<PAGE>
As filed with the Securities and Exchange Commission on October 26, 1999
Registration No. 333-88019
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
HEALTHCENTRAL.COM
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7375 94-3250851
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
6001 Shellmound Street, Suite 800
Emeryville, CA 94608
(510) 250-2500
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
----------------
Albert L. Greene
Chief Executive Officer
HealthCentral.com
6001 Shellmound Street, Suite 800
Emeryville, CA 94608
(510) 250-2500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------
Copies to:
Mark A. Medearis Craig S. Andrews
Laurel Finch David G. Odrich
Scott Ring Jeffrey C. Thacker
Gene Yoon Michelle A. Lara
VENTURE LAW GROUP BROBECK, PHLEGER & HARRISON LLP
A Professional Corporation 550 West "C" Street
2800 Sand Hill Road Suite 1300
Menlo Park, CA 94025 San Diego, CA 92101
----------------
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. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Securities To Amount of Registration Fee
Be Proposed Maximum Aggregate Offering
Registered price (1)
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<S> <C> <C>
Common stock, par value $ per share $86,250,000 $23,977.50 (2)
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) and Rule 457(o) under the
Securities Act.
(2) $23,977.50 has been previously paid by the Registrant in connection with
the filing of the Registration Statement on September 29, 1999.
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until 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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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion, Dated October 26, 1999
[HEALTHCENTRAL.COM LOGO]
Shares
Common Stock
- --------------------------------------------------------------------------------
We are offering shares of our common stock. This is our initial
public offering, and no public market currently exists for our shares. We have
applied to have the shares we are offering approved for quotation on the Nasdaq
National Market under the symbol "HCEN." We anticipate that the initial public
offering price will be between $ and $ per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.......................................... $ $
Underwriting discounts and commissions......................... $ $
Proceeds to HealthCentral.com.................................. $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of our common stock to cover over-allotments.
Lehman Brothers expects to deliver the shares of common stock to purchasers on
, 1999.
- --------------------------------------------------------------------------------
Lehman Brothers Hambrecht & Quist
Pacific Growth Equities, Inc.
Wit Capital Corporation
The date of this prospectus is , 1999
<PAGE>
Inside Front Cover
Description of page:
This page will portray the www.healthcentral.com homepage and related websites
from the HealthCentral.com network.
At the top of the page will be a description of the HealthCentral.com network.
The pulled quote will read as follows:
Our company network provides online healthcare content and e-commerce to
consumers through our HealthCentral.com network. Our goal is to become the
most trusted and complete source of online healthcare information and
products.
On the left side of the page, we will be a picture of the homepage for
www.healthcentral.com.
On the right side of the page, we will show 3 screens, in cascading format,
from the websites in the HealthCentral.com network.
The front screen will be a screen from www.epills.com. This screen will be
viewed in its entirety.
Behind the www.epills.com screen will be a screen from the
AltaVista/HealthCentral.com co-branded health channel. Only the header from
this screen will be visible.
Behind the AltaVista/HealthCentral.com screen will be a screen from
www.peoplespharmacy.healthcentral.com. Only the header from this screen will be
visible.
<PAGE>
Gatefold Page One
Description of page:
This page will be split into two. The top of the page will describe our
Institutional Internet Services business. The bottom half of the page will
describe our content.
Top Half of Page
For the top half of the page, which describes our Institutional Internet
Services business, the following pulled quote will read across the top of the
page:
In addition to our HealthCentral.com network, we act as an application
service provider for healthcare institutions by designing, hosting and
maintaining private label websites for these institutions.
Beneath the above quote will be three screens, displayed horizontally from left
to right, from the homepages of three institutional clients.
The screen on the left will be a picture of the homepage of
www.catholichealthcarewest.com. Directly beneath the picture of this screen
will read the following quote:
Catholic Healthcare West is a network of 48 hospitals, ancillary
facilities, home care and physician organizations based in California,
Arizona and Nevada.
The screen in the middle will be a picture of the homepage will be from the
homepage of www.scrippsclinic.com. Directly beneath the picture of this screen
will read the following quote:
Scripps Clinic is a medical group and clinical research organization with
over 320 physicians based in San Diego, California.
The screen on the far right will be from the homepage of
www.brownandtoland.com. Directly beneath the picture of this screen will read
the following quote:
Brown & Toland Medical Group is a partnership of University of California
at San Francisco and California Pacific Physicians with over 1,200
physicians.
The Bottom Half of Page Two
The bottom half of the page will describe content offered on the
HealthCentral.com network. At the top of this part of the page will read the
following quote:
Our HealthCentral.com network is built on the provision of unique and
engaging information from medical professionals who have established a high
degree of trust with consumers in the traditional media.
On the left will be a picture of Dr. Dean Edell. Directly beneath the picture
of Dr. Edell will read the following quote:
Dr. Dean Edell is one the leading physician broadcasters over the past
twenty years. Dr. Edell is the host of the Dr. Dean Edell show, a daily
one-hour radio program on over 300 radio station stations. Dr. Edell also
has a daily syndicated television report, which is broadcast in over 50
markets. Dr. Edell reaches a combined 20 million individuals each week.
To the right of the picture of Dr. Edell will be the The People's Pharmacy
logo. Directly beneath the logo will read the following quote:
Joe and Teresa Graedon write The People's Pharmacy, a newspaper column
syndicated by King Features and published three times per week in over 100
markets. The Graedon's also host a weekly radio show broadcast on over 500
stations in more than 100 countries.
<PAGE>
Gatefold Page Two
Description of Page
This page will be divided into two parts.
Top Half of Page
The top half of this page will show a picture of the homepage from
www.healthcentral.com. Lines will point to specific features on the homepage
screen. The following quotes will be used in reference to the features:
Search engine: provides rapid keyword searches through large volumes of
content
Today's Top Stories: provides up-to-date news selected, organized and
edited by our editorial team
Dr. Dean Today: provides the most recent topics covered by Dr. Dean in his
radio and television broadcasts
Dr. Dean Topics: provides topics covered by Dr. Dean over the past few
weeks
Columnists: original healthcare editorial columns
New Specials: provides engaging news polls and quizzes
Health Profile: provides unique personalization tools that encourage users
to get personal feedback about their health with mini-profiles on
nutrition, fitness, stress, and more.
My Health: includes Make My News (news pages that are personalized to
user's specific health interests); Cools Tools (engaging questionnaires and
simple tests to assess or demonstrate various health topics); Health
Newsletters sign-up (free daily, weekly and monthly email newsletters on
various health topics); and many features.
Centers: Over 90 different collections of resources updated weekly focusing
on different health-related topics
Bottom Half of Page
The bottom half of this page will be the homepage from www.epills.com. Lines
will point to specific features on the homepage screen. The following quotes
will be used in reference to the features:
The Health category includes over-the counter remedies, products for eye
and ear care, family planning, and home health.
The Personal Care category includes products related to deodorants, foot
care, men's care, oral hygiene, soaps and women's care.
The Supplements category includes adult nutritionals, diet, herbs,
minerals, natural health, sports and fitness and vitamins.
The Beauty Category includes cosmetics, fragrances, hair care, nail care,
skin care and sun care products.
The Parenting category includes baby care, child care and prenatal
products.
The Prescription category includes prescription medications for chronic and
acute illnesses.
The search engine allows customers to browse the entire inventory by
keyword, such as product name, brand name or description.
The virtual Shopping Bag feature remains on the screen at all times so that
the customer never has to go to a different page to select a product.
Customers have a variety of shipping options, including UPS Next Day Air.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 25
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Capitalization........................................................... 26
Dilution................................................................. 27
Selected Financial Data.................................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 30
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 35
Management................................................................. 57
Transactions with Affiliates............................................... 66
Principal Stockholders..................................................... 69
Description of Capital Stock............................................... 71
Shares Eligible for Future Sale............................................ 74
Underwriting............................................................... 76
Legal Matters.............................................................. 79
Experts.................................................................... 79
Additional Information..................................................... 79
Index to Financial Statements.............................................. F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
In this prospectus, references to the "Company," "HealthCentral.com," "we,"
"us," and "our" refer to HealthCentral.com and its subsidiaries, ePills Inc.
and Windom Health Enterprises, Inc.
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
----------------
"HealthCentral.com," "Windom Health," "ePills.com," "RxList.com,"
"HealthView" and "LifeView" are our trademarks. This prospectus also makes
reference to trademarks of other companies.
This prospectus includes statistical data regarding the Internet industry
from information published by industry sources such as Cyber Dialogue, IDC,
Forrester Research and Jupiter Communications. Although we believe that this
data is generally indicative of the matters expressed, it is inherently
imprecise, and you should not place undue reliance on this data.
1
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the financial statements and notes, before deciding to
invest in shares of our common stock.
HealthCentral.com
Our Business
Our company provides online healthcare content and e-commerce to consumers
through our HealthCentral.com network, which consists of the following
websites:
. www.HealthCentral.com. HealthCentral.com is our flagship website that
provides original, trustworthy, up-to-date and personalized online
healthcare information to consumers. The cornerstone of HealthCentral.com
is our relationship with Dr. Dean Edell, a widely recognized television
and radio personality who has a daily syndicated radio program that is
broadcast on over 300 radio stations, and a syndicated television report
broadcast in over 50 television markets, reaching a combined 20 million
individuals per week. In August 1999, according to an audit completed by
Nielsen I/PRO, www.healthcentral.com attracted five million page views,
and according to Double Click 599,400 unique users.
. www.ePills.com. ePills.com is our online drug store, offering over 23,000
stock keeping units, or SKUs, a term used to describe distinct retail
products. ePills.com has fulfillment agreements with Bergen Brunswig, a
major drug distributor, for health and beauty aids, over-the-counter
products and prescription drug orders. ePills.com is one of five health
anchor tenants on the America Online HealthOnline Pharmacy Channel.
. www.RxList.com. Rx.List.com is our online database of over 4,000
pharmaceuticals and other medicines, with extensive information on 600
entries. RxList.com has been developed and enhanced since 1995.
RxList.com has direct links from over 10,000 websites and search engines
seeking drug information. According to Nielsen I/PRO, www.RxList.com
attracted 2.8 million page views in September 1999, and, according to
Double Click, 364,000 unique users in that same month.
We intend to expand our HealthCentral.com network through additional
websites and relationships. We recently entered into an agreement with
AltaVista under which we will be the exclusive healthcare content provider to
its website, subject to conditions, and we expect to launch a co-branded health
channel in the first quarter of 2000. In the fourth quarter of 1999, we intend
to launch www.peoplespharmacy.healthcentral.com, featuring pharmacy-related
content provided exclusively by the authors of The People's Pharmacy, a
newspaper column published three times a week in over 100 markets. We also have
an agreement with MediaLinx, a Canadian portal, to launch a co-branded health
channel focusing on Canadian health content, which we intend to launch in the
fourth quarter of 1999.
In addition, we act as an application service provider for healthcare
institutions by designing, hosting and maintaining private label websites for
them. Some of our current clients include Brown and Toland, Scripps Clinic,
Sutter Health and Catholic Healthcare West.
Our Market Opportunity
The Internet has become an increasingly popular source of healthcare
information and products. Consumer research conducted by Cyber Dialogue in 1999
found that 24.8 million U.S. adults search for health information on the
Internet, with the number expected to grow to 30 million in the year 2000. The
explosive
3
<PAGE>
growth in demand for online health information has been driven by consumers
seeking to make better informed personal healthcare decisions. Consumers are
also increasingly purchasing healthcare products on the Internet. Forrester
Research estimates that 31.6% of surveyed Internet users shopped for healthcare
products online during the previous six months. In addition, Jupiter
Communications estimates that consumer purchases of healthcare goods are
expected to grow from $2.4 million in 1998 to $1.7 billion in 2003.
Our Business Model
We believe we are strongly positioned to integrate a wide range of health-
related content with a complete healthcare e-commerce solution. Through our
HealthCentral.com network, we derive revenue from advertisements, sponsorships
and e-commerce. Through our institutional Internet services business, we derive
revenue from annual license fees for applications, content, hosting and
maintenance services, as well as from development fees for customization
services. Our goal is to become the consumer's most trusted and complete online
source of healthcare information and products.
Our Strategy
Our business strategy incorporates the following key elements:
. build our brands and drive network traffic by using cross-media exposure
through our relationships with established medical professionals in
traditional media such as Dr. Dean Edell and Joe and Teresa Graedon,
through our portal deals with AltaVista, America Online and MediaLinx and
through television, radio and newspapers;
. cultivate our multiple revenue streams of sponsorship and advertising
fees principally from our flagship HealthCentral.com website and our
RxList.com website, e-commerce revenue from ePills.com, and fees and
licensing revenue from products and services that we provide to our
institutional clients;
. continue to add unique and compelling content to our HealthCentral.com
network;
. attract a growing base of customers to ePills.com and provide them with a
superior shopping experience by offering them a complete line of drug
store products and useful links to content on HealthCentral.com,
RxList.com and PeoplesPharmacy.HealthCentral.com;
. leverage personalization features and interactive tools to increase
users' return visits to our network;
. maintain and strengthen a relationship of trust with our users and
consumers; and
. leverage our existing strategic relationships with AltaVista, America
Online and Bergen Brunswig, and pursue additional complementary
relationships.
Our principal executive offices are located at 6001 Shellmound Street, Suite
800, Emeryville, CA 94608. Our telephone number at that location is (510) 250-
2500. Information contained on the websites on the HealthCentral.com network,
including www.healthcentral.com, www.rxlist.com and www.epills.com, does not
constitute part of this prospectus.
RxList.com
In October 1999, we entered into an acquisition agreement with RxList.com,
Inc., an online drug database with the website www.rxlist.com. Under the terms
of the acquisition agreement, RxList.com will be merged into HealthCentral.com
in exchange for 942,200 shares of our common stock, an aggregate of
$2.6 million in notes payable and $400,000 in assumed liabilities. We believe
that the acquisition of RxList will increase our network traffic and add
content sought by both consumers and medical professionals. The acquisition is
subject to conditions to closing, including that all representations and
warranties must be materially true at closing and that we shall have entered
into employment and noncompetition agreements with an officer of RxList.com.
This prospectus assumes that all conditions to closing have been satisfied and
that the acquisition of RxList.com has been consummated.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by HealthCentral.com.......... shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... Working capital, sales and
marketing, funding
contractual obligations,
website and content
development,
infrastructure
improvements, funding
operating losses and
potential acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. HCEN
</TABLE>
This table is based on shares outstanding as of August 31, 1999 and excludes
shares that may be issued on exercise of the following options and warrants:
. 1,890,177 shares subject to outstanding options at a weighted average
exercise price of $0.67;
. 744,361 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.57 per share;
. an aggregate of 1,093,064 shares available for future issuance under our
1998 Stock Plan;
. an aggregate of 1,776,923 shares to be issued or reserved for issuance
pursuant to the assumption of options outstanding in connection with our
acquisition of ePills.com; and
. an aggregate of 942,200 shares to be issued in connection with our
acquisition of RxList.com.
Except as otherwise indicated, all information in this prospectus is based
on the following assumptions: (a) the conversion of each outstanding share of
preferred stock into one share of common stock immediately before the
completion of this offering, (b) a 1.4-for-1 split of our capital stock
effective upon the completion of this offering, (c) no exercise of the
underwriters' overallotment option, (d) our reincorporation in Delaware before
the effectiveness of this offering, (e) the filing of our amended and restated
certificate of incorporation upon completion of this offering and (f) the
closing of our acquisition of RxList.com.
5
<PAGE>
Summary Financial Data
The following table sets forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Please see the
financial statements and the notes to the statements appearing elsewhere in
this prospectus for the determination of the number of shares used in computing
basic and diluted and pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
-------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 15,259 $ -- $ 126,546
Total operating
expenses............... 1,148 461,494 2,619 2,092,574
------------ ------------ ----------- -------------
Loss from operations.... (1,148) (446,235) (2,169) (1,966,028)
Interest income, net.... -- -- -- 7,519
------------ ------------ ----------- -------------
Net loss................ $ (1,148) $ (446,235) $ (2,619) $ (1,958,509)
============ ============ =========== =============
Basic and diluted net
loss per share......... $ -- $ (0.09) $ -- $ (0.37)
============ ============ =========== =============
Shares used in computing
basic and diluted net
loss per share......... 5,163,200 5,221,800 5,215,400 5,238,187
============ ============ =========== =============
Pro forma basic and
diluted net loss per
share.................. $ (0.09) $ (0.31)
============ =============
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 5,246,655 6,372,187
============ =============
</TABLE>
The pro forma balance sheet data as of June 30, 1999 reflects:
. the acquisition of Windom Health in August 1999, including $51,000 in
cash, a $458,000 note payable and 2,357,341 shares of common stock
issued to shareholders of Windom Health Enterprises, Inc.;
. the net proceeds from the sale of 4,523,065 shares of Series B preferred
stock in August and September 1999;
. the acquisition of ePills.com in September 1999, including the 1,776,923
shares of common stock issued or reserved for issuance pursuant to the
assumption of options outstanding to ePills.com stockholders; and
. the acquisition of RxList.com in October 1999, including the 942,200
shares of common stock, an aggregate of $2.6 million in notes payable
issued to shareholders of RxList.com, and $400,000 in assumed
liabilities.
The pro forma as adjusted balance sheet data gives effect to our receipt of
the estimated net proceeds from the sale of shares of common stock in
this offering at an assumed initial public offering price of $ per share
after deducting the estimated underwriting discount and commissions and
estimated offering expenses payable by us.
6
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------- ----------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 69,383 $19,931,811 $ --
Working capital (deficit)................. (314,675) 13,646,949 --
Total assets.............................. 1,579,662 59,354,072 --
Long-term obligations, including current
portion.................................. 500,000 3,785,534 --
Total stockholders' equity................ 547,055 51,835,934 --
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the following risks in addition to other
information in this prospectus before purchasing our common stock. The risks
and uncertainties described below are the ones we currently deem to be material
and that we believe are specific to our company, our industry and this
offering, but are not the only risks we face. If any of these or other risks
actually occurs, the trading price of our common stock could decline, and you
may lose all or a part of your investment.
Risks Related to Our Business
We have a limited operating history, which makes it difficult for investors to
evaluate an investment in our common stock.
We launched our HealthCentral.com network in November 1998, and our
ePills.com website was launched in September 1999. We therefore have a limited
operating history on which you can evaluate our business. We may not be able to
achieve revenue growth or profitability. You should consider an investment in
our stock in light of the risks, expenses and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets such
as the Internet healthcare market. These challenges include our ability to:
. attract and retain a large audience of users to our HealthCentral.com
network;
. compete effectively against better-established Internet health
companies;
. gain advertising and sponsorship revenue;
. implement a successful e-commerce strategy;
. maintain our current, and build new, strategic alliances with portals,
physician groups, content providers and other third parties;
. develop our institutional Internet services business;
. develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
We have a history of losses and expect our expenses to increase, and thus may
never become profitable.
Since our inception, we have had very limited revenues and have incurred net
losses in each year. As of June 30, 1999, we had an accumulated deficit of
approximately $2.4 million. While we are unable to predict accurately our
future operating expenses, we currently expect these expenses to increase
substantially, as we, among other things:
. enter into third party alliances to expand our HealthCentral.com
network;
. promote our brands;
. develop or acquire content;
. hire additional employees;
. increase our sales and marketing activities, including making
substantial payments to advertising partners;
. develop and expand our systems infrastructure and support functions; and
. offer product promotions.
We expect our operating expenses to substantially exceed revenues for the
foreseeable future, and we may never become profitable.
8
<PAGE>
A failure to build our brand names quickly and significantly will result in
lower than expected revenues.
We must build our brands in a market dominated by better established
competitors.
If we do not gain significant brand recognition quickly, we may lose the
opportunity to build a critical mass of customers and our business may fail.
Some of our competitors, such as drkoop.com, drugstore.com and planetRx have
much stronger name recognition than we do. The increasing competition in our
markets makes building a brand more expensive and difficult than it otherwise
would be. To increase brand recognition, we will need to increase substantially
our sales and marketing efforts, our third party alliances, and our content,
product and service offerings, all of which are expensive.
We need to build three separate brand names for each of HealthCentral.com,
ePills.com and Windom Health, and this brand management strategy is expensive
and difficult.
We intend to build separate brands around our HealthCentral.com consumer
network, including our ePills.com online drug store, and our Windom Health
institutional Internet services. This brand management strategy is based on our
intention to separate e-commerce and institutional activities from the
provision of health information to consumers so that our commercial activities
do not impair perceptions of the trustworthiness of our content. This brand
management strategy may be more expensive and less effective than a strategy
based on one brand. If this strategy confuses consumers or if our e-commerce or
institutional Internet services taints the trustworthiness of our content in
consumers' minds, then our business could suffer.
In addition, we intend to market our ePills.com brand in conjunction with
the Good Neighbor Pharmacy service mark, which we have licensed from Bergen
Brunswig. However, there already exists a Good Neighbor Pharmacy website and
one or more of the 2,000 independent pharmacies in the Good Neighbor Pharmacy
Network may develop their own websites for the promotion of their own stores.
This possible proliferation of websites using the Good Neighbor Pharmacy mark
could cause confusion and dilute our ePills.com brand.
We depend on Dr. Dean Edell to provide us with unique content and credibility,
and any failure by Dr. Edell to participate in our business could result in
reduced site traffic and revenues.
We rely on Dr. Dean Edell, one of our co-founders, to provide unique content
for, and drive traffic to, our HealthCentral.com network, neither of which he
is paid for or contractually obligated to do. If Dr. Edell ceased providing us
with content or ceased mentioning our HealthCentral.com network on his
television and radio shows, we would have to find a replacement for this unique
content or an alternative means of driving traffic to our site, both of which
would be difficult and expensive to do. If Dr. Edell started charging us a fee
for either of these activities, our expenses would increase.
In addition, Premiere Radio Networks, the syndicator of Dr. Edell's radio
show, owns the exclusive rights to broadcast and redistribute Dr. Edell's radio
shows in all forms of media, including the Internet. Under his agreement with
Premiere Radio Networks, Dr. Edell has agreed not to authorize the use of his
name or likeness to promote any product or service in any way that would
conflict with his programs' advertisers or potential advertisers, or would
impair his credibility as a program host.
