.65 million
annually for five years plus an incremental annual fee based on the number of
ESI members who make any purchase on the Company's website. This acquisition
will be accounted for using the purchase method of accounting, and accordingly,
the purchase price will be allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective values at the
date the acquisition is consummated.
Sponsorship and Content License Agreement (Unaudited)
In September 1999, the Company issued 371,103 shares of Series D Preferred
Stock to a web portal company in exchange for approximately $7.5 million in
cash. Each share of Series D is convertible to Common Stock upon the closing of
an initial public offering on a one-to-one basis. The Company also entered into
a three-year sponsorship and a three-year content license agreement. These
agreements require the Company to pay approximately $22.5 million over the
three year period in exchange for certain advertising services and rights to
certain online content. Future payments for advertising services and content
are approximately $8.7 million, $3.9 million, $5.3 million and $4.6 million
during the years ended December 31, 1999, 2000, 2001, and 2002, respectively.
Stock and Stock Option Grants (Unaudited)
In October 1999, the Company granted incentive stock options to an employee
to purchase 750,000 shares of Common Stock at an exercise price of $9.00 and
250,000 shares of Common Stock at an exercise price of $16.00. In connection
with the stock option grants with an exercise price of $9.00, the Company
recorded unearned compensation of approximately $5,250,000 which is being
amortized over the four-year vesting period of the related options.
In October 1999, the Company issued 25,000 shares of Common Stock to an
employee and recorded $400,000 in stock-based compensation expense.
In connection with the stock option and stock grants, the Company entered
into a full-recourse note receivable with an employee for $700,000 bearing
interest at 8.25% per annum payable over three years. Repayment of a portion of
the note may be due upon the employee's sale of any Company Common Stock,
subject to the Company's discretion. Such repayment will not exceed 50% of the
net gain earned on the stock sold.
F-25
<PAGE>
PLANETRX.COM, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
Overview
In August 1999, the Company entered into a series of agreements with
Express Scripts, Inc. ("ESI") and its wholly owned subsidiary,
YourPharmacy.com, Inc. Effective upon the closing of the offering under the
contribution agreement (the "Agreement"), the Company will issue 19.9% of its
outstanding stock to ESI, assuming the over-allotment option is exercised and
in exchange the Company will acquire certain assets and certain liabilities of
YourPharmacy.com, Inc. Additionally under other agreements in the series, ESI
members will be able to use their reimbursement plan to fill prescriptions
online at the Company's website and ESI will promote the Company as ESI's
exclusive Internet pharmacy.
The following unaudited pro forma consolidated financial data assumes a
purchase of certain assets of YourPharmacy.com, Inc. by the Company.
YourPharmacy.com, Inc. operates two websites, YourPharmacy.com ("YPC") and
DrugDigest.com and the following assumes the Company will purchase certain
assets and assume certain liabilities related to the YPC website and business
activities.
The acquisition will be accounted for using the purchase method of
accounting and, accordingly, the purchase price will be allocated to the
tangible and intangible assets acquired and the liabilities assumed at their
respective fair values at the date the acquisition is consummated. The purchase
price will consist of the quantity of shares issued upon the closing of the
initial public offering (including shares issued pursuant to the underwriters'
over-allotment option) to enable ESI to own 19.9% of the Company's outstanding
Common Stock at the price per share issued in the initial public offering, the
fair value of approximately 1,940,000 options to purchase the Company's Common
Stock issued in exchange for outstanding YourPharmacy.com, Inc. options, and
direct acquisition costs. Accordingly, for purchase accounting purposes,
changes associated with the underwriters' over-allotment option may change the
computation of the purchase price.
For the purpose of preparing the Unaudited Pro Forma Consolidated Financial
Data, the estimated purchase price of $193.5 million was comprised of (i) the
assumed issuance of approximately 10,115,000 shares of Common Stock at a price
per share of $16.00, (ii) the assumed issuance of 224,000 shares of Common
Stock at a preliminary price of $16.00 assuming the over-allotment is
exercised, (iii) the assumption of approximately 1,940,000 options to purchase
Common Stock and a price per share of $16.00 per share, and (iv) estimated
direct acquisition costs of $4.7 million. The allocation of the purchase price
in the Unaudited Pro Forma Consolidated Financial Data resulted in an excess
purchase consideration over tangible net liabilities of $194.1 million which
has been allocated to goodwill with an estimated useful life of 5 years.
The acquisition has been structured as a tax free exchange of stock,
therefore, the differences between the recognized fair values of acquired
assets, including tangible assets, and their historical tax bases will not be
deductible for tax purposes.
The following unaudited pro forma balance sheet gives effect to this
acquisition as if it had occurred on June 30, 1999 by combining the assets and
liabilities of YPC with the balance sheet of the Company.
The following unaudited pro forma statement of operations gives effect to
this acquisition as if it had occurred on February 2, 1998, the inception date
of YourPharmacy.com, Inc., by combining the results of operations of YPC with
the results of operations of the Company for the year ended December 31, 1998
and the six months ended June 30, 1999.
