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As filed with the Securities and Exchange Commission on October 11, 2000
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
PLANETRX.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 5912 94-3227733
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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349 Oyster Point Blvd., Suite 201
South San Francisco, CA 94080
(650) 616-1500
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(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Michael Beindorff, Chief Executive Officer
PlanetRx.com, Inc.
349 Oyster Point Blvd., Suite 201
South San Francisco, CA 94080
(650) 616-1500
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(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy to:
Luther F. Sadler, Jr., Esq. Dorothy An, Esquire
Jeffrey M. McFarland, Esq. 349 Oyster Point Blvd., Suite 201
Foley & Lardner South San Francisco, CA 94080
200 Laura Street (650) 616-1500
Jacksonville, Florida 32202
(904) 359-2000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration Statement number of the earlier effective registration statement
for the same offering. [______]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of Each Proposed Maximum Proposed
Class of Securities Amount to Offering Price per Maximum Aggregate Amount of
To Be Registered Be Registered Share Offering Price Registration Fee
----------------------- ------------------ --------------------- --------------------- --------------------
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Common Stock, Up to (2) $50,000,000(3) $13,200.00
$0.0001 par value 95,320,000(1)
Common Stock, 4,680,000(1) (4) $ 1,901,250(1) $ 501.93
$0.0001 par value
Up to $51,901,250(1) 13,701.93
Total 100,000,000(1)
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
(2) The price per common share of the common stock issued under the common
stock purchase agreement described in this prospectus will vary based on
the daily volume-weighted average prices of PlanetRx.com's common stock
during the drawdown periods provided for in the agreement. The purchase
price per share will be equal to a minimum of 91% of the average of the
five lowest daily volume-weighted average prices of the common stock during
the ten-day drawdown pricing periods. The agreement allows PlanetRx.com up
to $8,000,000 per draw, with each draw a minimum of 10 trading days apart,
up to an aggregate of $50,000,000 over a period of 12 months. In the event
that PlanetRx.com draws down a minimum of $10,000,000 within the first 12
months of the agreement, PlanetRx.com may extend the agreement for an
additional 12 months.
(3) This represents the maximum purchase price that Alpha Venture Capital is
obligated to pay PlanetRx.com for draws under the common stock purchase
agreement. The maximum net proceeds that PlanetRx.com can receive is
$50,000,000.
(4) Relates to a maximum 4,180,000 shares of common stock issuable pursuant to
warrants to be issued under the common stock purchase agreement in
connection with drawdowns thereunder and 500,000 shares of common stock
issuable pursuant to outstanding warrants issued on July 25, 2000 in
connection with execution of the common stock purchase agreement. The
exercise price of the warrants issuable in the future under the agreement
will be 120% of the closing price of our common stock on the date
PlanetRx.com issues the warrants. The exercise price of the July 25, 2000
warrants will be the lesser of (A) $1.375 per share (150% of the average
closing bid for the three consecutive trading days preceding July 25, 2000)
and (B) 120% of the average closing bid for three consecutive trading days
prior to the effective date of this registration statement. The shares
being registered which are issuable pursuant to the warrants may be offered
for sale and sold from time to time during the period the registration
statement remains effective, by or for the account of the selling
stockholder. The proposed maximum offering price per share has been
estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933. The proposed
maximum aggregate offering price for these shares is based upon the average
of the high and low reported prices of the registrant's common stock on
October 6, 2000.
_______________________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting offers to buy these securities
in any state where the offer or sale is not permitted.
Subject To Completion, dated October 11, 2000
100,000,000 Shares
PLANETRX.COM, INC.
Common Stock
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The shares of common stock offered by this prospectus are being sold by
Alpha Venture Capital pursuant to a common stock purchase agreement. We will not
receive any of the proceeds from the sale of shares by Alpha Venture Capital
that it has obtained under the common stock purchase agreement. However, we will
receive the sale price of any common stock we sell to Alpha Venture Capital
under the common stock purchase agreement and upon the exercise of warrants held
by Alpha Venture Capital to the extent it pays the exercise price in cash. We
expect to use any proceeds for general working capital purposes.
The number of shares of common stock which may be issued through the common
stock purchase agreement would constitute 66.2% of our issued and outstanding
common stock after the issuance, based on shares issued and outstanding on
August 31, 2000.
Alpha Venture Capital may offer shares of our common stock on the Nasdaq
National Market, in negotiated transactions or otherwise, or by a combination of
these methods. It may sell the shares through broker-dealers who may receive
compensation from the selling shareholder in the form of discounts or
commissions. Alpha Venture Capital is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with its sales. We will pay the costs of
registering the shares under this prospectus, including legal fees.
Our common stock is quoted on the Nasdaq National Market under the symbol
"PLRX." On October 6, 2000, the last reported share price of our common stock on
the Nasdaq National Market was $0.4375 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this propectus is , 2000
<PAGE>
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
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Page
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PROSPECTUS SUMMARY...................................................................... 3
RISK FACTORS............................................................................ 6
DILUTION................................................................................ 20
NOTE REGARDING FORWARD-LOOKING STATEMENTS............................................... 21
USE OF PROCEEDS......................................................................... 21
DIVIDEND POLICY......................................................................... 21
SELECTED FINANCIAL DATA................................................................. 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 25
BUSINESS................................................................................ 32
MANAGEMENT.............................................................................. 44
STOCK PLANS............................................................................. 51
RELATED PARTY TRANSACTIONS.............................................................. 55
PRINCIPAL STOCKHOLDERS.................................................................. 59
DESCRIPTION OF CAPITAL STOCK............................................................ 61
COMMON STOCK PURCHASE AGREEMENT......................................................... 63
SELLING STOCKHOLDER..................................................................... 66
PLAN OF DISTRIBUTION.................................................................... 66
LEGAL MATTERS........................................................................... 70
EXPERTS................................................................................. 70
ADDITIONAL INFORMATION.................................................................. 70
Financial Statements.................................................................... F-1
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____________________
Until [_______], 2000, 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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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. References in this prospectus to "we," "us" or
"our" refer to PlanetRx.com unless otherwise noted. 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 an online healthcare destination for commerce, content and
community. Our e-commerce website, www.PlanetRx.com, was launched on March 18,
1999. We offer products in six categories: prescription drugs; non-prescription
drugs; personal care; beauty and spa; vitamins, herbs and nutrition; and medical
supplies.
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
detailed 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 an
appearance similar to 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. To date, products within our market segments have been
sold primarily through chain drugstores, mass market retailers and supermarkets,
warehouse clubs, mail-order companies and independent drugstores and pharmacies.
However, consumers are beginning to use the Internet to fulfill their healthcare
needs. Consumers are using the Internet not only for online shopping, but also
increasingly as a source for health and medical information and as a means to
interact with other individuals with similar healthcare concerns. We believe
that this trend is a result of the limitations of traditional distribution
channels which are inconvenient, have limited selection, provide insufficient
information and lack a forum for community.
The PlanetRx.com Healthcare Destination
Our website offers extensive product selection, professionally-created
content and online communities developed around specific health-related topics.
We operate our own distribution center and pharmacy in Memphis, Tennessee.
The PlanetRx.com Strategy
Our strategy is to attract new customers, develop customer loyalty and
promote repeat purchases by:
. continuing to offer 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
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<PAGE>
. developing strategic relationships to further e-commerce opportunities.
To further our business strategy, we have entered into and will continue
to pursue key strategic relationships, such as:
. marketing relationships with various online advertising relationships,
such as our agreement with News Corporation for television and other
traditional media advertising; and
. disease state management sponsorships on our websites.
Recent History of Losses, Accumulated Deficit and Anticipation of Future Losses
We incurred net losses of $7,000 in 1996, $137,000 in 1997, $4.1 million in
1998, $98.0 million in 1999 and $93.5 million for the six months ended June 30,
2000. As of June 30, 2000, we had an accumulated deficit of $196.8 million. We
anticipate incurring operating losses and negative cash flow in the foreseeable
future.
Reverse Stock Split
We intend to ask our shareholders to approve a 1-for-8 reverse stock split
to increase the price of our common stock above $1.00 per share. The reverse
split is motivated by a Nasdaq rule that requires the bid price of our common
stock to be sustained at $1.00 or more per share. The board of directors will
retain discretion, even after shareholder approval, not to implement the reverse
split if the stock price is sustained at $1.00 or more on its own. However,
based on the recent bid prices for our common stock, we anticipate that the 1-
for-8 reverse stock split will be implemented. The price and share-related
numbers in this prospectus have not been adjusted for the 1-for-8 reverse split.
If the reverse split is implemented, we will make proportional changes to the
price and share-related numbers in this prospectus.
Corporate Information
We were incorporated in Delaware in March 1995. Our corporate offices are
currently located at 349 Oyster Point Blvd., Suite 201, South San Francisco, CA
94080. Our telephone number is (650) 616-1500. Our web site is located at
www.planetrx.com. Information contained on our website does not constitute a
part of this prospectus and the link to our website is an inactive textual
reference only.
PlanetRx, PlanetRx.com, eCenter and other trademarks are trademarks of
PlanetRx.com, Inc. This prospectus also contains brand names, trademarks, or
service marks of companies other than PlanetRx.com, Inc., and these brand names,
trademarks and service marks are the property of their respective holders.
THE OFFERING
This prospectus covers up to 100,000,000 shares of PlanetRx.com common
stock to be sold by selling stockholders identified in this prospectus. The
number of shares subject to this prospectus represents 195.9% of our issued and
outstanding common stock as of August 31, 2000 and 66.2% after issuance of all
shares included in this prospectus.
We signed a common stock purchase agreement with Alpha Venture Capital,
Inc., a Cook Islands corporation, on July 25, 2000, for the future issuance and
purchase of shares of our common stock. The stock purchase agreement establishes
what is sometimes termed an equity line of credit or an equity drawdown
facility.
In general, the drawdown facility operates like this: the investor, Alpha
Venture Capital, has committed to provide us up to $50.0 million upon our
request in return for our common stock. Once every 10 trading days, we may
request a draw of up to $8.0 million under this facility. The maximum amount we
actually can draw down upon each request will be determined by the average
trading volume and average price of our common stock for the 20 trading days
prior to our request. Each draw down must be for at least $500,000. At the end
of a 10 trading day period following the drawdown request, the per share
purchase price is determined based on the five lowest daily
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volume-weighted average prices of the common stock during that 10 day period. We
then divide the drawdown amount by the per share purchase price to determine the
number of shares we will issue to Alpha Venture Capital in return for that
money.
The formulas for determining the drawdown amounts, the number of shares we
issue to Alpha Venture Capital and the price per share paid by Alpha Venture
Capital are described in detail beginning on page 63 of this prospectus. The
aggregate total of all draws cannot exceed $50.0 million and no single draw can
exceed $8.0 million. We are under no obligation to request a draw for any
period.
The market price for our common stock on August 31, 2000 was $0.78 and the
average daily trading volume for the 20 trading days ended August 31, 2000 was
893,036. If our stock price remains $0.78 per share and the 20-day average
trading volume preceding August 31, 2000 remains constant over the initial 12-
month period of the common stock purchase agreement and we requested the maximum
amount available to us under the common stock purchase agreement, each draw
would be capped at $2,786,272 and we could make 18 draws for a total amount
drawn of $50,000,000 million. However, if our stock price or trading volume
declines from current levels, we may not be able to draw down all $50,000,000
million under the common stock purchase agreement during the initial 12-month
period. Nevertheless, so long as we draw at least $10,000,000 in the first 12
months, the common stock purchase agreement will be extended for an additional
12 months.
The per share dollar amount Alpha Venture Capital pays for our common stock
upon each drawdown includes a 9% discount from the five lowest daily volume-
weighted average prices of our common stock for the 10 trading day period after
our drawdown request. The percentage discount will get smaller if our stock
rises above $1.50 per share after we submit a drawdown notice but before the
drawdown funding date. For each drawdown, we also must issue to Alpha Venture
Capital warrants to purchase our common stock at an exercise price equal to 120%
of the closing price of our common stock on the drawdown closing date. The
maximum number of shares of common stock issuable pursuant to those warrants,
4,180,000, has been included in the shares offered pursuant to this prospectus.
In addition, this prospectus includes 500,000 shares of common stock issuable
pursuant to warrants we granted Alpha Venture Capital upon the closing of the
common stock purchase agreement. Those warrants have a per share exercise price
equal to the lesser of $1.375 or 120% of the average closing bid for our common
stock for the three consecutive trading days prior to the effective date of the
registration statement of which this prospectus is a part. The warrants may be
exercised for cash or by "cashless exercise."
Because our common stock is listed on the Nasdaq National Market, we are
required to comply with Nasdaq's listing rules. One of those rules provides that
we must get shareholder approval if we issue or propose to issue common stock or
securities convertible into or exercisable for common stock in a private
offering if:
. the price at which we issue the common stock is less than the greater of
book or market value of the common stock; and
. the number of shares issued equals 20% or more of the number of shares
of common stock outstanding or 20% or more of the voting power
outstanding at the closing of the transaction that gave rise to the
issuance.
Another Nasdaq rule requires shareholder approval if we propose to issue
common stock that will result in a change of control of our company. We expect
to issue common stock and securities exercisable for common stock to Alpha
Venture Capital in amounts that exceed 20% of the number of shares of common
stock we had outstanding on July 25, 2000, the date of closing of the common
stock purchase agreement. The majority of those shares will be issued at less
than the greater of book or market value of the common stock. In addition, the
shares we issue may result in a change of control of our company. Accordingly,
we intend to seek approval for the issuance of these shares from our
shareholders prior to the effective date of the registration of which this
prospectus is a part.
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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. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline and you may lose part
or all of your investment.
If our common stock price remains under $1.00, or if we otherwise fail to comply
with Nasdaq rules, our common stock is likely to be delisted from the Nasdaq
National Market, which could eliminate the trading market for our common stock
If the market price for our common stock remains below $1.00 per share and
we are no longer listed on the Nasdaq National Market, our common stock may be
deemed to be penny stock. If our common stock is considered penny stock, it
would be subject to rules that impose additional sales practices on broker-
dealers who sell our securities. For example, broker-dealers must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Also, a disclosure schedule
must be prepared prior to any transaction involving a penny stock and disclosure
is required about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
statements are also required to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stock. Because of these additional obligations, some brokers may be
unwilling to effect transactions in penny stocks. This could have an adverse
effect on the liquidity of our common stock and your ability to sell the common
stock covered by this prospectus.
On September 15, 2000, we received a notice from Nasdaq that our common
stock has failed to maintain a minimum bid price of $1.00 over the last 30
consecutive trading days as required for continued listing on the Nasdaq
National Market. The notice states that if at any time prior to December 14,
2000, the closing bid price of our common stock is not sustained at $1.00 or
more for at least 10 consecutive trading days, our common stock will be delisted
at the opening of business on December 18, 2000. If the bid price of our common
stock is sustained at $1.00 or more for at least 10 consecutive trading days,
Nasdaq will reevaluate our compliance with the listing qualifications.
Our issuance of common stock to Alpha Venture Capital, or the subsequent
resale of those shares by Alpha Venture Capital, in either case at a discount to
the market price, may depress the trading price of our common stock. In
addition, Alpha Venture Capital is not required to honor our drawdown requests
during any period in which our common stock is not listed on the Nasdaq National
Market.
We may implement a reverse stock split to increase the price of our common stock
to comply with Nasdaq listing requirements, which may cause the market to reduce
the trading volume and price for our common stock.
To maintain the listing requirements of Nasdaq, we intend to ask our
shareholders to approve a 1-for-8 reverse stock split that would increase the
price of our common stock above $1.00 per share. Even if the shareholders
approve the reverse stock split, our board of directors will have discretion not
to implement the reverse split if it is no longer necessary to meet the Nasdaq
requirements. The market sometimes views reverse stock splits negatively. If the
market views our reverse split negatively, it could hurt the trading volume and
price of our common stock after the reverse split, which could affect your
ability to resell any shares you acquire in our company. To the extent the
trading volume and price are negatively affected, we may not be able to draw
down all of the $50.0 million under the common stock purchase agreement with
Alpha Venture Capital because the amount we can draw down is limited by trading
volume and price. Also, the reverse stock split may result in fractional shares,
which we would be required to redeem with cash in an amount that cannot be
determined at this time.
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If Alpha Venture Capital acquires from us all of the shares offered by this
prospectus, it will likely own the majority of our common stock.
Based on the number of shares of common stock issued and outstanding as of
August 31, 2000, if Alpha Venture Capital acquires from us all 100,000,000
shares offered by this prospectus, it will own approximately 66.2% of our voting
stock after the acquisition. Accordingly, Alpha Venture Capital may gain
effective control over our company through its ability to control the election
of a majority of directors and all other matters that require action by our
stockholders.
Risks Related to Our Business
We may need additional capital in the future and additional financing may not be
available
We currently anticipate that our available cash resources combined with the
maximum drawdown under the stock purchase agreement with Alpha Venture Capital
will be sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next 12 months. However, if our stock
price and trading volume decline from current levels, we may not be able to draw
down all $50 million under the common stock purchase agreement and our available
cash resources may only meet our requirements for the next 6 months. In
addition, business and economic conditions may not make it feasible to draw down
under the common stock purchase agreement at every opportunity, and drawdowns
are only available every 10 trading days. We may need to raise additional
capital to fund our current operating requirements or to develop new and to
enhance existing services to respond to competitive pressures.
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 may not be able to obtain additional financing on terms favorable to us,
if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively execute our business plan.
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, $98.0
million for the year ended December 31, 1999 and $93.5 million for the six
months ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit
of $196.8 million. We expect to incur additional costs and expenses related to:
. marketing and customer acquisition and other promotional activities;
. the continued development of the PlanetRx.com website, our computer
network and the systems that we use to process customers' orders and
payments;
. the continued development of relevant, healthcare-related content on the
PlanetRx.com website;
. the development of marketing and distribution relationships with
strategic business partners; and
. the establishment and development of relationships in the healthcare
industry
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.
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Our limited operating history makes forecasting future results difficult
We were incorporated on March 31, 1995 and 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
If our marketing efforts are not successful, our business may be harmed
We have significantly reduced our spending related to traditional media
advertising and have restructured several of our online media arrangements. As a
result, the current level of marketing and advertising may not be successful or
consumers may not find our marketing efforts compelling. If our marketing
efforts are not successful, our business and operating results will be harmed.
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
our operations
The loss of the services of one or more of our key personnel could
seriously disrupt our business. Our future success also depends upon the
continued service of our executive officers and on our ability to attract and
retain key personnel. Competition for these individuals is intense, and we may
not be able to attract, assimilate or retain additional highly qualified
personnel in the future. In the past six months our chairman, chief financial
officer and chief technology officer resigned to pursue other opportunities.
Additionally, we have announced that we intend to relocate our company
headquarters to Memphis, Tennessee. This relocation may affect our ability to
retain key personnel and to attract new talent. Except for Michael Beindorff,
our Chief Executive Officer, 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 are dependent on strategic relationships with pharmaceutical companies to
provide sponsorship revenue. If litigation or governmental interference affects
the pharmaceutical companies' operations, our relationships may be adversely
affected
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. In March 2000, the sponsor voluntarily withdrew one of
its diabetes drugs from the market following a request from the US Food and Drug
Administration. In addition, in June 2000, the sponsor merged with another
pharmaceutical company. We are currently working with this sponsor to determine
the impact these events will have on future sponsorship revenues.