Any diminishment in Dr. Edell's reputation as a medical expert and advisor,
his death or incapacity, the expiration of his 15 year agreement with us, or
any other development that would cause us to lose the benefits of our
affiliation with Dr. Edell could diminish our standing with healthcare
consumers as a credible source of healthcare information and could harm our
business. Although we do maintain key person life insurance for Dr. Edell, his
role in providing unique content and marketing for the HealthCentral.com
network is sufficiently critical that the insurance would not adequately
protect us in the event of his loss. See "Business--Strategic Relationships."
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We face substantial competition from better established companies, which could
result in our failure to gain needed market share.
Over 15,000 healthcare websites compete with us for users, advertisers, e-
commerce transactions, institutional clientele and other sources of online
revenue, and the number of online participants in the healthcare market is
increasing at a rapid rate. In addition, traditional media and healthcare
providers compete for consumers' attention both through traditional means as
well as through new Internet initiatives.
HealthCentral.com Website
We currently compete directly for users, advertisers and content providers
with numerous Internet and non-Internet businesses, including:
. health-related online services or websites targeted at consumers;
. online and Internet portal companies;
. healthcare providers and payors, which offer healthcare information
through the Internet; and
. other consumer affinity groups that offer healthcare-related content to
special demographic groups.
See "Business--Competition--HealthCentral.com."
ePills.com Online Drug Store
Through ePills.com, we compete with online companies that sell
pharmaceuticals as well as over-the-counter drug and health, beauty and
personal care items, such as drugstore.com and planetRx, and pharmacy benefit
managers, or PBMs, that sell pharmaceuticals directly.
We compete with traditional brick-and-mortar drug stores, including drug
store chains, discount drug stores, supermarkets, combination food and drug
stores, mass market retailers, independent drug stores and local merchants. See
"--We need to generate substantial revenues from our e-commerce business for
healthcare products, and yet this market is unproven and we have limited
experience in it--Consumers may reject the concept of an online drug store in
favor of a brick-and-mortar drug store." Many of these brick-and-mortar drug
stores are also beginning to offer online services. We also compete with
hospitals, HMOs and mail order prescription drug providers, all of whom are or
may begin offering products and services over the Internet.
Most of our current and potential competitors enjoy substantial competitive
advantages, such as:
. greater name recognition and larger marketing budgets and resources;
. established marketing relationships with manufacturers and advertisers;
. larger customer and user bases;
. substantially greater financial, technical and other resources; and
. larger production and technical staffs.
We believe that we may face a significant competitive challenge from our
competitors forming alliances with each other. For instance, drugstore.com has
formed an alliance with RiteAid. In addition, PBMs and HMOs could form
alliances with our competitors that would prevent them from also entering into
relationships with us. For example, planetRx has formed a strategic alliance
with Express Scripts, Inc.
We believe the main competitive factors in the health-related e-commerce
market are the availability of branded products, selection, convenience, price,
quality of search tools, and reliability and speed of fulfillment for products
ordered. Increased competition could result in price reductions, fewer customer
orders, reduced margins and loss of, or failure to build, market share, any of
which could harm our business. See "Business--Competition--ePills.com."
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Institutional Internet Services
In the market for institutional Internet services, we compete mainly with
payors' and providers' internal systems development teams, with local web
development companies, and with other consumer-oriented websites that are
selling applications to institutions, such as drkoop.com, Baby Center's CHI
division and WebMD.
Healthcare participants may determine that our tools and website development
and maintenance services are inferior to those of our competitors, our product
mix is inappropriate for their needs, or that it would be more efficient and
desirable for them to independently develop and manage the process of
exchanging information with their consumers over the Internet. See "Business--
Competition--Institutional Internet Services."
We need to generate substantial revenues from our e-commerce business for
healthcare products, and yet the market is unproven and we have limited
experience in it.
The healthcare e-commerce market is unproven.
The online market for pharmaceutical and other health products is in its
infancy. This market is significantly less developed than the online market for
books, music, software, toys, auctions and a number of other consumer products.
Even if Internet usage and electronic commerce continues to increase, the rate
of growth, if any, of the online pharmacy and health products market could be
significantly less than the online market for other products. Our rate of
revenue growth could therefore be significantly less than that of other online
merchants.
Consumers may reject the concept of an online drug store in favor of a brick-
and-mortar drug store.
Historically, many pharmaceutical products have been sold through the
personal referral of a physician or pharmacist, and thus there is no
established business model for the sale of healthcare products or services over
the Internet. Specific factors that could prevent widespread customer
acceptance of our online drug store include:
. lack of coverage of customer prescriptions by insurance carriers or
pharmacy benefit managers;
. lack of consumer awareness of our online drug store;
. delivery time associated with Internet orders, as compared to the
immediate receipt of products at a physical store;
. shipping charges, which do not apply to shopping at brick-and-mortar
pharmacies;
. lack of face-to-face interaction with a pharmacist;
. pricing that does not meet customer expectations of finding the lowest
price on the Internet;
. additional steps and delays in ensuring insurance coverage for
prescription products;
. 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 fulfillment partners, resulting in a failure to establish
customers' trust in buying pharmacy and other health products online;
. acute conditions that require immediate access to prescriptions;
. delays in responses to customer inquiries or in deliveries to customers;
and
. difficulties in returning or exchanging orders.
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We have little experience in the healthcare e-commerce market.
ePills.com was only incorporated in January 1999 and only launched its
website in September 1999, and thus ePills.com has no experience to date in the
sale of healthcare products and services online. Prior to our acquisition of
ePills.com, we had no experience in the online sale of health products. If we
do not successfully develop our e-commerce operation, our business could fail.
We rely on Bergen Brunswig and Medi-Mail for fulfillment of our orders and
access to pharmacy benefit managers, and this relationship involves many risks.
In July and September 1999, ePills.com entered into a series of agreements
with Bergen Brunswig and its Medi-Mail subsidiary. These agreements are central
to our e-commerce strategy, and they include various arrangements relating to
the fulfillment of orders placed on our ePills.com website for healthcare
products and access to the PlusCare Provider Network of pharmacy benefit
managers. Under these agreements, Bergen Brunswig will be our exclusive
fulfillment provider for health and beauty and over-the-counter products and
Medi-Mail will be our exclusive fulfillment provider for most prescription drug
orders. This type of arrangement is complex, and there are many important
details regarding pricing, revenue sharing and operational procedures which
ePills.com and Bergen Brunswig have not yet finalized. This arrangement will
thus require a great deal of effort to operate successfully, and there are many
risks related to these relationships, including some that we may not have
foreseen. In addition, these agreements expire in five years, and they may not
be renewed on favorable terms, or at all. If for any reason we could not renew
these agreements or enter into similar contractual arrangements with a licensed
pharmacy, we could not operate our online pharmacy business without becoming a
licensed pharmacy ourselves. This process is extremely expensive and difficult.
If the intended benefits are not realized from ePills.com's relationship with
Bergen Brunswig, customer perceptions, revenues and our ability to execute our
e-commerce strategy may be jeopardized.
We expect that Medi-Mail will fill prescription orders placed on
ePills.com's website by mail, and that Bergen Brunswig will fulfill orders for
over-the-counter and health and beauty aid products placed through ePills.com
by mail. This fulfillment mechanism is complex and will require us to integrate
Bergen Brunswig's fulfillment systems with our web-based systems. Integrating
different information systems is technically difficult and may be delayed,
which could delay our receipt of revenues and diminish customer acceptance.
ePills.com has an agreement with Bergen Brunswig regarding access to the
PlusCare Provider Network of over 70 pharmacy benefit managers. These PBMs
provide pharmacy benefits for customers of approximately 4,000 individual
pharmacies. Medi-Mail is one of these pharmacies that has access to the
benefits provided by the PlusCare Provider Network. Notwithstanding assurances
from Bergen Brunswig regarding PBM access, Bergen Brunswig may be subject to
restrictions in the agreements with its individual PBMs that are unknown to us.
In addition, these contracts are typically subject to periodic renewal, and
thus we are subject to the risk of these contracts not being renewed at all, or
being renewed on terms that are not favorable to us. Furthermore, PBMs may
determine in the future to move business away from Medi-Mail for a variety of
reasons, including competitive reasons. As a result of these contractual and
business uncertainties, our revenue may be less than currently expected. In
addition, under our Medi-Mail agreement we bear the ultimate credit risk of
collecting from both consumers and payors. Finally, after the earlier of four
months or ten days after the closing of this offering, Bergen Brunswig will be
able to enter into additional agreements with other online pharmacy companies
and grant them access rights to these PBMs, which could diminish any
competitive advantage we may have.
We may need to raise additional capital in the future and may not be able to
raise it on acceptable terms, or at all.
We expect the proceeds of our initial public offering, together with
existing cash and cash equivalents to fund our operations for approximately 12
months. We do not expect a significant improvement in cash flows from
operations over this period and we need to make substantial investments in our
marketing and sales, our e-commerce capability and our technology and other
operations infrastructure. Moreover, we are contractually
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obligated to pay AltaVista $32.5 million and America Online $14.1 million over
the course of the next two years. The extent and timing of our capital
requirements will depend upon several factors, including:
. the rate of our sales and marketing spending;
. our ability to generate revenue from advertising, e-commerce and our
institutional Internet services;
. our ability to increase traffic on our HealthCentral.com website;
. the cost of expanding our content offerings; and
. the cost of technology upgrades and systems integration related to our
network infrastructure.
The sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. Any debt securities issued could have
rights senior to holders of common stock and could contain covenants that would
restrict our operations. Any additional financing may not be available in
amounts or on terms acceptable to us, if at all. In either case, our ability to
fund our operations, take advantage of unanticipated opportunities, develop or
enhance editorial content or our e-commerce business, or otherwise respond to
competitive pressure would be significantly limited.
We are obligated to pay AltaVista and America Online combined approximately
$48.6 million in cash and stock over the next two years, and if we do not
receive expected revenues from these relationships, our business could suffer.
In September 1999 we entered into a three year agreement with AltaVista to
develop a co-branded health channel. The agreement calls for our payment of an
aggregate of $65.6 million in cash and stock issued at fair market value to
AltaVista over the three-year term in exchange for a minimum number of user
impressions on the co-branded health channel; however either AltaVista or we
may terminate the relationship after two years, in which case our aggregate
payment obligation over the first two years in cash and stock would be $34.5
million. Our payment obligations to AltaVista are reduced if AltaVista fails to
meet its minimum impressions obligations. In addition, in August 1999,
ePills.com entered into a two year agreement with America Online under which
ePills.com will appear as an anchor tenant on the America Online Health Online
Pharmacy and receive a minimum number of advertising impressions in exchange
for payments of $14.1 million. These transactions are premised on the
assumption that the traffic we obtain from these arrangements will permit us to
increase awareness of our brand and generate revenues in excess of the payments
we make. However, even if AltaVista delivers the minimum impressions, we may
not generate revenues exceeding the payments due under the contract because
AltaVista retains all of the advertising revenues generated from the co-branded
channel. In addition, we may not generate traffic sufficient to justify our
expenses because users visiting our co-branded health channel may remain there
for a limited number of page views before they will be redirected to the
HealthCentral.com network. If we do not receive the revenues we currently
expect from these relationships, or if the AltaVista Health Channel or the
America Online HealthOnline Pharmacy Channel is unsuccessful in attracting
traffic to our websites or in enhancing our brands, our business will suffer.
Any errors in filling or packaging the prescription drugs that Medi-Mail or the
Good Neighbor Pharmacy Network dispense on our behalf may expose us to
liability and negative publicity.
Pharmacy errors relating to prescriptions, dosage and other aspects of the
medication dispensing process could produce liability for us that our insurance
may not cover. ePills.com will be the first point of contact for the consumer
in processing a prescription order. As the most visible participant in the
medication distribution chain, ePills.com may have more exposure to liability
claims.
Pharmacists are required by law to offer counseling, without additional
charge, to their customers about medication, dosage, delivery systems, common
side effects and other information they deem important. With ePills.com's
proposed mail order delivery through Medi-Mail, this counseling is expected to
be accomplished by telephone access to pharmacists, but also in part through
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. We also plan to post product information on
our ePills.com website.
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Providing information on pharmaceutical and other products 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. 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 the future, we expect that prescription orders placed on our ePills.com
website may be picked up in person at a pharmacy in the Good Neighbor Pharmacy
Network, as well as filled by mail order through Medi-Mail. We have limited
control over Medi-Mail and no control over any of the pharmacies in the Good
Neighbor Pharmacy Network, and they may make errors. Pharmacy errors either by
Medi-Mail, one of the pharmacies in the Good Neighbor Pharmacy Network or our
competitors may produce significant adverse publicity either for us or the
entire online pharmacy industry. Because our ePills.com service mark will be
displayed with the Good Neighbor Pharmacy Network mark, any negligence by any
of the pharmacies in the Good Neighbor Pharmacy Network in filling orders or
advising customers regarding prescription drugs, whether through ePills.com or
otherwise, could harm our reputation or result in lawsuits, with or without
merit, against us. The amount of negative publicity that we or the online
pharmacy industry may receive as a result of pharmacy or prescription
processing errors could be disproportionate in relation to the negative
publicity received by traditional pharmacies making similar mistakes. We
believe that any negative publicity could erode consumer trust and result in an
immediate reduction in product purchases.
We may be sued by consumers as a result of the products we sell through e-
commerce.
Consumers may sue us if any of our products or services that are sold
through our website are defective, fail to perform properly or injure the user,
even if such goods and services are provided by unrelated third parties. We
have some contractual limits on our recourse against Bergen Brunswig in the
case of some product liability claims. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages.
As a result, any such claims, whether or not successful, could seriously damage
our reputation and our business.
The health information and health products we provide are subject to extensive
and changing governmental regulation.
Numerous state and federal laws regulate our health business covering areas
such as:
. the practice of medicine and other healing arts professions;
. the sale of controlled products such as pharmaceuticals and other
healthcare products;
. prohibitions against the offer, payment or receipt of remuneration to
induce referrals to entities providing healthcare services or goods;
. dispensing and delivering prescription and over the counter drugs; and
. advertising of drugs and cosmetics.
Further, because the Internet health business is novel, federal and state
agencies may apply laws and regulations to us in unanticipated ways, and may
produce new legislation regulating our business, which could increase our costs
or reduce or eliminate certain of our activities or our revenues. See
"Business--Government Healthcare Regulation" and "Business--Other Governmental
Regulation."
Our strategy to provide unique healthcare content and drive traffic to our
HealthCentral.com network through cross-media exposure may not be successful.
To attract and retain users to our HealthCentral.com network, we need to
continue to provide unique and informative content. We will need to purchase or
license much of this content from third persons. Competition for content from
people with the professional reputation, name recognition and expertise that we
require is intense and increasing. This competition may increase the fees
charged by high quality content providers, resulting in increased expenses for
us. We will not only have to expend significant funds to obtain and improve
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our content, but we must also properly anticipate and respond to consumer
preferences for this content. If we are unable to enter into agreements for the
delivery of desirable content, or lose any existing agreements as a result of
early termination, it could delay market acceptance of the HealthCentral.com
network and/or disrupt end-user services until equivalent content, if any, can
be secured.
Additionally, our ability to increase our own brand awareness and website
traffic from relationships with third party content providers is contingent
upon the status of these content providers as healthcare experts, the size of
their audiences and their willingness to promote our brands, all of which are
outside of our control.
We rely on relationships with other Internet companies to drive traffic and
build brand awareness.
We have entered into agreements with other third parties such as
AskJeeves.com, Broadcast.com, NetPulse Communications, Snap.com and Yahoo! to
provide them with content in exchange for either impressions or traffic. Many
of our current or possible future agreements are short-term, non-exclusive or
may be terminated at the convenience of either party. If we are unable to
develop and maintain these relationships and generate sufficient traffic and
revenues from them, our business could suffer. In addition, those companies
that provide us with impressions or links to our network may never achieve
market acceptance or commercial success themselves, which could reduce our
revenues below our expectations and otherwise negatively impact the likelihood
of our success.
Our business model relies on developing and hosting websites for institutional
clients in the healthcare industry; this institutional market is new and
unproven and the institutions may not accept our Internet solutions.
We expect to derive a substantial amount of our revenues from license and
development fees related to the designing, hosting and maintenance of private
label websites for our institutional clients. To date, the healthcare industry
has resisted adopting new information technology solutions. Healthcare payors
and providers may determine that our solutions are too costly to implement or
unnecessary to manage their relationships with consumers. Moreover, these
healthcare industry participants may be unwilling to allow sensitive
information to be stored in our databases.
We face the risk of systems interruptions and capacity constraints on the
HealthCentral.com network, possibly resulting in adverse publicity, revenue
losses and erosion of customer trust.
The satisfactory performance, reliability and availability of the
HealthCentral.com network, including the ePills.com online drug store, is
critical to our reputation and our ability to attract and retain customers and
to maintain adequate customer service levels. System problems may include:
. unanticipated system disruptions;
. slower system response times;
. degradation in levels of service;
. impaired quality; and
. delays in reporting accurate information.
Any of these systems problems could result in negative publicity and reduce
the attractiveness of our website to consumers and reduce our advertising, e-
commerce and institutional revenues. Any service lapses could cause our users
to instead use the online services of our competitors or revert to traditional
drug stores.
Additionally, the satisfactory performance of the websites we build for our
institutional clients is critical to our business. If we fail to meet the
website performance standards in our contracts with our institutional clients,
they may terminate their agreements with us, or require that we refund part or
all of the license fees. Inadequate performance could also cause our renewal
rates of institutional licenses to significantly decrease below our
expectations, which would directly and significantly impact our business.
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From time to time, we have experienced temporary system interruptions for a
variety of reasons, including power failures, flaws in our software and greater
than expected site traffic. We may not be able to correct any problem in a
timely manner. Because we outsource the server hosting function to a third
party, some systems interruptions may be outside of our control, and thus we
may not be able to exercise sufficient control to remedy the problem quickly or
at all.
We depend significantly on our relationship with DoubleClick to generate
advertising revenues, and DoubleClick can terminate this relationship on short
notice.
A significant portion of our revenues consists of the sale of advertising on
the HealthCentral.com website, all of which is currently derived through our
relationship with DoubleClick, an online advertising sales agency. DoubleClick
is our exclusive representative for advertising sold on our HealthCentral.com
website, except for limited non-cash barter arrangements, if any; however
DoubleClick can enter into advertising sales contracts with our competitors,
and either party can terminate the contract on 90 days notice. We have no
control over DoubleClick's sales efforts, and if it fails to sell advertising
in accordance with our expectations, our revenues would likewise be lower. In
addition, while we anticipate that we may transition part or all of our
advertising sales activities to our own direct sales force over time, if
DoubleClick were to terminate our agreement before we completed a buildup in
our direct sales force, we would be forced to accelerate this process, which
would be expensive and difficult to do.
Our business model relies on developing and hosting websites for institutional
clients in the healthcare industry; this institutional market is new and
unproven and the institutions may not accept our Internet solutions.
We expect to derive a substantial amount of our revenues from license and
development fees related to the designing, hosting and maintenance of private
label websites for our institutional clients. To date, the healthcare industry
has resisted adopting new information technology solutions. Healthcare payors
and providers may determine that our solutions are too costly to implement or
unnecessary to manage their relationship with consumers. Moreover, these
healthcare industry participants may be unwilling to allow sensitive
information to be stored in our databases.
If the Internet does not prove to be an effective or profitable marketing media
for advertisers, especially those in the health industry, our business model
could fail.
The Internet is a relatively new advertising medium.
Our success depends on the increased use of the Internet as an advertising
medium. This advertising medium is unproven and may not become an effective
medium as compared to traditional advertising media. If the market for Internet
advertising fails to develop or develops more slowly than we anticipate, then
our ability to generate advertising revenue would be diminished. Various
pricing models are currently used to sell advertising on the Internet. It is
difficult to predict which, if any, will emerge as the industry standard,
thereby making it difficult to project our future advertising rates and
revenues. Our revenues could be adversely affected if we are unable to adapt to
new forms of Internet advertising. Moreover, filter software programs are now
available that limit or prevent advertising from being delivered to an Internet
user's computer. Widespread adoption of this software could adversely affect
the commercial viability of Internet advertising, which could significantly
impair our ability to generate revenues from advertising. See also "--A failure
to build our brand names quickly and significantly will result in lower than
expected revenues."
Companies buying advertising for healthcare products over the Internet face
special advertising issues.
Health-related companies, which comprise our advertising and sponsorship
target market, face special problems with regard to Internet advertising.
Historically, these companies have marketed their products through physicians
and pharmacologists, and thus direct-to-consumer marketing, whether on the
Internet or in traditional media, is relatively new and unproven. Advertising
and product claims of companies marketing or
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selling drugs and cosmetics, including over-the-counter drugs and nutritional
supplements, are subject to regulation and enforcement by the FDA, FTC and
similar state agencies.
Our quarterly operating results are subject to significant fluctuations, and
our stock price may decline if we do not meet quarterly expectations of
investors and analysts.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter for many reasons,
including:
. seasonal and cyclical patterns of spending by advertisers and sponsors;
. shifts in the nature and amount of publicity about us or our
competitors;
. long sales cycles and delays in website development for institutional
projects;
. our ability to enhance our technology to accommodate any future growth
in our operations or customers;
. changes in the growth rate of Internet usage;
. user traffic levels on HealthCentral.com; and
. costs related to potential acquisitions of technology or businesses.
Our quarterly revenues and operating results will also be significantly
influenced by the success of our e-commerce activities. In addition to the
reasons specified above, revenues and expenses from selling health, personal
care, supplements, beauty, parenting and pharmacy products may fluctuate from
quarter to quarter due to a number of factors, including:
. demand for our products;
. the availability or timeliness of reimbursement from pharmacy benefit
managers and insurance companies for prescription drugs;
. our ability to attract visitors to our website and convert those
visitors into customers;
. the frequency of repeat purchases by customers;
. average order size;
. the mix of products sold;
. our ability, and that of our fulfillment partners, to ensure sufficient
product supply;
. changes in our pricing policies or the pricing policies of our
competitors; and
. changes in government regulation.
If we do not meet the expectations of investors and analysts in any given
quarter, our stock price could decline. Any shortfall in revenues relative to
our expectations could cause a significant decline in our quarterly operating
results.
We have recently experienced and are currently experiencing rapid growth in our
business, and our inability to manage this growth could harm our business.