F-26
<PAGE>
The unaudited pro forma statements of operations are not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
The historical financial statements of the Company and YourPharmacy.com,
Inc. are included elsewhere in this Prospectus, and the unaudited pro forma
financial information presented herein should be read in conjunction with those
financial statements and related notes.
F-27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 Pro Forma
------------------------------ --------------------------
YourPharmacy.com,
PlanetRx.com Inc. Adjustments Combined
------------ ----------------- ----------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 62,688 $ -- $ -- $ 62,688
Accounts receivable.... -- 37 (37)(D) --
Inventories............ 1,612 -- -- 1,612
Deferred tax asset..... -- 113 (113)(D) --
Prepaid expenses and
other................. 12,053 34 (3)(D) 12,084
-------- ------- -------- --------
Total current
assets.............. 76,353 184 (153) 76,384
Property and equipment,
net................... 4,493 830 (63)(D) 5,260
Intangible assets,
net................... 4,222 -- 194,141 (A)(B) 198,363
Other assets........... 168 339 (339)(D) 168
-------- ------- -------- --------
$ 85,236 $ 1,353 $193,586 $280,175
======== ======= ======== ========
Liabilities and
Stockholders' Equity
Current liabilities:
Accounts payable....... $ 3,736 $ 319 $ -- $ 4,055
Accrued expenses....... 523 1,274 4,507 (B)(D) 6,304
Deferred revenue....... 375 -- -- 375
Borrowings, current.... -- -- -- --
Capital lease
obligations, current.. 7 -- -- 7
-------- ------- -------- --------
Total current
liabilities......... 4,641 1,593 4,507 10,741
Borrowings, long-term.. 1,600 -- -- 1,600
Capital lease
obligations, long-
term.................. -- -- -- --
-------- ------- -------- --------
6,241 1,593 4,507 12,341
-------- ------- -------- --------
Stockholders' equity:
Preferred Stock........ 2 -- -- 2
Common Stock........... 1 -- 1 (C) 2
Additional paid-in
capital............... 121,682 -- 188,838 (C) 310,520
Investment by Parent... -- 3,288 (3,288)(D) --
Notes receivable from
stockholders.......... (35) -- -- (35)
Deferred stock-based
compensation.......... (17,292) -- -- (17,292)
Accumulated deficit.... (25,363) (3,528) 3,528 (D) (25,363)
-------- ------- -------- --------
Total stockholders'
equity.............. 78,995 (240) 189,079 267,834
-------- ------- -------- --------
$ 85,236 $ 1,353 $193,586 $280,175
======== ======= ======== ========
</TABLE>
F-28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PlanetRx.com YourPharmacy.com, Inc. Pro Forma PlanetRx.com YourPharmacy.com, Inc.
------------ ---------------------- --------------------- ------------ ----------------------
Six Months
Year Ended Period from Ended
December 31, February 2, 1998 to Adjust- June 30, Six Months Ended
1998 December 31, 1998 ments Combined 1999 June 30, 1999
------------ ---------------------- -------- -------- ------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
e-commerce...... $ -- $ -- $ -- $ -- $ 622 $ 75
Sponsorship..... -- -- -- -- 195 --
------- -------- -------- -------- -------- -------
-- -- -- -- 817 75
------- -------- -------- -------- -------- -------
Cost of net
revenue:
e-commerce...... -- -- -- -- 694 --
Sponsorship..... -- -- -- -- 35 --
------- -------- -------- -------- -------- -------
-- -- -- -- 729 --
------- -------- -------- -------- -------- -------
Gross profit..... -- -- -- -- 88 75
------- -------- -------- -------- -------- -------
Operating
expenses:
Marketing and
sales.......... 907 -- -- 907 9,614 485
Product
development.... 1,025 1,046 (450)(D) 1,621 3,254 1,566
General and
administrative.. 541 912 (17)(D) 1,436 2,366 1,801
Stock-based
compensation... 1,650 -- -- 1,650 4,308 --
Amortization of
goodwill....... -- -- 35,596 (A) 35,596 -- --
------- -------- -------- -------- -------- -------
4,123 1,958 35,129 41,210 19,542 3,852
------- -------- -------- -------- -------- -------
Operating loss... (4,123) (1,958) (35,129) (41,210) (19,454) (3,777)
<CAPTION>
Pro Forma
-------------------------
Adjust-
ments Combined
------------ ------------
<S> <C> <C>
Net revenue:
e-commerce...... $ (75)(D) $ 622
Sponsorship..... -- 195
------------ ------------
(75) 817
------------ ------------
Cost of net
revenue:
e-commerce...... -- 694
Sponsorship..... -- 35
------------ ------------
-- 729
------------ ------------
Gross profit..... (75) 88
------------ ------------
Operating
expenses:
Marketing and
sales.......... (8)(D) 10,091
Product
development.... (143)(D) 4,677
General and
administrative.. (35)(D) 4,132
Stock-based
compensation... -- 4,308
Amortization of
goodwill....... 19,416 (A) 19,416
------------ ------------
19,230 42,624
------------ ------------
Operating loss... (19,305) (42,536)
Interest income.. 38 -- -- 38 399 --
Interest
expense......... (2) -- -- (2) (1,046) --
------- -------- -------- -------- -------- -------
Loss before
income taxes.... (4,087) (1,958) (35,129) (41,174) (20,101) (3,777)
Benefit from
income taxes.... -- 754 (754)(D) -- -- 1,453