In December 1999, we entered into an agreement with another major
pharmaceutical manufacturer to develop a unique website for allergy sufferers.
In March 2000, we entered into an agreement with another major pharmaceutical
manufacturer to develop a unique website for arthritis sufferers. We plan to
enter into similar agreements with other third parties in connection with the
expansion of other PlanetRx.com communities. Payments by these companies to us
for services that we provide to them may be at risk in future periods if these
companies become subject to subsequent events.
Our 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 changed our operations significantly since our inception and the
launch of our PlanetRx.com website in March 1999. The number of our employees
increased from three on December 31, 1998 to 381 on June 30, 2000. Our growth
has placed a significant strain on our management systems and resources, which
could
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result in slower revenue growth, increased operating costs and lower gross
margins. In the second quarter 2000, we reduced our workforce by approximately
15% in an effort to reduce our overall operating expenses. In August 2000, we
announced our intent to relocate the company's headquarters from South San
Francisco, California to Memphis, Tennessee, which may affect our ability to
retain key managers. 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.
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. Some 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.
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 attract repeat customers, we may not be able to increase our
revenues
We believe, 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.
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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;
. 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. 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. has been restructured and Express
Scripts is a significant stockholder
In June 2000, we completed an agreement with Express Scripts, Inc. to
restructure our relationship under the agreement executed in August 1999. While
we are, subject to exceptions, the preferred internet pharmacy for Express
Scripts for a term of five years with the right to participate in its pharmacy
network for five years, Express
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Scripts has no obligation to market or promote PlanetRx. Therefore, we may not
be able to convert Express Scripts members into PlanetRx customers as quickly as
anticipated under the original agreement or at all.
Additionally, while our relationship with Express Scripts significantly
broadens our 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' percentage of ownership of our common stock, it
will be able to influence all matters requiring approval by our stockholders,
including the approval of mergers or other business combinations.
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.
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 or have decided to develop their own Internet
capabilities or enter into relationships with online pharmacies that may compete
with us. In addition, many insurance companies have existing contracts with
chain drugstores and pharmacy benefit managers that have established or 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 relationships that give them access to major pharmacy benefit
managers. 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.
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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.
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.
Pharmacy or prescription processing errors could produce liability and
significant negative publicity
Mistakes relating to the dispensing 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 costs or 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
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service and inserts 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.
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 may be required to add additional software and hardware and to 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
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 Cybercash to handle many of the elements of our transaction
processing.
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.
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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
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. If any compromise of our
security occurs, it would injure our reputation, and could influence the success
of our business.
We rely on encryption and authentication technology licensed from third
parties to effect secure transmission of confidential information, such as
personal health information. Advances in computer capabilities, new discoveries
in cryptography, or other developments may result in a breach of the techniques
we use to protect customer data.
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.
We are also subject to laws and regulations regarding homeopathic drugs,
and we may face enforcement actions, lawsuits or claims asserting that we have
not complied with these laws and regulations. As we expand our product and
service offerings, more of our products and services will likely be subject to
regulation by the FDA, which regulates drug advertising and promotion.
Complying with FDA regulations is time consuming, burdensome and expensive, and
could delay our introduction of new products and services.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are conducting a review of online pharmacies, including the
current laws that govern pharmacy operations, and the potential for abuses by
some online sites, focusing on those that do not require the submission of a
valid prescription
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issued by the customer's physician. In addition, in December 1999 the Clinton
administration announced a proposal to eliminate illegal sales of prescription
drugs over the Internet by unlicensed website operators. If approved by
Congress, the proposal would, among other things, establish new federal
requirements for Internet pharmacies to ensure that they comply with state and
federal laws, create new civil penalties for the illegal sale of
pharmaceuticals, and authorize additional federal enforcement powers. We believe
that any regulations resulting from these investigations or the Clinton
administration's proposal or a similar proposal will likely result in increased
reporting and monitoring requirements, which could be burdensome and increase
our expenses. Other legislation and regulations currently being considered at
the federal and state level could affect our business, including legislation or
regulations relating to confidentiality of patients' records, including
electronic access and storage of such records, as well as the inclusion of
prescription drugs as a Medicare benefit. In addition, various state
legislatures are considering new legislation related to the regulation of
nonresident pharmacies. Compliance with new laws or regulations could increase
our expenses.
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 to implement the standard transactions
and standard identifiers have been adopted and the security regulations are
expected before the end of the year 2000. We are designing our applications to
comply with the regulations and proposed regulations. However, until all of
these regulations become final, possible changes in these regulations could
cause us to use additional resources and lead to delays as we revise our website
and operations.
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. It may
be expensive to implement security or other measures designed to comply with any
new legislation. Moreover, we may be restricted or prevented from delivering
patient records electronically. This could have an adverse impact on our
ability to gain and retain customers.
Our facilities, systems and operations are vulnerable to natural disasters and
other unexpected problems
Fire, flood, power loss, telecommunications 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.
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.
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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 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 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. 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 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.
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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 certain 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 reported financial results and possibly the
market price of our common stock. 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.
We are influenced by officers, directors and entities affiliated with them who
own a significant portion of our outstanding voting securities
Based upon shares outstanding as of August 31, 2000, executive officers,
directors and entities affiliated with them beneficially own approximately 45.9%
of our outstanding common stock. 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.
We depend on continued use of the Internet and growth of the online drugstore
market
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of business
and communication by our target customers. Rapid growth in the use of and
interest in the Internet has occurred only recently. As a result, acceptance
and use may not continue to develop at historical rates, and a sufficiently
broad base of consumers may not adopt, and continue to use, the Internet and
other online services as a medium of commerce.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success will depend, in
large part, upon third parties maintaining the Internet infrastructure to
provide a reliable network backbone with the speed, data capacity, security and
hardware necessary for reliable Internet access and services.
Further, the online market for drugstore products is in its infancy. The
market is significantly less developed than the online market for books,
auctions, music, software and numerous other consumer products. Even if use of
the Internet and electronic commerce continues to increase, the rate of growth,
if any, of the online drugstore market could be significantly less than the
online market for other products. Our rate of revenue growth could therefore be
significantly less than other online merchants.
If we do not respond to rapid technological changes, our services could become
obsolete and our business would be seriously harmed
As the Internet and online commerce industry evolve, we must license
leading technologies useful in our business, enhance our existing services,
develop new services and technology that address the increasingly sophisticated
and varied needs of our prospective customers and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. We may not be able to successfully implement new technologies or
adapt our website, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. If we are unable to do
so, it could adversely impact our ability to build the PlanetRx.com brand and
attract and retain customers.
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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 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.
We may face potential liability for invasion of privacy
We have a policy against using personally identifiable information obtained
from users of our online personal service infrastructure without the user's
permission. In the past, the Federal Trade Commission has investigated
companies that have used personally identifiable information without permission
or in violation of a stated privacy policy. If we use this information without
permission or in violation of our policy, we may face potential liability for
invasion of privacy for compiling and providing information to our corporate
customers and strategic partners.
Risks Related to this Offering
Our stock price is likely to continue to be volatile which could result in
losses for investors
The market price for our common stock has been and is likely to continue to
be highly volatile, particularly as the market for Internet-related stocks has
experienced extreme price and volume fluctuations in recent months. Our stock
price could 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;
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. 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 transfer restrictions on our outstanding shares of common
stock or sales of additional shares of common stock; and
. potential litigation.
In addition, a long-term decline in our stock price would harm our ability
to access the public capital market and harm our ability to pursue future
business plans such as expansion of our operations or possible acquisitions of
complementary businesses, services, products or technologies.
Future sales of shares could affect our stock price
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. In particular,
if Alpha Venture Capital sells all of the shares we are offering through this
prospectus, the market price of our common stock may decline. Such 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 August 31, 2000, upon issuance of all of the shares included
in this offering, we will have outstanding 151,042,081 shares of common stock.
DILUTION
The issuance of further shares and the eligibility of issued shares for
resale will dilute our common stock and may lower the price of our common stock.
If you invest in our common stock, your interest will be diluted to the extent
the price per share you pay for the common stock is greater than the pro forma
as adjusted net tangible book value per share of our common stock at the time of
sale. We calculate net tangible book value per share by calculating the total
assets less intangible assets and total liabilities, and dividing it by the
number of our outstanding shares of common stock.
The net tangible book value of our common stock as of June 30, 2000 was
$61,673,684 or approximately $1.19 per share. Assuming that -
. we issued on June 30, 2000 a total of 70,422,535 shares to Alpha
Venture Capital under the common stock purchase agreement at $0.71 per
share, which is 91% of the closing price for our common stock at
August 31, 2000 and reflects Alpha Venture Capital's maximum 9%
discount;
. on June 30, 2000, all warrants held by Alpha Venture Capital following
the drawdowns described above were exercised by Alpha Venture Capital
for cash at the exercise prices stated in the warrants, assuming the
market price of our common stock remained constant at $0.78 per share;
and
. on June 30, 2000 you purchased shares under this prospectus for $0.78
per share, which is the closing price for our common stock on August
31, 2000;
our pro forma net tangible book value as of June 30, 2000 would have been
$116,054,164 or $0.91 per share . This would represent dilution of $0.28 per
share to existing shareholders on June 30, 2000 and would represent an immediate
increase to you of approximately $0.13 per share. The actual dilution may be
greater or less than in this example, depending on the actual price you pay for
shares, the actual prices at which we issue shares to Alpha
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Venture Capital under the common stock purchase agreement and the actual
exercise prices of warrants issued to Alpha Venture Capital under the common
stock purchase agreement.
Furthermore, approximately 9,900,000 stock options and warrants will vest
within the next five years, we may issue additional shares, options and warrants
and we may grant additional stock options to our employees, officers, directors
and consultants under our stock option plans, all of which may further dilute
our net tangible book value.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "The Offering," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terminology such as "may,"
"will," "should," "anticipates," "believes," "plans," "expects," "future,"
"intends," "estimates," "scheduled" and "potential," and similar expressions.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
the information elsewhere in this prospectus, including the risks outlined under
"Risk Factors." These factors may cause our actual results to differ materially
from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable on the date of this prospectus, we cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by Alpha
Venture Capital that it has obtained under the common stock purchase agreement.
However, we will receive the sale price of any common stock we sell to Alpha
Venture Capital under the common stock purchase agreement and upon the exercise
of warrants held by Alpha Venture Capital to the extent it pays the exercise
price in cash. We expect to use the proceeds of any such sales for general
working capital purposes.
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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<PAGE>
PRICE RANGE OF COMMON STOCK
Since our initial public offering in October 1999, our common stock has
traded on the Nasdaq National Market under the symbol "PLRX." The following
table provides the range of high and low closing sales prices of our common
stock for the periods indicated:
Fiscal Quarter High Low
-------------- ---- ---
4th - 1999 $26.00 $14.50
1st - 2000 $18.25 $ 7.13
2nd - 2000 $ 6.25 $ 1.47
3rd - 2000 $ 1.50 $0.438
Based on information supplied by the transfer agent, as of August 31, 2000
there were approximately 372 record holders of our common stock (not including
individual participants in security position listings). As of that date, the
closing sale price of our common stock as quoted on The Nasdaq National Market
was $0.78.
[The Remainder of This Page Is Intentionally Left Blank]
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<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, 1999 and the balance sheet data as of December 31, 1998 and 1999
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 year ended December 31, 1996 and
the balance sheet data as of December 31, 1995, 1996, and 1997 are derived from
audited financial statements not included in this prospectus. The statement of
operations data for the six months ended June 30, 1999 and 2000 and the balance
sheet data as of June 30, 2000 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. All numbers are in thousands, except per share data.
<TABLE>
<CAPTION>
March 31, 1995
(inception) to Six Months Ended
December 31, Year Ended December 31, June 30,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ------ ------ ------ ------ ------ ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data :
Net revenue:
e-commerce............ $ -- $ -- $ -- $ -- $ 7,856 $ 622 $ 15,945
Sponsorship........... -- -- -- -- 1,143 195 2,263
----- ----- ------ -------- -------- -------- --------
-- -- -- -- 8,999 817 18,208
----- ----- ------ -------- -------- -------- --------
Cost of net revenue:
Net revenue:
e-commerce............ -- -- -- -- 7,489 694 15,070
Sponsorship........... -- -- -- -- 100 35 365
----- ----- ------ -------- -------- -------- --------
-- -- -- -- 7,589 729 15,435
----- ----- ------ -------- -------- -------- --------
Gross profit............ -- -- -- -- 1,410 88 2,773
----- ----- ------ -------- -------- -------- --------
Operating expenses:
Marketing & sales..... -- -- -- 907 55,184 9,614 49,342
Product development... 22 7 113 1,025 12,946 3,254 11,812
General &
administrative....... -- -- 23 541 6,448 2,366 4,859
Amortization of
Intangible Assets.... -- -- -- -- 9,627 -- 20,430
Stock-based
Compensation......... -- -- -- 1,650 15,647 4,308 7,129
Contract Termination -- -- -- -- -- -- 4,466
----- ----- ------ -------- -------- -------- --------
Total operating
expenses............. 22 7 136 4,123 99,852 19,542 98,038
----- ----- ------ -------- -------- -------- --------
Operating loss.......... (22) (7) (136) (4,123) (98,442) (19,454) (95,265)
Interest income......... -- -- -- 38 2,691 399 2,181
Interest expense........ -- -- (1) (2) (2,263) (1,046) (465)
----- ----- ------ -------- -------- -------- --------
Net loss................ $ (22) $ (7) $(137) $ (4,087) $(98,014) $(20,101) $(93,549)
===== ===== ===== ======== ======== ======== ========
Basic and diluted net
loss per share (1).... -- -- -- $ (9.12) $ (7.74) $ (8.35) $ (1.97)
===== ===== ===== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
March 31, 1995
(inception) to Six Months Ended
December 31, Year Ended December 31, June 30,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ------ ------ ------ ------ ------ ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares
used to compute basic
and diluted net loss
per share(1) -- -- -- 448 12,790 2,528 47,551
========== ====== ====== ======= ====== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
--------- ------- -------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents................ $ 5 $ 5 $ 15 $ 935 $116,748 $ 50,608
Working capital (deficit)................ 3 1 (19) 581 122,595 48,267
Total assets............................. 7 7 36 5,707 338,515 258,013
Borrowings and capital lease
obligations, long-term.................. -- -- 10 2 6,847 6,737
Total stockholders' equity (deficit)..... 5 3 (8) 3,469 315,645 229,358
</TABLE>
___________________
(1) See Note 10 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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the statements under this section and elsewhere in this prospectus
constitute forward-looking statements. These statements relate to future events
or our future financial performance, and are identified by terminology such as
"may," "will," "should," "anticipates," "believes," "plans," "expects,"
"future," "intends," "estimates," "scheduled" and "potential," and similar
expressions. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider the information elsewhere in this prospectus, including the risks
outlined under "Risk Factors." These factors may cause our actual results to
differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable on the date of this prospectus, we cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results.
Overview
PlanetRx.com is an 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 health channels
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
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.
We were incorporated in Delaware on March 31, 1995 and were in development
stage through December 31, 1998. In March 1999, upon the launch of our website,
we began to recognize our initial revenues. In October 1999, we completed our
initial public offering. 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, and identified and
executed strategic partnerships.
In September 2000, we restructured our sponsorship agreement with iVillage,
Inc. Under the terms of the new agreement, we will continue to be provided with
a specific number of advertising impressions through December 31, 2000. In
consideration, we agreed to pay iVillage approximately $1.0 million during
September through December, 2000. We paid $9.0 million during the year ended
December 31, 1999 and recognized $1.1 million and $800,000 in advertising
expense and content acquisition expense, respectively, during that same period.
In July 2000, we signed a definitive agreement with Alpha Venture Capital,
Inc., the purchaser of the shares covered by this prospectus, to provide us with
up to $50.0 million in additional financing in the form of an equity line
subject to certain terms and conditions. See "Common Stock Purchase Agreement."
Even if we are able to completely draw on the equity line, we expect that it
will be necessary to take additional financing and cost saving steps in order to
continue to develop our business.
In June 2000, we restructured our agreement with pharmacy benefits manager
Express Scripts, Inc. Under the new agreement, which eliminates our annual
$14.6 million payments to Express Scripts, we paid only the second
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quarter marketing expenses of $3.7 million, as well as a one-time contract
termination fee of $4.3 million. We remain the preferred Internet pharmacy in
the Express Scripts network for a period of five years, subject to certain
exceptions, with the right to participate in the Express Scripts network for a
period of five years, and Express Scripts retains ownership of its 10,269,990
shares of PlanetRx.com common stock.
In the second quarter of 2000, we reduced our operating expenses, excluding
amortization, stock-based compensation and one-time charges, approximately 25%
from the prior quarter. This reduction was due primarily to reduced levels of
advertising, the reduction of our workforce by approximately 15%, and the
reassignment of personnel deemed less critical to our growth.
In April 2000, Michael Beindorff was appointed Chief Executive Officer and
in August 2000 was appointed Chairman of PlanetRx.com.
In March 2000, the exclusive therapeutic disease state management sponsor
on the PlanetRx diabetes.com website voluntarily withdrew one of its diabetes
drugs from the market following a request from the US Food and Drug
Administration. In addition, in June 2000, the sponsor merged with another
pharmaceutical company. These events may negatively impact future sponsorship
revenues.
In December 1999, working through Express Scripts, we entered into a
strategic alliance with another pharmaceutical company. Under the terms of the
agreement, we are the exclusive sponsor within our unique website for allergy
sufferers.
In October 1999, we completed our initial public offering of 6,900,000
shares (including the exercise of the underwriter's overallotment option) at a
price of $16.00 per share. We received net cash proceeds of approximately
$101.0 million, after underwriting discounts and offering costs.
In October 1999, we completed a series of agreements with Express Scripts,
Inc. and its wholly owned subsidiary, YourPharmacy.com. We issued 10,369,990
shares of our common stock, valued at approximately $168.0 million, to Express
Scripts, in exchange for selected assets totaling $86,000 and liabilities
totaling $3.4 million of YourPharmacy.com. The total purchase price of
approximately $193.5 million also consisted of the estimated fair value of
1,810,019 options to purchase our common stock in exchange for outstanding
YourPharmacy.com options, as well as direct acquisition costs. The allocation
of the purchase price resulted in an excess purchase consideration over tangible
net liabilities of approximately $193.4 million, which has been allocated to
intangible assets being amortized over 5 years. We amortized approximately $8.4
million for the year ended December 31, 1999, and expect to amortize $38.7
million in 2000, 2001, 2002 and 2003, and $30.3 million in 2004. Results of
operations for YourPharmacy.com have been included with ours for periods
subsequent to the date of acquisition.
In September 1999, we entered into a three-year content license agreement
with iVillage, Inc. Under the terms of the agreement, we will be provided with
rights to certain online content. In consideration, we agreed to pay
approximately $7.5 million. 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.
In December 1998, we entered into a marketing agreement with America
Online. This agreement terminated on August 31, 2000. We paid $9.0 million in
2000 and 1999 related to this marketing agreement.
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 is being
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 is being amortized as
stock-based
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<PAGE>
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.
Net Revenue
e-commerce. e-commerce net revenue consists of product sales and charges
to 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 certain 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 also includes certain Internet access fees and certain 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, certain Internet access fees, certain 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.