We have experienced and are currently experiencing a period of significant
growth. This growth has placed, and the future growth we anticipate in our
operations will continue to place, a significant strain on our resources. As a
result of the ePills.com acquisition, we have added over 13 new employees,
including managerial, technical and operations personnel, and we will need to
assimilate the operations of ePills.com into our operations. In order to manage
this growth effectively, we have to implement new transaction-processing,
operational and financial systems, procedures and controls, expand, train and
manage our employee base, and maintain close coordination among our technical,
accounting, finance, marketing, sales and editorial staffs. We also need to
devote significant management time and financial resources to website and
content development,
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strategic relationships, technology infrastructure and finance and
administrative infrastructure. Our failure to successfully implement, improve
and integrate new systems and procedures, and otherwise manage our growth would
adversely affect our results of operations.
Our management team is new and we need these individuals to work together
effectively to manage our growth.
Because we only began operating our HealthCentral.com website in November
1998, virtually our entire management team is relatively new. Our future
success depends on the successful integration of this management team and their
ability to work together effectively. Also, we need to successfully integrate
ePills.com's employees into our existing team.
In order to execute our growth plan we must attract, retain and motivate highly
skilled employees, and we face significant competition from other Internet,
healthcare and new media companies in doing so.
If we fail to attract new personnel or retain and motivate our current
personnel, our business and future growth prospects will be severely harmed. We
will need to hire additional personnel in virtually all operational areas,
including sales and marketing, production and research and development.
Competition for personnel throughout the Internet and healthcare industry is
intense. We may be unable to retain our key employees or attract, assimilate or
retain other highly qualified employees in the future. We have from time to
time in the past experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications.
Lengthy sales cycles for our institutional solutions could adversely affect our
revenue growth.
A key element of our institutional strategy is to market our solutions
directly to large healthcare organizations. We expect that the sales process
will be lengthy and will involve a significant technical evaluation and
commitment of capital and other resources by our customers. The sales of our
solutions are subject to delays due to our customers' internal budgets and
procedures for approving large capital expenditures and deploying new
technologies within their networks.
If we are unable to acquire the necessary web domain names, our brands and
reputation could be damaged and we could lose customers.
We currently hold the Internet domain names healthcentral.com,
peoplespharmacy.healthcentral.com, epills.com and rxlist.com, as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the United States 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. As a result, we may not
acquire or maintain the healthcentral.com, peoplespharmacy.healthcentral.com,
epills.com or rxlist.com 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 brand name, trademarks and
other proprietary rights.
In addition we may be unable to prevent third parties from acquiring and
using domain names relating to our brands. The domain names doctoredell.com and
dredell.com are currently registered in the name of, and operated by, a third
party, and the domain name epill.com is registered in the name of, and operated
by, e-pill LLC, a company in the business of developing and marking medication
reminder products. The URLs e-pills.com and epill.com are also owned by third
parties. Any confusion that may result from information on or related to these
websites either presently or in the future, or on any other websites with
domain names relating to our brands, could impair both our ability to
capitalize upon our brands and our marketing strategy.
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We may not achieve the expected benefits of the acquisition of ePills.com, and
the integration of ePills.com may result in a disruption to our business or the
distraction of our management and employees.
We may not be able to successfully assimilate the ePills.com personnel and
operations or fund or accomplish the execution of this e-commerce business
plan. The integration of ePills.com into our business may strain our existing
technology and operations systems as we attempt to assimilate ePills.com into
our existing operations. In addition, key ePills.com personnel may decide not
to work for us. These difficulties could disrupt our ongoing business, distract
our management and employees or increase our expenses.
Any future acquisitions of companies or technologies may result in disruptions
to our business and/or the distraction of our management.
To date we have completed three acquisitions, Windom Health, ePills.com and
RxList.com. We may acquire or make investments in other complementary
businesses and technologies in the future. We may not be able to identify other
future suitable acquisition or investment candidates, and even if we do
identify suitable candidates, we may not be able to make these acquisitions or
investments on commercially acceptable terms, or at all. If we do acquire or
invest in other companies, we may not be able to realize the benefits we
expected to achieve at the time of entering into the transaction. In any future
acquisitions, we will likely face the same risks as discussed above with
respect to the integration of the business of ePills.com. Further, we may have
to incur debt or issue equity securities to pay for any future acquisitions or
investments, the issuance of which could be dilutive to our existing
stockholders.
Breaches in our security and other unexpected problems could result in lawsuits
by customers and a violation of federal law.
We retain confidential customer and patient information on our servers. We
use encryption and authentication technology licensed from third parties to
provide security and authentication for the secure transmission of confidential
information, such as buyer credit card numbers and non-anonymous patient
medical information. In addition, we maintain industry standard security
measures such as firewalls, video surveillance and secure facilities. Despite
the implementation of these security measures, our infrastructure may be
vulnerable to breaches from physical break-ins, computer viruses, programming
errors or attacks by third parties. Our systems are also vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure,
earthquakes and similar events. We do not have full redundancy for all of our
computer and telecommunications facilities and do not maintain a back-up data
facility. Any breach of security or unexpected natural disaster could subject
us to a lawsuit. We may be required to expend significant sums to protect
against security breaches or to alleviate problems caused by breaches. In
addition, a breach of privacy of patient health records could constitute a
violation of federal law. We may incur additional expenses if new regulations
regarding the use of personal information are adopted or if any regulator
chooses to investigate our privacy practices.
Any failure or inability to protect our intellectual property rights could
adversely affect our ability to establish our brands.
Our success depends significantly on our ability to protect our proprietary
rights in our content, technology, products and services. We also rely on a
variety of technologies that are licensed from third parties, including our
database and Internet server software, which is used in the HealthCentral.com
network to perform key functions. These third-party licenses may not be
available to us on commercially reasonable terms in the future. If we are not
adequately protected, our competitors could use the intellectual property that
we have developed to enhance their products and services, which could harm our
business. We rely on a
19
<PAGE>
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect our proprietary rights,
but these legal means afford only limited protection. See "Business--
Intellectual Property."
We may be sued by third parties for infringement of their proprietary rights.
The healthcare and Internet industries are characterized by the existence of
a large number of patents and frequent litigation based on allegations of
patent infringement or other violations of intellectual property rights. As the
number of entrants into our market increases, the possibility of an
intellectual property claim against us grows. Our content, technology, products
and services may not be able to sustain any third party claims or rights
against their use. Some of the information in our RxList.com database regarding
drug descriptions, clinical pharmacology, indications and usage, warnings and
the like is copied from package inserts, which accompany the particular drug.
We have not obtained licenses to reproduce this information from the various
pharmaceutical companies. Although we have not received a copyright claim to
date, we could face potential copyright infringement claims in this regard.
We may not be able to operate under the tradename "ePills.com."
We are aware that another company has filed an "intent to use" application
for the trademark "E-Pill." Any intellectual property claims, with or without
merit, could be time-consuming and expensive to litigate or settle and could
divert management attention from administering our core business.
As a publisher of online content, we may have liability for information we
provide on or which is accessed from the HealthCentral.com network.
Because users of our network and the websites of our institutional licensees
access health-related information, including with regard to possible adverse
reactions or side effects from medications or a particular medical condition
they may have, or may distribute our content to others, third parties may sue
us for, among other things, defamation, negligence, intellectual property
infringement, personal injury or other causes of action based on the nature and
content of materials that we publish or distribute. We could also become liable
if confidential information is disclosed inappropriately. These types of claims
have been brought successfully against online services in the past. Others
could also sue us for the content and services that are accessible from our
network through links to other websites or through content and materials that
may be posted by our users in chat rooms or bulletin boards.
Any indemnification provisions that we may have in agreements may not be
adequate to protect us. Our insurance may not adequately protect us against
these types of claims. Further, our business is based on establishing the
HealthCentral.com network as a trustworthy and dependable provider of health
care information and services. Allegations of impropriety, even if unfounded,
could therefore harm our reputation and business.
Our business could be harmed if the software, computer technology and other
systems we use are not year 2000 compliant.
Any failure of our material systems, our vendors' material systems or the
Internet to be able to distinguish between twentieth century dates and twenty-
first century dates could harm our business. Possible consequences of year 2000
problems include difficulties in operating our websites effectively, protecting
the confidentiality of patient records on our servers, conducting our e-
commerce business or conducting other fundamental parts of our business.
We are in the final stages of assessing the year 2000 readiness of the
software, computer technology and other services that we use that may not be
year 2000 compliant. Although we have attempted to isolate our systems to
minimize the expected period of downtime for our websites, in the event of
systems difficulties, we
20
<PAGE>
have not yet developed a contingency plan to address situations that may result
if we or our vendors are unable to achieve year 2000 compliance. We understand
that Medi-Mail, our pharmacy fulfillment provider, is not currently year 2000
compliant, but expects to be by November 1, 1999. If Medi-Mail has year 2000
problems, we could face delays in processing and fulfillment of prescription
drug orders placed on ePills.com. Our third party vendors may not all be year
2000 compliant, and we rely upon the vendors to implement patches or other
contingency plans. The cost of developing and implementing such measures could
be expensive.
We do not know whether external communications, content feeds and systems
outside of our direct control will function properly, and the success of our
business, and of our e-commerce strategy in particular significantly depends on
the year 2000 compliance of the computer systems and financial services used by
consumers. A significant disruption in the ability of consumers to reliably
access the Internet or portions of it or to use their credit cards would have a
negative impact on the demand for our products and services and reduce our
revenues. Additionally, we have warranted in several of our contracts that our
software, computer technology and other services are year 2000 compliant. To
the extent that we breach these warranties, we may face significant liability
under these contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
Our executive officers and directors own a large percentage of our voting stock
and could delay or prevent a change in our corporate control or other matters
requiring stockholder approval, even if favored by our other stockholders.
Immediately after this offering, our executive officers and directors, and
their respective affiliates, will continue to own approximately % of our
outstanding common stock. Accordingly, these stockholders may, as a practical
matter, be able to exert significant influence over matters requiring approval
by our stockholders, including the election of directors and the approval of
mergers or other business combinations. This concentration could have the
effect of delaying or preventing a change in control that other shareholders
view as favorable.
It may be difficult for a third party to acquire us even if doing so would be
beneficial to our stockholders.
Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. See "Management--Board Composition" and "Description of
Capital Stock--Delaware Anti-Takeover Law and Provisions of our Certificate of
Incorporation and Bylaws."
Risks Related to Our Industry
The success of our business model is dependent on continued growth and
acceptance of the Internet and growth of the online market for healthcare
information, products and services.
Our business model assumes that consumers will be attracted to and use
healthcare information and related content available on our Internet-based
consumer healthcare network which will, in turn, allow us the opportunity to
sell advertising and sponsorships designed to reach those consumers. Our
business model also assumes that those consumers will access important
healthcare needs through electronic commerce using our website and that
healthcare organizations and other Internet healthcare companies will partner
with us to reach these consumers. This business model is not yet proven, and
may not be successful. 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 and as an important channel for the
delivery of healthcare information, products and services. We need to attract a
significant number of consumers, institutions and other participants in the
healthcare industry to our network. Rapid growth in the use of and interest in
the Internet has occurred only recently and, to date, consumers have generally
looked to healthcare professionals, not the Internet, as their principal source
for health and wellness information. As a result, acceptance and use of the
Internet 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 acquiring healthcare information, products
and services.
21
<PAGE>
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.
Internet capacity constraints could impede the development of our business.
Our success depends upon a robust communications industry and infrastructure
for providing Internet access and carrying Internet traffic. The Internet may
not prove to be a viable commercial medium due to inadequate development of a
reliable network, delays in development of high speed modems, delays in the
adoption of new standards required to handle increased levels of Internet
activity, or increased government regulation. If the Internet continues to
experience significant growth in the number of users and level of transactions,
then the Internet infrastructure may not be able to continue to support the
demands placed on it. To the extent that our service is interrupted, our users
will be inconvenienced, our commercial customers will suffer from a loss in
advertising or service delivery and our reputation could be diminished.
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
network, 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 our brands and attract and retain
customers.
Governmental regulation of the Internet could affect our business.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the U.S.
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European Union
recently enacted its own privacy regulations. In particular, many government
agencies and consumers are focused on the privacy and security of medical and
pharmaceutical records. The law of the Internet, however, remains 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
privacy, libel and taxation apply to Internet websites like ours. The rapid
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 and
in particular, companies that maintain medical or pharmaceutical records. The
adoption or modification of laws or regulations relating to the Internet
business could adversely affect our ability to attract and serve customers. For
a more complete description of the risks we face relating to government
regulation of the Internet as it relates to our business, please see
"Business--Other Governmental Regulation."
The health industry is extremely dynamic and constantly changing, and thus our
business may be affected in unexpected ways.
The pressures of cost management, consumer demand for quality and safety and
professional concern about consumer reliance on non-professional advice will
dominate the healthcare marketplace for the foreseeable future. Any efforts to
contain costs by managed care entities will place downward pressures on gross
margins from sales of prescription drugs and other over-the-counter healthcare
products. Health care reform initiatives may further impact our prescription
drug sales. Any company in the health business is subject to the risk of an
extremely changeable marketplace, which could result in our need to continually
modify our business model, which could harm our business.
22
<PAGE>
Risks Related to this Offering
Management has broad discretion over how the proceeds of this offering will be
used.
Our management will have broad discretion with respect to the use of the net
proceeds from this offering, and investors will be relying on the judgment of
our management regarding the application of these proceeds. Presently,
anticipated uses include working capital, sales and marketing, funding
contractual obligations, including cash payments in the aggregate amount of
$46.6 million to AltaVista and America Online, website and content development,
infrastructure improvement, funding operating losses and potential
acquisitions. We may also use a portion of the proceeds for strategic alliances
and acquisitions and to repay debt. We have not yet determined the aggregate
amount of net proceeds to be used specifically for the foregoing purposes.
The liquidity of our common stock is uncertain because it has not been publicly
traded.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of Internet-related companies have been
extremely volatile.
Recent initial public offerings by Internet companies have been accompanied
by exceptional share price and trading volume changes in the first days and
weeks after the securities were released for public trading. Investors may not
be able to resell their shares at or above the initial public offering price.
If our future quarterly operating results are below the expectations of
securities analysts or investors, the price of our common stock would likely
decline. In the past, securities class action litigation has often been brought
against a company after a period of volatility in the market price of its
stock. Any securities litigation claims brought against us could result in
substantial expense and the diversion of management's attention from our core
business.
New investors will suffer immediate and substantial dilution in the tangible
net book value of their shares.
We expect the initial public offering price will be substantially higher
than the net tangible book value per share of the common stock. As a result,
investors purchasing common stock in this offering will incur immediate
substantial dilution. The net tangible book value of a share of common stock
purchased at the initial public offering price of $ per share will be only
$ . In addition, we have issued options and warrants to acquire common stock
at prices significantly below the initial public offering price. You may incur
additional dilution if holders of stock options or warrants, whether currently
outstanding or subsequently granted, exercise their options or warrants to
purchase common stock.
Future sales of shares by existing stockholders could affect our stock price.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall, potentially resulting in substantial losses to investors. 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, 1999, upon completion of this offering, we
will have outstanding shares of common stock, assuming no exercise of
the underwriters' over-allotment option assuming no exercise of options or
warrants. This includes
23
<PAGE>
shares that we are selling in the offering, which may be resold
immediately in the public market. The remaining 13,528,790 shares will become
eligible for resale in the public market as follows:
. 5,095,195 shares will be eligible for sale 180 days from the effective
date, due to agreements the holders of these shares have with us and the
underwriters.
. 7,142,795 shares will be eligible for resale within 180 days and 365 days
after the effective date due to the requirements of federal securities
laws.
. 1,290,800 shares will be eligible for sale 365 days from the date of this
prospectus due to an agreement the holder of these shares has with us
*****
24
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. These statements relate to future events or our future financial
performance, and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. Such factors include those listed
under "Risk Factors" in this prospectus.
In some cases, you can identify forward-looking statements by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of these
and other similar words.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, 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
Our net proceeds from the sale of the shares of common stock we are
offering are estimated to be $ ($ if the underwriters' over-allotment
option is exercised in full), assuming an offering price of $ per share,
after deducting the estimated underwriting discount and commissions and the
estimated offering expenses.
We currently expect to use the net proceeds primarily for working capital,
sales and marketing, funding contractual obligations, including cash payments
in the aggregate amount of $46.6 million to America Online and AltaVista over
the next two years, website and content development, infrastructure
improvements and funding operating losses. In addition, we may use a portion of
the net proceeds for complementary acquisitions of products, technologies and
businesses, although we have no present plans, commitments or agreements to
make any major acquisitions. The amount of cash that we actually expend for
working capital purposes will vary significantly depending on a number of
factors, including future revenue growth, if any, and the amount of cash we
generate from operations. Thus, management will have significant discretion in
applying the net proceeds of this offering. Pending the uses described above,
we will invest the net proceeds in short-term, investment grade, interest-
bearing securities.
DIVIDEND POLICY
We have never paid dividends on our common stock or preferred stock. We
currently intend to retain any future earnings to fund the development of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future.
25
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. the actual capitalization of HealthCentral.com as of June 30, 1999.
. the pro forma capitalization of HealthCentral.com after giving effect to:
. automatic conversion of all outstanding shares of preferred stock into
5,657,065 shares of common stock;
. the acquisition of Windom Health in August 1999, including $51,000 in
cash, $458,000 in notes payable and 2,357,341 shares of common stock
valued at $3.95 per share issued to shareholders of Windom Health in
connection with the acquisition;
. the net proceeds of $19.8 million from the sale of 4,523,065 shares of
Series B preferred stock in August and September 1999;
. the acquisition of ePills.com in October 1999, including 1,776,923
shares of common stock valued at $8.10 per share issued to, or
reserved for issuance pursuant to the assumption of options held by,
shareholders of ePills.com in connection with the acquisition; and
. the acquisition of RxList.com in October 1999, including 942,200
shares of common stock valued at $9.00 per share, an aggregate of $2.6
million in notes payable issued to shareholders of RxList.com and
$400,000 in assumed liabilities.
. the pro forma as adjusted capitalization after giving effect to the sale
of shares of common stock at an assumed initial public offering price of
$ per share in this offering, after deducting the estimated
underwriting discount and commissions and estimated offering expenses.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes to the Financial Statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------- ----------- -----------
<S> <C> <C> <C>
Long term debt--including current
portion.................................. $ 500,000 $ 3,785,534 $ --
---------- ----------- -----
Stockholders' equity:
Convertible preferred stock, par value
$0.001; 2,100,000 shares authorized,
1,134,000 shares issued and
outstanding; 4,700,000 shares
authorized, none issued or outstanding
pro forma; 5,000,000 shares authorized,
none issued or outstanding pro forma as
adjusted............................... 1,134 -- --
Common stock, par value $0.001,
26,600,000 shares authorized, 5,252,695
shares issued and outstanding;
31,080,000 shares authorized,
15,986,224 issued and outstanding pro
forma; 100,000,000 shares authorized
pro forma as adjusted, shares is-
sued and outstanding,
pro forma as adjusted.................. 4,468 15,986 --
Additional paid-in capital.............. 5,390,465 57,473,960 --
Notes receivable from stockholders...... (5,931) (5,931)
Deferred stock compensation ............ (2,437,103) (2,437,103) --
Accumulated deficit..................... (2,405,978) (3,210,978) --
---------- ----------- -----
Total stockholders' equity.............. 547,055 51,835,934 --
---------- ----------- -----
Total capitalization...................... $1,047,055 $55,621,468 $
========== =========== =====
</TABLE>
- --------
This table excludes the following shares as of June 30, 1999:
. 1,337,597 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $0.48 per share,
. 638,824 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.29 per share, and
. an aggregate of 1,995,644 shares available for future issuance under our
1998 Stock Plan. See "Management--Stock Plans" and Note 5 of Notes to
Financial Statements.
26
<PAGE>
DILUTION
The pro forma net tangible book value per share of our common stock at June
30, 1999 was $ . Pro forma net tangible book value per share represents total
pro forma tangible assets less liabilities, divided by pro forma common shares
outstanding. Pro forma net tangible book value reflects the actual net tangible
book value of the Company at June 30, 1999, and includes the pro forma effects
of the following events:
. the automatic conversion of all outstanding shares of preferred stock
into 5,657,065 shares of common stock
. the acquisition of Windom Health in August 1999, including $51,000 in
cash, $458,000 in notes payable and 2,357,341 shares of common stock
valued at $3.95 per share issued to shareholders of Windom Health in
connection with the acquisition;
. the net proceeds of $19.8 million from the sale of 4,523,065 shares of
Series B preferred stock in August and September 1999;
. the acquisition of ePills.com in October 1999, including 1,776,923 shares
of common stock valued at $8.10 per share issued to, or reserved for
issuance pursuant to the assumption of options held by, shareholders of
ePills.com in connection with the acquisition; and
. the acquisition of RxList.com in October 1999, including 942,200 shares
of common stock valued at $9.00 per share, an aggregate of $2.6 million
in notes payable issued to shareholders of RxList.com and $400,000 in
assumed liabilities.
After giving effect to our sale of shares of common stock in this offering
and after deducting the estimated underwriting discounts and commissions and
our estimated offering expenses, our pro forma net tangible book value as of
June 30, 1999 would have been $ , or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors. Dilution in pro forma net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately following this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of June 30,
1999.......................................................... $
Increase per share attributable to new investors...............
----
Pro forma net tangible book value after the offering.............
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the differences between the existing stockholders and new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid to us, and the average price per share paid.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ % $ % $
New investors....................
--- ----- --- -----
Totals......................... 100.0% $ 100.0%
=== ===== === =====
</TABLE>
- --------
This table excludes the following shares as of June 30, 1999:
. 1,337,597 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $0.48 per share,
27
<PAGE>
. 638,824 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.29 per share, and
. an aggregate of 1,995,644 shares available for future issuance under our
1998 Stock Plan. See "Management--Stock Plans" and Note 5 of Notes to
Financial Statements.
If the underwriters' over-allotment option is exercised in full, the
following will occur:
. the number of shares of common stock held by existing stockholders will
decrease as a percentage of the total number of outstanding shares to
approximately % of the total number of shares of our common stock
outstanding after this offering; and
. the number of shares held by new investors will be increased as a
percentage of the total number of outstanding shares to or
approximately % of the total number of shares of our common stock
outstanding after this offering.