------- -------- -------- -------- -------- -------
Net loss......... (4,087) (1,204) (35,883) (41,174) (20,101) (2,324)
Plus effect of
antidilution
provision of
Series B
Preferred
Stock........... -- -- -- -- (1,009) --
------- -------- -------- -------- -------- -------
Net loss
available to
common
shareholders.... $(4,087) $ (1,204) $(35,883) $(41,174) $(21,110) $(2,324)
======= ======== ======== ======== ======== =======
Basic and diluted
net loss per
share........... $ (1.00) $ (3.04)(E) $ (1.04)
======= ======== ========
Weighted average
shares used to
compute basic
and diluted net
loss per share.. 448 13,535 (E) 2,528
======= ======== ========
Interest income.. -- 399
Interest
expense......... -- (1,046)
------------ ------------
Loss before
income taxes.... (19,305) (43,183)
Benefit from
income taxes.... (1,453)(D) --
------------ ------------
Net loss......... (20,758) (43,183)
Plus effect of
antidilution
provision of
Series B
Preferred
Stock........... -- (1,009)
------------ ------------
Net loss
available to
common
shareholders.... $(20,758) $(44,192)
============ ============
Basic and diluted
net loss per
share........... $ (1.45)(E)
============
Weighted average
shares used to
compute basic
and diluted net
loss per share.. 30,549 (E)
============
</TABLE>
F-29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
1. The following pro forma adjustments are reflected in the unaudited pro forma
consolidated financial data and are required to allocate the preliminary
purchase price and acquisition costs to the net liabilities to be acquired
from YourPharmacy.com, Inc. For the purpose of preparing the unaudited
pro forma consolidated financial data, the estimated purchase price of
$193.5 million was comprised of (i) the assumed issuance of approximately
10,115,000 shares of Common Stock at a price per share of $16.00, (ii) the
assumed issuance of 224,000 shares of Common Stock at a preliminary price of
$16.00 assuming the over-allotment is exercised, (iii) plus the assumption
of approximately 1,940,000 YourPharmacy.com, Inc. options at fair value of
$23.4 million using the Black-Scholes pricing model (iv) plus direct
acquisition costs of $4.7 million. The preliminary purchase price was
allocated to tangible assets and liabilities using their carrying values,
which approximates their fair values. The remainder, including the excess
purchase consideration over tangible net liabilities, has been allocated to
goodwill.
Adjustments reflecting the acquisition of certain assets from
YourPharmacy.com, Inc.:
(A) To record and amortize goodwill associated with the Agreement.
Amortization is over the estimated useful lives of the assets acquired
of five years.
(B) To record non-recurring charges estimated to be associated with the
purchase of YPC as a part of the purchase price. These charges of $2.5
million severance payable, $1 million contract exit fees and $1.2
million professional and bankers fees are direct acquisition costs and
are not included in the pro forma statement of operations. There can be
no assurance the Company will not incur or assume additional charges in
subsequent periods.
(C) Reflects the estimated fair value of shares issued to ESI and employee
stock options assumed.
(D) To reflect the assets, liabilities, equity and operating activity
associated with the operations of the Drugdigest.org website not
acquired with the purchase of the assets and liabilities associated
with the YourPharmacy.com website. The assets not acquired are
primarily comprised of a deferred tax asset, leasehold improvements and
long-term contract prepayments of contracts not assumed. The
liabilities not acquired are primarily liabilities associated with
contracts not assumed.
(E) The difference between the historical and pro forma basic and diluted
net loss per share for the year ended December 31, 1998 and the six
months ended June 30, 1999, other than the adjustments discussed above,
is the result of the following:
Increase in shares used in the calculation of pro forma net loss per
share:
. Inclusion of 10,339,000 shares issued in connection with the purchase
of certain assets and certain liabilities of YPC as if such shares
were outstanding from February 2, 1998. The resulting pro forma
adjustment increases the weighted average shares used to compute
basic and diluted net loss per share by approximately 9,433,000 and
approximately 10,339,000 for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively.
. Inclusion of all outstanding warrants and the purchase option at June
30, 1999 and the assumed conversion of the Company's Preferred Stock
effective upon the closing of the Company's initial public offering,
as if such change in conversion rate and conversion occurred on
January 1, 1998 or at the date of original issuance, if later. The
resulting pro forma adjustment increased the weighted average shares
used to compute basic and diluted net loss per share by approximately
3,654,000 and approximately 17,682,000 for the year ended December
31, 1998 and the six months ended June 30, 1999, respectively.