Results of Operations --Six Months Ended June 30, 1999 and 2000
Net Revenue
Net revenues were $817,000 and $18.2 million for the six months ended June
30, 1999 and 2000, respectively. E-commerce revenues were $622,000 and $15.9
million and sponsorship revenues were $195,000 and $2.3 million for the six
months ended June 30, 1999 and 2000, respectively.
Cost of Net Revenue
Cost of revenues were $729,000 and $15.4 million for six months ended June
30, 1999 and 2000, respectively. We had negative gross margins on e-commerce of
12% for the six months ended June 30, 1999 and positive gross margins on e-
commerce of 5% for the six months ended June 30, 2000. We expect that our e-
commerce margins will fluctuate in the future as we continue with our customer
acquisition programs. Our sponsorship margin was 82% and 84% for the six months
ended June 30, 1999 and 2000, respectively.
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Operating Expenses
Marketing and Sales. For the six months ended June 30, 1999, marketing
and sales expense was $9.6 million as compared to $49.3 million for the six
months ended June 30, 2000. This increase is due primarily to costs relating to
marketing and promotional campaigns and increased headcount.
Product Development. For the six months ended June 30, 1999, product
development expense was $3.3 million as compared to $11.8 million for the six
months ended June 30, 2000. This increase is related to the maintenance of our
websites and internal systems and related increased headcount.
General and Administrative. For the six months ended June 30, 1999,
general and administrative expenses were $2.4 million as compared to $4.9
million for the six months ended June 30, 2000. This increase is primarily
related to increases in headcount and increases in professional service fees.
Amortization of Intangible Assets. Amortization of intangible assets was
$20.4 million in the first half of 2000. The amortization recorded is
attributable to the amortization of intellectual property related to domain
names and intangible assets resulting from the purchase of selected assets and
liabilities of YourPharmacy.com in October 1999. The fair value of the
intangible assets associated with the domain names is amortized over their
estimated useful lives, which is two years, while the intangible assets
associated with YourPharmacy.com are being amortized over five years.
Stock-Based Compensation. We recorded additional deferred stock-based
compensation of approximately $3.8 million during the six months ended June 30,
2000, in connection with stock options granted during the period. Our stock-
based compensation expense totaled $7.1 million for the six months ended June
30, 2000 as compared to $4.3 million for the corresponding period of 1999. The
remaining deferred stock compensation balance of approximately $15.3 million
will be amortized through 2004.
Interest Income and Expense. Interest income consists of earnings on our
cash, cash equivalents, and marketable securities and interest expense consists
of interest associated with our notes payable, borrowings, and capital lease
obligations. Interest income, net of interest expense, for the six months ended
June 30, 2000 increased over the corresponding periods of 1999 due to higher
interest-bearing asset balances in 2000.
Results of Operations -- Fiscal Years Ended December 31, 1998 and 1999
Net Revenue
We commercially launched the PlanetRx.com website on March 18, 1999. Prior
to our launch, we generated no net revenue. Net revenues for the year ended
December 31, 1999 were $9.0 million. Of this amount, $7.9 million, or 87%, was
e-commerce revenue and $1.1 million, or 13%, was sponsorship revenue. We
recognize revenue from product sales, net of allowances for coupons, discounts
and estimated returns, when the product is shipped from our warehouse to the
customer. Outbound shipping and handling charges, which are charged to the
customer, are included in net revenue. We provide an allowance for sales
returns, based on historical experience, in the period revenues are recognized.
Payment for product sales is generally made by credit card. We recognize
sponsorship revenue ratably over the related service period.
Cost of Net Revenue
Our cost of net revenue for the year ended December 31, 1999 was $7.6
million. Our gross margin that period was 16%. 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 year
ended December 31, 1999 was $7.4 million resulting in a gross margin on e-
commerce of 5% for the period. Cost of e-commerce net revenue consists
primarily of the costs of products sold to customers and costs of outbound and
inbound shipping. We
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expect that our e-commerce margins will fluctuate in the future as we continue
with our customer acquisition programs.
Sponsorship. Our cost of net revenue resulting from sponsorship for the
year ended December 31, 1999 was $100,000 resulting in a gross margin on
sponsorship of 91%. 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. 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
approximately $900,000 for the year ended December 31, 1998 to approximately
$55.2 million during the year ended December 31, 1999. 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. The year-to-year
increases are due primarily to costs relating to marketing and promotional
campaigns as well as costs related to order processing and distribution and
growth in headcount. We expect that as our e-commerce revenue increases and as
we continue to focus on aggressively marketing the PlanetRx.com brand, our
marketing and sales expenses will increase in absolute dollars.
Product Development. Product development expenses were $1.0 million for
the year ended December 31, 1998 compared to $12.9 million for the year ended
December 31, 1999. Product development costs, consisting 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, are expensed as incurred, except
for certain software development costs. In January 1999, we adopted Statement
of Position 98-1, which requires development costs associated with internal use
software to be charged to operations until certain capitalization criteria are
met. There was no significant impact on our financial position or operating
results due to this adoption. The year-to-year increases are related to the
expansion of our websites and system development and related increased
headcount. 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 were
$500,000 for the year ended December 31, 1998 compared to $6.4 million for the
year ended December 31, 1999. General and administrative expenses consist
primarily of payroll-related expenses for executive and administrative
personnel, corporate facility expenses, professional service expenses, travel
and other general corporate expenses. The year-to-year increases are primarily
related to increases in headcount, professional service fees, and facilities
costs. 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.
Amortization of Intangible Assets. Amortization of intangible assets was
$9.6 million for the year ended December 31, 1999. Prior to 1999, we had
recorded no amortization of intangible assets. The amortization recorded in
1999 is attributable to the amortization of intellectual property related to
domain names acquired in 1998 and 1999 and intangible assets resulting from the
purchase of selected assets and liabilities of YourPharmacy.com. The fair value
of the intangible assets associated with the domain names is amortized over
their estimated useful lives, which is deemed to be two years, while the
intangible assets associated with YourPharmacy.com are being amortized over five
years.
Stock-Based Compensation. We recorded total deferred stock-based
compensation of approximately $4.6 million for the year ended December 31, 1998
and approximately $33.1 million for the twelve months ended December 31, 1999.
Our resulting amortization of deferred stock-based compensation totaled
approximately $900,000 and $11.3 million for the years ended December 31, 1998
and 1999, respectively. Our deferred compensation of approximately $25.5
million will be amortized through 2004.
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Interest Income and Expense. Interest income was $38,000 for the year
ended December 31, 1998 compared to $2.7 million for the year ended December 31,
1999. Interest income consists of earnings on our cash and cash equivalents and
short-term investments, and the year-to-year increase relates to higher average
balances in these asset accounts. Interest expense was $2,000 for the year
ended December 31, 1998 compared to $2.3 million for the year ended December 31,
1999. Interest expense consists of interest associated with our notes payable,
borrowings and capital lease obligations. As of December 31, 1998 and December
31, 1999 the balance outstanding under our interest-bearing liabilities was
approximately $600,000 and $7.3 million, respectively.
Interest expense also includes the non-cash amortization of 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 provided for the purchase of up to 716,000 shares of our series B
preferred stock for approximately $5.00 per share. During 1999, we recorded
approximately $1.8 million as the fair value of the warrant and purchase option
and recognized non-cash interest expense of approximately $1.8 million.
Income Taxes. At December 31, 1999, we had a fully reserved deferred tax
asset of $23.9 million. We have incurred losses from inception through December
31, 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 December 31, 1999. See Note 6 of
Notes to Financial Statements.
Results of Operations -- 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 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 interest-bearing liabilities 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
PlanetRx.com invests excess cash predominantly in debt instruments that are
highly liquid, of high-quality investment grade, and predominantly have
maturities of less than one year with the intent to make such funds readily
available for operating purposes. Prior to our initial public offering, which
closed in October 1999 and provided net proceeds of approximately $101.0
million, we financed our operations primarily through private sales of
convertible preferred stock and common stock. At June 30, 2000, we had cash and
cash equivalents and investments in marketable debt securities totaling $50.6
million compared to $116.7 million at December 31, 1999.
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Net cash used in operating activities was $57.0 million during the six
months ended June 30, 2000, primarily a result of quarterly net losses as well
as an increase in inventories, partially offset by decreases in prepaid expenses
and other assets, increases in accounts payable and accrued expenses, and non-
cash charges for depreciation and amortization. Net cash used in operating
activities was $15.2 million during the six months ended June 30, 1999 primarily
as a result of net losses as well as increases in prepaid expenses, partially
offset by increases in accounts payable, accrued expenses, and non-cash charges
for depreciation and amortization.
Net cash provided by investing activities was approximately $53.9 million
during the six months ended June 30, 2000, primarily consisting of the sale of
short-term investments partially offset by the acquisition of equipment and
systems, including computer and warehouse equipment. Net cash used in investing
activities was $2.4 million during the six months ended June 30, 1999, primarily
consisting of purchases of property and equipment, including computer equipment,
software, and furniture and fixtures.
Net cash provided by financing activities was approximately $2.1 million
during the six months ended June 30, 2000, and primarily consisted of net
proceeds from equipment financing. Net cash provided by financing activities
was $79.4 million during the six months ended June 30, 1999, and primarily
consisted of net proceeds of $77.8 million from the issuance of convertible
preferred stock.
As of June 30, 2000, our principal commitments consisted of obligations
outstanding under operating leases and marketing agreements with certain web
portals aggregating approximately $33.0 million through 2005. In July 2000, we
paid our $8 million commitment to ESI and in August 2000 we terminated our
agreement with AOL eliminating $6.0 million in future commitments.
In July 2000, we signed a common stock purchase agreement for up to $50.0
million in equity financing from Alpha Venture Capital Inc., the purchaser of
the shares relating to this prospectus. See "Common Stock Purchase Agreement."
We anticipate that draws under this agreement will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, there is no assurance that we will be able to meet
the conditions required for drawing funds from the equity line, and currently
expect that we may need to raise additional funds. If we cannot draw down all
$50.0 million under the agreement, we expect our available cash resources will
meet our requirements for only the next 6 months. 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.
Recent Accounting Pronouncements
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements. SAB 101 is effective for the
fourth quarter of years ending after December 31, 1999. We will adopt SAB 101
in the quarter ending December 31, 2000 and do not expect such adoption to have
a significant impact on our results of operations, financial position or cash
flows.
In March 2000, the Emerging Issues Task Force released Issue No. 00-02,
"Accounting for Website Development Costs". EITF 00-02 is effective for all
fiscal quarters beginning after June 30, 2000. EITF 00-02 discusses the
capitalization criteria regarding website development costs. We adopted EITF
00-02 in the quarter ending September 30, 2000 and such adoption has not had a
significant impact on our results of operations, financial position or cash
flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". The interpretation is
intended to clarify certain issues that have arisen in practice since the
issuance of APB 25. We adopted the Interpretation on July 1, 2000 and such
adoption has not had a significant impact on our results of operations,
financial position or cash flows.
In July and September 2000, the Emerging Issues Task Force released Issue
No. 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Revenues and
Costs". EITF 00-10 notes that amounts billed, if any, for shipping and handling
should be included in revenue. If shipping and handling costs are significant
and are not included in cost of sales, a company should disclose both the amount
of such costs and which line item on the income statement includes that amount.
EITF 00-10 is effective for our fourth quarter of 2000. We will adopt the
pronouncement in the quarter ending December 31, 2000, and do not expect such
adoption to have a significant impact on our results of operations, financial
position, or cash flows.
In May 2000, the Emerging Issues Task Force released Issue No. 00-14
("EITF 00-14"), "Accounting for Certain Sales Incentives". EITF 00-14 is
effective for our fourth quarter of 2000. We will adopt the pronouncement in the
quarter ending December 31, 2000, and do not expect such adoption to have a
significant impact on the Company's results of operations, financial position,
or cash flows.
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Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash, cash
equivalents and short-term investments. Due to the short-term nature of these
investments and our investment policies and our procedures, we have determined
that the risk associated with interest rate fluctuations related to these
financial instruments does not pose a material risk to us.
BUSINESS
PlanetRx.com
PlanetRx.com is an 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 health channels
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
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.
In October 1999, we acquired the e-commerce operations of Express Scripts'
YourPharmacy.com and became the online pharmacy for Express Scripts, one of the
three largest pharmacy benefit managers in the U.S. with over 36 million covered
lives. In October 1999, we completed our initial public offering.
Industry Background
The Internet and Online Commerce
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. 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.
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.
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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.
The PlanetRx.com Solution
PlanetRx.com is an 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:
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Convenient Shopping Experience. We provide consumers with a 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.
Selection. We offer a broad selection of healthcare-related products that
would be impractical to stock in most traditional stores. We offer both
traditional drugstore items as well as health, beauty and wellness products,
including alternative-care products.
Information. We provide a broad array of 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.
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, health channels 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 Premier Content and 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 to develop our network of
satellite destination sites, such as diabetes.com, and health channels, such as
our Weight Loss Channel, 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 and offer us
additional sponsorship revenue opportunities.
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.
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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:
. content and commerce portals and online service providers to drive
traffic to our website;
. pharmacy benefit managers and managed care organizations to increase
payment alternatives for our prescription drug customers;
. pharmaceutical manufacturers to sponsor our various satellite sites
focused on chronic conditions; and
. hospital organizations in order to market directly to their patient
and doctor populations;
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;
. 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 offer over 11,000 SKUs of traditional and alternative healthcare related
products in the following market segments:
. prescription drugs;
. non-prescription drugs;
. personal care;
. beauty and spa;
. vitamins, herbs and nutrition; and
. medical supplies.
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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;
. newsletters and notices of special offers and new product
announcements;
. customer service through our customer service department;
. a high level of privacy when purchasing products that reveal
personally-sensitive aspects of their health, and the ability to 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 and Reuters News. The information is
maintained and updated by our in-house editorial.
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 drug information library directly at the PlanetRx.com website.
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.
Community
We currently have 33 Health 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, commerce and community relevant to each
group's health needs. For example, our Women's Health eCenter provides news and
information on menopause, breast cancer, osteoporosis and pregnancy, as well as
additional information related to prescriptions and alternative care for these
conditions.
Some of these eCenters are built around intuitive domain names for chronic
healthcare conditions and have a similar look and feel to the PlanetRx.com
website. Today, diabetes.com, depression.com, obesity.com, alzheimers.com,
cholesterol.com, arthritis.com, breast.cancer.com and weightloss2000.com are
operational. These sites have in-depth content and clinical information and
provide articles and expert advice 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
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therapeutic disease state management sponsor for our allergy website. 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:
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
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 they can mail their
written prescription directly to PlanetRx.com. Additionally, our customers can
easily transfer an existing prescription from their current pharmacy to
PlanetRx.com.
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
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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 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.
In June 1999, 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 became 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 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. 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:
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Convenient and Fast Access to a Wide Variety of Products. Our 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
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 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.
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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.
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;
. warehouse clubs;
. online retailers of health, beauty, wellness, personal care and/or
pharmaceutical products, such as drugstore.com, CVS.com and More.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;
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. 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 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 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,
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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 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 to
implement the standard transactions and standard identifiers have been adopted
and the security regulations are expected before the end of the year 2000. We
are designing our applications to comply with the regulations and 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 expand our product and service
offerings, more of our products and services will likely be subject to Food and
Drug Administration regulation.
The federal anti-kickback 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
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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 and eCenter. We
may be unable to secure these registered marks. 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 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.
Employees
As of June 30, 2000, we had 381 full-time employees, 281 of whom were in
marketing and sales, 69 of whom were in product development and 31 of whom were
in general and administrative. In August 2000, we announced our intention to
relocate our corporate headquarters from South San Francisco, California to
Memphis, Tennessee. 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 the company leases approximately 35,000 square feet under a
lease that expires in June 2002. We also lease an aggregate of approximately
165,000 square feet for our distribution facilities in Memphis, Tennessee, under
three leases that expire in September and December 2003 and July 2004. In August
2000, we announced our intention to relocate our corporate headquarters from
South San Francisco, California to our distribution facilities in Memphis,
Tennessee.
Legal Proceedings
From time to time we are subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. We are not
currently aware of any legal proceedings or claims that the we believe will
have, individually or in the aggregate, a material adverse effect on our
financial position or results of operations.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their ages and the positions held by
them, as of August 31, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position Held as of August 31, 2000
--------------------------------------------------- --------- --------------------------------------------------
<S> <C> <C>
Michael Beindorff 47 Chairman and Chief Executive Officer
Allan Goldman 45 Vice President of Merchandising
John McAlpin 41 President and Chief Operating Officer
Matthew Naythons, M.D. 53 Vice President of Editorial and Publisher
Stephanie Schear-Tilenius 32 Senior Vice President of Sales and Business
Development
David M. Beirne (2) 35 Director
Terrence C. Burke (1) 58 Director
Christos M. Cotsakos (2) 50 Director
Michael Moritz (1)(2) 44 Director
Terrence Arndt (3) 52 Director
</TABLE>
_________________
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Mr. Arndt is the appointee of ExpressScripts, which has a contractual right
to appoint one member of our board of directors.
Michael Beindorff has served as our Chief Executive Officer since April
2000 and our Chairman since August 2000. From October 1999 to March 2000, Mr.
Beindorff served as our Executive Vice President and Chief Operating Officer.
From 1995 to 1999, Mr. Beindorff was with Visa International, where he served as
president and chief "e" officer of eVisa, Visa's Internet and electronic
commerce division as well as Visa USA's executive vice president of marketing
and product management. Mr. Beindorff holds a BS degree from the University of
Alabama and an MBA from Emory University.
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 Corporation. Mr. Goldman holds a B.S. in
Health Science from James Madison University.
John McAlpin has served as out President and Chief Operating Officer since
August 2000. From September 1998 to August 2000, Mr. McAlpin served as our
Senior Vice President of Distribution Services. 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). Dr. Naythons holds a B.S. from Muhlenberg College and an M.D.
from Hahnemann University.
Stephanie Schear-Tilenius, a founder of PlanetRx.com, has served as our
Senior 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
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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.
Mr. Beirne has been a Managing Member of Benchmark Capital, a venture capital
firm, since 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 serves on the board
of directors of Kana Communications, Inc., Scient Corporation, Webvan Group,
Inc. and 1-800-Flowers.com, Inc. and several private companies. Mr. Beirne
received a B.S. 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 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.
Terrence Arndt has served as a director of PlanetRx.com, Inc. since August
2000. He was appointed Senior Vice President of Marketing for Express Scripts
in April 1999. Prior to joining Express Scripts, Mr. Arndt was President and
Chief Operating Officer of EDI USA 1994, a national electronic healthcare
information network. Mr. Arndt is a graduate of LaSalle Institute and Siena
College, where he received a BBA in Accounting.
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 PlanetRx.com's Board
of Directors has the exclusive authority to establish the level of base salary
payable to the Chief Executive Officer and certain other executive officers of
PlanetRx.com and to administer PlanetRx.com's 1999 Equity Incentive Plan and
Employee Stock Purchase Plan. In addition, the compensation committee has the
responsibility for approving the individual bonus programs to be in effect for
the CEO and certain other executive officers. The compensation committee is
composed of Messrs. Beirne, Cotsakos and Moritz, each of whom is a non-employee
director. The committee meets on a scheduled basis to evaluate the effectiveness
of the compensation program in linking our performance and executive pay.
Additionally, the compensation committee is routinely consulted to approve the
compensation package of a newly hired executive or of an executive whose scope
of responsibility has changed significantly.