28
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the period August
12, 1996 to December 31, 1996 and the years ended December 31, 1997 and 1998
and the balance sheet data at December 31, 1997 and 1998 are derived from the
audited financial statements included elsewhere in this prospectus. The balance
sheet data at December 31, 1996 is derived from our audited financial
statements not included elsewhere in this prospectus. The selected financial
data as of June 30, 1999 and for the six months ended June 30, 1998 and 1999
are derived from our unaudited financial statements that include, in our
opinion, all adjustments, consisting of only normal recurring adjustments,
necessary for the fair representation of the financial condition and results of
operations for such periods. The results of operations for the six months ended
June 30, 1999 or any other period are not necessarily indicative of our future
results. The selected financial data should be read in conjunction with our
financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Period from
Inception to Years Ended Six Months
December 31, December 31, Ended June 30,
------------ ---------------------- -----------------------
1996 1997 1998 1998 1999
------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Advertising............ $ -- $ -- $ 15,259 $ -- $ 126,546
---------- ---------- ---------- ---------- -----------
Operating expenses:
Production, content and
product development... -- -- 136,788 -- 496,197
Sales and marketing.... -- 848 141,516 -- 435,458
General and
administrative........ 86 300 78,549 2,619 257,988
Stock compensation..... -- -- 104,641 -- 902,931
---------- ---------- ---------- ---------- -----------
Total operating
expenses.............. 86 1,148 461,494 2,619 2,092,574
---------- ---------- ---------- ---------- -----------
Loss from operations.... (86) (1,148) (446,235) (2,619) (1,966,028)
Interest income, net.... -- -- -- -- 7,519
---------- ---------- ---------- ---------- -----------
Net loss................ $ (86) $ (1,148) $ (446,235) $ (2,619) $(1,958,509)
========== ========== ========== ========== ===========
Basic and diluted net
loss per share......... $ -- $ -- $ (0.09) $ -- $ (0.37)
========== ========== ========== ========== ===========
Shares used in computing
basic and diluted
net loss per share..... 4,318,144 5,163,200 5,221,800 5,215,400 5,238,187
========== ========== ========== ========== ===========
Pro forma basic and
diluted net loss per
share.................. $ (0.09) $ (0.31)
========== ===========
Shares used in computing
pro forma basic and
diluted net loss
per share.............. 5,246,655 6,372,187
========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1996 1997 1998 1999
------ ------ ---------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $7,414 $6,773 $1,091,551 $ 69,383
Working capital (deficit)................... 7,414 6,773 1,039,092 (314,675)
Total assets................................ 7,414 6,773 1,670,281 1,579,662
Long-term obligations....................... -- -- -- 500,000
Total shareholders' equity.................. 7,414 6,773 1,602,633 547,055
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
In addition to historical information, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties. HealthCentral.com's actual results could differ materially from
those anticipated by these forward looking statements due to factors discussed
under "Risk Factors," "Business" and elsewhere in this prospectus.
Overview
HealthCentral.com was co-founded by Dr. Dean S. Edell and James J. Hornthal
in August 1996, and, beginning in July 1998, was primarily involved in capital
raising activities and recruiting management personnel. In August 1998,
HealthCentral.com and Windom Health, a website development and consulting
services company to healthcare institutions, entered into a License and
Management Agreement under which HealthCentral.com took over the daily
management of Windom Health and undertook the development of the
HealthCentral.com website. The website was based largely on Windom Health's
software architecture and was launched in November 1998. Since the launch of
the website, we have focused on refining the technological architecture of the
HealthCentral.com website, developing programs and content to market the
HealthCentral.com brand name and attract users to the network, recruiting
personnel and raising capital. In September 1999, we acquired ePills.com, our
online drug store.
We have historically derived revenue from advertising sales, generally
short-term banner advertisements or sponsorships. We record advertising
revenues in the period the advertising services are provided to customers. We
currently use an outside vendor, DoubleClick, to solicit customers to use its
advertising services, to serve the ads to our website and to bill and collect
for these services. This outside vendor provides monthly reports indicating the
amount billed for our advertising services and the related administrative fee.
Advertising revenues, as reported by the outside vendor, are recorded net of
this administrative fee as we bear no collection risk for the gross amount of
the advertising fees. In addition, our ePills.com subsidiary will provide us
with e-commerce revenues from sales of health-related products through our
online drug store.
In order to implement our e-commerce strategy, we acquired ePills.com in
September 1999. In July and September 1999, ePills.com entered into a series of
agreements with Bergen Brunswig and its Medi-Mail subsidiary. These agreements
include various arrangements relating to the fulfillment of orders placed on
our website for healthcare products as well as access to the PlusCare Provider
Network of pharmacy benefit managers. Under these agreements, Bergen Brunswig
will be our exclusive fulfillment provider for over-the-counter and health and
beauty aid products and Medi-Mail will be our exclusive fulfillment provider
for most prescription drug orders. These types of arrangements are complex and
many important details regarding pricing, revenue sharing and operational
procedures have not yet been finalized. Once these detail arrangements have
been completed, we expect to recognize revenues from product sales for over-
the-counter and health and beauty aid products, net of discounts, when products
are shipped to customers. Further, we expect to recognize commissions for the
use of our website from sales made by Medi-Mail for all prescription drugs. In
both instances however, we will retain the ultimate credit risk for all sales
made by Bergen Brunswig and Medi-Mail.
HealthCentral.com incurred net losses of $86 in 1996, $1,148 in 1997,
$446,235 in 1998 and $1,958,509 for the six months ended June 30, 1999. We
anticipate that we will incur additional operating losses for the foreseeable
future.
Recent Events
In May 1999, pursuant to a letter of intent executed in 1998, we entered
into a definitive agreement to specify the terms of our acquisition of Windom
Health. The acquisition was completed on August 12, 1999, at which date Windom
Health became a wholly-owned subsidiary of HealthCentral.com. In connection
with the
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acquisition, we issued 2,357,341 shares of common stock, notes payable in the
aggregate amount of $458,000 and paid cash of $51,000, representing a total
purchase price of approximately $13.8 million.
This acquisition was accounted for using the purchase method of accounting.
We recorded intangibles and goodwill of approximately $12,455,000, which will
be amortized on a straight line basis over two to three years. We also recorded
a charge for acquired in-process research and development of $555,000.
In August and September 1999, we sold 4,523,065 shares of Series B preferred
stock to investors resulting in total net proceeds of $19.8 million. Each share
of Series B preferred stock is convertible into one share of common stock upon
closing of this offering.
In October 1999, we acquired ePills.com in exchange for 1,776,923 shares of
common stock issued to, or reserved for issuance pursuant to the assumption of
options held by, ePills.com stockholders, and the assumption of liabilities
representing a total purchase price of approximately $14.9 million. This
acquisition was accounted for using the purchase method of accounting. We
recorded intangibles and goodwill of approximately $13,197,000 which will be
amortized on a straight line basis over two to three years. We also recorded a
charge for acquired in-process research and development of $250,000.
In October 1999, we acquired RxList.com in exchange for 942,200 shares of
common stock, an aggregate of $2.6 million in notes payable to the RxList.com
shareholders discounted at a deemed interest rate of 10% over 6 months, and the
assumption of approximately $400,000 in liabilities, representing a total
purchase price of approximately $11.5 million. This acquisition was accounted
for using the purchase method of accounting. We recorded intangibles and
goodwill of approximately $11,383,000 which will be amortized on a straight
line basis over two to three years.
If AltaVista meets given performance thresholds under our agreement
regarding our co-branded health channel, we will issue warrants to AltaVista to
purchase shares of common stock, with the number of shares depending on the
amount by which AltaVista exceeds the performance thresholds. These warrants
will have varying exercise prices. If the market value of our common stock
exceeds the warrant exercise price on the date of issuance or during the
exercise period, there would be a deferred compensation charge associated with
the exercise of each of these warrants.
Results of Operations
Six Months Ended June 30, 1999 and 1998
Revenues. Revenues consist of advertising revenues principally from short-
term banner advertisements or sponsorships. Our total revenues increased to
$126,546 for the six months ended June 30, 1999 from $0 for the six months
ended June 30, 1998. The 1999 revenues resulted primarily from initial
advertising revenues after the launch of the HealthCentral.com website in
November 1998.
Production, Content and Product Development. Production, content and product
development expenses consist primarily of personnel costs for our engineering
and production personnel, expenditures related to editorial content, payments
to editorial consultants, server maintenance costs, and software development
and operations expenses. Production, content and product development expenses
increased to $496,197 for the six months ended June 30, 1999 from $0 for the
six months ended June 30, 1998. The 1999 expenses were primarily attributable
to personnel-related costs in connection with recruiting our production and
engineering staff for the HealthCentral.com website and new content. We expect
our production content and product development expenses to increase
substantially in the future as we enhance our websites and develop and license
additional content.
Sales and Marketing. Sales and marketing expenses consist primarily of
related personnel costs. Sales and marketing expenses increased to $435,458 for
the six months ended June 30, 1999 from $0 for the six months ended June 30,
1998. The 1999 sales and marketing expenses were primarily attributable to
salaries and
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benefits paid to new sales personnel. We expect that sales and marketing
expenses will increase in absolute dollars for the foreseeable future, as we
increase expenditures for branding, promotion and marketing, enter into new
promotional agreements, and expand our sales and marketing staff.
General and Administrative. General and administrative expenses consist
primarily of personnel costs and related costs for general corporate functions,
including executive management and finance and fees for legal and other
professional services. General and administrative expenses increased to
$257,988 for the six months ended June 30, 1999 from $2,619 for the six months
ended June 30, 1998. The increase was primarily related to personnel and legal
expense in order to support the growth of our business. We expect general and
administrative expenses to increase in the future as we hire additional
personnel and incur additional costs related to the growth of our business and
operation as a public company. In addition, we expect to expand our facilities
and incur associated expenses to support our anticipated growth.
Amortization of Stock Compensation. Options granted in the fourth quarter
of 1998 and in 1999 have been considered to be compensatory as their deemed
value for accounting purposes was greater than the exercise prices as
determined by the board of directors on the dates of grant. For the six months
ended June 30, 1999, we had recorded a total of $3,055,553 of deferred stock
compensation. We recognized amortization of stock compensation of $902,931 for
the six months ended June 30, 1999. Deferred stock compensation is being
amortized over the respective vesting periods of the outstanding options,
generally 4 years. We expect amortization expense to substantially increase in
future periods for options granted after June 30, 1999.
Years Ended December 31, 1998, 1997 and Period Ended December 31, 1996
Revenues. Our total revenues were $15,259 in 1998. There were no revenues in
1997 and 1996. We first recognized advertising revenues in November 1998 as a
result of the launch of the HealthCentral.com website.
Production, Content and Product Development. Production, content and product
development expenses were $136,788 in 1998. There were no expenses in 1997 and
1996. Expenses in 1998 were primarily attributable to personnel costs
associated with the development of the HealthCentral.com website.
Sales and Marketing. Sales and marketing expenses were $141,516 in 1998, an
increase of $140,668 over 1997 expenditures of $848. The increase in sales and
marketing expenses was primarily attributable to personnel related expenditures
as a result of the commencement of our sales and marketing efforts.
General and Administrative. General and administrative expenses were $78,549
in 1998, an increase of $78,249 over 1997 expenditures of $300. The increase in
general and administrative expenses in 1998 was primarily due to increases in
personnel and professional services, travel and facilities-related expenses
incurred to support the commencement and growth of our operations.
Amortization of Stock Compensation. Through December 31, 1998, we had
recorded a total of $389,122 of deferred stock compensation. We recognized
amortization of stock compensation of $104,641 for the year ended December 31,
1998.
Income Taxes. No provision for federal and state income taxes has been
recorded as we have incurred net operating losses through the year ended
December 31, 1998. As of December 31, 1998, we had approximately $239,000 of
federal and state net operating loss carryforwards available to offset future
taxable income. Due to the change in our ownership interests in connection with
this offering and prior sales of our equity securities, our use of these
federal and state net operating loss carryforwards will be subject to certain
annual limitations.
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Liquidity and Capital Resources
Since our inception, we have financed operations primarily through the sale
of our preferred stock and the issuance of a note payable. As of June 30, 1999,
we had $69,383 in cash and cash equivalents. Net cash provided by financing
activities was $1,935,025 in 1998, which was primarily the result of our
preferred stock financing in December 1998. Net cash provided by financing
activities was $507 in 1997, which was the result of the sale of common stock.
Net cash provided by financing activities was $7,500 in 1996, which was the
result of the sale of common stock. In August and September 1999, we sold
4,523,065 shares of Series B preferred stock resulting in net cash proceeds of
approximately $19.8 million.
Net cash used in operating activities was $723,979 in the six months ended
June 30, 1999 and $286,706 in 1998, which was primarily the result of net
operating losses and increases in prepaid expenses, partially reduced by non-
cash stock compensation expense and increases in deferred revenue. Net cash
used in operating activities was $1,148 in 1997, which was primarily the result
of a net operating loss. Net cash used in operating activities in 1996 was $86.
Net cash used in investing activities was $798,189 for the six months ended
June 30, 1999, $563,541 in 1998 and $0 in 1997. Cash used in investing
activities in 1999 and 1998 was primarily related to bridge loans to Windom
Health. There were no changes in cash flows as a result of investing activities
in 1996.
As of June 30, 1999, our principal commitment consisted of an obligation
outstanding under the terms of a $500,000 bridge loan. This loan was repaid in
full in August 1999. Although we have no material commitments for capital
expenditures, we anticipate substantial increases in our capital expenditures,
minimum advertising payments and lease commitments consistent with our
anticipated growth in operations, infrastructure and personnel.
In September 1999, we entered into a three-year agreement with AltaVista to
develop a co-branded health channel. The agreement provides that, in exchange
for a minimum number of user impressions on the co-branded health channel, we
are obligated to pay AltaVista approximately $65.6 million in cash and stock
over the three-year term of the agreement; however, either AltaVista or we may
terminate the relationship after two years, in which case our aggregate payment
obligation over the first two years in cash and stock would be $34.5 million.
In addition, in August 1999, ePills.com entered into a two-year agreement with
America Online under which ePills.com will appear as an anchor tenant on the
America Online HealthOnline Pharmacy Channel and receive a minimum number of
advertising impressions in exchange for payments of $14.1 million.
Our capital requirements depend on numerous factors, including market
acceptance of our HealthCentral.com network, and the resources we allocate to
building our network, marketing and selling our products and services, and
promoting our brand. We have experienced substantial increases in our
expenditures since our inception, consistent with growth in our operations and
personnel, and we anticipate that our expenditures will continue to increase
for the foreseeable future. Additionally, we will continue to evaluate possible
acquisitions of or investments in complementary businesses, technologies,
services or products and plan to expand our sales and marketing programs. We
currently believe that our available cash and cash equivalents at September 24,
1999, combined with the net proceeds from this offering, will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least the next 12 months. We may need to raise additional capital, however, in
order to fund more rapid expansion, including significant increases in
personnel and office facilities; to develop new or enhance existing services or
products; to respond to competitive pressures; to enter into significant
promotional partnerships; or to acquire or invest in complementary businesses,
technologies, services or products. In addition, in order to meet our long term
liquidity needs, we may need to raise additional funds, establish a credit
facility or seek other financing arrangements. Additional funding may not be
available on favorable terms or at all.
Recent Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivatives and Hedging
Activities." Statement No. 133 establishes
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accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. In July 1999, the Board issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133." This Statement deferred the effective date of
Statement No. 133 until fiscal years beginning after June 15, 2000. We will
adopt Statement No. 133 during the year ending December 31, 2001. To date, we
have not engaged in derivative or hedging activities and we are unable to
predict the impact of adopting Statement No. 133 if we were to engage in
derivative and hedging activities in the future.
Disclosures About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of our cash
equivalents, we believe that we are not subject to any material market risk
exposure.
We do not have any foreign currency hedging or other derivative financial
instruments as of June 30, 1999.
Year 2000 Compliance
We may be exposed to a loss of revenues and our operating expenses could
increase if the systems on which we are dependent to conduct our operations are
not year 2000 compliant. Our potential areas of exposure include products
purchased from third parties, information technology, including computers and
software, and non-information technology, including telephone systems and other
equipment used internally. The reasonably likely worst case scenario for year
2000 issues would be if a significant defect exists in key hardware or software
and if a solution for such a problem were not immediately available. If a
problem is detected in these subsystems during our year 2000 compliance testing
process, these components will need to be revised or replaced.
We do not currently have a complete contingency plan to deal with the worst-
case scenario that might occur if technologies we are dependent upon are not
year 2000 compliant and fail to operate effectively after the year 2000. We
intend to develop a plan for this scenario upon the completion of our
compliance assessment plan. This contingency plan is expected to be completed
by early in the fourth quarter of 1999.
All areas that are vital to our operations are being tested and validated
for year 2000 compliance. We have completed our year 2000 compliance assessment
plan and expect to complete our compliance testing and related documentation by
the end of the fourth quarter. Until our testing is complete we will not be
able to evaluate whether our systems will need to be revised or replaced, or
the cost involved. We have contacted all our major third party vendors. Of
these vendors, 100% have had written statements concerning their year 2000
compliance and strategy on their websites or in their software documentation.
Of the vendors that have replied, 60% are representing that they are year 2000
compliant, while 40% are still in the process of fixing any known year 2000
problems or have already identified specific patches available that we will
need to install and verify. To the extent that vendors fail to provide
certification that they are year 2000 compliant, we will seek to terminate and
replace those relationships.
We do not expect to spend more than $15,000 to assess and remediate the year
2000 problem based on the size of our operations, the percentage of our vendors
that sell industry-standard software upon which we rely to ensure compliance,
and the lack of dependency on older legacy software in our systems.
In the event that our production and operational facilities that support our
websites are not year 2000 compliant, portions of our websites may become
inaccessible. A prolonged disruption in our operations could cause our business
clients and consumers to stop doing business with us. Our review of our systems
has shown that there is no single application that would make our websites
totally unavailable and we believe that we can quickly address any difficulties
that may arise. In the event that our webhosting facilities are not year 2000
compliant, our websites would be unavailable and we would not be able to
deliver services to our users until such time as we could relocate our servers
to an unaffected facility.
If our present efforts to address the year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with whom we
conduct business do not successfully address such issues, our business could be
significantly disrupted.
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BUSINESS
Company Overview
We provide original, trustworthy, up-to-date and personalized online
healthcare information and sell health-related products to consumers through
our HealthCentral.com network. In addition, we enable healthcare institutions
to provide healthcare information to their patients and consumers through our
institutional Internet services business.
Through our HealthCentral.com network, we derive revenue from
advertisements, sponsorships and e-commerce. Through our institutional Internet
services business we derive revenue from annual license fees for applications,
content, hosting and maintenance services, as well as from development fees for
customization services.
We believe we are strongly positioned to integrate a wide range of health-
related content with a complete healthcare e-commerce solution. Our goal is to
become the consumer's most trusted and complete online source of healthcare
information and products. We intend to accomplish this by:
. providing credible, original, engaging and personalized content through
our HealthCentral.com network;
. offering a broad range of products through our online drug store,
ePills.com;
. offering our content to our e-commerce customers to help them make
better-informed purchases of health-related products;
. maintaining the strict independence of our editorial content; and
. utilizing a cross-media promotions strategy leveraging our relationships
with established medical media personalities from traditional media.
Our HealthCentral.com network of interactive websites offers consumer-
oriented health content and health related e-commerce. Our flagship
HealthCentral.com website currently offers health-related content provided by
media personalities such as Dr. Dean Edell. Our ePills.com online drug store
offers approximately 23,000 SKUs of prescription pharmaceutical products,
health and beauty aids, parenting and personal care products and nutritional
supplements. RxList.com is our online database of over 4,000 pharmaceuticals
and other medicines, with extensive information on 600 entries. We recently
entered into an agreement with AltaVista under which we will be the exclusive
healthcare content provider to its website, subject to conditions, and we
expect to launch our co-branded health channel in the first quarter of 2000. We
expect to launch our PeoplesPharmacy.HealthCentral.com website, featuring Joe
and Teresa Graedon, and our Canadian co-branded health channel on MediaLinx in
the fourth quarter of 1999.
In addition, we act as an application service provider for healthcare
institutions by designing, hosting and maintaining private label websites for
these institutional clients. Some of our largest clients include Brown and
Toland, Scripps Clinic, Sutter Health and Catholic Healthcare West.
Industry Background
The Growth of the Internet and Electronic Commerce
The Internet has revolutionized the way in which people obtain and exchange
information and transact business. International Data Corporation, or IDC,
estimates that the number of Internet users will increase from 142 million at
the end of 1998 to 500 million by the end of 2003. The Internet has unique and
powerful characteristics that differentiate it from traditional channels of
retail distribution, which are often narrow in selection, inconvenient, limited
in product information and lacking in privacy. IDC estimates that worldwide
business-to-consumer sales over the Internet will increase from approximately
$11 billion in 1998 to approximately $93 billion by 2002.
The Growth of the Internet Healthcare Market
The Internet has become an increasingly popular source for healthcare
information and products. Consumer research conducted by Cyber Dialogue in 1999
found that 24.8 million U.S. adults search for health information on the
Internet, with the number of people retrieving health-related information
projected to grow
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to 30 million in 2000. This growth in demand for online health information has
been driven by consumers seeking to make better personal health care decisions.
Consumers are also increasingly purchasing healthcare products online.
Forrester Research estimates that 31.6% of surveyed Internet users shopped for
healthcare products online during the previous six months. According to Jupiter
Communications, the total online and offline market for health goods, which
includes over-the-counter as well as prescription drugs, is expected to grow
from $133.6 billion in 1998 to $205.2 billion in 2003, while the amount of
online consumer purchases of healthcare goods is expected to grow from $2.4
million in 1998 to $1.7 billion in 2003.
Healthcare Industry Trends
Consumers are taking it upon themselves to seek more information about their
healthcare needs for the following reasons:
. Patients' access to their physicians has become significantly reduced due
to managed care.
. Employers are increasingly shifting healthcare costs and decisions to
their employees.
. Insurance plans allow individuals greater choice in healthcare options,
at increased personal costs.
. Advances in medicine have broadened treatment options for many medical
conditions.
The advent of the Internet has provided a medium for consumers to seek such
information. Moreover, the Internet allows consumers to seek information on
sensitive or embarrassing health issues while maintaining anonymity and
confidentiality.
Payors and providers, who are faced with increasing economic pressures as an
outcome of managed care, are increasingly competing for consumers. Physician
groups compete to increase their patient bases to spread their administrative
costs and increase their negotiating leverage with payors. This competition in
the provider market is exacerbated by an oversupply of specialist physicians in
many markets and underutilization in many hospitals. Due to this increased
competition for members and patients, both payors and providers are looking for
ways to develop and maintain the loyalty of their existing members and patients
and attract new members and patients. Internet-based services enable health
plans and providers to differentiate their services, decrease their customer
support costs, and improve ties with their members or patients.