F-30
<PAGE>
PLANETRX.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (Continued)
2. Pro forma consolidated stockholders' equity is computed including (1) the
exercise and conversion of all outstanding warrants to purchase 100,000
shares of Series A, warrants to purchase 16,000 shares of Series B and
purchase rights to purchase 700,000 shares of Series B into approximately
849,000 shares of Common Stock, and (2) the automatic conversion of the
pro forma outstanding shares of Series A, Series B and Series C Preferred
Stock into approximately 11,159,000, 5,441,000 and 6,833,000 shares,
respectively, of Common Stock. The Company plans to effect, upon the
closing of its initial public offering the authorization of 100,000,000
shares of Common Stock and 5,000,000 shares of undesignated Preferred
Stock.
At June 30, 1999, the pro forma consolidated effects of these
transactions are as follows (in thousands):
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Stockholders'
Pro Forma Equity
at June 30, at June 30,
1999 1999
----------- -------------
<S> <C> <C>
Preferred Stock.................................... $ 2 $ --
Common Stock....................................... 2 4
Additional paid-in capital......................... 310,520 314,150
-------- --------
$310,524 $314,154
======== ========
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Express Scripts, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit, and of cash flows present
fairly, in all material respects, the financial position of YourPharmacy.com,
Inc. (a development stage company), a wholly-owned subsidiary of Express
Scripts, Inc., at December 31, 1998, and the results of its operations and its
cash flows for the period from February 2, 1998 (date of inception) through
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of Express
Scripts, Inc. and YourPharmacy.com, Inc.; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting 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 audit provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
August 23, 1999, except for Note 8
which is as of August 31, 1999
F-32
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Accounts receivable.................................. $ -- $ 37
Miscellaneous receivables............................ 2
Deferred tax asset................................... 137 113
Prepaid expenses..................................... 15 34
------- -------
Total current assets................................ 154 184
Property and equipment, less accumulated
depreciation......................................... 153 830
Other assets.......................................... 8 339
------- -------
Total assets.......................................... $ 315 $ 1,353
======= =======
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable..................................... $ 146 $ 319
Accrued product development.......................... 628 464
Accrued compensation................................. 131 517
Accrued other........................................ 41 293
------- -------
Total current liabilities........................... 946 1,593
------- -------
Commitments and contingencies (Note 5)
Stockholders' Equity:
Common stock, $0.01 par value, 1,000 shares
authorized, issued and outstanding
Investment by Parent................................. 573 3,288
Deficit accumulated during the development stage..... (1,204) (3,528)
------- -------
Total stockholder's deficit......................... (631) (240)
------- -------
Total liabilities and stockholder's deficit........... $ 315 $ 1,353
======= =======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Period from
February 2, 1998 Six Months February 2, 1998
to Ended (inception) to
December 31, 1998 June 30, 1999 June 30, 1999
----------------- ------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net revenues................... $ -- $ 75 $ 75
------- ------- -------
Cost and expenses:
Marketing and selling......... -- 485 485
Product development........... 1,046 1,566 2,612
General and administrative.... 912 1,801 2,713
------- ------- -------
1,958 3,852 5,810
------- ------- -------
Loss before income taxes....... (1,958) (3,777) (5,735)
Benefit from income taxes...... 754 1,453 2,207
------- ------- -------
Net loss....................... $(1,204) $(2,324) $(3,528)
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During
------------- Investment Development
Shares Amount by Parent Stage Total
------ ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at February 2, 1998..... -- $ -- $ -- $ -- $ --
Net loss....................... (1,204) (1,204)
Net transactions with Parent... -- -- 573 -- 573
----- ----- ------ ------- --------
Balance at December 31, 1998.... -- -- 573 (1,204) (631)
Net loss (unaudited)........... (2,324) (2,324)
Common stock issued to Parent
on February 26, 1999
(unaudited)................... 1,000
Net transactions with Parent
(unaudited)................... -- -- 2,715 -- 2,715
----- ----- ------ ------- --------
Balance at June 30, 1999
(unaudited).................... 1,000 $ -- $3,288 $(3,528) $ (240)
===== ===== ====== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
February 2, 1998 Six Months February 2, 1998
to Ended (inception) to
December 31, 1998 June 30, 1999 June 30, 1999
----------------- ------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(1,204) $(2,324) $(3,528)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization.............. 24 50 74
Deferred tax benefit....... (145) 21 (124)
Changes in operating assets
and liabilities:
Accounts receivable....... (37) (37)
Miscellaneous
receivables.............. (2) 2 0
Prepaid expenses.......... (15) (19) (34)
Other assets.............. (335) (335)
Accounts payable.......... 146 173 319
Accrued product
development.............. 628 (164) 464
Accrued compensation...... 131 386 517
Accrued other............. 41 252 293
------- ------- -------
Net cash used in
operating activities.... (396) (1,995) (2,391)
------- ------- -------
Cash flows from investing
activities:
Purchases of property and
equipment.................. (177) (720) (897)
------- ------- -------
Net cash used in
investing activities.... (177) (720) (897)
Cash flows from financing
activities:
Net transactions with
Parent..................... 573 2,715 3,288
------- ------- -------
Net cash provided by
financing activities.... 573 2,715 3,288
------- ------- -------
Net increase in cash......... -- -- --
Cash at beginning of period.. -- -- --
------- ------- -------
Cash at end of period........ $ -- $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and operations
YourPharmacy.com, Inc. ("the Company") (a development stage company), a
wholly owned subsidiary of Express Scripts, Inc. ("Express Scripts") is an
Internet pharmacy offering prescription drugs; non-prescription drugs; personal
care; beauty and cosmetics; vitamins and nutrition; medical supplies; and
household supplies. The Company's e-commerce website, www.YourPharmacy.com,
officially launched on July 27, 1999. The Company also maintains a second site,
DrugDigest.org, which is a non-commercial, fact-based information resource
dedicated to helping consumers make informed health choices. The Company has
been in development since February 2, 1998 and officially incorporated on
February 26, 1999 as ESI OnLine, Inc. and issued 1,000 shares of Common Stock
to Express Scripts. The Company's activities to date have consisted of
development of the Company's website, recruiting personnel and building
necessary strategic relationships to carry out its business plan. On April 12,
1999, the Company officially changed its name. The Company is headquartered in
St. Louis, Missouri and has a technology office in San Mateo, California.