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
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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 members of the audit
committee are Messrs. Burke and Moritz, each of whom is an independent director
that is able to read and understand fundamental financial statements. The audit
committee recently adopted a written charter that specifies the scope of its
responsibilities and how it carries them out, the outside auditor's
accountability to the board of directors and the audit committee, and the audit
committee's responsibility for ensuring the independence of the outside auditor.
Under Nasdaq rules, we are required by June 14, 2001 to add a third
independent director to the audit committee who is able to read and understand
fundamental financial statements and who has past employment experience in
finance or accounting. Failure to comply with this Nasdaq rule could result in
our common stock being delisted from the Nasdaq National Market.
Advisory Board
The advisory board provides guidance on specific healthcare-related issues,
including content and editorial review. The members of the advisory board
include:
Barry R. Bloom, Ph.D. - Dean, Harvard University School of Public Health
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
Except for grants of stock options and the reimbursement of expenses
incurred in connection with attendance of Board of Directors or committee
meetings, directors of PlanetRx.com generally do not receive compensation for
services provided as a director. PlanetRx.com also does not pay compensation
for committee participation or special assignments of the Board of Directors.
Non-employee members of the Board of Directors are eligible for option
grants pursuant to the provisions of the 1999 Director Stock Option Plan. Under
the 1999 Director Stock Option Plan, each individual who first becomes a non-
employee member of the Board of Directors after the date of PlanetRx.com's
initial public offering will be granted an initial option to purchase 25,000
shares of common stock on the date such individual joins the
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Board of Directors, provided such individual has not been in the prior employ of
PlanetRx.com. Each initial option vests over four years, with 25% of the option
shares vesting upon the completion of 12 months of service and the balance of
option shares vesting in equal monthly installments upon the completion of each
of the next 36 months of service. In addition, at each Annual Meeting of
Stockholders, each individual who will continue to be a director after such
Annual Meeting will receive an additional option to purchase 10,000 shares of
common stock per year. Each director who received an initial option under the
1999 Director Stock Option Plan will not receive the additional option in the
same calendar year. The additional option will vest monthly over the one-year
period after the option grant date. The exercise price for each option grant
will be equal to the fair market value per share of common stock on the option
grant date. The member of the Board of Directors appointed by ExpressScripts as
a matter of policy declines his or her initial option grant.
Directors are eligible to receive options and be issued shares of common
stock directly under the 1999 Equity Incentive Plan and directors who are also
employees of PlanetRx.com are also eligible to participate in PlanetRx.com's
Employee Stock Purchase Plan.
Compensation Committee Interlocks and Insider Participation
The compensation committee of PlanetRx.com's Board of Directors was formed
in July 1999. The current members of the compensation committee are Messrs.
Beirne, Cotsakos and Moritz. None of these individuals was at any time an
officer or employee of PlanetRx.com. No executive officer of PlanetRx.com
serves as a member of the Board of Directors or a compensation committee of any
entity that has one or more executive officers serving as a member of
PlanetRx.com's Board of Directors or compensation committee.
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.
We have entered into indemnification agreements with our directors and executive
officers that indemnify them 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 certain 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 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.
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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 certain
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.
Executive Compensation
The following table sets forth the compensation earned by PlanetRx.com's
former Chairman and the four other most highly compensated executive officers
who were serving as such as of December 31, 1999, each of whose aggregate
compensation for fiscal 1999 exceeded $100,000 for services rendered in all
capacities to PlanetRx.com and its subsidiaries for that fiscal year.
[The Remainder of This Page Is Intentionally Left Blank]
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Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- ----------------------
Awards Number
Name and Fiscal of Securities All Other
Principal Position Year Salary Bonus Underlying Options Compensation
----------------------------- ---- ------------ --------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
William J. Razzouk 1999 $160,000 $160,000 300,000 $22,000(1)
Former Chief Executive 1998 54,545 47,879 1,809,000 --
Officer and Chairman(2).....
Steve Valenzuela 1999 129,583 -- 475,000 --
Former Vice President of 1998 -- -- -- --
Finance, Chief Financial
Officer and Secretary(3)....
James Chong 1999 175,000 100,000 550,000 --
Former Chief Technology 1998 --
Officer(4)..................
Allan Goldman 1999 150,000 -- 175,000 --
Vice President of 1998 4,688 -- 100,000 --
Merchandising(5)............
John McAlpin 1999 130,000 -- 150,000 --
Vice President of 1998 33,750 -- 200,000 --
Distribution Services(6)....
</TABLE>
__________________
(1) Relocation expenses.
(2) Mr. Razzouk's employment with us terminated in July 2000.
(3) Mr. Valenzuela's employment with us terminated in August 2000.
(4) Mr. Chong's employment with us terminated in July 2000.
(5) Mr. Goldman has served as our Vice President of Merchandising since
December 1998.
(6) Mr. McAlpin has served as our Vice President of Distribution Services since
September 1998.
Option Grants in Last Fiscal Year
The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31, 1999.
No stock appreciation rights were granted during the year.
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<TABLE>
<CAPTION>
Individual Grants Potential Realizable Value
----------------------------------------------------------------------
Assumed Annual Rates of
Number of # of Total Exercise or Stock Price Appreciation
Securities Options Granted Base Price for Option Term(3)
------------------------------
Underlying Options to Employees in ($/Sh) (2) Expiration
Name Granted (#)(1) 1999 Date 5% ($) 10% ($)
--------------------------- ----------------------- ------------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
William J. Razzouk......... 300,000 4.35% $5.50 8/16/2009 $1,037,676 $2,629,675
Steve Valenzuela........... 400,000(4) 5.80% 0.50 3/30/2009 125,779 318,748
75,000 1.09% 5.50 8/16/2009 259,419 657,419
James Chong................ 335,000 4.86% 0.05 1/03/2009 10,534 26,695
65,000(5) 0.94% 2.00 6/09/2009 81,756 207,187
150,000 2.18% 5.50 8/16/2009 518,838 1,314,838
Allan Goldman.............. 50,000 0.73% 0.50 4/13/2009 15,722 39,844
75,000(5) 1.09% 2.00 6/09/2009 94,334 239,061
50,000 0.73% 5.50 8/16/2009 172,946 438,279
John McAlpin............... 100,000(5) 1.45% 2.00 6/09/2009 125,779 318,748
50,000 0.73% 5.50 8/16/2009 172,946 438,279
</TABLE>
________________
(1) The options disclosed in the table were granted in 1999 under the Company's
1998 stock option plan. The exercise price for each option may be paid in
cash, in shares of 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. PlanetRx.com may also finance the option exercise by
loaning the optionee sufficient funds to pay the exercise price for the
purchased shares, together with any federal and state income tax liability
incurred by the optionee in connection with such exercise. The plan
administrator has the discretionary authority to reprice the options
through the cancellation of those options and the grant of replacement
options with an exercise price based on the fair market value of the option
shares on the regrant date. The options have a maximum term of 10 years
measured from the option grant date, subject to earlier termination in the
event of the optionee's cessation of service with PlanetRx.com. Except as
otherwise noted, the options listed in the table become exercisable and
vested for 25% of the shares after one year of service from the designated
vesting start date and for the balance of the shares in a series of 36
equal monthly installments from the first anniversary of the designated
vesting start date. Under each of the options, the option shares will vest
upon an acquisition of PlanetRx.com by merger or asset sale, unless the
acquiring company assumes the options. Each option shall fully vest if we
are subject to a change in control before the optionee terminates service
and our repurchase right is not assigned to the entity that employs the
optionee immediately after the change in control.
(2) Based on an aggregate of 6,896,380 options granted in the fiscal year.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
PlanetRx.com's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of our common stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officers.
(4) This option becomes exercisable and vested in a series of 48 equal monthly
installments from the designated vesting start date.
(5) This option becomes exercisable and vested for 100% of the shares after
five years of service from the designated vesting start date.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information concerning option exercises in
fiscal year 1999 and option holdings as of December 31, 1999 with respect to
each of the Named Officers. No stock appreciation rights were outstanding at the
end of that year and none was exercised during fiscal year 1999 by the Named
Officers.
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<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Shares Value Year-End (#)(2) Fiscal Year-End($)(3)
Acquired on Realized ------------------------- --------------------------
Name Exercise (#) ($)(1) Vested Unvested Vested Unvested
------------------------------ ------------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
William J. Razzouk............ 0 0 0 300,000 $ 0 $2,700,000
Steve Valenzuela.............. 400,000 0 0 75,000 0 675,000
James Chong................... 335,000 0 0 215,000 0 2,162,250
Allan Goldman................. 0 0 25,000 250,000 361,250 361,250
John L. McAlpin............... 200,000 0 0 150,000 0 1,700,000
</TABLE>
(1) Based on the fair market value of PlanetRx.com's common stock on the date
of exercise less the exercise price paid for the shares upon exercise.
(2) The options are immediately exercisable, but any shares purchased under
those options will be subject to repurchase by us at the original exercise
price paid per share, if the optionee ceases service with the us 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, 1999.
(3) Based on the fair market value of PlanetRx.com's common stock at December
31, 1999 ($14.50 per share) less the exercise price payable for the shares
upon exercise.
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 8,000,000 shares of our common stock for issuance under the 1999 Equity
Incentive Plan. On January 1 of each year 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 option plan are forfeited, then those options or shares will again become
available for awards under the 1999 Equity Incentive Plan. As of August 31,
2000, there were 3,832,659 options outstanding under the 1999 Equity Incentive
Plan and 4,167,341 options available for issuance.
The 1999 Equity Incentive Plan also governs options originally granted
under our 1998 Stock Plan. As of August 31, 2000, there were 2,054,253 options
outstanding under the 1998 Stock Plan and 2,717,893 options available for
issuance.
Administration. The compensation committee of our Board of Directors
administers the 1999 Equity Incentive Plan. The committee has 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
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. 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;
. 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, or if more than 50% of our
outstanding stock is acquired and we continue to honor the option or 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
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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.
YourPharmacy Stock Plan
In October 1999, in connection with the acquisition of YourPharmacy.com, we
assumed the YourPharmacy.com 1998 Stock Plan. As of August 31, 2000, there were
23,919 options outstanding under the YourPharmacy.com 1998 Stock Plan and
1,786,100 options available for issuance. We do not presently intend to issue
additional options under this plan. The compensation committee of our Board of
Directors administers the YourPharmacy.com 1998 Stock Plan in the same manner in
which it administers the 1999 Equity Incentive Plan. Employees, outside
directors and consultants are entitled to direct stock grants and stock option
awards under the YourPharmacy.com 1998 Stock Plan. Options under the plan may be
incentive stock options or non-qualified stock options.
Options vest at the time or times determined by the compensation committee.
The options generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier. The
stated exercise price cannot be less than 85% of the estimated fair value of the
shares on the date of grant, except that the exercise price for incentive stock
options cannot be less than 100% of the estimated fair market value of the
shares and the exercise price for incentive stock options granted to a 10%
shareholder cannot be less than 110% of the estimated fair market value.
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 of 1986. We have reserved 1,750,000
shares of our common stock for issuance under the plan. On January 31 of each
year 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. As of August 31, 2000, there were 822,000 shares of
stock available for issuance under the Employee Stock Purchase Plan.
Eligibility. All of our employees that are employed by us for more than 20
hours per week and for more than five months per year are eligible to
participate in the Employee Stock Purchase Plan. 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.
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
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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
. 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 of Directors 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. As of August 31, 2000, there were no
options outstanding under the 1999 Director Stock Option Plan and 400,000
options available for issuance.
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 are fully vested at
grant.
Annual Grants. At the time of each of our annual stockholders' meetings,
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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RELATED PARTY TRANSACTIONS
Since March 31, 1995, we have issued and sold securities to the following
persons who are current or former executive officers, directors or principal
stockholders of PlanetRx.com. These figures reflect activity through August 31,
2000 and give effect to conversions of preferred stock originally issued to
these persons.
Common
Investor Stock
-------- ---------
Michael Beindorff (2) 36,111
Allan Goldman.................................. --
John McAlpin (3)............................... 200,000
Matthew Naythons, M.D. (4)..................... 690,000
Stephanie Schear-Tilenius (5).................. 1,280,000
Michael Bruner (6)............................. 2,002,000
James Chong (7)................................ 335,000
Jay O'Connor (8)............................... 325,000
William J. Razzouk (9)......................... 1,809,000
Steve Valenzuela (10).......................... 400,000
David Beirne (11).............................. 5,384,989
Michael Moritz (12)............................ 5,334,989
Christos M. Cotsakos (13)...................... 848,194
Terrence C. Burke.............................. 200,000
Funds affiliated with Benchmark Capital (14)... 5,334,989
Funds affiliated with Sequoia Capital (15)..... 5,334,989
_____________
(1) See "Principal Stockholders" for more detail on shares held by
officers, directors and principal shareholders as of August 31, 2000.
(2) Reflects the grant of 25,000 shares in October 1999 and the exercise
in December 1999 of options to purchase 11,111 shares of our common
stock at $9.00 per share.
(3) Reflects the exercise on January 11, 1999 of options to purchase our
common stock at $0.05 per share.
(4) 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 at $0.05 per
share.
(5) Reflects the purchase of shares of common stock pursuant to a stock
purchase agreement dated September 15, 1998 for a per share purchase
price of $0.025.
(6) 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.
(7) Reflects the exercise on January 11, 1999 of options to purchase our
common stock at $0.05 per share.
(8) Reflects the exercise on February 19, 1999 of options to purchase our
common stock at $0.05 per share.
(9) Reflects the exercise on October 8, 1998 of options to purchase our
common stock at $0.025 per share.
(10) Reflects the exercise on March 31, 1999 of options to purchase our
common stock at $0.50 per share.
(11) Consists of 5,000,000 shares of series A preferred, 100,000 shares of
series B preferred stock and 228,441 shares of series C preferred
stock converted into shares of common stock, all held by Benchmark
Capital Partners II, L.P., and 50,000 shares of series A preferred
stock converted into shares of common stock held by Ramsey/Beirne
Associates. Mr. Beirne is a Managing Member of Benchmark Capital
Management Co. II LLC, which is the General Partner of Benchmark
Capital Partners II, L.P., and Chairman of Ramsey/Beirne Associates.
(12) Consists of the following:
. 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, all converted into shares of common stock and held by
Sequoia Capital VIII;
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. 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,
all converted into shares of common stock and 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,
all converted into shares of common stock and 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,
all converted into shares of common stock and 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, all
converted into shares of common stock and 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.
(13) Includes 100,000 shares of common stock, 100,000 shares of series A
preferred stock and 8,567 shares of series C preferred, all converted
into shares of common stock and stock held by the Cotsakos Revocable
Trust u/a/d 9/3/87; 10,000 shares of series B preferred stock
converted into shares of common stock and 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, each converted into shares of common stock and held by the
E*TRADE Group, Inc. Mr. Cotsakos is Chairman and Chief Executive
Officer of the E*TRADE Group, Inc.
(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, all converted into shares of common stock and 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 the following:
. 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, all converted into shares of common stock and 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,
all converted into shares of common stock and 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,
all converted into shares of common stock and 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,
all converted into shares of common stock and 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, all
converted into shares of common stock and held by Sequoia 1997.
In addition, we have granted options to our executive officers. See
"Management -- Option Grants in Last Fiscal Year".
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. All
of the series A preferred stock has converted to common stock at the rate of one
share of common stock for each share of preferred stock.
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.
All of the series B preferred stock has converted to common stock at the rate of
approximately 1.0463 shares of common stock for each share of preferred stock.
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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. All of the series C preferred stock has converted to common
stock at the rate of approximately 1.0084 shares of common stock for each share
of preferred stock.
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. All of
the series D preferred stock has converted to common stock at the rate of one
share of common stock for each share of preferred stock.
Change in Conversion Price
On June 30, 1999, PlanetRx.com filed a restated certificate of
incorporation whereby each share of series B preferred stock became convertible
into approximately 1.0463 shares of common stock and each share of series C
preferred stock became 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 Certain Executive Officers
In October 1999, we entered into an employment agreement with Michael
Beindorff, our Chairman and Chief Executive Officer, pursuant to which he was
given 25,000 shares of common stock and granted an option to purchase 1,000,000
shares of common stock. Upon a change of control, if Mr. Beindorff is not
employed by the acquiring company in substantially the same position and job
title, he 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 Certain Executive Officers
On September 15, 1998, we advanced $31,936 to Stephanie Schear-Tilenius,
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.
During 1999, in connection with his employment agreement, the Company
entered into a full-recourse note receivable with Michael Beindorff, our
Chairman and Chief Executive Officer, 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 on the stock
sold. In the second quarter of 2000, $200,000 of the note receivable plus
associated interest was forgiven, with the remaining balance currently
outstanding.
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,
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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. 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 certain
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".
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 -- 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.
[The Remainder of This Page Is Intentionally Left Blank]
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PRINCIPAL STOCKHOLDERS
The following table provides information about the beneficial ownership of
our common stock as of August 31, 2000. We have listed each person that
beneficially owns more than 5% of the outstanding common stock, each of our
directors and executive officers identified in the summary compensation table
and all directors and executive officers as a group. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
For purposes of calculating the number of shares of common stock
beneficially owned after the offering, we have assumed the sale of all shares
covered by the registration statement of which this prospectus is a part. For
purposes of calculating the percentage beneficially owned after the offering,
the total number of shares outstanding includes (1) the shares of common stock
covered by the registration statement of which this prospectus is a part that
are registered on behalf of Alpha Venture Capital and (2) shares of common stock
covered by this registration statement of which this prospectus is a part that
are issuable upon the exercise of warrants.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
--------------------------------------
Number of Shares
Beneficially Owned Before After
Name of Beneficial Owner (1) Before Offering Offering Offering
-------------------------------------------------------- ---------------------- ------------------ ------------------
<S> <C> <C> <C>
Officers and Directors:
William J. Razzouk (2).................................. 1,775,666 3.5% 1.2%
John McAlpin (3)........................................ 383,333 * *
Allan Goldman (4)....................................... 291,250 * *
David M. Beirne (5)..................................... 5,392,342 10.6 3.6
Terrence C. Burke....................................... 200,000 * *
Christos Cotsakos (6)................................... 848,194 1.7 *
Michael Moritz (7)...................................... 5,334,989 10.5 3.5
Terrence Arndt (8)...................................... 10,269,990 20.1 6.8
Other 5% Stockholders:
Entities affiliated with Benchmark Capital (9).......... 5,334,989 10.5 3.5
2480 Sand Hill Road, Suite 200
Menlo Park, California 94025
Entities affiliated with Sequoia Capital(10)............ 5,334,989 10.5 3.5
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, California 94025
Express Scripts, Inc.................................... 10,269,990 20.1 6.8
13900 Riverport Drive
St. Louis, Missouri 63043
All executive officers and directors 24,340,169 45.9% 15.9%
as a group (12 persons) (11)............................
</TABLE>
_____________
* Represents beneficial ownership of less than 1%.
[Footnotes continued on following page]
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(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) As of the third quarter 2000, William Razzouk is neither an executive
officer nor a director. Accordingly, he has not been included in the
figures for directors and executive officers as a group.
(3) Includes options immediately exercisable for 150,000 shares.
(4) Includes options immediately exercisable for 275,000 shares.
(5) Includes 50,000 shares held by Ramsey/Beirne Associates and 5,334,989
shares held by Benchmark Capital Partners II, as nominee for Benchmark
Capital Partners II, L.P., Benchmark Founders' Fund II, L.P., Benchmark
Founders' Fund II-A, 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, and Benchmark Members' Fund II, and is a director of
PlanetRx.com. He disclaims beneficial ownership of these shares held by
Ramsey/Beirne Associates and the Benchmark funds, except with respect to
7,353 shares and to the extent of his pecuniary interest therein.