The consumer has also become the marketing focus of commercial healthcare
enterprises, such as pharmaceutical and other healthcare products companies.
While pharmaceutical manufacturers have traditionally marketed their
prescription products to physicians, these companies have recognized that
consumers want to learn about and exercise greater control over their drug
therapies across an ever-widening list of conditions. Pharmaceutical companies
have thus begun advertising their products directly to consumers, most notably
through television advertising. This direct-to-consumer, or DTC, advertising is
increasing rapidly. Jupiter Communications projects that overall health related
advertising spending in all forms of media will increase to $10.8 billion by
2003, while DTC advertising for pharmaceutical products will grow to almost
$3.8 billion. Advertisers are also increasingly turning to the Internet as a
medium to deliver their message. Jupiter Communications projects that overall
online health and medical advertising spending, including online DTC
advertising, will increase to $356 million by 2003, up from $12.3 million in
1998.
Internet Healthcare Market Opportunities
Although the Internet enables consumers to access healthcare information,
products and services, several Internet healthcare opportunities have yet to be
fully addressed. Despite approximately 15,000 healthcare websites, online
healthcare information is typically provided in a generic, impersonal and
sometimes misleading manner, with the line between editorial content and
advertising blurred. In addition, Internet services offered to healthcare
institutions typically offer no customization capabilities or branding
opportunity to these institutions.
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The interactive nature of the Internet enables a unique combination of
content provision with product offerings. However, the markets for health-
related content and e-commerce have not been well integrated to date. Online
merchants of health-related products are beginning to overcome the challenges
of inconvenience, narrow selection and lack of privacy that face traditional
store-based retailers. Yet, we believe these online merchants generally do not
offer content that is both wide-ranging and personalized in combination with
their product offerings.
HealthCentral.com Solution
We provide original, trustworthy, up-to-date and personalized online
healthcare information and sell health-related products to consumers through
our HealthCentral.com network. In addition, we enable healthcare institutions
to provide healthcare information to their patients and consumers through our
institutional Internet services business.
Our HealthCentral.com Network
Our consumer-focused network of interactive websites currently consists of
our flagship HealthCentral.com website, our RxList.com pharmaceutical database
and our ePills.com online drug store. We also plan to launch our
PeoplesPharmacy.HealthCentral.com website and our MediaLinx Canadian affiliate
in the fourth quarter of 1999, and our AltaVista co-branded health channel in
the first quarter of 2000. We also have important affiliations with other
online promotional and portal companies. Our HealthCentral.com network is a
global consumer health information source--from current fitness issues to
complex diseases--as well as an online drug store through which consumers can
purchase health-related products.
Unique, Trustworthy and Engaging Health Information Content. Our
HealthCentral.com network is built on the provision of unique and engaging
information from medical professionals who have established a high degree of
trust with consumers through traditional media. Currently our original content
comes from established media sources such as Dr. Dean Edell, one of the leading
physician broadcasters in the United States over the past twenty years, and Joe
and Teresa Graedon, who host their own internationally syndicated radio show
and write The People's Pharmacy, a nationally syndicated newspaper column.
Online Prescription Pharmaceuticals and Other Health-Related
Products. ePills.com offers approximately 23,000 SKUs, of which approximately
12,000 are prescription pharmaceuticals and approximately 11,000 are health and
beauty aids and over-the-counter medications. ePills.com has fulfillment
agreements with Bergen Brunswig, a major drug distributor, for health and
beauty aids, over-the-counter products and, through Bergen Brunswig's Medi-Mail
mail order pharmacy subsidiary, prescription drug orders. Through this
relationship with Bergen Brunswig and Medi-Mail, ePills.com also has access to
the Good Neighbor Pharmacy Network, a coalition of approximately 2,000
participating retail pharmacies nationwide, and the PlusCare Provider Network
of third-party pharmaceutical benefit management companies, or PBMs.
Collectively, these PBMs provide prescription drug benefits for approximately
80 million covered lives.
Personalized Level of Service. We personalize the level of service for our
visitors to enable them to make informed personal health decisions. Our
proprietary tools were designed and developed over a 15-year period by Windom
Health, whose efforts were in part funded through an advanced technology
program under a shared grant of $20 million from governmental and private
sources. By using our various interactive tools, visitors can receive a
personal health report outlining their greatest health risks, find information
tailored to their interests and build their online personal health record. This
personalized content includes action guides relating to visitors' particular
health concerns and free e-mail newsletters on specific healthcare topics, for
which we currently have approximately 400,000 subscriptions.
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Institutional Internet Services
Primary Online Consumer Interface for Institutional Clients. We act as an
application service provider for healthcare institutions by designing, hosting
and maintaining their private label websites. Unlike many of our competitors,
we provide these services on a private label basis, which enables our
institutional clients to build needed brand loyalty to retain and attract
members and patients. We receive both development fees for building customized
websites and an annual license fee for our content and interactive tools.
Multiple Levels of Service to Institutional Clients. With our private label
websites, our institutional clients are able to improve their patient support
and marketing efforts, reduce their administrative costs of interacting with
their patients and provide relevant health information, control and choice to
the consumer. We offer three levels of application services:
. QuickStart. Our entry-level service package, called QuickStart, can be
implemented in as few as two days and provides basic tools.
. A La Carte Application Licenses. Institutions may license any combination
of our content and interactive tools to incorporate into their own
websites. We also offer administrative tools for both updating content
and measuring site usage. License fees, which include fees for
maintenance but not technical support, depend on the combination of tools
and content licensed.
. Comprehensive Website Development. Our premium service features
comprehensive website development, in which we integrate the
institutional customer's content and tools with our content and tools,
then continually update our content and maintain the website. We receive
both a fee, based on time and materials, for developing the website and
an annual license fee, which includes four hours per month of maintenance
and customer support. We also customize our tools to suit the specific
institutional client's needs, which leads to the development of unique
tools that can often be repurposed for use on our consumer network or on
other institutional websites.
Our Strategy
Our goal is to become the consumer's most trusted and complete online source
of healthcare information and products. We intend to accomplish this objective
by the following:
Build Our Brands and Drive Network Traffic Through Our Cross-Media
Exposure. Our cross-media strategy entails increasing our exposure through the
promotional efforts of established medical professionals in traditional media
such as television, radio and newspaper, and through select Internet portal
relationships. We believe our cross-media strategy is a cost-effective means
for increasing and sustaining our network traffic. We intend to continue
building our cross-media exposure to build brand awareness and drive traffic to
HealthCentral.com and other websites on the HealthCentral.com network,
including RxList.com and ePills.com.
. Dr. Dean Edell. Dr. Dean Edell is the host of the Dr. Dean Edell Show, a
daily one hour radio program on over 300 radio stations, including the 20
largest radio markets in the United States. Dr. Edell typically refers
listeners to our HealthCentral.com network several times on his daily
one-hour syndicated radio program. He also has daily Medical Minutes
radio programs typically aired during morning and evening rush hour
traffic. Dr. Edell reaches 13 million radio listeners weekly, according
to the Arbitron report. Dr. Edell also has a daily syndicated television
report, which is broadcast in over 50 markets, including seven of the
20 largest television markets in the United States. According to AC
Nielsen, Dr. Edell reaches over 7 million television viewers each week.
We expect that the television broadcast will be rebranded as The
HealthCentral.com Report upon annual syndication renewals beginning in
October 1999.
. The People's Pharmacy. Teresa and Joe Graedon write The People's
Pharmacy, a newspaper column syndicated by King Features and published
three times a week in over 100 markets, including
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New York, Baltimore, Los Angeles, Boston and Chicago. The Graedons also
host a weekly radio show that is broadcast on over 500 stations in more
than 100 countries. In addition, they are the authors of ten books,
including The People's Pharmacy, a New York Times No. 1 best seller. In
the fourth quarter of 1999, we expect to launch a co-branded website,
PeoplesPharmacy.HealthCentral.com.
. Portal Relationships with AltaVista, America Online and MediaLinx. In
September 1999, we entered into an agreement with AltaVista under which
we will be the exclusive healthcare content provider to its website,
subject to conditions, and we expect to launch a co-branded health
channel in the first quarter of 2000. In August 1999, ePills.com entered
into a two-year agreement with America Online, under which ePills.com
will appear as one of the five health-related anchor tenants on the
America Online HealthOnline Pharmacy Channel. In the fourth quarter of
1999, we expect to launch our co-branded health website with MediaLinx,
which manages the largest Internet service provider in Canada.
. Other Internet Affiliations. We have agreements with portals and other
websites, including AskJeeves.com, Broadcast.com, Looksmart, NetPulse,
Snap.com and Yahoo!.
Cultivate Multiple Revenue Streams. Our strategy is to develop our multiple
revenue streams to spread our business risk and leverage our intellectual
property. We currently receive revenue from three different sources:
. Sponsorship and Advertising Fees. Companies can sponsor, through
exclusive advertising, Health Topic Centers, which are pages devoted to
specific health issues written and compiled by our editorial staff, or
free e-mail newsletters requested by users on specific health topics. We
currently have approximately 400,000 subscriptions to these newsletters.
We generate advertising fees from placing ads, all of which are clearly
delineated from our editorial content, on our websites. DoubleClick
currently acts as our advertising sales agent for our HealthCentral.com
website and, since January 1999, 100% of our available ad inventory has
been sold. DoubleClick also acts as our advertising sales agent for our
RxList.com website. We also intend to derive fees from developing bridge
sites that allow users to access commercial information from various
pharmaceutical and other healthcare companies.
. e-commerce. ePills.com, our online drug store, offers prescription
pharmaceutical products, health and beauty aids, parenting and personal
care products and nutritional supplements. ePills.com currently delivers
prescriptions, over-the-counter items, and health and beauty aids by mail
order. In the first half of 2000, we expect to make prescriptions
available for pickup, and in some cases same-day delivery, from the
approximately 2,000 local pharmacies in the Good Neighbor Pharmacy
Network .
. Institutional Internet Services. Our institutional clients pay us fees
for licensing our tools and content, as well as development fees for
customized website development. We have developed a personal health
record that enables our institutional clients to provide their members
or patients with Internet access to personal health data. This service
is currently in beta testing at Catholic Healthcare West.
Deliver Compelling and Unique Content to Consumers. We intend to
continually add credible and compelling content and provide interactive and
personalized tools to retain visitors to our HealthCentral.com network. Our
production and editorial staff of 29 employees and consultants develops,
screens, edits and compiles content for our HealthCentral.com network, so that
the healthcare information we provide continues to be original, topical and
engaging for our visitors.
Attract a Growing Base of Customers to ePills.com and Provide Visitors with
a Superior Shopping Experience. We intend to grow our online drug store
business by:
. offering consumers useful links to information related to products by
integrating selected content and tools from HealthCentral.com,
RxList.com and PeoplesPharmacy.HealthCentral.com;
. strengthening the ePills.com brand through traditional and online
advertising;
. expanding our broad range of consumer products and services;
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. offering the consumer the choice of mail order delivery, in-store pickup
or, in some cases, delivery from any of the approximately 2,000
pharmacies in the Good Neighbor Pharmacy Network;
. encouraging repeat purchasing patterns by allowing customers to store
frequently purchased items in their own personal shopping lists;
. continually improving the shopping experience by adding new features to
the site; and
. maintaining a high level of customer service.
Leverage Personalization Features. Our database of visitor information will
allow us to improve the user's return visits to our network by providing the
user with targeted content of particular interest. Each page of our content is
reviewed by our editorial staff and linked to specific health conditions or
interests. While protecting all confidential patient information, we can
provide advertisers and electronic merchants with direct links to highly
specialized target markets, enabling them to use DTC advertising more
efficiently.
Maintain and Cultivate a Relationship of Trust with Consumers. Through our
affiliations with trusted media personalities such as Dr. Dean Edell and Teresa
and Joe Graedon of The People's Pharmacy, we enjoy a privileged and trusted
status with those consumers who seek our HealthCentral.com network based on
their experience with those personalities. We hold that level of trust in high
regard and seek to maintain it by providing consumers with reliable editorial-
reviewed content and by keeping individual consumer information confidential.
We strive to clearly delineate our editorial content from our advertising.
Leverage Strategic Relationships. We have strategic relationships with
AltaVista, America Online, and Bergen Brunswig, which we plan to leverage into
increased traffic, branding and market power. We intend to pursue additional
complementary relationships that would provide us with increased competitive
advantage.
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Content and Interactive Tools
The following table describes our content and interactive tools and their
availability directly to the consumer on our HealthCentral.com network and
indirectly through our institutional Internet services. Some of our tools were
developed over a 15-year period by Windom Health.
<TABLE>
<CAPTION>
Content/Tool Availability Description
<S> <C> <C>
News and Features
Dr. Dean Edell Consumer, Unique content on topics introduced by
Institutional Dr. Edell on his radio and television
broadcasts, as well as other original
reports, searchable archives,
television broadcast transcripts, and
the Ask Dr. Dean feature, through which
Dr. Edell selects several e-mail
questions per week for discussion on
his radio broadcast
- ----------------------------------------------------------------------------------------------
The People's Pharmacy (scheduled Q4/99) Exclusive Internet publication of
Consumer, pharmacological information and
Institutional resources developed by Joe and Teresa
Graedon, health columnists, radio
personalities, and authors of 10 books,
including The People's Pharmacy
- ----------------------------------------------------------------------------------------------
RxList Consumer, Internet drug index that contains
Institutional content on pharmaceuticals. Keyword
search, alternative medicines, drug
specific discussions, and drug
summaries including physician
monographs, consumer monographs and
searchable drug topics. Includes a
database of over 4,000 pharmaceuticals
and other medicines, with extensive
information on 600 entries.
- ----------------------------------------------------------------------------------------------
Columnists Consumer, Original columns by Joe Flower,
Institutional Healthcare Futurist; Oscar London,
M.D., Medical Humorist;
Rochelle Perrine Schmalz, M.S.L.,
Medical Librarian
- ----------------------------------------------------------------------------------------------
Daily Health News Consumer, Daily consumer-oriented health stories
Institutional from Reuters and the Associated Press,
organized and edited by our editors,
linked to related content and tools on
our site
Interactive Health Assessment
HealthView Risk Consumer, The LifeView interactive survey, which
Assessment Institutional uses regression models and data from
the Center for Disease Control to
analyze health risks based on
individual survey responses, as well as
shorter surveys concerning such areas
as exercise and fitness, stress
management, diet and nutrition,
substance abuse, and sexual health
- ----------------------------------------------------------------------------------------------
Cool Tools Consumer, Engaging questionnaires and simple
Institutional tests to assess or demonstrate various
health topics, such as facial
proportions, body mass index, waist-to-
hip ratio, ideal weight, life
expectancy, calorie counting
techniques, and specific disease risks
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Content/Tool Availability Description
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Personal Health Record Consumer, Private repository of composited health
Institutional data collected either by saving the
results of the LifeView Health Risk
Assessment, saving the results of any
of the five mini-profile surveys, or by
saving the My Health Notes file
containing self-created information
about family health, insurance,
emergency contacts and pet health
</TABLE>
<TABLE>
<S> <C> <C>
Databases and Search
Health Explorer Search Consumer, Search engine, based upon commercially
Engine Institutional available technology, which allows
rapid searches through large volumes of
content; enhanced by our keyword
taxonomy that improves search results
and allows contextually relevant
information to be displayed during or
after a search; may be used to crawl
and classify other sources of health
information as well as poll major
search engines in a meta search
- ---------------------------------------------------------------------------------------
Health Libraries Consumer, Our proprietary encyclopedia containing
Institutional reports of over 700 diseases and
conditions, compiled and updated by Dr.
Kevin Patrick, our Chief Medical
Officer, currently the Editor-in-Chief
of the American Journal of Preventive
Medicine; also a second health library
licensed from a third party on general
health, pediatrics, and sexual health
- ---------------------------------------------------------------------------------------
Health Topic Centers Consumer, Over 90 different collections of
Institutional resources, all updated weekly, each
focusing on a particular topic and
providing links to current news
stories, original content, and online
reports, organized into areas of
interest such as Hot Topics, Fitness
and Nutrition, Health Conditions, Life
Issues, Wellness and Alternative
Therapies
- ---------------------------------------------------------------------------------------
Website Directory Consumer, Comprehensive database of over 2,000
Institutional health-related websites of government
agencies and non-profit and educational
organizations, compiled and screened by
our editorial team
- ---------------------------------------------------------------------------------------
Books and Video Consumer, Database of health-related books and
Directory Institutional videos, which can be purchased online
through Amazon.com
- ---------------------------------------------------------------------------------------
Personalized Information and Discussion
Personalized Consumer, Comprehensive architecture for
Newsletter Engine Institutional providing personalized newsletters to
subscribers, based on their self-
identified health risks and concerns
- ---------------------------------------------------------------------------------------
Discussion Groups Consumer, Discussion groups allowing users to
Institutional build communities around health-related
topics of interest
- ---------------------------------------------------------------------------------------
Health Reminders Institutional Online reminders to users of upcoming
(Consumer scheduled health obligations
Q1/00)
</TABLE>
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Content/Tool Availability Description
<S> <C> <C>
Resource Locators
Physician Finder Institutional Physician directories with biographies,
specialties and locations; integrated
for contextual linking within the site
- ----------------------------------------------------------------------------------
Facilities Finder Institutional Facility directories with profile
information and maps; linked to related
information in the site
- ----------------------------------------------------------------------------------
Events Finder Institutional Calendar of events and classes offered
by each institution
- ----------------------------------------------------------------------------------
Community Health (scheduled Q4/99) Directory of community health resources
Resource Finder Institutional within each institution's community
</TABLE>
ePills.com
ePills.com, our online drug store, was founded in January 1999 and in
September 1999 launched its website. ePills.com has fulfillment agreements with
Bergen Brunswig, a major drug distributor, for health and beauty aids, over-
the-counter products and, through Bergen Brunswig's Medi-Mail mail order
pharmacy subsidiary, prescription drug orders. ePills.com also has an agreement
with Bergen Brunswig for access to the PlusCare Provider Network of pharmacy
benefit managers, which has approximately 80 million covered lives. We expect
that access to the PlusCare Provider Network will enable many of our customers'
prescription drug orders to be covered by their pharmacy benefit managers.
ePills.com also has a two-year agreement with America Online under which it
is one of five health anchor tenants on the America Online HealthOnline
Pharmacy Channel, only three of which currently market prescription
pharmaceuticals on America Online.
Products Available on Our ePills.com Website
We provide our customers with access to over 23,000 SKUs of prescription
pharmaceuticals, health and beauty aids and health-related over-the-counter
products through our relationship with Bergen Brunswig. Products are organized
on the ePills.com website into the following categories:
. Health. The health category includes over-the-counter remedies, such as
cough, cold, allergy and pain relief medications, and products for eye
and ear care, family planning, and home health. Representative brands
carried in our health category include Bayer, Advil, Excedrin,
Robitussin, Vicks and Alka-Seltzer.
. Personal Care. The personal care market category includes products
related to deodorants, foot care, men's care, oral hygiene, soaps and
women's care. Representative brands carried in our personal care product
category include Gillette, Revlon, Desenex, Rogaine, Crest, Ivory, and
Playtex.
. Supplements. The supplements category includes adult nutritionals, diet,
herbs, minerals, natural health, sports and fitness, and vitamins.
Representative brands carried in our supplements category include Slim-
Fast, Twin Labs, Weider, Centrum, Geritol and Power Bar.
. Beauty. The beauty category includes cosmetics, fragrances, hair care,
nail care, skin care and sun protection products. Representative brands
carried in our beauty category include Cover Girl, L'Oreal, Christian
Dior, Vidal Sassoon and Clairol.
. Parenting. The parenting category includes baby care, child care and
prenatal products. Representative brands carried in our parenting
category include Tylenol Infant's, Advil, and Huggies.
. Prescriptions. This category consists of prescription medication for
chronic illnesses, such as high blood pressure, osteoporosis and
depression, as well as for acute illnesses. Chronic illnesses represent
approximately 73% of the U.S. prescription drug market according to
Advanstar Communications. These orders are currently delivered by mail,
and we expect to make these medications available for pickup and, in some
cases same-day delivery, from a local pharmacy in the Good Neighbor
Pharmacy Network in the first half of 2000.
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Shopping @ ePills.com
Customers at ePills.com can fill prescriptions and shop for brand name
health and beauty aids online from the privacy and convenience of their homes.
The ePills.com site has a virtual shopping bag that keeps a running tab of
selected items and prices, allowing shoppers to quickly purchase their needed
healthcare products. The shopping bag remains to the right of their screen
while browsing so that consumers do not have to click to a different page to
select each product. To quickly find a particular item, shoppers can use our
search engine, browsing the entire inventory by key word, such as the product
name, brand name or description. By the first half of 2000, we expect to offer
ailment-related focus centers for customers interested in finding and
researching products by relevant health topic, such as allergies and asthma,
back and neck, dietary control, stress relief, fitness, women's health and pain
relief.
To further enhance the shopping experience, we plan to supply the following
interactive tools and decision-support functionality:
. My ePills.com--personalization manager that creates custom shopping lists
and page layouts according to set preferences and past behavior.
. Rx Reminder--customizable shopping calendar for pre-order and re-
order/refill.
. Healthy Chat--chat rooms with virtual pointers to reference material,
e.g., product description, health information.
Currently, our customers can have their general questions about account
information, ordering products, and shipping status addressed by ePills.com
customer care representatives. In addition, licensed pharmacists at Medi-Mail
are available to provide guidance, advice or information about prescription
medications concerning correct use and dosage, generic alternatives, potential
side effects and drug interactions.
Prescription Pharmaceutical Orders
Orders placed on our ePills.com website for prescription pharmaceuticals are
processed, adjudicated and fulfilled under our agreement with Medi-Mail, a mail
order pharmacy, which is a wholly owned subsidiary of Bergen Brunswig.
. Accepting Prescriptions. Our customers can initiate the prescription
process by any one of the following methods: ordering online, directing
their physician to call or fax the prescription to Medi-Mail or having
Medi-Mail contact their physician directly to obtain prescription
information. Medi-Mail is licensed to fill prescriptions in 48 of the 50
states. Licenses to fill prescriptions are pending in Michigan and
Tennessee.