Unaudited interim results
The interim financial statements as of and for the six months ended June
30, 1999, together with the financial data and other information for those
periods disclosed in these notes to the financial statements, are unaudited. In
the opinion of management, the interim financial statements have been prepared
on the same basis as the audited financial statements and reflect all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the results of interim periods. The results of operations
for the interim periods are not necessarily indicative of the results to be
expected for any future periods.
Use of estimates
The preparation of the financial statements conform to generally accepted
accounting principles, and require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual amounts could differ from those estimates and
assumptions.
Property and equipment
Property and equipment is carried at cost and is depreciated using the
straight-line method over estimated useful lives of seven years for furniture,
five years for equipment and purchased computer software, and three years for
personal computers. Leasehold improvements are amortized on a straight-line
basis over the term of the lease or the useful life of the asset, if shorter.
Expenditures for repairs and maintenance are charged to income as incurred.
Expenditures that improve an asset or extend its estimated useful life are
capitalized. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts and any gain or
loss is included in income.
Impairment of long lived assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on
F-37
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the ability to recover the balance of assets from expected future operating
cash flows on an undiscounted basis. In the opinion of management, no such
impairment existed as of December 31, 1998 or as of June 30, 1999.
Revenue recognition
The Company recognizes e-commerce revenue when the related products are
shipped to customers. Outbound shipping charges are included in net revenues
when the products are shipped. The Company records an allowance for estimated
returns, in the period of sales. The Company recognizes sponsorship revenue
ratably over the related period.
Product development
The Company expenses product development costs as incurred for the periods
ended December 31, 1998 and June 30, 1999.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of
Position 93-7 "Reporting on Advertising Costs." As such, the Company expenses
the cost of communicating advertising in the period in which the advertising
space or airtime is used. Internet advertising expenses are recognized based on
the terms of the individual agreements, but generally over the greater of the
ratio of the number of impressions received over the total number of contracted
impressions, or on a straight-line basis over the term of the contract. There
was no advertising expense for the periods ended December 31, 1998 and June 30,
1999.
Income taxes
The Company's operating results are included in the consolidated federal
income tax return of Express Scripts. However, for financial reporting
purposes, the Company's benefit from income taxes are computed as if a separate
return had been filed for the Company, using those elements of income and
expense as reported in the Statement of Operations. Deferred tax assets and
liabilities are recognized based on temporary differences between financial
statement basis and tax basis of assets and liabilities using presently enacted
tax rates. The related benefit from current income taxes receivable is
reflected in investment by parent at December 31, 1998 and additional paid-in
capital at June 30, 1999 within the Stockholder's Equity section of the
Company's Balance Sheet.
Fair value of financial instruments
The carrying value of accounts receivable, miscellaneous receivables and
accounts payable approximates fair value due to their short-term maturities.
Stock-based compensation
The Company, in conjunction with Express Scripts, accounts for employee
stock options in accordance with Accounting Principles Board No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, the Company applies
the intrinsic value method of accounting and, therefore, does not recognize
compensation expense for options granted, because options are only granted at a
price equal to market value at the time of grant. Statement of Financial
Accounting
F-38
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation,"
prescribes the recognition of compensation expense based on the fair value of
options determined on the grant date. However, FAS 123 grants an exception that
allows companies applying APB 25 at FAS 123's effective date to continue using
that method. Express Scripts elected to continue applying the intrinsic value
method under APB 25. For companies that choose to continue applying the
intrinsic value method, FAS 123 mandates certain pro forma disclosures as if
the fair value method has been utilized (see Note 7).