(6) Includes 208,628 shares held by the Cotsakos Revocable Trust u/a/d 9/3/87
and 10,463 shares held by Christos M. Cotsakos C/F Suzanne R. Cotsakos CA
UTMA, as well as 629,092 shares 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.
(7) Includes:
. 4,835,101 shares held by Sequoia Capital VIII;
. 61,352 shares held by Sequoia International Technology Partners
VIII;
. 320,099 shares held by Sequoia International Technology Partners
VIII(Q);
. 106,698 shares held by CMS Partners, LLC; and
. 11,737 shares held by Sequoia 1997.
(8) Consists of 10,369,990 shares beneficially owned by Express Scripts, Inc.
Mr. Arndt is Vice President of Marketing for Express Scripts and a director
of PlanetRx.com. He disclaims beneficial ownership of the shares held by
Express Scripts.
(9) Consists of 5,334,989 shares 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, and Benchmark Members' Fund
II, L.P.
(10) Consists of: 4,835,101 shares held by Sequoia Capital VIII;
. 4,835,101 shares held by Sequoia Capital VIII;
. 61,352 shares held by Sequoia International Technology Partners
VIII;
. 320,099 shares held by Sequoia International Technology Partners
VIII(Q);
. 106,698 shares held by CMS Partners, LLC; and
. 11,737 shares held by Sequoia 1997.
(11) Includes options immediately exercisable for 1,971,074 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
The members of the Board of Directors, the executive officers of
PlanetRx.com and persons who hold more than 10% of PlanetRx.com's outstanding
common stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, which require them to file reports with respect
to their ownership of PlanetRx.com's common stock and their transactions in such
common stock. Based upon (i) the copies of Section 16(a) reports that
PlanetRx.com received from such persons for their 1999 fiscal year transactions
in the common stock and their common stock holdings and (ii) the written
representations received from one or more of such persons that no annual Form 5
reports were required to be filed by them for the 1999 fiscal year, PlanetRx.com
believes that all reporting requirements under Section 16(a) for such fiscal
year were met in a timely manner by its executive officers, members of the Board
of Directors and greater than ten-percent stockholders.
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DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.0001 par value, and 5,000,000 shares of preferred stock, $0.0001 par
value. Before this registration statement is declared effective, we intend to
obtain shareholder approval to increase our authorized capital stock to
200,000,000 shares of common stock, $.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 August 31, 2000, there were 51,042,081 shares of common stock
outstanding. 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.
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.
Options and Warrants
As of August 31, 2000, 5,910,831 options for shares were outstanding under
our stock option plans and 8,671,334 shares were available for future grants
under our stock option plans.
As of the date of this prospectus, there are three outstanding warrants.
The first warrant, which is to purchase 16,741 shares of common stock at $5.00
per share, expires in October 2000. The second warrant is to purchase 150,000
shares of common stock at an exercise price of $0.84 per share and expires in
September 2002. The third warrant is the 500,000 warrant granted to Alpha
Venture Capital which expires on July 25, 2003 and is described in more detail
under "Common Stock Purchase Agreement."
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Certificate of Incorporation and Bylaws. The certificate of incorporation
provides that 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.
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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 of the Delaware General Corporation Law 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 the exercise, exchange or conversion of
securities exercisable for, exchangeable 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 of the Delaware General Corporation Law 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.
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COMMON STOCK PURCHASE AGREEMENT
We signed a common stock purchase agreement with Alpha Venture Capital,
Inc., a Cook Islands corporation, on July 25, 2000, for the future issuance and
purchase of shares of our common stock. The stock purchase agreement establishes
what is sometimes termed an equity line of credit or an equity drawdown
facility.
In general, the drawdown facility operates like this: the investor, Alpha
Venture Capital, has committed to provide us up to $50.0 million as we request
it in return for our common stock. Once every 10 trading days, we may request a
draw of up to $8.0 million under this facility. The maximum amount we actually
can draw down upon each request will be determined by the trading volume and
price of our common stock for the 20 business days prior to our request. Each
draw down must be for at least $500,000. At the end of a 10 day trading period
following the drawdown request, the per share purchase price is determined based
on the five lowest volume-weighted average daily prices of the common stock
during that 10 day period. We then divide the drawdown amount by the per share
purchase price to determine the number of shares we will issue to Alpha Venture
Capital in return for that money.
The aggregate total of all draws cannot exceed $50.0 million and no single
draw can exceed $8.0 million. We are under no obligation to request a draw for
any period.
The per share dollar amount Alpha Venture Capital pays for our common stock
upon each drawdown includes a 9% discount to the five lowest daily volume-
weighted average prices of our common stock for the 10-day period after our
drawdown request. The percentage discount will get smaller if our stock rises
above $1.50 per share after we submit a drawdown notice but before the drawdown
funding date. For each drawdown, we also must issue to Alpha Venture Capital
warrants to purchase our common stock. A description of the warrants which will
be issued to Alpha Venture Capital upon drawdowns is described in more detail
below.
Based on a review of our trading volume and stock price history and the
number of drawdowns we expect to make, we are registering 95,320,000 shares of
common stock for possible issuance under the stock purchase agreement. In
addition, we are registering 4,180,000 shares of common stock issuable upon
exercise of the warrants we must issue to Alpha Venture Capital upon each
drawdown closing. We also are registering 500,000 shares of common stock
issuable upon exercise of a warrant we issued to Alpha Venture Capital upon
closing of the common stock purchase agreement. This warrant for 500,000 shares
has a per share exercise price equal to the lesser of $1.375 and 120% of the
average closing bid for our common stock for the three consecutive trading days
prior to the effectiveness of the registration statement of which this
prospectus is a part. This warrant expires on July 25, 2003. All warrants may
be exercised for cash or by "cashless exercise."
Because our common stock is listed on the Nasdaq National Market, we are
required to comply with Nasdaq's listing rules. One of those rules provides
that we must get shareholder approval if we issue common stock or securities
convertible into or exercisable for common stock in a private offering if:
. the price at which we issue the common stock is less than the greater of
book or market value of the common stock; and
. the number of shares issued equals 20% or more of the number of shares
of common stock outstanding or 20% or more of the voting power
outstanding at the closing of the transaction that gave rise to the
issuance.
Another rule requires shareholder approval if we propose to issue common
stock that will result in a change of control of our company. The amount of
common stock we expect to issue Alpha Venture Capital under the common stock
purchase agreement and pursuant to warrants exceeds 20% of the number of shares
of common stock we had outstanding on July 25, 2000, the date of closing of the
common stock purchase agreement. The majority of those shares will be issued at
less than the greater of book or market value of the common stock. In addition,
the shares we issue may result in a change of control of our company.
Accordingly, we intend to seek approval of our shareholders prior to the
effective date of the registration of which this prospectus is a part.
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Amount of the draw
No draw can be less than $500,000, more than $8.0 million or more than an
amount equal to 400% of the dollar amount of the average daily trading volume of
the common stock, calculated based on the average closing bid price and average
daily trading volume for the 20 consecutive business days immediately preceding
the related drawdown notice date. Subject to those limitations, the amount we
can draw down is the amount we request in our drawdown notice.
We cannot make another drawdown request within the 10 trading days that
follow a drawdown request we have already made.
Price per Share and Number of Shares
The 10 trading days immediately following the drawdown notice are used to
determine the price per share of the common stock that we will issue in return
for the financing provided by Alpha Venture Capital, and thus the number of
shares that Alpha Venture Capital will receive.
To determine the price per share of common stock that we must issue in
connection with the drawdown, we will take the average of the five lowest
reported daily volume-weighted average prices of our common stock for the 10
trading days immediately after the drawdown notice, and multiply it by the draw
down discount percentage. The draw down discount percentage is initially equal
to 91%. However, for each $0.50 that our common stock's market price increases
from $1.50 as of the related draw down request date, the draw down discount
percentage shall increase incrementally by 0.25%, to a maximum of 97%.
To determine the number of shares we will issue, we will divide the dollar
amount of our drawdown request by the per share price of the common stock.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the drawdown amount and
the number of shares we would issue to Alpha Venture Capital in connection with
that drawdown based on hypothetical assumptions.
Sample drawdown amount calculation
In this example, suppose we provide a drawdown notice to Alpha Venture
Capital that we wish to make a drawdown. Suppose the average daily trading
volume for the 20 days prior to our drawdown notice is 800,000 and that the
average closing bid price of our common stock for the 20 days prior to the
notice is $0.63 per share. The dollar amount of the average daily trading
volume of the common stock is $504,000, or 800,000 multiplied by $0.63. We
cannot draw down more than 400% of that number, or $2,016,000.
Sample Calculation of Per Share Price and Number of Shares
Assume the following:
. we have made a drawdown request that is capped at $2,016,000 based on
the formula above;
. the average of the five lowest reported daily volume-weighted average
prices of the common stock for the 10 trading days immediately after the
drawdown notice is $0.68; and
. the market price for the common stock was not above $1.50 as of the
related drawdown date, and therefore the drawdown discount percentage is
91%.
Based on these assumptions, the price per share that Alpha Venture Capital would
pay for these shares would be equal to $0.6188, or $0.68 multiplied by 91%.
Therefore, based on the maximum allowable drawdown of $2,016,000 in this
situation, we would issue 3,257,919 shares to Alpha Venture Capital.
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Drawdown Warrants
In addition to the common stock we will issue upon each drawdown, we will
issue to Alpha Venture Capital warrants to purchase our common stock. The
number of shares of common stock purchasable pursuant to these warrants is based
on the amount of our drawdown request, but will not exceed 4,180,000 shares. To
calculate the number of shares of common stock purchasable pursuant to the
warrants, multiply the drawdown dollar amount by 4,180,000 and divide by
$50,000,000, which is the maximum drawdown amount under the common stock
purchase agreement. Using the examples above, for a drawdown of $2,016,000, we
would issue a warrant to purchase 168,538 shares of common stock. Each warrant
would be exercisable for three years from the date of its issuance.
The exercise price for these warrants is 120% of the closing price of our
common stock on the date we receive the drawdown funds. The warrants may be
exercised for cash or by a cashless exercise mechanism. A cashless exercise
means that Alpha Venture Capital Fund will receive shares of common stock with a
total market value equal to the per share excess of the market value of the
common stock over the exercise price, multiplied by the number of shares being
exercised.
Necessary Conditions Before Alpha Venture Capital is Obligated to Purchase our
Shares
The following conditions must be satisfied before Alpha Venture Capital is
obligated to purchase the common shares that we wish to sell from time to time:
. A registration statement for the shares must be declared effective by
the Securities and Exchange Commission and must remain effective and
available as of the draw down settlement date for making resales of the
common shares purchased by Alpha Venture Capital;
. There can be no material adverse change in our business, operations,
properties, prospects or financial condition;
. The representations and warranties we made in the common stock purchase
agreement must be accurate in all material respects on the drawdown
closing date
. No statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the stock purchase agreement; and
. Trading in our common shares must not have been suspended by the
Securities and Exchange Commission or the Nasdaq National Market;
On each drawdown closing date for the sale of common shares, we must
deliver an opinion from our counsel about these matters.
Costs of Closing the Transaction
At the closing of the transaction on July 25, 2000, we delivered the
requisite opinion of counsel to Alpha Venture Capital and paid Krieger & Prager
$45,000 for Alpha Venture Capital's legal and administrative costs. We also
issued warrants to purchase 500,000 shares of our common stock to Alpha Venture
Capital upon closing the transaction.
Termination of the Common Stock Purchase Agreement
The common stock purchase agreement expires on the first anniversary of the
date the registration statement of which this prospectus is a part is declared
effective by the Securities and Exchange Commission. However, if during the
initial term of the agreement we draw down at least $10.0 million, the common
stock purchase agreement will be extended for an additional 12 months unless we
give Alpha Venture Capital notice that we do not wish to extend the term of the
agreement. Notwithstanding the foregoing, any party may terminate the
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common stock agreement purchase agreement if a registration statement covering
the shares to be issued upon drawdowns has not been declared effective by the
Securities and Exchange Commission by December 7, 2000. The common stock
purchase agreement can otherwise be terminated by Alpha Venture Capital only if
we breach the agreement to the extent that applicable law would permit Alpha
Venture Capital to terminate the agreement.
Rights of First Refusal
As part of the common stock purchase agreement, Alpha Venture Capital has
rights of first refusal if we issue equity in a private transaction. Alpha
Venture Capital can purchase the equity on terms equal to or better than the
terms we intend to offer to third parties. The right of first refusal does not
arise if we issue equity to strategic partners, in an acquisition transaction or
upon exercise or conversion of existing securities.
Registration Rights
To permit Alpha Venture Capital to resell the common shares issued to it
under the stock purchase agreement, we agreed to register those shares and to
maintain that registration. To that end, we have agreed with Alpha Venture
Capital that we will prepare and file such amendments and supplements to the
registration statement and the prospectus as may be necessary in accordance with
the Securities Act and the rules and regulations promulgated thereunder, to keep
it effective until the earliest of any of the following dates:
. the date which is one year after delivery to Alpha Venture Capital of
all of the common stock and warrants issuable pursuant to the common
stock purchase agreement;
. the date after which all of the common shares held by Alpha Venture
Capital that are covered by the registration statement may be sold, in
the opinion of our counsel, under Rule 144 under the Securities Act of
1933 irrespective of any applicable volume limitations;
. the date Alpha Venture Capital no longer owns any of our securities,
provided that it is not entitled to receive further securities under the
common stock purchase agreement; and
. the date the we are advised or reasonably conclude that Alpha Venture
Capital does not intend to exercise its warrants and sell the shares
issued pursuant to the warrants.
SELLING STOCKHOLDER
Alpha Venture Capital is engaged in the business of investing in publicly
traded equity securities for its own account. Alpha Venture Capital's principal
offices are located at Cumberland House, Cumberland Street, Nassau, New
Providence, The Bahamas. Investment decisions for Alpha Venture Capital are
made by its board of directors. Other than the warrants we issued to Alpha
Venture Capital in connection with signing the common stock purchase agreement,
Alpha Venture Capital does not currently own any of our securities as of the
date of this prospectus. Other than its obligation to purchase common shares
under the common stock purchase agreement, it has no other commitments or
arrangements to purchase or sell any of our securities. There are no business
relationships between Alpha Venture Capital and us, other than the common stock
purchase agreement.
PLAN OF DISTRIBUTION
Alpha Venture Capital is offering the common shares for its account as a
statutory underwriter, and not for our account. We will not receive any
proceeds from the sale of common shares by Alpha Venture Capital. Alpha Venture
Capital has agreed to be named as a statutory underwriter within the meaning of
the Securities Act of 1933 in connection with its sales of common shares and
will be acting as an underwriter in its resales of the common stock under this
prospectus. Alpha Venture Capital has, prior to any sales, agreed not to effect
any offers or sales of the common shares in any manner other than as specified
in the prospectus and not to purchase or induce others to purchase common shares
in violation of any applicable state and federal securities laws, rules and
regulations, and the rules and regulations of The Nasdaq National Market.
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On August 31, 2000, we had 51,042,081 shares of common stock outstanding.
The following table shows the number of shares we would issue to Alpha Venture
Capital and the price it would pay for those shares given the hypothetical
variables shown in the table, if
. we requested drawdowns of the maximum amounts under the common stock
purchase agreement;
. we requested as many draws as possible per year for the two year term of
the agreement, assuming we issue at least $10 million in common stock
the first year and assuming no more than 25 draws per year; and
. the trading volume and the price in the table is (1) the average daily
trading volume and average closing bid price of our common stock for the
20 trading days before each drawdown request under the common stock
purchase agreement and (2) the average of the five lowest volume-
weighted average daily prices for the 10 trading days after our drawdown
request.
<TABLE>
<CAPTION>
Number of Shares Issuable
Average Total Amount Drawn to Alpha Venture Capital Price per share paid
Closing Average Daily Under Common Stock under Common Stock by Alpha Venture
Bid Price Trading Volume Purchase Agreement Purchase Agreement Capital
--------------- ------------------ ---------------------- ---------------------------- ------------------------
<S> <C> <C> <C> <C>
$0.39/(a)/ 446,518/(d)/ $34,828,404/(g)/ 98,135,824 $0.355
0.78/(b)/ 893,036/(e)/ 50,000,000/(h)/ 70,442,378 0.710
1.17/(c)/ 1,339,554/(f)/ 50,000,000/(h)/ 46,961,585 1.065
</TABLE>
______________________________
/(a)/ Based on 50% of the closing bid price of our common stock on August 31,
2000.
/(b)/ Based on the closing bid price of our common stock on August 31, 2000.
/(c)/ Based on 150% of the closing bid price of our common stock on August 31,
2000.
/(d)/ Based on 50% of the average trading volume of our common stock for the 20
business days preceding August 31, 2000.
/(e)/ Based on the average daily trading volume of our common stock for the 20
business days before August 31, 2000.
/(f)/ Based on 150% of the average trading volume of our common stock for the
20 business days before August 31, 2000.
/(g)/ Based on 50 draws over a two-year period.
/(h)/ Based on the maximum $50,000,000 available under the common stock
purchase agreement.
Shares of common stock offered through this prospectus may be sold from
time to time by Alpha Venture Capital. Sales may be made on The Nasdaq National
Market, on the over-the-counter market or otherwise at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated private transactions, or in a combination of these methods. Alpha
Venture Capital will act independently of us in making decisions with respect to
the form, timing, manner and size of each sale. We have been informed by Alpha
Venture Capital that there are no existing arrangements between it and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of shares of common stock which may be sold by Alpha Venture
Capital through this prospectus.
The common shares may be sold in one or more of the following manners:
. a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
. purchases by a broker or dealer for its account under this prospectus;
or
. ordinary brokerage transactions and transactions in which the broker
solicits purchases.
In effecting sales, brokers or dealers engaged by Alpha Venture Capital may
arrange for other brokers or dealers to participate. Except as disclosed in a
supplement to this prospectus, no broker-dealer will be paid more than a
customary brokerage commission in connection with any sale of the common shares
by Alpha Venture Capital. Brokers or dealers may receive commissions, discounts
or other concessions from Alpha Venture Capital in
-67-
<PAGE>
amounts to be negotiated immediately prior to the sale. The compensation to a
particular broker-dealer may be in excess of customary commissions. Profits on
any resale of the common shares as a principal by such broker-dealers and any
commissions received by such broker-dealers may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933. Any broker-dealer
participating in such transactions as agent may receive commissions from Alpha
Venture Capital (and, if they act as agent for the purchaser of such common
shares, from such purchaser).
Broker-dealers may agree with Alpha Venture Capital to sell a specified
number of common shares at a stipulated price per share, and, to the extent a
broker dealer is unable to do so acting as agent for Alpha Venture Capital, to
purchase as principal any unsold common shares at a price required to fulfill
the broker-dealer commitment to Alpha Venture Capital. Broker-dealers who
acquire common shares as principal may thereafter resell such common shares from
time to time in transactions (which may involve crosses and block transactions
and which may involve sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market, in
negotiated transactions or otherwise at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such resales may pay to or
receive from the purchasers of such common shares commissions computed as
described above. Brokers or dealers who acquire common shares as principal and
any other participating brokers or dealers may be deemed to be underwriters in
connection with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part, and have
reimbursed Alpha Venture Capital $45,000 for its legal and administrative costs.