. Verifying Prescriptions. Medi-Mail's licensed pharmacists are required
to verify the validity and completeness of prescription drug orders.
. Verifying Prescription Drug Coverage. Medi-Mail determines the
availability of prescription drug coverage and obtains all necessary
approvals from healthcare providers within one business day of the
placement of the order. If health insurance coverage is not available or
denied for any reason, Medi-Mail will advise us so that we can arrange
for payment in full by the consumer. Medi-Mail will not ship any order
unless we have advised them that we have received payment in full from
the consumer.
. Drug Utilization Review. In the future, we intend to build a database
for each customer based upon his or her historical prescription usage at
ePills.com. We expect that the pharmacists at Medi-Mail will eventually
be able to crosscheck each prescription received for allergies,
therapeutic overlap, overuse/underuse and drug interactions with other
drugs or foods.
. Delivery of Prescription Products. We offer our customers various
shipping options, including next-day delivery service. By the first half
of 2000, we expect to provide our customers with the ability to pick up
and, in some cases receive same-day delivery of, their prescription
drugs at any of the approximately 2,000 pharmacies in the Good Neighbor
Pharmacy Network.
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Distribution and Order Fulfillment for Non-Prescription Healthcare Products
We outsource our distribution and order fulfillment operations for health
and beauty aids and over-the-counter product orders on an exclusive basis with
Bergen Brunswig. Our agreement with Bergen Brunswig for these services ends in
August 2004.
Orders for health and beauty aids and over-the-counter products are placed
on our website and then forwarded to Bergen Brunswig by electronic data
interchange. Each order provides a description of the product, SKU
designations, quantities, method of payment, requested method of delivery and
the designated delivery location. We expect that Bergen Brunswig will maintain
sufficient inventory in an effort to facilitate the delivery of orders placed
on our sites. We currently offer approximately 11,000 SKUs of health and beauty
aids and over-the-counter products on our sites. We offer a variety of shipping
options, including UPS 3-5 day ground service, UPS 2nd day air and UPS Next Day
Air.
Customers
Consumer
In August 1999, according to an audit completed by Nielsen I/PRO,
www.healthcentral.com attracted 5 million page views and 1,174,726 total
visits, with an average visit time of 8 minutes, 16 seconds. DoubleClick
measured 599,400 unique users during that same month. Page views are the total
number of complete pages retrieved and viewed by visitors to the
HealthCentral.com website. Each single-session use of the website constitutes a
visit, and a unique user is an individual visitor to the HealthCentral.com
website.
In September 1999, according to Nielsen I/PRO, www.RxList.com attracted
2,840,548 page views and 773,516 total visits, with an average visit time of 6
minutes and 19 seconds. DoubleClick measured 364,000 unique users during that
same month.
Institutional
The following is a list of our current institutional customers, to whom we
are currently licensing and providing website development services:
<TABLE>
<CAPTION>
Name Description
---- -----------
<C> <S>
Brown & Toland Medical Group Partnership of University of California at San
Francisco and California Pacific Physicians
with over 1,200 physicians
Network of 48 hospitals based in California,
Catholic Healthcare West Nevada and Arizona
Healthcare insurer serving over six million
Humana members in 15 states
LifeMasters Disease management company that provides
patrons with online health services
Acute care hospital affiliated with Sutter
Mills Peninsula Medical Center Health
Palo Alto Medical Foundation Non-profit organization affiliated with Sutter
Health providing health care services, research
and education
Scripps Clinic Medical group and clinical research
organization with over 320 physicians based in
San Diego, California
Sutter Health Seventh largest healthcare network in the U.S.
with 26 acute care hospitals and relationships
with approximately 5,000 physicians
</TABLE>
Strategic Relationships
We have the following strategic relationships:
Dr. Dean Edell. In May 1999, we entered into a 15-year agreement with Dr.
Edell, in which he granted us the exclusive right to the use of his name in
connection with our business and exclusive commercialization
45
<PAGE>
rights to his services over the Internet, except for the publication of radio
transcripts and Internet broadcasts of his radio program. Under this agreement,
we own all content that Dr. Edell creates for our HealthCentral.com network.
America Online. In August 1999, ePills.com entered into a two-year agreement
with America Online, under which ePills.com will appear as one of five health-
related anchor tenants on the America Online HealthOnline Pharmacy Channel.
ePills.com is required to pay approximately $14 million over the term of the
agreement for a minimum number of advertising impressions.
AltaVista. In September 1999, we entered into a three year agreement with
AltaVista for the creation of a co-branded website on the AltaVista Health
Channel. We are the exclusive content provider on this co-branded site unless
we fail to provide desired content within a given period. Under the agreement,
AltaVista must deliver a minimum of advertising impressions and will receive
payments from us of up to $65.6 million in cash and stock issued at fair market
value over the three year term. In addition, we have agreed to issue AltaVista
warrants to purchase stock if they meet higher performance thresholds. If
AltaVista fails to deliver the minimum advertising impressions, we reduce our
payments to them. Either AltaVista or we may cancel the agreement after two
years.
Bergen Brunswig. Bergen Brunswig is one of our stockholders and a strategic
partner. In July and September 1999, we entered into a series of agreements
whereby Bergen Brunswig will provide us with fulfillment services for health
and beauty aids, over-the-counter products and prescription drug orders. The
fulfillment agreement for health and beauty aids and over-the-counter products
is a five-year agreement and provides our customers with access to over 11,000
SKUs. Our pharmacy services fulfillment agreement is with Bergen Brunswig's
mail order pharmacy, Medi-Mail, and has a term of five years and provides our
customers with access to over 12,000 prescription pharmaceutical SKUs. Our
relationship with Bergen Brunswig provides us access to the Good Neighbor
Pharmacy Network of approximately 2,000 independent pharmacies and access to
the PlusCare Provider Network of over 70 pharmacy benefit managers covering
approximately 80 million lives. Each of the PBMs has entered into an agreement
with Bergen Brunswig, pursuant to which it provides pharmacy benefits for
customers of approximately 4,000 individual pharmacies. Medi-Mail is one of
these pharmacies that has access to the benefits provided by the PlusCare
Provider Network.
The People's Pharmacy. In September 1999, we entered into a four-year
agreement with Joe and Teresa Graedon to launch a co-branded website,
PeoplesPharmacy.HealthCentral.com, to provide users with exclusive Internet
access to pharmacy-related content produced by the Graedons in the form of
books, newspaper columns, and radio shows. The People's Pharmacy, a newspaper
column written by the Graedons and syndicated by King Features, is published
three times a week in over 100 markets, including New York, Baltimore, Los
Angeles, Boston and Chicago. They also host a weekly radio show that is
broadcast on over 500 stations in more than 100 countries. The Graedons have
agreed to participate in an interactive pharmacy chat room on the co-branded
site. We make annual payments to the Graedons and have issued them an option to
purchase up to a maximum of 200,000 shares of our common stock.
MediaLinx. In the fourth quarter of 1999, we expect to launch our co-branded
website with MediaLinx, an Internet portal in Canada. MediaLinx manages
Sympatico, the largest Internet service provider in Canada. We expect that
Canadian users accessing MediaLinx will have access to our co-branded channel
offering Canadian-specific health content and editorials.
We also have promotional, content distribution and portal relationships with
AskJeeves.com, Broadcast.com, Looksmart, NetPulse, Snap.com and Yahoo!.
Technology
Our engineering mission is to provide a secure and confidential repository
for user information, provide high performance and high quality software and
application systems, and develop reusable components and
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tools that integrate with evolving healthcare standards. Our HealthCentral.com
and ePills.com websites employ similar three-tier software architectures, and
each is hosted on a different third-party web hosting service. We plan to
integrate the RxList.com and ePills.com applications, services and databases
into the HealthCentral.com network architecture.
Physical Architecture. We employ a reliable and scalable server architecture
in a mixed LINUX, UNIX and Windows NT environment. Our HealthCentral.com
network, as well as our institutional clients' websites, are protected by an
industry standard firewall. All sensitive data is stored on a separate, private
network that is not directly accessible from the Internet. In addition, there
is a security system that includes video surveillance of all servers 24 hours a
day, and a well-defined audit mechanism.
Software Architecture. We employ a three-tier software architecture, which
allows customization, updating and repair of each layer without interfering
with the operation of the other layers. Our architecture consists of:
. a user interface layer, which allows quick customization of applications
and allows non-technical staff to maintain and improve the user interface
and look and feel of both the HealthCentral.com network and our
institutional clients' websites.
. an engine layer, which implements the business logic for our
applications. Our engine was developed over a 15-year period by Windom
Health and enhanced by participation in an advanced technology program
grant.
. a database layer, which holds all content and data related to our website
on a private network not directly connected to the Internet. An
institutional client may choose to have its database reside with us or
remain at the client's location. Our database servers are Oracle, Sybase
on Sun Solaris for high end applications and MS SQL servers for low-end
applications. We are in the process of improving the scalability of our
database servers.
Sales and Marketing
HealthCentral.com and RxList.com
Our current sales and marketing strategy is to quickly build our revenues,
brand recognition and brand loyalty from sponsorships and advertising. Our
advertising campaigns target both online and traditional audiences and are
designed to promote an enhanced customer experience.
Our online advertising efforts are focused on Internet portals and other
websites. We employ DoubleClick, the largest Internet advertising company, to
conduct advertising and sponsorship sales for our HealthCentral.com and
RxList.com websites. Our senior management participates with DoubleClick
representatives in important sales efforts. Under the terms of the agreement,
we cannot sell advertising, with some exceptions, for our HealthCentral.com
website through alternate avenues; however, the agreement is terminable by
either party on 90 days notice. 100% of our advertising inventory for the
HealthCentral.com website has been sold each month from January 1999 through
August 1999. We intend to continue to use the unique resources of the Internet
as a means of marketing in an effort to drive traffic and repeat purchases.
ePills.com
Our current sales and marketing strategy is to establish brand awareness and
build brand loyalty of ePills.com in order to drive sales of prescription and
non-prescription items. Our advertising and promotional activities target both
online and offline audiences and are initially designed to attract first-time
customers. To induce customer loyalty, we intend to employ frequency reward
programs based upon repeat purchases, where customers will be able to
accumulate points for every purchase and redeem them for prizes and free
products. In the first half of 2000, we plan to target people who suffer from
chronic conditions by offering disease-specific information and building
communities around common health concerns and prevention and health management
topics.
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Our online marketing efforts are focused on identifying and marketing to
early adopters of healthcare e-commerce, who we believe are typically women and
Internet users 45 years or older. We intend to reach these groups through co-
marketing initiatives with affiliate websites targeting female and mature
demographics, e.g, women's interests, parenting and family, investing, travel
planning, real estate, and senior-oriented sites. We intend to employ incentive
programs for affiliate sites to co-register users for our newsletter, as well
as reward affiliates for directing traffic to our site that results in
purchases. We also intend to acquire or rent opt-in e-mail lists to market
through e-mail based communications. We also plan to reinforce our online
marketing efforts through branded giveaway items in our product packaging,
e.g., ePills.com-branded pill boxes, thermometer strips, pens, water bottle
straps, first-aid kits and band-aids.
In addition to marketing through online channels, we intend to use
traditional marketing and promotional efforts, including print media campaigns,
TV, radio and billboards. We intend to increase our brand awareness through
associating with health and family-related events. In addition, we are in the
process of executing an extensive co-branding effort with the Good Neighbor
Pharmacy Network to extend our brand both online and offline and differentiate
our service through affiliation with trusted brick-and-mortar pharmacies.
Institutional Internet Services
Our current sales and marketing strategy is to quickly build our
institutional customer base, while deriving revenues from licensing and
development fees. We are in the process of building our direct sales teams for
our institutional Internet services.
Competition
To be competitive, we must increase our site traffic and market share both
rapidly and significantly. Thus, we must attract and retain users to our
HealthCentral.com network by offering unique content and services, including
the ability to purchase health-related products, of particular interest to our
users.
HealthCentral.com and RxList.com
There are currently over 15,000 Internet websites that provide health-
related information. As a result, our industry is fragmented and competition is
extremely intense. Our HealthCentral.com and RxList.com consumer websites
compete directly for users, advertisers, e-commerce merchants and other
partners with numerous Internet and non-Internet businesses, including:
. health-related websites targeted at consumers, such as drkoop.com,
AllHealth.com, DiscoveryHealth.com, InteliHealth, Medscape.com,
OnHealth.com, Thrive.com and WebMD.com;
. online portal companies, such as America Online, Excite, Inc., The Go
Network, Lycos Corporation Microsoft Network, and Yahoo!;
. hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payors that offer healthcare information
through the Internet; and
. consumer affinity groups, such as the American Association of Retired
Persons and SeniorNet, which offer online healthcare-related content to
special demographic groups.
ePills.com
The online e-commerce markets in the health, beauty, wellness, personal care
and pharmacy categories are fragmented and intensely competitive, with no clear
dominant leader in any of our market categories. Our competitors in these areas
can be divided into several groups:
. chain drugstores, such as CVS, Eckerd and Walgreen's, and independent
drug stores;
. mass market retailers such as Kmart, Target and Wal-Mart;
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. supermarkets and warehouse clubs;
. online retailers of health, beauty, personal care and/or pharmaceutical
products, such as planetRx and drugstore.com;
. mail-order pharmacies and prescription benefits managers, such as
Express Scripts and Merck-Medco;
. Internet-portals and online service providers that feature shopping
services such as America Online, Yahoo!, Excite and Lycos; and
. cosmetics departments at major department stores.
Each of these competitors operate within one or more of the health, beauty,
wellness, personal care and pharmacy product categories. In addition, nearly
all of our competitors have, or have announced their intention to have, the
capability to accept orders for products online. In particular, Walgreen's,
CVS, Albertson's and Wal-Mart already are accepting prescription refill or
other orders on their websites.
Many of these competitors have substantial competitive advantages over us,
such as:
. greater name recognition;
. larger user bases;
. greater financial, technical and other resources;
. the ability to offer a wider array of online products and services; and
. more diversified content offerings.
Institutional Internet Services
In the market for institutional Internet services, we compete mainly with
payors' and providers' internal systems development teams, with local web
development companies, with consumer-oriented websites that are selling
applications to institutions, such as drkoop.com, WebMD and BabyCenter's CHI
division. The main competitive factors in the institutional Internet services
market are depth of content, cost, development and maintenance ability and the
ability to allow the institutional client to promote its own brand.
Intellectual Property Rights
Our intellectual property rights are important to our business. We rely on a
combination of copyright, trade secret, trademark and trade dress laws,
confidentiality procedures and contractual provisions to protect our
proprietary rights. We intend to file for federal trademark registrations for
the mark HealthCentral.com and "Windom Health." We have a 15-year agreement
with Dr. Edell, in which he has granted us the exclusive right to the use of
his name in connection with our business and exclusive commercialization rights
to his services over the Internet, except for the publication of radio
transcripts and Internet broadcasts of his radio program. Under this agreement,
all content that Dr. Edell creates for our HealthCentral.com network is owned
by us. Windom Health developed some elements of HealthView, the Personal Health
Record and the general architecture of the HealthCentral.com consumer website
during its participation in a project funded by a grant from the National
Institute of Standards and Technology. Under the terms of the grant, Windom
Health owns the intellectual property it developed for the project and granted
a nonexclusive, nontransferable license to the U.S. government of that
intellectual property. In addition, we have various other exclusive contractual
rights. See "--Strategic Relationships."
Our policy is to enter into confidentiality and invention assignment
agreements with all employees and consultants, and nondisclosure agreements
with all potential business partners. These protections, however, may not be
adequate to protect our intellectual property rights. In addition, we may be
sued by third parties alleging, with or without merit, that we have violated
their intellectual property rights. See "Risk Factors--Any failure or inability
to protect our intellectual property rights could adversely affect our ability
to establish our brands" and "--We may be sued by third parties for
infringement of their proprietary rights."
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Government Healthcare Regulation
General. Numerous state and federal laws regulate our health business
covering areas such as:
. the practice of medicine and other healing arts professions;
. the sale of controlled products such as pharmaceuticals and other
healthcare products;
. prohibitions against the offer, payment or receipt of remuneration to
induce referrals to entities providing healthcare services or goods;
. dispensing and delivering prescription, over-the-counter drugs and other
medical products; and
. advertising of drugs, cosmetics and nutritional supplements.
Generally, the laws and regulations governing the healthcare industry have
not been tested in relation to e-commerce in healthcare products and/or the
provision of healthcare information on the Internet. The laws may be
interpreted in such a way that we may not be permitted to conduct our business
as described. The requirement that we comply with any new legislation or
regulations, or any unanticipated application or interpretation of existing
laws or regulations, may decrease the growth in the use of the Internet, which
could in turn decrease the demand for our products, services and information
offered through our HealthCentral.com network, increase our cost of doing
business or otherwise harm our business.
Regulation of the Practice of Medicine. The practice of medicine is
generally defined by state law and varies from state to state. Often it is
defined as engaging in, with or without compensation, diagnosis or treatment of
a physical or mental condition. The practice of medicine requires a license
under state law and, depending on state law, practice of medicine without a
license can be a civil or criminal violation. We have endeavored to structure
our site, and in particular our health risk assessment tools and our
descriptions of various healthcare products, to avoid violation of state
licensing requirements. For example, we have included within our website
disclaimers and other notices that we have deemed appropriate to advise users
that the information provided is not intended to be a substitute for
consultation with a licensed physician. However, the application of this area
of the law to Internet services such as ours is novel and a key element of our
strategy is to encourage consumers to associate us with Dr. Dean Edell, a
licensed physician. Also, we have not conducted a state by state survey of
licensing requirements and policies. Accordingly, a state regulatory authority
and/or one or more licensed physicians or physician advocacy groups or
consumers may allege that one or more elements of our business requires a
license to practice medicine under existing or future laws or statutes and/or
that the disclaimer is ineffective as to particular consumers who claim to rely
upon advice or information provided by us. Any application of practice of
medicine regulations to our business could harm our business or require us to
change our business model. Further, liability based on a determination that we
engaged in the practice of medicine without a license may cause us to be
excluded from coverage under the terms of our current general liability
insurance policy and may also subject us to a higher standard of care than
would be applicable to activities that do not require a professional license.
Regulation of Other Healthcare Professions. We provide information on
pharmacology, nutrition and mental health on our website, including
electronically accessible information regarding prescription drugs and answers
to frequently asked questions about prescription drugs. The practice of
pharmacology, nutrition, psychology and certain personal counseling is also
defined by and regulated by state law, which also varies from state to state.
While we have taken the same precautions to avoid the practice of other
healthcare professions as we have with the practice of medicine, a local
professional licensing board, local professionals, professional advocacy
groups, or consumers may seek to impose state law licensing requirements on
some aspects of our business. Any application of the regulation of the practice
of another healthcare profession to our business could harm our business or
require us to change our business model. Further, any liability based on a
determination that we engaged in the practice of a healthcare profession
without a license may cause us to be excluded from coverage under the terms of
our current general liability insurance policy and may also subject us to a
higher standard of care than would be applicable to activities which do not
require a professional license.
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Regulation of Pharmacy Prescription Drug Activities. Our business of
providing prescription drugs and other medical products is subject to federal,
state and local regulations, many of which are specific to pharmacies. For
example, pursuant to the Omnibus Budget Reconciliation Act of 1990 and related
state and local regulations, pharmacists are required to offer counseling,
without additional charge, to prescription drug 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. In addition, the FTC
and many state agencies regulate advertising and product performance claims for
prescription drugs. Pharmacy operations are subject to federal, state and local
licensing and registration regulations with respect to the Controlled
Substances Act and federal Drug Enforcement Agency regulations, as well as
related state and local laws and regulations, relating to pharmacy operations,
including registration, security, recordkeeping, and reporting requirements
related to the purchase, storage and dispensing of controlled substances and
prescription drugs, and certain over-the-counter drugs. We have attempted to
structure our agreement with Medi-Mail, for the fulfillment of prescription
orders, such that we do not have to qualify as a pharmacy under federal, state
and territorial laws and regulations. Medi-Mail is required to provide
pharmacist support to respond to consumer inquiries, and we are required to
provide consumer accessible electronic information including answers to
frequently asked questions about prescription drugs. Nevertheless, because we
are the interface with the consumer for the purchasing of prescription drugs,
we may be the subject of FDA, FTC, DEA and state agency enforcement actions and
could be liable to the consumer in the case of adulterated drugs, false or
misleading advertising or claims or problems with the transport and sale of
controlled substances. While we have rights against the drug manufacturer as to
adulteration issues and rights against Medi-Mail for problems relating to
compounding and dispensing drugs, we may have liability if the manufacturer
and/or Medi-Mail cannot or will not indemnify us in a specific situation.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focused on those who prescribe drugs online and on
pharmacies that fill invalid prescriptions, including those that are written
online. The committee requested that the General Accounting Office undertake a
formal review of a number of issues pertaining to online pharmacies, including
an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. Any regulatory issues
or investigation of our fulfillment partners could involve us, and could harm
our business, even if we had no direct liability.
The National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, has developed a program, the Verified Internet Pharmacy
Practice Sites, or VIPPS, as a model for self-regulation for online pharmacies.
As of September 15, 1999, the first VIPPS certifications were issued to
drugstore.com, Merck-Medco Rx Services and planetRx.com, which are now entitled
to display the VIPPS seal on their websites. To the extent that consumers rely
upon the VIPPS seal, it may be a competitive disadvantage if Medi-
Mail/ePills.com does not obtain certification. In addition, various state
legislatures are considering new legislation related to the regulation of
nonresident pharmacies. The inclusion of prescription drugs as a Medicare
benefit has been the subject of numerous bills in the U.S. Congress. Should
legislation on prescription drug coverage for Medicare recipients be enacted
into law, compliance with any corresponding rules and regulations would be
required.
Regulation of the Sale of OTC Drugs, Nutritional Supplements, Cosmetics and
Medical Devices. The FDA and FTC and similar state agencies regulate drug and
cosmetic advertising and promotion, including direct-to-consumer advertising,
done by or on behalf of drug and cosmetic manufacturers and marketers. In
addition, the FDA regulates product safety for nutritional supplements as well
as over-the-counter drugs, medical devices and prescription drugs. Many of our
products and services are subject to FDA and FTC regulation and enforcement for
false advertising and misleading advertising, including overstatements
regarding product performance, especially regarding nutritional supplements.