Comprehensive income
During 1998, Statement of Financial Accounting Standards No. 130 ("FAS
130"), "Reporting Comprehensive Income," became effective for the Company. FAS
130 requires non-cash changes in stockholder's equity be combined with net
income and reported in a new financial statement category entitled
"comprehensive income." The Company has no other components, other than net
loss, that should be included in comprehensive income for the periods ended
December 31, 1998 and June 30, 1999.
Segment reporting
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 requires that the Company report certain information, if
specific requirements are met, about operating segments of the Company
including information about services, geographic areas of operation and major
customers. The information is to be derived from the management approach which
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The Company adopted FAS 131 during 1998 and operates in
only one segment.
New accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-
1 is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company early adopted the
provisions of SOP 98-1 in its fiscal year ended December 31, 1998, and the
adoption did not have a material effect on the Company's results of operations,
financial position and cash flows.
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-
Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, commencing some new operation or organizing a new entity. Under SOP
98-5, the cost of start-up activities should be expensed as incurred. The
Company early adopted the provisions of SOP 98-5 in the period ended December
31, 1998, and expensed start-up activities as incurred.
In June 1998, Statement of Financial Accounting Standards Statement 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") was
issued. FAS 133 requires all derivatives to be recognized as either assets or
liabilities in the statement of financial position and
F-39
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
measured at fair value. In addition, FAS 133 specifies the accounting for
changes in the fair value of a derivative based on the intended use of the
derivative and the resulting designation. The effective date for FAS 133 was
originally effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. However, the Financial Accounting Standards Board has deferred
the effective date so that it will begin for all fiscal quarters of fiscal
years beginning after June 15, 2000, and will be applicable to the Company's
first quarter of fiscal year 2001. Adoption of FAS 133 will not have a material
impact on the Company's financial position, results of operations or cash
flows.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
(in thousands)
<S> <C> <C>
Furniture........................................... $ 36 $ 88
Equipment........................................... 43 450
Leasehold improvements.............................. 96 96
Software............................................ 20 299
---- ----
195 933
Less accumulated depreciation....................... 42 103
---- ----
$153 $830
==== ====
</TABLE>
NOTE 3--INCOME TAXES
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
(in thousands)
<S> <C> <C>
Current (benefit) provision:
Federal........................................... $(522) $(1,264)
State............................................. (87) (210)
----- -------
Total current (benefit) provision................ (609) (1,474)
Deferred (benefit) provision:
Federal........................................... (132) 18
State............................................. (13) 3
----- -------
Total deferred (benefit) provision............... (145) 21
----- -------
Total current and deferred (benefit) provision..... $(754) $(1,453)
===== =======
Effective tax rate................................. 38.5% 38.5%
===== =======
</TABLE>
The effective tax rate is comprised of a federal rate of 35.0% for the
periods ended December 31, 1998 and June 30, 1999, state taxes net of federal
benefit of 3.6% for the periods ended December 31, 1998 and June 30, 1999; and
all other items comprising (0.1)% for the periods ended December 31, 1998 and
June 30, 1999.
F-40
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The net deferred tax asset recorded in the balance sheet as of December 31,
1998 and June 30, 1999 was $145,000 and $124,000, respectively. The deferred
tax asset consisted of depreciation and accruals for professional fees and
bonuses. The deferred tax asset at December 31, 1998 and June 30, 1999,
reflected above, is realized when included in the consolidated Federal and
certain state income tax returns of Express Scripts. Additionally, the Federal
and state tax benefit recorded by the Company during the periods ended December
31, 1998 and June 30, 1999 are realized when included in the consolidated
Federal and certain state income tax returns of Express Scripts.
NOTE 4--RELATED PARTY TRANSACTIONS
Express Scripts uses a centralized cash management system to finance its
operations. Cash deposits from the Company are deposited into Express Scripts
on a daily basis and Express Scripts funds the Company's accounts payable and
accrued expenses as required. No interest has been charged on transactions with
Express Scripts.
Express Scripts also provides certain centralized general and
administrative functions, including legal, accounting, tax, treasury, risk
management, and employee benefits. Portions of these costs were allocated to
the Company. Allocations for the periods ended December 31, 1998 and June 30,
1999 were $193,000 and $389,000, respectively. The allocations were based on
the Company's relative percentage of selling, general and administrative
expenses to the consolidated selling, general and administrative expenses of
Express Scripts. In the opinion of management, the methods for allocating such
costs to the Company appear reasonable. However, such costs are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions.
Express Scripts pays rent expense on behalf of the Company for certain
office space leased by Express Scripts and occupied by the Company. Rent
expense included in the Statement of Operations for the periods ended December
31, 1998 and June 30, 1999 were $0 and $13,027, respectively.
The investment by Parent at December 31, 1998 and June 30, 1999 included
within the Stockholder's Equity section of the Company's Balance Sheet
represents the net intercompany payable from the Company and reflects the
transactions described above.