Alpha Venture Capital is subject to the applicable provisions of the
Exchange Act, including without limitation, Rule 10b-5 thereunder. Under
applicable rules and regulations under the Exchange Act, any person engaged in a
distribution of the common shares may not simultaneously engage in market making
activities with respect to such securities for a period beginning when such
person becomes a distribution participant and ending upon such person's
completion of participation in a distribution, including stabilization
activities in the common shares to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition, in
connection with the transactions in the common shares, Alpha Venture Capital and
we will be subject to applicable provisions of the Exchange Act and the rules
and regulations under that Act, including, without limitation, the rules set
forth above. These restrictions may affect the marketability of the common
shares.
Alpha Venture Capital will pay all commissions and their own expenses, if
any, associated with the sale of the common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part.
The price at which we will issue the common shares to Alpha Venture Capital
under the stock purchase agreement will be 91% of the average of the five lowest
daily volume-weighted average prices reported on The Nasdaq National Market, for
the ten days following our drawdown request. Assuming we use the entire $50
million of financing available under the stock purchase agreement and issue
70,442,378, based upon a 9% discount to the market price of our common stock on
August 31, 2000, we will pay underwriting compensation to and expenses for Alpha
Venture Capital, and other offering expenses, as follows:
-68-
<PAGE>
Underwriting Compensation and Expenses
<TABLE>
<CAPTION>
Per Share Total
--------------- ------------
<S> <C> <C>
Discount to Alpha Venture Capital (9%)/(a)/ $0.07 $4,945,055
Expenses payable on behalf of Alpha Venture Capital/(b)/ 0.00 49,500
Estimated offering expenses:
SEC filing fee 0.00 13,702
Nasdaq annual listing fee 0.00 10,500
Accountants' fees and expenses 0.00 55,000
Legal fees and expenses 0.00 35,000
--------------- ------------
Total $0.07 $5,108,757
=============== ============
</TABLE>
____________________
(a) For each $0.50 that the common stock's market price increases from $1.50
as of the related draw down request date, the draw down discount percentage will
decrease incrementally by .25%, but not below 3%. In connection with the signing
of the common stock purchase agreement, we also issued to Alpha Venture Capital
a warrant to purchase 500,000 shares of our common stock at the lesser of $1.375
per share and 120% of the average closing bid for the common stock for the three
consecutive trading days prior to the effective date of the registration
statement of which this prospectus is a part. We also will issue additional
warrants in connection with each drawdown, as described above. Each of the
warrants expires three years from the date of its issuance.
(b) We have agreed to pay an additional $2,000 legal fee on behalf of Alpha
Venture Capital in the event we file additional registration statements covering
securities issued under the common stock purchase agreement.
Limited Grant of Registration Rights
We granted registration rights to Alpha Venture Capital to enable it to
sell the common stock it purchases under the common stock purchase agreement and
under the related warrants. In connection with any such registration, we will
have no obligation -
. to assist or cooperate with Alpha Venture Capital in the offering or
disposition of such shares;
. to indemnify or hold harmless the holders of any such shares (other than
Alpha Venture Capital as described below) or any underwriter designated
by such holders;
. to obtain a commitment from an underwriter relative to the sale of any
such shares; or
. to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use our best efforts to file, during any period during which we are
required to do so under our registration rights agreement with Alpha Venture
Capital, one or more post-effective amendments to the registration statement of
which this prospectus is a part to describe any material information with
respect to the plan of distribution not previously disclosed in this prospectus
or any material change to such information in this prospectus. This obligation
may include, to the extent required under the Securities Act of 1933, that a
supplemental prospectus be filed, disclosing
. the name of any broker-dealers;
. the number of common shares involved;
. the price at which the common shares are to be sold;
-69-
<PAGE>
. the commissions paid or discounts or concessions allowed to broker-
dealers, where applicable;
. that broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, as
supplemented; and
. any other facts material to the transaction.
Our registration rights agreement with Alpha Venture Capital permits us to
restrict the resale of the shares Alpha Venture Capital has purchased from us
under the common stock purchase agreement for a period of time sufficient to
permit us to amend or supplement this prospectus to include material
information. If we restrict Alpha Venture Capital for more than 10 consecutive
business days, we will pay Alpha Venture Capital $1,000 per day each day after
the 10 day period and until the restriction is lifted, but only if Alpha Venture
Capital holds at least 10,000 shares of our common stock.
We have agreed to indemnify Alpha Venture Capital, its directors and
officers, and any persons controlling Alpha Venture Capital, against liabilities
under the securities laws relating to this prospectus, the registration
statement of which it is a part, or any violations by us of the securities laws
in connection with this offering.
LEGAL MATTERS
The validity of the shares of common stock issued in this offering will be
passed upon for us by Foley & Lardner, Jacksonville, Florida, special counsel to
PlanetRx.com.
EXPERTS
The financial statements as of December 31, 1997, 1998 and 1999 for each of
the three years in the period ended December 31, 1999 included in this
prospectus have been so included in reliance on the report 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 are not
necessarily complete. 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, New York
10048, and the regional offices of the Commission located at 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>
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
</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 cash flows and of changes in stockholders' equity (deficit)
present fairly, in all material respects, the financial position of
PlanetRx.com, Inc. at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The Company has sustained losses since inception and expects to continue to
incur losses for the foreseeable future. As such, the Company will require
additional financing to support its operations during fiscal 2001. See Note 1
for management's plans in this regard.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 18, 2000
F-2
<PAGE>
PLANETRX.COM, INC.
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1998 1999 2000
----------- ------------ --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 935 $ 51,629 $ 50,608
Short-term investments - 65,119 -
Inventories 18 2,276 2,967
Prepaid expenses and other current assets 1,864 19,594 16,610
----------- ------------ --------------
Total current assets 2,817 138,618 70,185
Property and equipment, net 2,809 10,884 19,425
Intangible assets, net - 188,115 167,685
Other assets 81 898 718
----------- ------------ --------------
$ 5,707 $ 338,515 $ 258,013
=========== ============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,600 $ 7,099 $ 7,973
Accrued expenses 28 8,444 7,145
Accrued contract termination fees - - 4,250
Deferred revenue - 8 16
Borrowings, current 600 418 2,071
Capital lease obligations, current 8 54 463
----------- ------------ --------------
Total current liabilities 2,236 16,023 21,918
Borrowings, long-term - 6,582 4,929
Capital lease obligations, long-term 2 265 1,808
----------- ------------ --------------
2,238 22,870 28,655
----------- ------------ --------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred Stock: issuable in series, $0.0001 par value;
5,000 shares authorized; 11,039, none, and none actual shares issued
and outstanding, respectively 1 - -
Common Stock: $0.0001 par value; 100,000 shares authorized; 6,592,
52,286, and 51,752 shares issued and outstanding, respectively - 5 5
Additional paid-in capital 11,438 444,405 441,502
Notes receivable from stockholders (35) (35) (34)
Deferred stock-based compensation (3,682) (25,454) (15,290)
Accumulated deficit (4,253) (103,276) (196,825)
----------- ------------ --------------
Total stockholders' equity 3,469 315,645 229,358
----------- ------------ --------------
$ 5,707 $ 338,515 $ 258,013
=========== ============ ==============
</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,
-------------------------------------- ---------------------------
1997 1998 1999 1999 2000
--------- ----------- ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue:
e-commerce $ - $ - $ 7,856 $ 622 $ 15,945
Sponsorship - - 1,143 195 2,263
-------- ---------- ------------ ----------- -----------
- - 8,999 817 18,208
-------- ---------- ------------ ----------- -----------
Cost of net revenue:
e-commerce - - 7,489 694 15,070
Sponsorship - - 100 35 365
-------- ---------- ------------ ----------- -----------
- - 7,589 729 15,435
-------- ---------- ------------ ----------- -----------
Gross profit - - 1,410 88 2,773
-------- ---------- ------------ ----------- -----------
Operating expenses:
Marketing and sales - 907 55,184 9,614 49,342
Product development 113 1,025 12,946 3,254 11,812
General and administrative 23 541 6,448 2,366 4,859
Amortization of intangible
assets - - 9,627 - 20,430
Stock-based compensation - 1,650 15,647 4,308 7,129
Contract termination and
severance charges - - - - 4,466
-------- ---------- ------------ ----------- -----------
Total operating expenses 136 4,123 99,852 19,542 98,038
-------- ---------- ------------ ----------- -----------
Operating loss (136) (4,123) (98,442) (19,454) (95,265)
Interest income - 38 2,691 399 2,181
Interest expense (1) (2) (2,263) (1,046) (465)
-------- ---------- ------------ ----------- -----------
Net loss $ (137) $ (4,087) $ (98,014) $ (20,101) $ (93,549)
======== ========== ============ =========== ===========
Effect of antidilution provisions of
Series B Preferred Stock - - (1,009) (1,009) -
-------- ---------- ------------ ----------- -----------
Net loss available to common
stockholders $ (137) $ (4,087) $ (99,023) $ (21,110) $ (93,549)
======== ========== ============ =========== ===========
Basic and diluted net loss per
share $ - $ (9.12) $ (7.74) $ (8.35) $ (1.97)
======== ========== ============ =========== ===========
Weighted average shares used to
compute basic and diluted net loss
per share - 448 12,790 2,528 47,551
======== ========== ============ =========== ===========
</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>
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-in
Shares Amount Shares Amount Capital
----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 64 $ -- 2,800 $ -- $ 32
Issuance of Series A Preferred Stock at $0.50 222 -- -- -- 111
Issuance of Series A Preferred Stock for services 30 -- -- -- 15
Net loss -- -- -- -- --
--------- ------- --------- ------- ---------
Balance at December 31, 1997 316 -- 2,800 -- 158
Issuance of Series A Preferred Stock at $0.50, net
of issuance costs of $37 10,474 1 -- -- 5,198
Issuance of Series A Preferred Stock for services 149 -- -- -- 188
Issuance of Series A Preferred Stock warrants for services -- -- -- -- 339
Issuance of Series A Preferred Stock in connection with
warrants exercised 100 -- -- -- 50
Issuance of Common Stock and options for services -- -- 263 -- 847
Issuance of Common Stock for cash in connection with stock
option exercises -- -- 2,109 -- 53
Issuance of Common Stock for notes receivable from
stockholders -- -- 1,420 -- 35
Deferred stock-based compensation -- -- -- -- 4,570
Amortization of stock-based compensation -- -- -- -- --
Net loss -- -- -- -- --
--------- ------- --------- ------- ---------
Balance at December 31, 1998 11,039 1 6,592 -- 11,438
Issuance of Series A Preferred Stock for services 20 -- -- -- 77
Issuance of Series A Preferred Stock in connection
with a warrant exercise 200 -- -- -- 100
Issuance of Series B Preferred Stock at $5.00, net
of issuance costs of $43 5,200 -- -- -- 25,957
Issuance of Series B Preferred Stock in connection
with a purchase option exercise 700 -- -- -- 3,500
Issuance of Series C Preferred Stock at $8.755, net
of issuance costs of $61 5,919 1 -- -- 51,765
Issuance of Series C Preferred Stock for advertising 857 -- -- -- 7,500
Issuance of Series D Preferred Stock at $20.210 371 -- -- -- 7,500
Issuance of Common Stock in initial public offering -- -- 6,900 1 101,010
Conversion of Preferred Stock into Common Stock (24,306) (2) 24,637 2 --
Issuance of Common Stock for charitable contribution -- -- 200 -- 3,200
Issuance of Common Stock for selected assets and
liabilities of yourPharmacy.com, Inc. -- -- 10,370 1 190,019
Issuance of Common Stock for intellectual property -- -- 342 -- 3,762
Issuance of Common Stock and options for services -- -- -- -- 1,045
Issuance of Common Stock for cash in connection
with stock option exercises, net -- -- 3,204 1 1,566
Issuance of Common Stock for services in connection
with stock option exercises -- -- 41 -- 21
Issuance of Series B Preferred Stock purchase option and
warrant for financing -- -- -- -- 1,842
Deferred stock-based compensation -- -- -- -- 33,094
Amortization of stock-based compensation -- -- -- -- --
Effect of antidilution provisions of Series B Preferred Stock -- -- -- -- 1,009
Net loss -- -- -- -- --
--------- ------- --------- ------- ---------
Balance at December 31, 1999 -- -- 52,286 5 444,405
Repurchases of unvested Common Stock from prior
exercises of stock options and from Founder (unaudited) -- -- (712) -- (335)
Issuance of Common Stock pursuant to Employee Stock
Purchase Plan (unaudited) -- -- 178 -- 467
Recapture of deferred stock-based compensation, net
(unaudited) -- -- -- -- (3,035)
Amortization of stock-based compensation (unaudited) -- -- -- -- --
Net Loss (unaudited) -- -- -- -- --
Repayment of Note Receivable From stockholder (unaudited) -- -- -- -- --
--------- ------- -------- ------ ---------
Balance at June 30, 2000 (unaudited) -- $ -- 51,752 $ 5 $ 441,502
========= ======= ======== ====== =========
<CAPTION>
Deferred
Notes Stock- Total Stock
Receivable based Accum- holders'
from Stock- Compen- ulated Equity
holders sation Deficit (Deficit)
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- $ -- $ (29) $ 3
Issuance of Series A Preferred Stock at $0.50 -- -- -- 111
Issuance of Series A Preferred Stock for services -- -- -- 15
Net loss -- -- (137) (137)
------ --------- ---------- ---------
Balance at December 31, 1997 -- -- (166) (8)
Issuance of Series A Preferred Stock at $0.50, net
of issuance costs of $37 -- -- -- 5,199
Issuance of Series A Preferred Stock for services -- -- -- 188
Issuance of Series A Preferred Stock warrants for services -- -- -- 339
Issuance of Series A Preferred Stock in connection with
warrants exercised -- -- -- 50
Issuance of Common Stock and options for services -- -- -- 847
Issuance of Common Stock for cash in connection with stock
option exercises -- -- -- 53
Issuance of Common Stock for notes receivable from
stockholders (35) -- -- --
Deferred stock-based compensation -- (4,570) -- --
Amortization of stock-based compensation -- 888 -- 888
Net loss -- -- (4,087) (4,087)
------ --------- ---------- ---------
Balance at December 31, 1998 (35) (3,682) (4,253) 3,469
Issuance of Series A Preferred Stock for services -- -- -- 77
Issuance of Series A Preferred Stock in connection
with a warrant exercise -- -- -- 100
Issuance of Series B Preferred Stock at $5.00, net
of issuance costs of $43 -- -- -- 25,957
Issuance of Series B Preferred Stock in connection
with a purchase option exercise -- -- -- 3,500
Issuance of Series C Preferred Stock at $8.755, net
of issuance costs of $61 -- -- -- 51,766
Issuance of Series C Preferred Stock for advertising -- -- -- 7,500
Issuance of Series D Preferred Stock at $20.210 -- -- -- 7,500
Issuance of Common Stock in initial public offering -- -- -- 101,011
Conversion of Preferred Stock into Common Stock -- -- -- --
Issuance of Common Stock for charitable contribution -- -- -- 3,200
Issuance of Common Stock for selected assets and
liabilities of yourPharmacy.com, Inc. -- -- -- 190,020
Issuance of Common Stock for intellectual property
Issuance of Common Stock and options for services -- -- -- 3,762
Issuance of Common Stock for cash in connection
with stock option exercises, net -- -- -- 1,045
Issuance of Common Stock for services in connection
with stock option exercises -- -- -- 1,567
Issuance of Series B Preferred Stock purchase option and
warrant for financing -- -- -- 21
Deferred stock-based compensation -- (33,094) -- 1,842
Amortization of stock-based compensation -- 11,322 -- 11,322
Effect of antidilution provisions of Series B Preferred Stock -- -- (1,009) --
Net loss -- -- (98,014) (98,014)
------ --------- ---------- ---------
Balance at December 31, 1999 (35) (25,454) (103,276) 315,645
Repurchases of unvested Common Stock from prior
exercises of stock options and from Founder (unaudited) -- -- -- (335)
Issuance of Common Stock pursuant to Employee Stock
Purchase Plan (unaudited) -- -- -- 467
Recapture of deferred stock-based compensation, net
(unaudited) -- 3,035 -- --
Amortization of stock-based compensation (unaudited) -- 7,129 -- 7,129
Net Loss (unaudited) -- -- (93,549) (93,549)
Repayment of Note Receivable From stockholder (unaudited) 1 -- -- 1
------ --------- ---------- ---------
Balance at June 30, 2000 (unaudited) $ (34) $ (15,290) $ (196,825) $ 229,358
====== ========= ========== =========
</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 December 31,
----------------------------------
1997 1998 1999
-------- ---------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (137) $ (4,087) $ (98,014)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8 139 2,214
Non-cash interest charges related to purchase option and warrant -- -- 1,812
Stock-based compensation 15 1,648 15,665
Amortization of intangible assets -- -- 9,627
Changes in operating assets and liabilities:
Inventories -- (18) (2,258)
Prepaid expenses and other current assets -- (1,250) (10,814)
Other assets (2) (79) (817)
Accounts payable 1 1,600 5,499
Accrued expenses 22 2 4,985
Deferred revenue -- -- 8
------ --------- ---------
Net cash used in operating activities (93) (2,045) (72,093)
------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3) (2,929) (9,885)
Purchases of short-term investments -- -- (65,119)
Sales of short-term investments -- -- --
------ --------- ---------
Net cash provided by (used in) investing activities (3) (2,929) (75,004)
------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock for cash, net 111 5,248 189,834
Proceeds from exercises of Common Stock options, net -- 53 1,567
Proceeds from borrowings (5) 600 6,400
Repayment of notes receivable from stockholders -- -- --
Principal payments on capital lease obligations -- (7) (9)
------ --------- ---------
Net cash provided by financing activities 106 5,894 197,791
------ --------- ---------
Increase (Decrease) in cash and cash equivalents 10 920 50,694
Cash and cash equivalents at beginning of period 5 15 935
------ --------- ---------
Cash and cash equivalents at end of period $ 15 $ 935 $ 51,629
====== ========= =========
Supplemental cash flow information:
Cash paid for interest $ 1 $ 2 $ 451
====== ========= =========
Supplemental non-cash financing activity:
Property and equipment acquired under capital leases $ 21 $ -- $ 318
====== ========= =========
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 intangible assets $ -- $ -- $ 3,762
====== ========= =========
Issuance of Common Stock for selected assets and liabilities of
YourPharmacy.com, Inc. $ -- $ -- $ 190,020
====== ========= =========
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 2000
------------ ------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,101) $ (93,549)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 697 2,676
Non-cash interest charges related to purchase option and warrant 906 --
Stock-based compensation 4,308 7,129
Amortization of intangible assets -- 20,430
Changes in operating assets and liabilities:
Inventories (1,594) (691)
Prepaid expenses and other current assets (2,366) 2,984
Other assets (87) 180
Accounts payable 2,136 874
Accrued expenses 495 2,951
Deferred revenue 375 8
--------- ---------
Net cash used in operating activities (15,231) (57,008)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,381) (11,217)
Purchases of short-term investments -- --
Sales of short-term investments -- 65,119
--------- ---------
Net cash provided by (used in) investing activities (2,381) 53,902
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock for cash, net 77,773 --
Proceeds from exercises of Common Stock options, net 595 132
Proceeds from borrowings 1,000 2,000
Repayment of notes receivable from stockholders -- 1
Principal payments on capital lease obligations (3) (48)
--------- ---------
Net cash provided by financing activities 79,365 2,085
--------- ---------
Increase (Decrease) in cash and cash equivalents 61,753 (1,021)
Cash and cash equivalents at beginning of period 935 51,629
--------- ---------
Cash and cash equivalents at end of period $ 62,688 $ 50,608
========= =========
Supplemental cash flow information:
Cash paid for interest $ 146 $ 457
========= =========
Supplemental non-cash financing activity:
Property and equipment acquired under capital leases $ -- $ --
========= =========
Issuance of Common Stock for notes receivable from stockholders $ -- $ --
========= =========
Issuance of Common Stock in exchange for services, a prepaid asset
in 1998, and reclassified to intangible asset in 1999 $ 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 intangible assets $ 3,762 $ --
========= =========
Issuance of Common Stock for selected assets and liabilities of
YourPharmacy.com, Inc. $ -- $ --
========= =========
</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, 1999 and
2000 is unaudited)
Note 1--The Company and Summary of Significant Accounting Policies
The Company
PlanetRx.com, Inc. ("PlanetRx" or the "Company"), is an online healthcare
destination for commerce, content and community. The Company was incorporated in
Delaware on March 31, 1995 and was in the development stage through December 31,
1998.