While we have rights against the manufacturer as to adulteration issues and
product claims (to the extent we have received the claims as a result of the
manufacturer), we may have liability if the manufacturer cannot or will not
indemnify us in a specific situation.
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Application of State and Foreign Laws. Although our business offices are
located in California, our website is available to users all over the United
States and the world. Therefore, the governments of other states and foreign
countries also regulate our activity and our transmissions and may take action
against us for violations of their laws. For example, many states have enacted
laws related to telemedicine, where physicians are practicing medicine by
various means of communication over state lines. The states have varied
tremendously in their approaches to this issue, including, among others,
requiring full licensing of the out of state practitioner or by requiring the
involvement of a state licensed practitioner. The states have uniformly
asserted their right to regulate telemedicine activity, based upon the location
of patients in their state, and we would expect the states to take the same
approach as to other electronic activities directed to consumers in their
states. In addition, our pharmacy business requires that our fulfillment
partner be registered as a pharmacy in any state where it delivers prescription
drugs. We have not undertaken a state by state or a country by country review
of the health-related laws that could apply to our business. Violations of
these laws may be alleged or charged by state or foreign governments or may be
modified, or new laws may be enacted, in the future. Any of the foregoing could
harm our business.
Liability for Health Information and Health Products. Due to the nature of
our business, we may become involved in litigation regarding the information
transmitted from our site with the risk of adverse publicity, significant
defense costs and substantial damage awards. In addition, if we are deemed to
be engaged in the practice of medicine or another healthcare profession,
including pharmacy, we could be subject to claims and/or malpractice liability
exposure for which we may not be insured. We may also be liable for personal
and property damage from products provided by us, including from prescription
drugs. Finally, the FDA could look to us first in enforcing a product recall.
In recent years, participants in the healthcare industry have been subject to
an increasing number of lawsuits alleging malpractice, product liability and
related legal theories, many of which involve large claims and significant
defense costs. We have legal rights against the manufacturer and fulfillment
companies, with some limits, for their activities related to the products we
provide. To date, we have not been the subject of any claim involving the
operation of our site. However, claims may be brought against us. Even if these
claims ultimately prove to be without merit, defending against them can be
time-consuming and expensive, and any adverse publicity associated with these
claims could adversely affect our business. Our liability insurance does not
provide coverage for professional malpractice, so these claims would not come
within the scope of or be covered by our insurance. We may not be able to
maintain existing coverage or expand its scope to address evolving risks, or
obtain increased amounts of coverage on acceptable terms or at all.
Use of Medical Information and Data. There are changing federal and state
laws governing the storage and disclosure of medical information and healthcare
records. Our site does and will contain information submitted by users, in
response to questions on our personal health risk assessment and in connection
with prescription drug and other healthcare product orders. We expect that our
site will also contain information compiled by users for their personal
healthcare histories. While this information is not intended to constitute or
be treated as medical records, users or regulatory agencies may seek to
characterize this information as medical records and impose requirements and/or
sanctions upon us related to the maintenance and handling of medical records.
Maintaining this information could also expose us to claims if unauthorized
persons gain access to it notwithstanding our efforts to maintain its security.
Federal and State Anti-Kickback Laws. Provisions of the Social Security Act
known as the Federal Anti-Kickback Law prohibit knowingly or willfully,
directly or indirectly, paying or offering to pay, or soliciting or receiving,
any remuneration in exchange for the referral of patients to a person
participating in, or for the order, purchase or recommendation of items or
services that are subject to reimbursement by, Medicare, Medicaid and similar
other federal or state healthcare programs. Violations may result in civil and
criminal sanctions and penalties. Civil penalties include exclusion from
government health programs. Criminal sanctions include imprisonment for up to
five years and fines of up to $25,000 or both, for each violation. Recent
federal legislation expanded the sanctions to include civil monetary penalties
up to $50,000 for each prohibited act and up to three times the total amount of
remuneration offered, paid, solicited or received, even in circumstances where
a portion of such remuneration is offered, paid, solicited or received for a
lawful purpose. Certain courts
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reviewing the statute have taken a broad view of the Federal Anti-Kickback Law
and have ruled that it can be violated if only one purpose of a payment
arrangement is to induce referrals. Many states also have enacted similar local
anti-kickback laws.
At present, neither Medicare nor Medicaid reimburses outpatient prescription
drugs, with the exception of a few items. While we believe that we have
structured our fee relationships with our pharmacy and health product
affiliates so that the Federal Anti-Kickback Law is not implicated for any
items or services covered by it, the agency may take a contrary position,
especially if Medicare and Medicaid benefits are expanded to cover prescription
drugs. If this were to happen, our prescription drug arrangement with our e-
commerce pharmaceutical and healthcare supply affiliates, as currently
structured, may not qualify as among the practices exempted from federal
prosecution or other enforcement under the Federal Anti-Kickback Law by the
regulatory safe harbors promulgated by the Department of Health and Human
Services. Failure to meet a safe harbor, however, does not mean that an
arrangement violates the statute. Many activities engaged in by healthcare
providers and related entities fall outside the safe harbors yet are not deemed
illegal. While we believe that our fee arrangements are not illegal as to
products and services reimbursable by Medicare or other federal programs
covered by the statute, given the breadth of the Federal Anti-Kickback Law, the
limited scope of the existing safe harbors and the desire of the agencies to
eliminate programs that create financial incentives to provide excessive care,
we may face adverse regulatory positions. The Office of Inspector General is
authorized to issue advisory opinions regarding the interpretation and
applicability of the Federal Anti-Kickback Law, including whether an activity
or proposed activity constitutes grounds for the imposition of civil or
criminal sanctions. We have not sought this kind of opinion and are aware of no
opinion that has been issued regarding website sponsorships or planned sales
activities.
In addition, most states have enacted anti-kickback, or illegal
remuneration, laws that are similar to the Federal Anti-Kickback laws. Some of
these state laws are very closely patterned on the Federal Anti-Kickback Law;
others, however, are broader and reach reimbursement by private payors, and
still others are more narrow, applying, for example, only to kickbacks paid or
received by providers. We have not conducted a survey of these laws in all
fifty states and therefore, our arrangements with our e-commerce affiliates may
result in investigation or prosecution by state regulators or attorneys
general.
If our activities were deemed to be inconsistent with the Federal Anti-
Kickback Law or with state anti-kickback or illegal remuneration laws, we could
face civil and criminal penalties or be barred from such activities, any of
which could harm our business. Further, we could be required to restructure our
existing or planned sponsorship compensation arrangements and e-commerce
activities in a manner that could harm our business.
Federal and State Self-Referral Prohibitions. The federal physician self-
referral statute, often identified as the Stark Law, generally forbids payments
under Medicare or Medicaid based on a physician referral for "designated health
services" to any entity with which the physician (or an immediate family
member) has a financial relationship. The financial relationship can be direct
or indirect. The financial relationship can take the form of an ownership or
investment interest or a compensation relationship. A referral, under the Stark
Law, can include prescribing or requesting designated health services, and also
establishing a plan of care for the designated health services. The Stark Law
applies to clinical laboratory services and other designated health services,
including outpatient prescription drugs and durable medical equipment.
Penalties for violating the Stark Law include denial of payment from Medicare
and Medicaid programs for any services referred to an entity in violation of
the Stark Law, civil monetary penalties of up to $15,000 for each offense and
exclusions from the Medicare and Medicaid programs. Many states have adopted
similar self-referral laws, which may extend to governmental and third-party
payors. We have not conducted a survey of these laws in all fifty states.
We have attempted to structure our physician relationships and our
information delivered to customers so that we are not viewed as practicing
medicine, either directly or as a vehicle for the practice of medicine by an
affiliated physician. However, if we were deemed to be a vehicle for a
physician referral for services or equipment covered by federal or state self-
referral laws, the manner in which we are paid by the referral
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recipient could subject us to action under Stark or state self-referral laws,
which could harm our business and subject us to sanctions under these laws.
FDA Regulation of Medical Devices. Some computer applications and software
are considered medical devices and are subject to regulation by the United
States Food and Drug Administration. We do not believe that our current
applications or services will be regulated by the FDA; however, our
applications and services may become subject to FDA regulation. Additionally,
we may expand our application and service offerings into areas that subject us
to FDA regulation. We have no experience in complying with FDA regulations. We
believe that complying with FDA regulations would be time consuming, burdensome
and expensive and could delay or prevent our introduction of new applications
or services.
Other Governmental Regulation
General. There is an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and how
existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, libel, copyright, trade mark, trade
secret, obscenity, personal privacy, taxation, regulation of professional
services, regulation of medical devices and the regulation of the sale of other
specified goods and services apply to the Internet and Internet advertising.
The requirement that we comply with any new legislation or regulation, or any
unanticipated application or interpretation of existing laws, may decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our service, increase our cost of doing business or otherwise harm our
business.
Online Content Regulations. Several federal and state statutes prohibit the
transmission of indecent, obscene or offensive content over the Internet to
certain persons. In addition, pending legislation seeks to ban Internet
gambling and federal and state officials have taken action against businesses
that operate Internet gambling activities. The enforcement of these statutes
and initiatives, and any future enforcement activities, statutes and
initiatives, may result in limitations on the type of content and
advertisements available on HealthCentral.com. Legislation regulating online
content could slow the growth in use of the Internet generally and decrease the
acceptance of the Internet as an advertising and e-commerce medium, which could
impair our ability to generate revenues.
Privacy Concerns. The Federal Trade Commission is considering adopting
regulations regarding the collection and use of personal identifying
information obtained from individuals when accessing websites, with particular
emphasis on access by minors. These regulations may include requirements that
companies establish procedures to, among other things:
. give adequate notice to consumers regarding information collection and
disclosure practices;
. provide consumers with the ability to have personal identifying
information deleted from a company's database;
. provide consumers with access to their personal information and with the
ability to rectify inaccurate information;
. clearly identify affiliations or a lack thereof with third parties that
may collect information or sponsor activities on a company's website; and
. obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Such regulation may also include enforcement and redress provisions. While
we have implemented programs designed to enhance the protection of the privacy
of our users, these programs may not conform with
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any regulations adopted by the FTC. Moreover, even in the absence of such
regulations, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. One such investigation has
resulted in a consent decree pursuant to which an Internet company agreed to
establish programs to implement the principles noted above. We may become
subject to such an investigation, or the FTC's regulatory and enforcement
efforts may adversely affect the ability to collect demographic and personal
information from users, which could have an adverse effect on the our ability
to provide highly targeted opportunities for advertisers and e-commerce
marketers. Any of these developments could harm our business.
It is also possible that cookies may become subject to laws limiting or
prohibiting their use. The term cookies refers to information keyed to a
specific server, file pathway or directory location that is stored on a user's
hard drive, possibly without the user's knowledge and which is used to track
demographic information and to target advertising. Most currently available
Internet browsers allow users to modify their browser settings to remove
cookies at any time or prevent cookies from being stored on their hard drives.
In addition, a number of Internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
limiting or abolishing the use of cookies. Limitations on or elimination of the
use of cookies could limit the effectiveness of the targeting of
advertisements, which could have impair our ability to generate advertising
revenue.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under this EU directive, EU citizens are
guaranteed rights, including the right of access to their data, the right to
know where the data originated, the right to have inaccurate data rectified,
the right to recourse in the event of unlawful processing and the right to
withhold permission to use their data for direct marketing. The EU directive
could, among other things, affect U.S. companies that collect information over
the Internet from individuals in EU member countries, and may impose
restrictions that are more stringent than current Internet privacy standards in
the United States. In particular, companies with offices located in EU
countries will not be allowed to send personal information to countries that do
not maintain adequate standards of privacy. The EU directive does not, however,
define what standards of privacy are adequate. As a result, the EU directive
may adversely affect the activities of companies like ours, which plan to
engage in data collection from users in EU member countries.
Planned features of our website include the retention of personal
information about our users which we obtain with their consent. We have a
stringent privacy policy covering this information. However, if third persons
were able to penetrate our network security and gain access to, or otherwise
misappropriate, our users' personal information, we could be subject to
liability. This liability could include claims for misuses of personal
information, such as for unauthorized marketing purposes or unauthorized use of
credit cards. These claims could result in litigation, our involvement in
which, regardless of the outcome, could require us to expend significant
financial resources. Moreover, to the extent any of the data constitutes or is
deemed to constitute patient health records, a breach of privacy could violate
federal law.
Data Protection. Legislative proposals have been made by the federal
government that would afford broader protection to owners of databases of
information, such as stock quotes and sports scores. This kind of protection
already exists in the EU. If enacted, this legislation could result in an
increase in the price of services that provide data to websites. In addition,
this legislation could create potential liability for unauthorized use of this
data.
Internet Taxation. A number of legislative proposals have been made at the
federal, state and local level, and by foreign governments, that would impose
additional taxes on the sale of goods and services over the Internet, and some
states have taken measures to tax Internet-related activities. Although
Congress recently placed a three-year moratorium on state and local taxes on
Internet access or on discriminatory taxes on electronic commerce, existing
state or local laws were expressly excepted from this moratorium. Further, once
this moratorium is lifted, some type of federal and/or state taxes may be
imposed upon Internet commerce. This legislation or other attempts at
regulating commerce over the Internet may substantially impair the growth of
commerce on the Internet and, as a result, adversely affect our opportunity to
derive financial benefit from these activities.
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Domain Names. Domain names are the user's Internet address. Domain names
have been the subject of significant trademark litigation in the United
States. Third parties may bring claims for infringement against us for the use
of the HealthCentral.com or the ePills.com trademarks. Moreover, because
domain names derive value from the individual's ability to remember these
names, our domain names may lose their value if, for example, users begin to
rely on mechanisms other than domain names to access online resources.
The current system for registering, allocating and managing domain names
has been the subject of litigation and of proposed regulatory reform. Our
domain names may lose their value, or we may have to obtain entirely new
domain names in addition to or in lieu of our current domain names if
litigation or reform efforts result in a restructuring in the current system.
State Insurance Regulation. In the future we may market insurance online.
The use of the Internet in the marketing of insurance products is a relatively
new practice. It is not clear whether or to what extent state insurance
licensing laws apply to these activities. If we were required to comply with
such licensing laws, compliance could be costly or impossible, which could
harm our business or require us to change our business plans.
Jurisdiction. Due to the global reach of the Internet, it is possible that,
although our transmissions over the Internet originate primarily in the State
of California, the governments of other states and foreign countries might
attempt to regulate Internet activity and our transmissions or take action
against us for violations of their laws. Violations of these laws may be
alleged or charged by state or foreign governments, or these laws may be
modified, or new laws enacted, in the future. Any of the foregoing could harm
our business.
Employees
As of September 15, 1999 we had 47 employees, of which 6 were employed in
sales and marketing, 15 were employed in engineering, 17 were employed in
production, and 9 were employed in general management and administration. We
believe that our relations with our employees is good.
Facilities
We lease an aggregate of approximately 16,100 square feet at our two
facilities in Emeryville, California. The lease for approximately 7,300 square
feet expires in March 2004 and the lease for approximately 8,800 feet expires
in December 2003. We have also entered into a license agreement to use
facilities in Stamford, Connecticut. This agreement renews every three months
and the current agreement will expire in November 1999.
Legal Proceedings
We have no pending legal proceedings, however we may become subject to
lawsuits from time to time.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth specific information regarding our executive
officers and directors as of August 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Albert L. Greene........ 49 President, Chief Executive Officer and Director
C. Fred Toney........... 33 Senior Vice President and Chief Financial Officer
Deryk Van Brunt......... 40 Senior Vice President of Operations
Marcos A. Athanasoulis.. 32 Vice President of Engineering
Ann-Marie Buddrus....... 47 Vice President of Production
James J. Hornthal....... 45 Co-Chairman of the Board of Directors
Michael D. McDonald..... 43 Co-Chairman of the Board of Directors
Louis M. Andersen....... 38 Director
Sheryle J. Bolton....... 53 Director
Annette Campbell-White.. 52 Director
Dean S. Edell........... 58 Director
Wesley D. Sterman....... 39 Director
Robin Wolaner........... 45 Director
</TABLE>
Albert L. Greene has served as our President and Chief Executive Officer
since joining HealthCentral.com in July 1998 and as a director since October
1998. From May 1990 to February 1998, Mr. Greene served as President of Alta
Bates Medical Center, a hospital in Berkeley, California. From January 1996 to
July 1998, Mr. Greene served as Chief Executive Officer of the East Bay Service
Area of Sutter Health, a healthcare provider. He presently serves on the boards
of directors of Quadramed Corporation, a developer of healthcare software and
services, Lumisys Incorporated, a supplier of medical imaging products, and
Acuson Corporation, a manufacturer of medical ultrasound equipment. Mr. Greene
received a B.A. in Psychology from Ithaca College and an M.H.A. in Hospital
Administration from the University of Michigan.
C. Fred Toney has served as our Senior Vice President and Chief Financial
Officer since joining HealthCentral.com in July 1999. From August 1992 to July
1999, he served as Research Analyst, Director of Research and Senior Managing
Director at Pacific Growth Equities, Inc., an investment banking firm. He also
serves on the board of directors of two private companies. Mr. Toney received a
B.A. in both Economics and English from the University of California, Davis.
Deryk Van Brunt has served as our Senior Vice President of Operations since
HealthCentral.com acquired Windom Health in August 1999. From June 1994 to
August 1999, Dr. Van Brunt was Chief Operating Officer of Windom Health. Dr.
Van Brunt received a B.S. in Natural Resources, an M.P.H. in Epidemiology and a
Dr.P.H. in Health Informatics from the University of California, Berkeley.
Marcos A. Athanasoulis has served as our Vice President of Engineering since
HealthCentral.com acquired Windom Health in August 1999. At Windom Health, Mr.
Anthanasoulis served as Director of Engineering from June 1998 to August 1999,
and as Director of Research and Development from June 1996 to June 1998. From
June 1990 to May 1996, Mr. Athanasoulis was a Research Scientist at Impact
Assessment, Inc. He was also an independent consultant in health information
systems from June 1995 to June 1998. Mr. Athanasoulis received a B.A. in Social
Science, an M.P.H. in Epidemiology and Biostatistics, and a Dr.P.H. in Health
Information Sciences from the University of California, Berkeley.
Ann-Marie Buddrus has served as our Vice President of Production since
HealthCentral.com acquired Windom Health in August 1999. At Windom Health, Ms.
Buddrus served as Vice President of Production from March 1999 to August 1999.
From May 1997 to March 1999, she served as President of JUMP Design, an
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Internet development consulting company. From February 1997 to April 1997, she
served as Vice President, Production at NetChannel, Inc., an Internet media
company. From March 1994 to February 1997, Ms. Buddrus was Director of
Production in the Interactive Television Division of Pacific Bell Video
Services, where she helped pioneer the development of interactive shopping mall
prototypes. Ms. Buddrus received a B.A. in Art History from Maryville
University.
James J. Hornthal co-founded HealthCentral.com in August 1996 and has been a
director since inception and co-chairman of the board of directors since
September 1999. In March 1985, Mr. Hornthal founded Preview Travel, an online
travel services company. He has served as chairman of the board of directors of
Preview Travel since inception, as well as President until April 1994 and Chief
Executive Officer until June 1997. Mr. Hornthal is also the chairman of NewsNet
Central, a privately-held media convergence company. Mr. Hornthal received an
A.B. in Economics from Princeton University and an M.B.A. from Harvard Business
School, where he was a Baker Scholar.
Michael D. McDonald has served as co-chairman of the board of directors
since September 1999 and served as chairman of the board of directors from
August 1999 to September 1999. Since December 1995, he has served as President
and a director at both Global Health Initiatives, a health information company,
and Health Initiatives Foundation, Inc., a health and technology non-profit
company. At Windom Health, Dr. McDonald served as President and chairman of the
board of directors from June 1984 to August 1999. He also served as Director of
Health and Telecom at the C. Everett Koop Institute from May 1994 to July 1995,
and as Director of Health and Telecom at the Koop Foundation, Inc. from March
1995 to April 1997. Dr. McDonald received a B.A. in Interdisciplinary Study of
Medicine from the University of California, San Diego, and an M.P.H. and
Dr.P.H. from the University of California, Berkeley.
Louis M. Andersen has served as a director of HealthCentral.com since August
1999. Mr. Andersen has been Vice President, Strategy and Business Development
at United HealthCare Corporation, a healthcare management and insurance
provider, since September 1998. From October 1989 to September 1998, he was
Director of Strategy at Prudential HealthCare, a healthcare affiliate of
Prudential Insurance Company of America. Mr. Andersen received a B.S./B.A.
degree in Accounting from the University of Nebraska, and an M.B.A. from
Columbia University.
Sheryle J. Bolton has served as a director of HealthCentral.com since
October 1998. Since November 1996, Ms. Bolton has served as Chief Executive
Officer and a director of Scientific Learning Corporation, a neuroscience-
based, educational Internet and software company, and she has also served as
President since June 1997. From September 1995 to October 1996, Ms. Bolton was
a consultant to companies in the Internet, healthcare and technology sectors.
From January 1994 to August 1995, Ms. Bolton was the President and Chief
Operating Officer of Physicians' Online, Inc., an online clinical information
resource for physicians. Ms. Bolton serves as a director or trustee for several
mutual fund families of Scudder Kemper Investments, Inc. Ms. Bolton received a
B.A. in English and an M.A. in Linguistics from the University of Georgia, and
an M.B.A. from Harvard Business School.
Annette Campbell-White has served as a director of HealthCentral.com since
September 1999. She has been the Managing General Partner of MedVenture
Associates, a life sciences venture capital firm, since May 1986. Ms. Campbell-
White serves on the board of directors of ArthroCare Corporation, a
manufacturer of surgical instruments, and several privately held companies. Ms.
Campbell-White received a B.Sc. in Chemical Engineering and an M.Sc. in
Physical Chemistry from the University of Cape Town, South Africa.
Dean S. Edell, M.D. co-founded HealthCentral.com in August 1996, and has
been a director since inception. From inception to July 1998, Dr. Edell also
served as President and Chief Executive Officer. Dr. Dean Edell has been a
medical journalist for twenty years, and is the host of the Dr. Dean Edell
Show, which is broadcast on more than 300 radio stations. His television news
reports appear in over 50 markets in the United States and Canada. Dr. Edell
has received numerous awards for his broadcasting work, including a C. Everett
Koop Media award, an Edward R. Murrow award, and awards from the American
Cancer Society and the American Heart Association. Dr. Edell received a B.A. in
Zoology from Cornell University and an M.D. from Cornell University Medical
School.