NOTE 5--COMMITMENTS AND CONTINGENCIES
The Company has non-prescription health, wellness and beauty orders
supplied and fulfilled by an independent pharmacy wholesaler. Express Scripts
dispenses all of the Company's prescription orders. The Company believes other
alternative sources are readily available and that no other concentration risks
exist at December 31, 1998 and June 30, 1999.
The Company has entered into an advertising agreement with a third-party to
be the exclusive online pharmacy for certain sites. The agreement requires the
Company to pay $1,285,000 in equal installments on July 1, 1999, December 31,
1999, March 31, 2000 and June 30, 2000. The agreement also requires the Company
to pay $0.15 per click up to a maximum $3,715,000.
F-41
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998 and June 30, 1999, the Company was a guarantor of
Express Scripts' $1.05 billion credit facility and $250 million 9 5/8% Senior
Notes due 2009. On August 23, 1999, the $1.05 billion credit facility was
amended to remove the Company as guarantor. Contemporaneously, with this
amendment, the Company is no longer a guarantor for the $250 million 9 5/8%
Senior Notes due 2009 based on provisions within the description of the notes.
NOTE 6--RETIREMENT PLAN
Retirement savings plan
The Company, through Express Scripts, offers all of its full-time employees
a retirement savings plan under Section 401(k) of the Internal Revenue Code.
Employees may elect to enter into a written salary deferral agreement under
which a maximum of 10% of their salary, subject to aggregate limits required
under the Internal Revenue Code, may be contributed to the plan. The Company
matches the first $2,000 of the employee's contribution for the year. For the
periods ended December 31, 1998 and June 30, 1999, the Company made
contributions of approximately $5,700 and $3,200, respectively.
Employee stock purchase plan
The Company, through Express Scripts, offers all of its full-time
employees, excluding certain management level employees, the ability to
purchase shares of Express Scripts' Class A Common Stock through a plan that
qualifies under Section 423 of the Internal Revenue Code. Participating
employees may elect to contribute up to 10% of their salary to purchase common
stock at the end of each six-month participation period at a purchase price
equal to 85% of the fair market value of the common stock at the end of the
participation period.
NOTE 7--STOCK-BASED COMPENSATION PLAN
Express Scripts offers a stock option plan for certain employees through
its Express Scripts, Inc. 1994 Stock Option Plan (the "Plan"), amended in 1995,
1997 and 1998. Under the Plan, the exercise price of the options granted may
not be less than the fair market value of the shares at the time of grant. The
options typically vest over a five-year period from the date of grant and must
be exercised within 10 years from the date of grant.
The Company and Express Scripts applies APB 25, and related interpretations
in accounting for the Plan. Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the stock based
compensation plan been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed by FAS 123,
the Company's net loss would have been increased to $1,246,000 for the period
ended December 31, 1998 and $2,417,000 for the six months ended June 30, 1999
on a pro forma basis. Because future options may be granted and vesting
typically occurs over a five year period, the pro forma impact shown is not
necessarily representative of the impact in future years.
The fair value of the options granted (which is amortized to expense over
the option vesting period in determining the pro forma impact), is estimated on
the date of grant using the Black-Scholes multiple option-pricing model with
the following weighted average assumptions for the period ended December 31,
1998 and for the six months ended June 30, 1999: expected option life of
3-7 years, dividend yield of 0.0%, volatility of 44%, risk free investment rate
of 4.1-5.5%.
F-42
<PAGE>
YOURPHARMACY.COM, INC.,
(a development stage company)
A WHOLLY OWNED SUBSIDIARY OF EXPRESS SCRIPTS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8--SUBSEQUENT EVENTS
On August 31, 1999, Express Scripts and the Company entered into an Asset
Contribution and Reorganization Agreement (the "Contribution Agreement") with
PlanetRx.com, Inc. ("PlanetRx"), PRX Holdings, Inc. ("Holdings"), and PRX
Acquisition Corp. ("Acquisition Sub"). Pursuant to the Contribution Agreement,
the Company will contribute certain operating assets constituting its e-
commerce business in prescription and non-prescription drugs and health and
beauty aids to Holdings in exchange for 19.9% of the post-initial public
offering common equity of Holdings (the "IPO"). Simultaneously, Acquisition Sub
will merge into PlanetRx and PlanetRx shareholders will receive stock in
Holdings, which will change its name to "PlanetRx.com Inc." As a result of the
transactions, the Company will be a 19.9% shareholder in the new PlanetRx
(formerly Holdings), which will conduct business as an internet pharmacy.
F-43
<PAGE>
UNDERWRITING
PlanetRx.com and the underwriters for the offering named below have entered
into an underwriting agreement with respect to the shares being offered hereby.