Liquidity
The Company has sustained losses since inception and expects to continue to
incur losses for the foreseeable future. The Company has 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, $98.0 million for the year ended December 31, 1999 and
$93.5 million for the six months ended June 30, 2000. In July 2000, the Company
signed a common stock purchase agreement for up to $50.0 million in equity
financing. The company anticipates that draws under this agreement will be
sufficient to meet their anticipated working capital and capital expenditure
requirements for the next 12 months. However, there is no assurance that the
Company will be able to meet the conditions required for drawing funds from the
equity line, and the Company may need to raise additional funds. The Company
cannot be certain that additional financing will be available on favorable terms
when required, or at all.
Unaudited interim results
The interim financial statements as of June 30, 2000 and for the six months
ended June 30, 1999 and 2000, 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 the 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 and short-term investments
The Company invests its excess cash in debt instruments of the U.S.
Government and its agencies, and in high-quality corporate issuers. All highly
liquid instruments with an original maturity of three months or less are
considered cash equivalents, those with original maturities greater than three
months and current maturities less than twelve months from the balance sheet
date are considered short-term investments and those with maturities greater
than twelve months from the balance sheet date are considered long-term
investments.
The Company's marketable securities are classified as available-for-sale as
of the balance sheet date and are reported at fair value, with unrealized gains
and losses, net of tax, recorded in stockholders' equity. Realized gains or
losses and permanent declines in value, if any, on available-for-sale securities
will be reported in other income or expense as incurred. As of December 31, 1998
and 1999, and as of June 30, 2000, amortized cost approximated fair value and
unrealized gains and losses were insignificant.
F-7
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
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 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 are amortized using the straight-line method over their
respective estimated useful lives from two to five years.
Revenue recognition
The Company recognizes revenue from product sales, net of allowances for
coupons, discounts and estimated returns, when the product is shipped from the
Company's warehouse to the customer. Outbound shipping and handling charges,
which are charged to the customer, are included in net revenue. The Company
provides an allowance for sales returns, based on historical experience, in the
period revenues are recognized. Payment for product sales is generally made by
credit card. Consequently, accounts receivable balances are insignificant and
have been included in other assets. The Company recognizes sponsorship revenue
ratably over the related service period.
The Company complies with the provisions of Emerging Issues Task Force No.
99-17, "Accounting for Barter Transactions." The fair value of the advertising
barter transactions cannot be reasonably determined and therefore the revenue
and corresponding advertising expenses have not been recorded.
F-8
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
Product development
Product development costs are expensed as incurred, except for certain
software development costs. In January 1999, the Company adopted Statement of
Position ("SOP") 98-1, which requires development costs associated with internal
use software to be charged to operations until certain capitalization criteria
are met.
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.
Advertising expenses totaled $266,000 and $29.2 million for the years ended
December 31, 1998 and 1999, respectively, and $5.0 million and $19.0 million for
the six months ended June 30, 1999 and 2000, respectively. There was no
advertising expense for the year ended December 31, 1997.
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 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.
F-9
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
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.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents and short-term investments.
The Company manages credit risk related to cash and cash equivalents and short-
term investments by only maintaining these accounts with high quality financial
institutions. As of December 31, 1999, one customer accounted for 11% of
revenue. During the six months ended June 30, 2000, no customer accounted for
more than 10% of revenue.
Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents, short-
term investments, 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.
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").
F-10
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
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 two years ended December 31, 1999 and the six
months ended June 30, 2000, the Company has not had any significant transactions
that are required to be reported in comprehensive income.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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.
Recent accounting pronouncements
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 is effective
for the fourth quarter of years ending after December 31, 1999. The Company will
adopt SAB 101 in the quarter ending December 31, 2000 and does not expect such
adoption to have an impact on the Company's results of operations, financial
position or cash flows.
In March 2000, the Emerging Issues Task Force released Issue No. 00-02
("EITF 00-02"), "Accounting for Web Site Development Costs". EITF 00-02 is
effective for all fiscal quarters beginning after June 30, 2000. EITF 00-02
discusses the capitalization criteria regarding web site development costs. The
Company will adopt EITF 00-02 in the quarter ending September 30, 2000 and does
not expect such adoption to have a significant impact on the Company's results
of operations, financial position or cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25" (the "Interpretation").
The Interpretation is intended to clarify certain issues that have arisen in
practice since the issuance of APB 25. The Company will adopt the Interpretation
on July 1, 2000 and does not expect such adoption to have a significant impact
on the Company's results of operations, financial position or cash flows.
In July and September 2000, the Emerging Issues Task Force released Issue
No. 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Revenues and
Costs". EITF 00-10 notes that amounts billed, if any, for shipping and handling
should be included in revenue. If shipping and handling costs are significant
and are not included in costs of sales, a company should disclose both the
amount of such costs and which line item on the income statement includes that
amount. EITF 00-10 is effective for the Company's fourth quarter of 2000. The
Company will adopt the pronouncement in the quarter ending December 31, 2000,
and does not expect such adoption to have a significant impact on its results of
operations, financial position, or cash flows.
In May 2000, the Emerging Issues Task Force released Issue No. 00-14 ("EITF
00-14"), "Accounting for Certain Sales Incentives". EITF 00-14 is effective for
our fourth quarter of 2000. The Company will adopt the pronouncement in the
quarter ending December 31, 2000, and does not expect such adoption to have a
significant impact on its results of operations, financial position, or cash
flows.
F-11
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
NOTE 2 - EXPRESS SCRIPTS
In October 1999, the Company completed a series of agreements with Express
Scripts, Inc. and its wholly owned subsidiary, YourPharmacy.com. The Company
issued 10,369,990 shares of its Common Stock, valued at approximately $168.0
million to Express Scripts, in exchange for selected assets totaling $86,000 and
liabilities totaling $3.4 million of YourPharmacy.com. The total purchase price
of approximately $193.5 million also consisted of the estimated fair value of
1,810,019 options to purchase the Company's Common Stock in exchange for
outstanding YourPharmacy.com options, as well as direct acquisition costs. The
allocation of the purchase price resulted in an excess purchase consideration
over tangible net liabilities of approximately $193.4 million, which has been
allocated to intangible assets being amortized over 5 years. The Company
amortized approximately $8.4 million for the year ended December 31, 1999, $19.3
million in the six months ended June 30, 2000, and expects to amortize $19.3
million over the rest of 2000, $38.7 million in 2001, 2002 and 2003, and $30.3
million in 2004. Results of operations for YourPharmacy.com have been included
with those of the Company for periods subsequent to the date of acquisition.
The following table illustrates the components of net revenues and net loss
attributable to PlanetRx.com and YourPharmacy.com for the periods presented, as
if the purchase had occurred at the beginning of the period (in thousands).
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1997 1998 1999
-------------- ------------- -------------
<S> <C> <C> <C>
Net Revenue:
PlanetRx.com $ - $ - $ 8,999
YourPharmacy.com - - 280
-------------- ------------- -------------
$ - $ - $ 9,279
============== ============= =============
Net loss available to common stockholders:
PlanetRx.com $ (137) $ (4,087) $ (99,023)
YourPharmacy.com - (1,204) (5,609)
-------------- ------------- -------------
$ (137) $ (5,291) $ (104,632)
============== ============= =============
</TABLE>
In June 2000, the Company restructured its agreement with Express Scripts,
Inc. Under the new agreement, which eliminates PlanetRx.com's annual $14.6
million payments to Express Scripts, PlanetRx.com paid only the second quarter
marketing expenses of $3.7 million, as well as a one-time contract termination
fee of $4.3 million. PlanetRx.com remains the preferred Internet pharmacy for
Express Scripts for a term of five years, subject to certain exceptions, with
the right to participate in the Express Scripts network for a period of give
years, and Express Scripts retains ownership of its 10,300,000 shares of
PlanetRx.com common stock.
F-12
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
NOTE 3 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31, June 30,
-----------------------------
1998 1999 2000
------------ ----------- ------------
<S> <C> <C> <C>
Prepaid expenses and other current assets: (unaudited)
Prepaid advertising $ 1,250 $ 11,402 $ 8,397
Prepaid content - 6,679 5,442
Prepaid (intangible assets) 614 - -
Other - 1,513 2,771
------------ ----------- ------------
$ 1,864 $ 19,594 $ 16,610
============ =========== ============
December 31, June 30,
-----------------------------
1998 1999 2000
------------ ----------- ------------
Property and equipment: (unaudited)
Computer equipment and software $ 2,415 $ 10,585 $ 13,439
Warehouse equipment - 179 4,557
Equipment under capital leases 21 339 2,318
Furniture and fixtures 435 990 1,454
Leasehold improvements 86 485 2,057
Construction in progress - 668 638
------------ ----------- ------------
2,957 13,246 24,463
Less: Accumulated depreciation and
amortization (148) (2,362) (5,038)
------------ ----------- ------------
$ 2,809 $ 10,884 $ 19,425
============ =========== ============
</TABLE>
Depreciation expense for the three years ended December 31, 1999 and for the
six months ended June 30, 1999 and 2000 was $8,000, $139,000, $2.2 million,
$697,000 and $2.7 million, respectively. Accumulated depreciation of assets
under capital leases totaled $12,000, $16,000, $21,000, and $388,000 at December
31, 1997, 1998 and 1999, and June 30, 2000, respectively.
F-13
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------
1998 1999 2000
--------------- ------------- -------------
<S> <C> <C> <C>
Accrued expenses: (unaudited)
Accrued marketing expenses $ - $ 3,971 $ 3,750
Accrued merger expenses - 2,345 115
Compensation and benefits 28 1,551 2,634
Other - 577 646
--------------- ------------- -------------
$ 28 $ 8,444 $ 7,145
=============== ============= =============
</TABLE>
NOTE 4--SHORT-TERM INVESTMENTS:
All of the Company's investments are considered available-for-sale securities
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------
1998 1999 2000
--------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Demand deposits $ - $ 1,558 $ 9,860
Money market funds - 6,697 1,446
Commercial Paper - 41,143 35,523
US Government and agencies - 67,350 3,779
--------------- ----------------------------
$ - $ 116,748 $ 50,608
=============== ============= =============
</TABLE>
All short-term investments as of June 30, 2000, contractually mature within
one year.
NOTE 5--NOTE RECEIVABLE:
During 1999, in connection with an employment agreement, 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 on the stock sold. At June 30, 2000, $500,000 was outstanding under
this note.
NOTE 6--INCOME TAXES:
At December 31, 1999, the Company had approximately $30.0 million and $65.0
million, of federal and state net operating loss carryforwards, respectively,
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
F-14
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
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, 1999. Due to the uncertainty surrounding the realization of the
favorable tax attributes and future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable net deferred tax assets.
Deferred tax assets and liabilities consist of the following (in thousands):
December 31,
------------------------------
1998 1999
------------- ------------
Deferred tax assets:
Net operating loss carryforwards $ 1,066 $ 26,273
Accruals and reserves (3) (2,366)
------------- ------------
1,063 23,907
Less valuation allowance (1,063) (23,907)
------------- ------------
$ - $ -
============= ============
F-15
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
NOTE 7--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 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. 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, 2000, the Company had $7.0
million outstanding under the line of credit.
As of June 30, 2000, principal payments are payable over the next nine
quarters beginning with the quarter ended September 30, 2000 totaling $165,000,
$253,000, $538,000, $1.1 million, $1.1 million, $1.2 million, $1.0 million,
$945,000 and $645,000, respectively.
Equipment financing arrangement
In January 1999, the Company entered into a $2.0 million capital lease
credit facility with a financing institution. Interest accrues 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. The company drew down the entire facility during the
first quarter of 2000, and $2.0 million remained outstanding as of June 30,
2000.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through July 2005. 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 totaled $39,000, $111,000, and $1.2 million
during the years ended December 31, 1997, 1998, and 1999, and $476,000 and
$902,000 for the six months ended June 30, 1999 and 2000, respectively.
F-16
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Future minimum lease payments under noncancelable operating and capital
leases at December 31, 1999 are as follows (in thousands):
Capital Operating
Year Ended December 31, Leases Leases
--------------------------------------------- ---------- ----------
2000 $ 96 $ 1,902
2001 94 1,837
2002 94 995
2003 94 969
2004 55 663
Thereafter - 129
---------- ----------
Total minimum lease payments 433 $ 6,495
==========
Less: Amount representing interest (114)
----------
Present value of capital lease obligations 319
Less: Current portion (54)
----------
Long-term portion of capital lease
obligations $ 265
==========
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
year ended December 31, 1999 and the six months ended June 30, 2000, the Company
paid $6.3 million and $15 million, and recognized $4.0 million and $2.5 million
in advertising expense in connection with the agreement. See Note 14 to the
Financial Statements for subsequent events.
Other commitments
At June 30, 2000, the Company had additional commitments for online
advertising, promotion programs and employment agreements. Future minimum
commitments under the noncancelable agreements are approximately $2.7 million,
$6.0 million and $3.6 million in the years ending December 31, 2000, 2001 and
2002, respectively. See Note 14 to the Financial Statements for subsequent
events.
F-17
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
In May 2000 (unaudited), the Company adopted a bonus program for certain
employees. The program may pay out a maximum of $5.96 million in 2000 and 2001
for the achievement of milestones in 2000 and 2001.
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.
NOTE 9--STOCKHOLDERS EQUITY (DEFICIT):
In October 1999, PlanetRx.com completed its initial public offering of
6,900,000 shares (including the exercise of the underwriters' overallotment
option) at a price of $16.00 per share. The Company received net cash proceeds
of approximately $101.0 million, after underwriting discounts and offering
costs. The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 100,000,000 and 5,000,000 shares of $0.0001 par value Common
Stock and Preferred Stock, respectively. A portion of the shares sold is subject
to the right of repurchase by the Company subject to vesting, generally over a
four-year period. No dividends have on common stock have been declared by the
Board of Directors from inception through June 30, 2000.
Common Stock
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, 1999 and June 30, 2000, approximately
1,971,000 and 1,283,000 shares, respectively, of outstanding Common Stock were
subject to repurchase by the Company at $0.025.
F-18
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Notes receivable from stockholders
At December 31, 1999 and June 30, 2000, the Company held full-recourse
notes receivable from stockholders of the Company totaling $35,000 and $34,000,
respectively, 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, 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 year
ended December 31, 1999 and the six months ended June 30, 2000, the Company
amortized $308,000 and $152,000 as stock-based compensation expense,
respectively.
During 1998 and 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 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
and amortized $5,000 as stock-based compensation expense. During the year ended
December 31, 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 year ended December 31, 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
F-19
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
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. In 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 approximately $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. During the year ended December 31, 1999 and the six months
ended June 30, 2000, the Company recognized $941,000 and $941,000 of
amortization expense, respectively.
F-20
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Reserved shares
The Company has reserved shares of Common Stock for future issuance as
follows (in thousands):
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
Options available and outstanding
under the option plans 11,752 14,295
Exercise of outstanding warrants 17 17
Common Stock outstanding 52,286 51,752
Undesignated 35,945 33,936
------------ -----------
100,000 100,000
============ ===========
Common stock and option grants
During 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 $5.3 million, which is being
amortized over the four-year vesting period of the related options.
During 1999, the Company issued 25,000 shares of Common Stock to an
employee and recorded $400,000 in stock-based compensation expense. During the
year ended December 31, 1999 and the six months ended June 30, 2000, the Company
amortized $200,000, respectively, as stock-based compensation expense.
Preferred Stock
Upon the consummation of the initial public offering, all outstanding
shares of preferred stock were converted into 24,637,000 shares of common stock.
Prior to such conversion, Series A, B, C and D Preferred Stock held certain
voting, dividend, liquidation and conversion rights. No dividends on preferred
stock were declared by the Board of Directors from inception through the date of
conversion. Per share conversion ratios for Series A, B, C and D Preferred Stock
were 1.0000, 1.0463, 1.0084 and 1.0000, respectively.
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.
F-21
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
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
During 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. 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. All of these
warrants were exercised during 1998 and 1999.
Series B Preferred Stock purchase option and warrant for financing
During 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 Company recorded prepaid debt issuance costs of $1.8
million using the Black-Scholes pricing model and recognized non-cash interest
expense of $1.8 million during the year ended December 31, 1999. In August 1999,
the purchase option was exercised and approximately 732,000 shares of Series B
Preferred Stock were issued.
During 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 one year after the completed initial
public offering or October 2000. The Company recorded prepaid debt issuance
costs of $42,000 using the Black-Scholes pricing model and recognized non-cash
interest expense of $12,000 during the year ended December 31, 1999. The
remaining prepaid debt issuance costs will be amortized over the term of the
agreement. At June 30, 2000, the warrant remained outstanding. Common Stock
issuable upon the exercise and conversion of the warrant at December 31, 1999
was approximately 17,000 shares.
Effect of antidilution provision of Series B Preferred Stock
During 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.
F-22
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
Series C Preferred Stock for advertising
During 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. The Company
originally 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.
Series D Preferred Stock for advertising
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.
NOTE 10--NET LOSS PER SHARE
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. Diluted net loss per share is
computed using the weighted average number of common and common equivalents, if
dilutive. Common equivalent shares consist of the incremental common shares
subject to issuance upon conversion of the convertible preferred stock (using
the if-converted method) and shares issuable upon the exercise of stock options
and warrants (using the treasury stock method), and the common shares
outstanding subject to repurchase. The periods presented below exclude potential
common shares as the effect of such shares on a weighted average basis is anti-
dilutive.
F-23
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
The following table sets forth the computation of basic and diluted net
loss per share and pro forma basic and diluted net loss per share for the
periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- --------- --------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator
Net Loss $ (137) $ (4,087) $ (98,014) $ (20,101) $ (93,549)
Effect of anti-dilution provisions
of Series B Preferred Stock - - (1,009) (1,009) -
------- -------- --------- --------- ---------
Net loss available to Common
stockholders $ (137) $ (4,087) $ (99,023) $ (21,110) $ (93,549)
======= ======== ========= ========= =========
Denominator:
Weighted average common shares 2,800 3,706 19,051 8,766 52,005
Weighted average unvested common
shares subject to repurchase (2,800) (3,258) (6,261) (6,238) (4,454)
------- -------- --------- --------- ---------
Denominator for basic and diluted
calculation - 448 12,790 2,528 47,551
======= ======== ========= ========= =========
Net loss per share:
Basic and diluted $ - $ (9.12) $ (7.74) $ (8.35) $ (1.97)
======= ======== ========= ========= =========
</TABLE>
NOTE 11 -- 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 Plans
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, 1999 and June
30, 2000, there were approximately 3,885,000 and 2,905,000 shares subject to
repurchase, respectively. As of June 30, 2000, the Company had four stock-based
compensation plans, which are described below.