Subject to certain conditions, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs
& Co., BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and William
Blair & Company, L.L.C. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................ 2,405,000
BancBoston Robertson Stephens Inc.................................. 1,082,000
Hambrecht & Quist LLC.............................................. 1,082,000
William Blair & Company, L.L.C. ................................... 241,000
Bear, Stearns & Co. Inc. .......................................... 110,000
CIBC World Markets Corp............................................ 110,000
Deutsche Bank Securities Inc....................................... 110,000
Gruntal & Co., L.L.C. ............................................. 60,000
Edward D. Jones & Co., L.P......................................... 110,000
C.L. King & Associates, Inc........................................ 60,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 110,000
J.P. Morgan Securities Inc. ....................................... 110,000
Morgan Keegan & Company, Inc....................................... 60,000
Salomon Smith Barney Inc........................................... 110,000
Tucker Anthony Cleary Gull......................................... 60,000
U.S. Bancorp Piper Jaffray Inc..................................... 60,000
Wachovia Securities, Inc........................................... 60,000
Wit Capital Corporation............................................ 60,000
---------
Total.............................................................. 6,000,000
=========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 900,000
shares from PlanetRx.com to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by PlanetRx.com. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase 900,000 additional shares.
<TABLE>
<CAPTION>
Paid by PlanetRx.com
---------------------
No Full
Exercise Exercise
---------- ----------
<S> <C> <C>
Per Share................................................. $1.12 $1.12
---------- ----------
Total..................................................... $6,720,000 $7,728,000
========== ==========
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.67 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $0.10 per share from
the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Each of PlanetRx.com, iVillage, Express Scripts, and substantially all the
directors, officers, employees and other stockholders of PlanetRx.com have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common
U-1
<PAGE>
stock during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, except with the prior written
consent of Goldman, Sachs & Co. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price has been negotiated among
PlanetRx.com and the representatives. Among the factors considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, was historical performance, estimates of our
business potential and earnings prospects, an assessment of our management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PLRX".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Common Stock. As a result, the price of the
Common Stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At our request, the underwriters are reserving up to 374,500 shares of
common stock for sale at the initial public offering price to directors,
officers, employees and friends through a directed share program. The number of
shares of common stock available for sale to the general public in the public
offering will be reduced to the extent these persons purchase these reserved
shares.
PlanetRx.com estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,200,000.
PlanetRx.com has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933.
Each of the representatives of the underwriters beneficially owns shares of
preferred stock of PlanetRx.com as follows:
. Goldman, Sachs & Co. beneficially owns 159,908 shares of our series C
preferred stock;
. BancBoston Robertson Stephens Inc. beneficially owns 45,139 shares of
our series C preferred stock;
. entities associated with Hambrecht & Quist LLC beneficially own
approximately 61,160 shares of our series B preferred stock; and
. William Blair & Company, L.L.C. beneficially owns 114,220 shares of our
series C preferred stock.
The 159,908 shares of series C preferred stock acquired by Goldman, Sachs &
Co. and its affiliates and affiliated persons, the 45,139 shares of series C
preferred stock acquired by limited partners of Bayview
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<PAGE>
Investors Ltd., an affiliate of BancBoston Robertson Stephens Inc., the 114,220
shares of series C preferred stock acquired by Wilblairco Associates, an
affiliate of William Blair & Company, LLC, all of which were acquired in June
1999, and the 61,160 shares of series B preferred stock acquired by entities
associated with Hambrecht & Quist LLC in January 1999, will be restricted from
sale, transfer, assignment or hypothecation for a period of three years from
the effective date of the offering, except to the underwriters and members of
the selling group and/or their officers or partners (but not directors).
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<PAGE>
INSIDE BACK COVER
The inside back cover includes:
The PlanetRx.com logo at the upper right corner of the inside back cover,
and the caption "A LEADING INTERNET PHARMACY, INTEGRATING COMMERCE, CONTENT AND
COMMUNITY" is to the left of the logo.
Screen shot of the PlanetRx online store on the upper right side of the page.
To the left of the screen shot is a caption that reads:
"COMMERCE
. Advice and other helpful information about how to use the product
. Specific product information and ingredients
. Related conditions for which the product is often used"
Screen shot of a PlanetRx.com web page containing content on the left side of
the inside back cover. To the right of the screen shot is a caption that reads:
"CONTENT
. Up-to-date, unbiased content in an easy-to-understand format"
Screen shots of five satellite site web pages in the lower right corner of the
inside back cover. To the left of the screen shots is a caption that reads:
"COMMUNITY
A family of satellite websites designed to provide an extended community
for people interested in chronic healthcare conditions, with links to
PlanetRx.com for products."
<PAGE>
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Note Regarding Forward-Looking Statements................................ 21
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Selected Unaudited Pro Forma Consolidated Financial Data................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 34
Management............................................................... 48
Related Party Transactions............................................... 59
Principal Stockholders................................................... 63
Description of Capital Stock............................................. 65
Shares Eligible for Future Sale.......................................... 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Additional Information................................................... 70
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
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Through and including October 31, 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
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6,000,000 Shares
PlanetRx.com, Inc.
Common Stock
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[PLANETRX.COM, INC. LOGO]
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Goldman, Sachs & Co.
Hambrecht & Quist
Robertson Stephens
William Blair & Company
Representatives of the Underwriters
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