1998 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
F-24
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
grants and stock options to employees, outside directors, and consultants of the
Company. Upon the consummation of the initial public offering, all options were
assumed by the 1999 Equity Incentive Plan. 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. 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. 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.
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.
1998 YourPharmacy.com Stock Plan
In October 1999, the Company assumed the YourPharmacy.com 1998 Stock Plan
(the "YourPharmacy.com Plan"). The Plan provides for the granting of direct
stock grants and stock options to employees, outside directors, and consultants
of the Company. At June 30, 2000, the Company has reserved 1,810,000 shares of
common stock for issuance under the YourPharmacy.com Plan. Options granted under
the YourPharmacy.com 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. The YourPharmacy.com 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.
In accordance with the YourPharmacy.com 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.
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
F-25
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
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. At June 30, 2000, the Company has reserved
17,161,000 shares of common stock for issuance under the 1999 Equity Incentive
Plan. 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 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.
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 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. As of
June 30, 2000, no shares have been granted under the Director Plan.
Stock plan activity
F-26
<PAGE>
PLANETRX.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(information as of and relating to the six months ended June 30, 1999 and 2000
is unaudited)
The following summarizes stock option activity under the stock plans (in
thousands, except per share amounts):
Options Outstanding
---------------------
Weighted
Options Average
Available Number of Exercise
for Grant Options Price
--------- --------- --------
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 12,510 - $ -
Options granted (8,706) 8,706 $ 4.96
Options exercised - (3,393) $ 0.50
Options canceled 158 (158) $ (1.67)
Unvested shares repurchased 147 - $ -
--------- --------- --------
Balance at December 31, 1999 5,523 6,230 $ 6.63
Shares authorized 2,000 - $ -
Options granted (5,338) 5,338 $ 4.65
Options exercised - (15) $ 0.35
Options canceled 1,718 (1,718) $ 5.71
Unvested shares repurchased 560 - $ -
--------- --------- --------
Balance at June 30, 2000 4,463 9,835 $ 5.73
--------- --------- --------
The weighted-average grant-date fair value of options granted during the
year ended December 31, 1998 and 1999 and the six months ended June 30, 2000,
was $0.01 and $5.40 and $5.73, respectively.
The following table summarizes the information about stock options
outstanding and exercisable as of December 31, 1999 (in thousands, except per
share amounts):
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
----------------- ----------- ----------- -------- ----------- --------
$0.05 - $0.50 390 $ 8.80 $ 0.38 390 $ 0.38
$2.00 831 $ 9.45 $ 2.00 831 $ 2.00
$4.90 1,810 $ 9.76 $ 4.90 1,762 $ 4.90
$5.50 - $9.00 2,277 $ 9.68 $ 6.85 2,277 $ 6.85
$16.00 - $17.50 922 $ 9.80 $ 16.28 33 $ 16.00
----------- ----------- -------- ----------- --------
6,230 $ 9.48 $ 6.63 5,293 $ 5.02
----------- ----------- -------- ----------- --------
F-27
<PAGE>
PLANETRX.COM,INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
The following table summarizes the information about stock options
outstanding and exercisable as of June 30, 2000 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------
Weighted Weighted Weighted
Average Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Outstanding Price
------------------- ------------------ ------------------ -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.05 - $2.00 1,099 8.58 $ 1.48 897 $ 1.53
$2.55 2,375 9.80 $ 2.55 299 $ 2.55
$4.90 1,735 9.26 $ 4.90 1,718 $ 4.90
$5.50 - $9.00 3,881 9.44 $ 7.23 2,167 $ 7.01
$16.00 - $17.50 745 9.30 $ 16.24 87 $ 16.40
------------------ ------------------ -------------- ------------------ ----------------
9,835 9.48 $ 5.73 5,168 $ 5.26
------------------ ------------------ -------------- ------------------ ----------------
</TABLE>
At December 31, 1999 the Company had 1,908,000 options vested and
exercisable.
Employee Stock Purchase Plan
In July 1999, the Board of Directors and stockholders adopted the Employee
Stock Purchase Plan (the "ESPP"), which became 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 began on the
first business day on which price quotations for the Company's common stock were
available on The NASDAQ National Market. Based on the effective date, the first
Purchase Period will be more 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.
F-28
<PAGE>
PLANETRX.COM,INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
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, 1999 and 1998, 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 Ended
Year Ended December 31, June 30,
----------------------------------
1998 1999 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss available to common (unaudited)
stockholders:
As reported $ (4,087) $ (99,023) $ (93,549)
============= ============= ==============
Pro forma $ (4,091) $ (113,327) $ (95,135)
============= ============= ==============
Net loss per share:
As reported $ (9.12) $ (7.74) $ (1.97)
============= ============= ==============
Pro forma $ (9.13) $ (8.86) $ (2.00)
============= ============= ==============
</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 Ended
Year Ended December 31, June 30,
----------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Risk-free interest rates 4.80% 6.30% 4.90%
Expected lives (in years) 4 years 4 years 4 years
Dividend yield 0% 0% 0%
Expected volatility 0% 90% 90%
</TABLE>
Because additional stock options are expected to be granted each year, the
above pro forma disclosures are not representative of pro forma effects on
reported financial results for future years.
Deferred stock-based compensation
F-29
<PAGE>
PLANETRX.COM,INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of and relating to the six months ended June 30, 1999 and
2000 is unaudited)
In connection with certain stock option grants to employees and Health
Advisory Board members from October 1998 through December 31, 1998 and for the
year ended December 31, 1999 and the six months ended June 30, 2000, the Company
recognized deferred stock-based compensation totaling $4.6 million, $33.1
million, and $3.8 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 1999 and the six months ended June 30, 2000, totaled
approximately $888,000, $11.3 million, and $7.1 million, respectively.
NOTE 12--SPONSORSHIP AGREEMENTS:
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. In March 2000 (unaudited), the sponsor voluntarily
withdrew one of its diabetes drugs from the market following a request from the
U.S. Food and Drug Administration. In addition, in June 2000, the sponsor merged
with another pharmaceutical company. The company is currently working with the
sponsor to determine the impact these events will have on future sponsorship
revenues.
In December 1999, the Company entered into a strategic alliance with another
pharmaceutical company. Under the terms of the agreement, the company is the
exclusive sponsor within the Company's unique Web site for allergy sufferers.
NOTE 13--CONTRACT TERMINATION AND SEVERANCE CHARGES:
For the six months ended June 30, 2000, the Company recorded one-time charges
for the ESI contract termination of $4.3 million, see Note 2 of the Financial
Statements, and $200,000 in severance charges related to a workforce reduction
of approximately 15% that occurred in June 2000.
NOTE 14--SUBSEQUENT EVENTS (UNAUDITED):
In July 2000, the Company signed a definitive agreement for up to $50.0
million, subject to shareholder approval, in equity financing from Alpha Venture
Capital Inc., a member of the Alpha Group of Funds. The financing is in the form
of an equity line that can be utilized based on a formula relating to the
trading volume and price of the Company's Common Stock subject to certain terms
and conditions. Upon each financing drawdown, the proceeds will be allocated to
Common Stock and Common Stock warrants based on the respective fair value of the
instruments. The Common Stock warrants will be valued using the Black-Scholes
pricing model.
Reserve stock split
We intend to ask our shareholders and board of directors to approve a 1-for-8
reverse stock split. Share information for the three years ended December 31,
1999 and the six months ended June 30, 1999 and 2000 have not been retroactively
adjusted to reflect the reverse stock split.
Advertising agreement
In August 2000, the Company terminated a three-year marketing agreement with
a web portal company. See Note 8 to the Financial Statements.
Other commitments
In September 2000, the Company restructured its advertising agreement with
iVillage, Inc. Under the terms of the new agreement, the Company will continue
to be provided with a specific number of advertising impressions through
December 31, 2000. At June 30, 2000, assuming the restructuring of the
agreement, future minimum commitments under noncancelable agreements are
approximately $1.4 million. See Note 8 to the Financial Statements.
Restructuring
In August 2000, the Company announced the move of its operations from South
San Francisco, CA to Memphis, TN. In conjunction with this move the Company will
record one-time restructuring charges during its quarter ended September 30,
2000.
F-30
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table provides the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the
securities being registered. All amounts are estimates, except the Securities
and Exchange Commission registration fee and the Nasdaq Listing Fee. All of
these costs and expenses will be borne by the registrant.
Securities and Exchange Commission filing fee.............. $ 13,702
Nasdaq annual listing fee.................................. 10,500
Expenses of counsel to Alpha Venture Capital/(a)/.......... 49,500
Accountants' fees and expenses............................. 55,000
Legal fees and expenses.................................... 35,000
--------
Total...................................................... $163,702
========
________________
(a) The registrant has agreed to pay an additional $2,000 legal fee on behalf of
Alpha Venture Capital in the event we file additional registration statements
covering securities issued under the common stock purchase agreement.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article VII of our
Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of our Bylaws
(Exhibit 3.2 hereto) provide for indemnification of our directors, officers,
employees and other agents to the maximum extent permitted by Delaware law. In
addition, we have entered into Indemnification Agreements (Exhibit 10.1 hereto)
with our officers and directors. The Registration Rights Agreement (Exhibit 4.4)
also provides for indemnification by PlanetRx.com and Alpha Venture Capital with
respect to certain matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, the registrant has issued and sold the
following securities that were not registered under the Securities Act. The
numbers reflect the 500-for-one recapitalization on September 15, 1998 and the
two-for-one stock split on November 6, 1998.:
1. From inception through August 31, 2000, the registrant has granted
options to purchase 5,910,831 shares of common stock and restricted common stock
at exercise prices ranging from $0.025 to $17.50 per share to employees,
consultants, directors and other service providers pursuant to its 1998 Stock
Plan, 1998 YourPharmacy.com Stock Plan, 1999 Equity Incentive Plan and 1999
Director Stock Option Plan. The registrant has also issued 178,000 shares
pursuant to its Employee Stock Purchase Plan. Employees, officers, directors
and consultants received these securities in consideration of services provided
to the registrant.
2. On September 15, 1998, the registrant issued and sold an aggregate of
10,100,000 shares of its Series A Preferred Stock for an aggregate purchase
price of $5,050,000 to investors including funds affiliated with Benchmark
Capital and Sequoia Capital.
3. On October 6, 1998, the registrant issued three warrants for 100,000
shares of Series A Preferred Stock to Christos Cotsakos, Charles McCall and
Terrence Burke at an exercise price of $0.50 per share in exchange for services
previously rendered.
II-1
<PAGE>
4. On January 15, 1999, the registrant issued and sold an aggregate of
5,200,000 shares of its Series B Preferred Stock for an aggregate purchase price
of $26,000,000 to investors including investors affiliated with the E*TRADE
Group, and funds affiliated with Benchmark Capital and Sequoia Capital.
5. On January 15, 1999, the registrant issued warrants to purchase 16,000
shares of its Series B Preferred Stock to Comdisco, Inc. at an exercise price of
$5.00 per share in connection with an equipment financing arrangement.
6. On January 15, 1999, the registrant issued to Comdisco, Inc. an option
to purchase up to 700,000 share of Series B Preferred Stock for $5.00 per share
in connection with a line of credit.
7. Between June 3 and June 18, 1999, the registrant sold 6,776,364 shares
of its Series C Preferred Stock for an aggregate purchase price of $59.3 million
to investors including investors affiliated with the E*TRADE Group, and funds
affiliated with Benchmark Capital and Sequoia Capital.
8. In August 1999, the registrant entered into an agreement with Express
Scripts, Inc. with respect to the issuance of 10,355,254 shares of Common Stock
in exchange for certain assets which is expected to close simultaneously with
this offering.
9. On September 2, 1999, the registrant issued and sold 371,103 shares of
its Series D Preferred Stock for an aggregate purchase price of $7.5 million to
iVillage Inc.
10. On July 25, 2000, the registrant issued warrants to purchase 500,000
shares of its common stock to Alpha Venture Capital, Inc. in consideration of
the closing of a common stock purchase agreement. The warrants are exercisable
at a per share price equal to the lesser of $1.375 and the average closing bid
for the registrant's common stock for the three consecutive trading days prior
to the effective date of this registration statement.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances described in Item 1 were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
Item 16(a). Exhibits
Exhibit
Number Description of Document
------------- -----------------------------------------------------------------
2.1* Asset Contribution and Reorganization Agreement between
PlanetRx.com, Inc., PRX Holdings, Inc., PRX Acquisition Corp.,
YourPharmacy.com, Inc. and Express Scripts, Inc., dated August
31, 1999.
3.1* Certificate of Incorporation of the registrant, as amended.
3.1(a)++ Proposed Amendment to Certificate of Incorporation increasing
authorized shares
3.1(b)++ Proposed Amendment to Certificate of Incorporation implementing
reverse stock split.
3.2* Bylaws of the registrant.
4.1* [Reference is made to Exhibits 3.1 and 3.2.]
4.2* Amended and Restated Investors' Rights Agreement.
4.3* Specimen Common Stock Certificate.
4.4** Registration Rights Agreement between registrant and Alpha
Venture Capital, Inc. dated July 25, 2000.
5.1++ Opinion of Foley & Lardner, special counsel to registrant, as to
the validity of the common stock
10.1* Form of Indemnification Agreement.
II-2
<PAGE>
Exhibit
Number Description of Document
------------- -----------------------------------------------------------------
10.2* 1999 Equity Incentive Plan.
10.3* Employee Stock Purchase Plan.
10.4* 1999 Director Stock Option Plan.
10.5* Form of Warrant for the purchase of Preferred Stock.
10.6* Real Property Lease between registrant and Belz Devco LP, dated
October 16, 1998.
10.7* Real Property Sublease between registrant and Radar Companies,
dated May 5, 1999.
10.8* Real Property Sublease between registrant and Cellegy
Pharmaceuticals, Inc., dated November 6, 1998.
10.9+* Supply Agreement between registrant and McKesson U.S. Health
Care, dated January 14, 1999.
10.10* Asset Acquisition Agreement between registrant and NetHealth.com,
Inc.
10.11* Internet Domain and Trademark Assignment Agreement between
registrant and Epicenter Communications, Inc.
10.12* Series A Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated September 15, 1998.
10.13* Series B Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated January 15, 1999.
10.14* Series C Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated June 3, 1999.
10.15* Series D Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated September 3, 1999.
10.16+* Agreement between registrant and Express Scripts, Inc. dated
August 31, 1999.
10.17** Agreement between registrant and Express Scripts, Inc. dated June
19, 2000.
10.18** Common Stock Purchase Agreement between registrant and Alpha
Venture Capital, Inc. dated July 25, 2000.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
23.2++ Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (included in signature page hereto)
_______________
++ To be filed by amendment
* Previously filed as an exhibit to the registration statement on Form S-1
(File No. 333-82485) of PlanetRx.com, Inc.
** Previously filed on August 14, 2000 as an exhibit to registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to Alpha Venture
Capital, which is deemed an "underwriter" within the meaning of the Securities
Act of 1933 with respect to certain shares covered by this registration
statement, certificates in such denominations and registered in such names as
required by Alpha Venture Capital to permit prompt delivery to each subsequent
purchaser.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement;
provided, however, that paragraphs (i) and (ii) shall not apply if such
information is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities and Exchange Act that is
incorporated by reference into this registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, State of
California on October 10, 2000.
PLANETRX.COM, INC.
By: /s/ Michael Beindorff
-------------------------------
Michael Beindorff
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Michael
Beindorff, as his attorney-in-fact, with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this registration
statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said registration statement.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
----------------------------- -------------------------------------------- -----------------
<S> <C> <C>
/s/ Michael Beindorff Chief Executive Officer, October 10, 2000
-----------------------------
Michael Beindorff Chairman of the Board of Directors,
principal financial officer and principal
accounting officer
/s/ David M. Beirne Director October 10, 2000
-----------------------------
David M. Beirne
/s/ Terrence C. Burke Director October 10, 2000
-----------------------------
Terrence C. Burke
/s/ Christos M. Cotsakos Director October 10, 2000
-----------------------------
Christos M. Cotsakos
Director October __, 2000
-----------------------------
Michael Moritz
Director October __, 2000
-----------------------------
Terrence Arndt
</TABLE>
II-5
<PAGE>
Exhibit Index
Exhibit
Number Description of Document
------------- -----------------------------------------------------------------
2.1* Asset Contribution and Reorganization Agreement between
PlanetRx.com, Inc., PRX Holdings, Inc., PRX Acquisition Corp.,
YourPharmacy.com, Inc. and Express Scripts, Inc., dated August
31, 1999.
3.1* Certificate of Incorporation of the registrant, as amended.
3.1(a)++ Proposed Amendment to Certificate of Incorporation increasing
authorized shares
3.1(b)++ Proposed Amendment to Certificate of Incorporation implementing
reverse stock split.
3.2* Bylaws of the registrant.
4.1* [Reference is made to Exhibits 3.1 and 3.2.]
4.2* Amended and Restated Investors' Rights Agreement.
4.3* Specimen Common Stock Certificate.
4.4** Registration Rights Agreement between registrant and Alpha
Venture Capital, Inc. dated July 25, 2000.
5.1++ Opinion of Foley & Lardner, special counsel to registrant, as to
the validity of the common stock
10.1* Form of Indemnification Agreement.
10.2* 1999 Equity Incentive Plan.
10.3* Employee Stock Purchase Plan.
10.4* 1999 Director Stock Option Plan.
10.5* Form of Warrant for the purchase of Preferred Stock.
10.6* Real Property Lease between registrant and Belz Devco LP, dated
October 16, 1998.
10.7* Real Property Sublease between registrant and Radar Companies,
dated May 5, 1999.
10.8* Real Property Sublease between registrant and Cellegy
Pharmaceuticals, Inc., dated November 6, 1998.
10.9+* Supply Agreement between registrant and McKesson U.S. Health
Care, dated January 14, 1999.
10.10* Asset Acquisition Agreement between registrant and NetHealth.com,
Inc.
10.11* Internet Domain and Trademark Assignment Agreement between
registrant and Epicenter Communications, Inc.
10.12* Series A Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated September 15, 1998.
10.13* Series B Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated January 15, 1999.
10.14* Series C Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated June 3, 1999.
10.15* Series D Stock Purchase Agreement between registrant and the
Investors named on Schedule thereto, dated September 3, 1999.
10.16+* Agreement between registrant and Express Scripts, Inc. dated
August 31, 1999.
10.17** Agreement between registrant and Express Scripts, Inc. dated June
19, 2000.
10.18** Common Stock Purchase Agreement between registrant and Alpha
Venture Capital, Inc. dated July 25, 2000.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
23.2++ Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney (included in signature page hereto)
_______________
++ To be filed by amendment.
* Previously filed as an exhibit to the registration statement on Form S-1
(File No. 333-82485) of PlanetRx.com, Inc.
** Previously filed on August 14, 2000 as an exhibit to registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