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Wesley D. Sterman has served as a director of HealthCentral.com since
December 1998. Dr. Sterman co-founded Heartport, Inc., a cardiovascular medical
technology company, in May 1992, and since inception has served as its
President, Chief Executive Officer and chairman of the board of directors. Dr.
Sterman received a B.S. in both Biology and Chemistry from Stanford University,
an M.B.A. from the Graduate School of Business at Stanford University, and an
M.D. from the Stanford University School of Medicine. Dr. Sterman also serves
on the boards of directors of several private companies.
Robin Wolaner has served as a director of HealthCentral.com since October
1998. Since October 1997, Ms. Wolaner has served as the Executive Vice
President of CNET, Inc, an internet media company. From July 1992 to December
1995, Ms. Wolaner served as President and Chief Executive Officer of Sunset
Publishing Corporation, a magazine and book company and a division of Time
Publishing Ventures. She serves on the board of directors of Burnham Pacific
Properties, a real estate investment trust, as well as on the board of
directors of a private company. Ms. Wolaner received a B.S. in Industrial and
Labor Relations from Cornell University.
Board Composition.
Our bylaws currently provide for a board of directors consisting of nine
members. All directors hold office until the next annual meeting of our
stockholders and until their successors have been elected and qualified.
Although our principal stockholders have agreed to be bound by a voting
agreement providing for the election of all of our directors, this voting
agreement will terminate upon completion of this offering.
In accordance with the terms of our amended and restated certificate of
incorporation to be effective upon completion of this offering, the board of
directors will be divided into the following three classes, each serving
staggered three-year terms, after the completion of this offering: Class I,
whose initial term will expire at the annual meeting (or special meeting held
in lieu of the annual meeting) of stockholders in 2000; Class II, whose initial
term will expire at the annual meeting (or special meeting held in lieu of the
annual meeting) of stockholders in 2001; and Class III, whose initial term will
expire at the annual meeting (or special meeting held in lieu of the annual
meeting) of stockholders in 2002. As a result, only one class of directors will
be elected at each annual meeting of stockholders of HealthCentral.com, with
the other classes continuing for the remainder of their respective terms. These
provisions in our amended and restated certificate of incorporation may have
the effect of delaying or preventing changes in the control or management of
HealthCentral.com.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, our directors do
not currently receive compensation for their services as members of the board
of directors. Employee directors are eligible to participate in our 1998 Stock
Plan and 1999 Stock Plan and, following the completion of this offering, will
be eligible to participate in our 1999 Employee Stock Purchase Plan.
Nonemployee directors are eligible to participate in our 1998 Stock Plan and
1999 Stock Plan and, following the completion of this offering, will be
eligible to participate in our 1999 Directors' Stock Option Plan. See "Stock
Plans."
In October 1998, we granted each of Ms. Bolton and Ms. Wolaner nonstatutory
stock options to purchase 70,000 shares of our common stock at an exercise
price of $0.22 per share. In February 1999, we granted Dr. Sterman a
nonstatutory stock option to purchase 70,000 shares of our common stock at an
exercise price of $0.22 per share. In August 1999, we granted Dr. McDonald a
nonstatutory stock option to purchase 70,000 shares of our common stock, we
granted Mr. Andersen a nonstatutory stock option to purchase 14,000 shares of
our common stock, and Dr. Sterman a nonstatutory stock option to purchase
14,000 shares of our common stock each at an exercise price of $1.14 per share.
Each of these option grants vests over a 48 month period.
Board Committees
The audit committee consists of Ms. Campbell-White and Mr. Andersen. The
audit committee:
. makes recommendations to the board of directors regarding the selection
of independent auditors;
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. reviews the results and scope of the audit and other services provided by
our independent auditors; and
. reviews and evaluates our audit and control functions.
The compensation committee consists of Ms. Bolton, Dr. Sterman and Ms.
Wolaner. The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and
. makes recommendations to the board of directors regarding such matters.
The stock option subcommittee consists solely of Mr. Greene. The stock
option subcommittee has authority to grant stock options to optionees who are
not executive officers or directors of HealthCentral.com.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of the board of directors are
currently Ms. Bolton, Dr. Sterman and Ms. Wolaner, none of whom has ever been
an officer or employee of HealthCentral.com.
No executive officer of HealthCentral.com serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.
Executive Compensation
The following table sets forth the compensation received for services
rendered to us during the fiscal year ended December 31, 1998 by our Chief
Executive Officer. None of our executive officers earned in excess of $100,000
from us during the fiscal year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
-------------------- --------------------------
Restricted Securities
Name and Principal Stock Underlying All Other
Position Salary ($) Bonus ($) Awards ($) Options (#) Compensation($)
- ------------------ ---------- --------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Albert L. Greene, Chief
Executive Officer...... 64,800 -- 2,429(1)(2) 167,685 --
</TABLE>
- --------
(1) In February 1998, Mr. Greene purchased 62,710 shares of common stock at a
purchase price of $0.04 per share for a total purchase price of $2,429,
which amount was paid through the performance of services. At the end of
the fiscal year ended December 31, 1998, this common stock was valued at
$13,769, based on the fair market value of our common stock as determined
by our board of directors.
(2) In September 1998, Mr. Greene was issued 26,786 shares of common stock at a
purchase price of $0.22 per share, for a total purchase price of $5,931, in
exchange for Mr. Greene's issuance to us of a promissory note. At the end
of the fiscal year ended December 31, 1998, this common stock was valued at
the same price at which it was issued, based on the fair market value of
our common stock as determined by the board of directors.
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Option Grants
The following table shows information regarding a stock option granted to
Mr. Greene, our Chief Executive Officer and President. None of our other
executive officers earned in excess of $100,000 during the fiscal year ended
December 31, 1998. No stock appreciation rights were granted to Mr. Greene
during the year.
The stock option listed in the following tables was granted under the 1998
Stock Plan and has fully vested. The percentage below is based on a total of
167,685 shares subject to options granted by us during the year ended December
31, 1998 to all of our employees and consultants. The exercise price per share
of the option was equal to the fair market value of the common stock on the
date of grant as determined by the board of directors. Potential realizable
values assume that the price of the applicable stock increases from the date of
grant until the end of the ten-year option term at the annual rates specified.
There is no assurance provided to any executive officer or any other holder of
our 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.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates Of Stock
Number of Percentage Price
Shares of Total Appreciation
Underlying Options Exercise for Option Term
Options Granted to Price Expiration ---------------
Name Granted (#) Employees per Share Date 5% 10%
- ---- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Albert L. Greene... 167,685 100% $0.22 8/25/2008 $23,351 $59,176
</TABLE>
The following table provides summary information concerning the shares of
common stock represented by the outstanding stock option held by Mr. Greene, as
of December 31, 1998.
The value realized represents the difference between the fair market value
of the shares on the date of exercise, as determined by our board of directors,
and the exercise price of the option.
Aggregated Option Exercises in 1998 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares December 31, 1998 (#) December 31, 1998 ($)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Albert L. Greene........ -- -- 167,685 -- -- --
</TABLE>
Employment and Consulting Agreements
In August 1999, we entered into an employment agreement with Mr. Greene, our
Chief Executive Officer and President, which provides that Mr. Greene receives
an initial base salary of $235,000 and is eligible to receive a bonus of from
30% to 60% of his base salary depending on his achievement of performance
milestones. If Mr. Greene is terminated without cause before August 11, 2000,
he will receive monthly severance payments equal to his monthly base salary
until that date.
A June 1999 offer letter to Mr. Toney, our Chief Financial Officer and
Senior Vice President, provides that Mr. Toney receives an initial base salary
of $200,000, with an incentive bonus of up to 30% of his base salary depending
on his achievement of performance milestones. In the first year of his
employment, Mr. Toney is guaranteed a bonus of at least 15% of his base salary.
If Mr. Toney is terminated without cause during the first year of his
employment, he will receive monthly severance payments equal to his monthly
base salary until the later of the one year anniversary of his employment start
date or six months after his termination date.
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Messrs. Greene and Toney also have change of control provisions, which
provide that fifty percent (50%) of their unvested shares and options vest on
an acquisition of our company, and that if they are terminated without cause
within 12 months after an acquisition of our company, the remaining unvested
shares vest automatically at that time.
A March 1999 offer letter to Ms. Buddrus, our Vice President of Production,
provides that Ms. Buddrus receives a base salary of $110,000, with an incentive
bonus up to $40,000 depending on her achievement of performance milestones. An
August 1999 letter provides that if Ms. Buddrus is terminated without cause
during the first year of her employment, she will receive monthly severance
payments equal to her monthly salary until the later of the one year
anniversary of her employment start date or six months after her termination
date.
In August 1999, we entered into employment agreements with Dr. Van Brunt,
our Senior Vice President of Operations, and Mr. Athanasoulis, our Vice
President of Engineering, in connection with our acquisition of Windom Health.
These employment agreements each provide that if the officer is terminated
without cause before August 11, 2000, he will receive monthly severance
payments equal to his monthly base salary until that date.
In September 1999, the board of directors amended option agreements held by
our officers to provide that fifty percent of any unvested options vests on our
acquisition by another company and the remaining fifty percent vests monthly
over 12 months.
Stock Plans
1999 Stock Plan. Our 1999 stock plan provides for the grant of incentive
stock options to employees, including employee directors, and of nonstatutory
stock options and stock purchase rights to employees, directors (including
employee directors) and consultants. The purposes of the 1999 plan are to
attract and retain the best available personnel, to provide additional
incentives to our employees and consultants and to promote the success of our
business. The 1999 plan was originally adopted by our board of directors in
August 1999. At the time of adoption, 280,000 shares of common stock were
reserved for issuance under the 1999 plan. The 1999 plan was amended by our
board of directors in September 1999 to increase the total number of shares
reserved for issuance by 4,900,000 shares, and to incorporate certain other
changes, after which amendment a total of 5,180,000 shares of common stock has
been reserved for issuance under the plan. In addition, the 1999 plan was
amended to provide for an automatic annual increase on the first day of each of
our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the
lesser of 882,000 shares, 3.5% of our outstanding common stock on the last day
of the immediately preceding fiscal year, or such lesser number of shares as
the board of directors determines. This amendment to the 1999 plan will be
submitted for approval by our stockholders prior to the completion of this
offering. Unless terminated earlier by the board of directors, the 1999 plan
will terminate in August 2009.
As of August 31, 1999, options to purchase 280,000 shares of common stock
were outstanding under the 1999 plan at a weighted average exercise price of
$1.14 per share, and no shares had been issued upon exercise of outstanding
options or pursuant to restricted stock purchase agreements.
The 1999 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options and stock purchase rights granted under the 1999 plan,
including the number of shares subject to the award, the exercise or purchase
price, and the vesting and/or exercisability of the award and any other
conditions to which the award is subject. In no event, however, may an employee
receive awards for more than 2,000,000 shares under the 1999 plan in any fiscal
year. Incentive stock options granted under the 1999 plan must have an exercise
price of at least 100% of the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and the purchase
price of stock purchase rights is determined by the administrator, although we
expect that nonstatutory stock options and stock purchase rights granted to our
Chief Executive Officer and our four
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other most highly compensated officers will generally equal at least 100% of
the grant date fair market value. Payment of the exercise or purchase price may
be made in cash or such other consideration as determined by the administrator.
With respect to options granted under the 1999 plan, the administrator
determines the term of options, which may not exceed 10 years (or 5 years in
the case of an incentive stock option granted to a holder of more than 10% of
the total voting power of all classes of our stock). Generally, an option
granted under the 1999 plan is nontransferable other than by will or the laws
of descent and distribution, and may be exercised during the lifetime of the
optionee only by such optionee. However, the administrator may in its
discretion provide for the limited transferability of nonstatutory stock
options granted under the 1999 plan under certain circumstances. Stock issued
pursuant to stock purchase rights granted under the 1999 plan is generally
subject to a repurchase right exercisable by us upon the termination of the
holder's employment or consulting relationship with us for any reason
(including death or disability). This repurchase right will lapse in accordance
with the terms of the stock purchase right determined by the administrator at
the time of grant.
If we are acquired by another corporation, each outstanding option and stock
purchase right may be assumed or an equivalent award substituted by our
acquirer. However, if the acquirer does not agree to such assumption or
substitution, outstanding awards will become fully vested and exercisable
immediately prior to the consummation of the transaction. The administrator has
the authority to amend or terminate the 1999 plan, but no action may be taken
that impairs the rights of any holder of an outstanding option or stock
purchase right without the holder's consent. In addition, we must obtain
stockholder approval of amendments to the plan as required by applicable law.
1998 Stock Plan. Our 1998 stock plan was adopted by our board of directors
in August 1998 and approved by our stockholders in August 1998. The 1998 plan
provides for the grant to employees of incentive stock options and the grant of
nonstatutory stock options and stock purchase rights to employees, consultants
and directors. An aggregate of 3,360,000 shares of common stock have been
reserved for issuance under the 1998 plan. As of August 31, 1999, options to
purchase 1,890,177 shares of common stock at a weighted average exercise price
of $0.67 were outstanding under this plan, 376,758 shares with a weighted
average purchase price of $1.08 have been issued upon exercise of options or
stock purchase rights and 1,093,064 shares remain available for future grant.
Unless terminated earlier, the 1998 plan will terminate in August 2008.
The terms of options and stock purchase rights issued under our 1998 plan
are generally the same as those that may be issued under our 1999 plan, except
with respect to the following features. The 1998 plan imposes a limitation of
1,400,000 on the number of shares of stock subject to options and stock
purchase rights that may be granted to any individual employee during a fiscal
year. In addition, the 1998 plan does not allow for the granting of
nonstatutory stock options with any transferability rights.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan was
adopted by our board of directors in September 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. A total of
1,400,000 shares of common stock has been reserved for issuance under the 1999
purchase plan, none of which have been issued as of the date of this offering.
The number of shares reserved for issuance under the 1999 purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of
490,000 shares, 2% of our outstanding common stock on the last day of the
immediately preceding fiscal year, or such lesser number of shares as the board
of directors determines. The 1999 purchase plan becomes effective upon the date
of this offering. Unless terminated earlier by the board of directors, the 1999
purchase plan shall terminate in September 2019.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on February 1 and
August 1 of each year. Each offering period will generally consist of four
consecutive purchase periods of six months' duration, at the end of which an
automatic purchase will be made for participants. The initial offering period
is expected to commence on the date of this offering and end on January 31,
2002; the initial purchase period is expected
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to begin on the date of this offering and end on July 31, 2000, with subsequent
purchase periods ending on January 31, 2001, July 31, 2001 and January 31,
2002. The 1999 purchase plan will be administered by the board of directors or
by a committee appointed by the board. Our employees (including officers and
employee directors), or of any majority-owned subsidiary designated by the
board, are eligible to participate in the 1999 purchase plan if they are
employed by us or any such subsidiary for at least 20 hours per week and more
than five months per year. The 1999 purchase plan permits eligible employees to
purchase common stock through payroll deductions, which in any event may not
exceed 20% of an employee's base salary. The purchase price is equal to the
lower of 85% of the fair market value of the common stock at the beginning of
each offering period or at the end of each purchase period, subject to certain
adjustments as provided in the plan. Employees may end their participation in
the 1999 purchase plan at any time during an offering period, and participation
ends automatically on termination of employment.
An employee is not eligible to participate in the 1999 purchase plan if
immediately after the grant of an option to purchase stock under the plan such
employee would own stock and/or hold outstanding options to purchase stock
equaling 5% or more of the total voting power or value of all classes of our
stock or stock of our subsidiaries, or if such option would permit an
employee's rights to purchase stock under the 1999 purchase plan at a rate that
exceeds $25,000 of fair market value of such stock for each calendar year in
which the option is outstanding. In addition, no employee may purchase more
than 2,800 shares of common stock under the 1999 Purchase Plan in any one
purchase period. If the fair market value of the common stock on a purchase
date is less than the fair market value at the beginning of the offering
period, each participant in that offering period shall automatically be
withdrawn from the offering period as of the end of the purchase date and re-
enrolled in the new twenty-four month offering period beginning on the first
business day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
purchase plan will be assumed or an equivalent right substituted by our
acquiror. If our acquiror did not agree to assume or substitute stock purchase
rights, any offering period and purchase period then in progress would be
shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Our board of directors has the power to amend or
terminate the 1999 purchase plan and to change or terminate offering periods as
long as such action does not adversely affect any outstanding rights to
purchase stock thereunder. However, the board of directors may amend or
terminate the 1999 purchase plan or an offering period even if it would
adversely affect outstanding options in order to avoid our incurring adverse
accounting charges.
1999 Directors' Stock Option Plan. The 1999 directors' stock option plan was
adopted by the board of directors in September 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. It will
become effective upon the date of this offering. A total of 350,000 shares of
common stock has been reserved for issuance under the directors' plan, all of
which remain available for future grants. The directors' plan provides for the
grant of nonstatutory stock options to our nonemployee directors. The
directors' plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by the
board of directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which such director has a
personal interest. Unless terminated earlier, the directors' plan will
terminate in September 2009.
The directors' plan provides that each person who becomes a nonemployee
director after the completion of this offering will be granted a nonstatutory
stock option to purchase 14,000 shares of common stock on the date on which
such individual first becomes a member of our board of directors. In addition,
on the date of each annual stockholders meeting, each nonemployee director who
will continue serving on the board following the meeting and who has been a
director of HealthCentral.com for at least six months prior to the meeting date
will be granted an option to purchase 7,000 shares of common stock.
All options granted under the directors' plan will have a term of ten years
and an exercise price equal to the fair market value of on the date of grant
and will be nontransferable. All options granted under the
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directors' plan to new directors shall vest monthly over four years from the
date of a grant and all options granted at the time of our annual stockholders
meeting will vest monthly over 12 months. If a nonemployee director ceases to
serve as a director for any reason other than death or disability, he or she
may, but only within 90 days after the date he or she ceases to be a director,
exercise options granted under the directors' plan. If he or she does not
exercise the option within such 90-day period, the option shall terminate. If a
director's service terminates as a result of his or her disability or death, or
if a director dies within three months following termination for any reason,
the director or his or her estate will have 12 months after the date of
termination or death, as applicable, to exercise options that were vested as of
the date of termination.
If we are acquired by another corporation, each option outstanding under the
directors' plan will be assumed or equivalent options substituted by our
acquirer, unless our acquirer does not agree to such assumption or
substitution, in which case the options will terminate upon consummation of the
transaction to the extent not previously exercised. In connection with any
acquisition, each director holding options under the directors' plan will have
the right to exercise his or her options immediately before the consummation of
the merger as to all shares underlying the options, including shares which
would not have been vested and exercisable but for the acquisition. Our board
of directors may amend or terminate the directors' plan as long as such action
does not adversely affect any outstanding option and we obtain stockholder
approval for any amendment to the extent required by applicable law.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part of
the indemnified parties. Our bylaws also permit us to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of HealthCentral.com, any subsidiary of
HealthCentral.com or any other entity to which the person provides services at
our request. In addition, we maintain directors' and officers' insurance. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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TRANSACTIONS WITH AFFILIATES
Since January 1, 1996, we have issued shares of our convertible preferred
stock and warrants to purchase our common stock and preferred stock to
investors in private placement transactions as follows: an aggregate of
1,134,000 shares of Series A preferred stock at a price of $1.79 per share and
warrants to purchase 544,320 shares of Series A preferred stock at a price of
$1.79 per share in December 1998, and an aggregate of 4,523,065 shares of
Series B preferred stock at a price of $4.64 per share in August and September
1999. The following table summarizes the shares of preferred stock purchased by
our executive officers, directors and 5% stockholders and persons and entities
associated with them in these private placement transactions. All shares of our
preferred stock will convert into common stock on a 1-for-1 basis upon
completion of this offering.
<TABLE>
<CAPTION>
Series A
Series A Preferred Stock Series B
Preferred Stock Warrants Preferred Stock
--------------- --------------- ---------------
<S> <C> <C> <C>
Directors (1)
Entities affiliated with
James J. Hornthal 56,000 26,880 21,537
Entities affiliated with
MedVenture Associates III,
L.P. (Annette Campbell-
White) -- -- 753,846
Wesley D. Sterman 84,000 40,320 21,537
Robin Wolaner 28,000 13,440 --
Sheryle J. Bolton 14,000 6,720 --
East Peak Partners (Jeff
Edwards (2)) 224,000 107,520 159,391
Executive Officers
Albert L. Greene 14,000 6,720 10,768
C. Fred Toney -- -- 68,492
5% stockholders (1)
Entities affiliated with
InterWest Partners VII,
L.P. -- -- 1,076,923
Entities affiliated with
Delphi Ventures IV, LP -- -- 1,076,923
</TABLE>
- --------
(1) Shares and warrants held by affiliated persons and entities have been
aggregated. See "Principal Stockholders."
(2) Jeff Edwards resigned as a director in August 1999.
In April 1999, we issued promissory notes in the aggregate principal amount
of $500,000 to MedVenture Associates III, L.P., a 5% stockholder, and MedVen
Affiliates III, L.P., both of which are affiliated with Annette Campbell-White,
one of our directors. The promissory note bore an interest rate of 4.99%. The
principal amount of this note was converted into shares of Series B preferred
stock and the interest of $8,340 was paid in full in September 1999.
In July 1999, we issued a promissory note in the principal amount of
$100,000 and a warrant to purchase 3,111 shares of our common stock at a
purchase price of $3.21 per share to East Peak Partners, an entity with which
Jeff Edwards, who was one of our directors at the time of issuance of these
securities, is affiliated. The promissory note bore an interest rate of 10.00%.
The principal amount of this note was converted into shares of Series B
preferred stock and the interest of $822 was paid in full in September 1999.
In July 1999, we issued a promissory note in the principal amount of
$100,000 and a warrant to purchase 3,111 shares of our common stock at a
purchase price of $3.21 per share to the Hornthal Living Trust, an entity with
which James J. Hornthal, one of our directors, is affiliated. The promissory
note bore an interest rate of 10.00%. The principal amount of this note was
converted into shares of Series B preferred stock and the interest of $822 was
paid in full in September 1999.
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In July 1999, we issued a promissory note in the principal amount of
$100,000 to C. Fred Toney, our Senior Vice President and Chief Financial
Officer. The promissory note bore an interest rate of 10.00%. The principal
amount of this note was converted into shares of Series B preferred stock and
the interest of $822 was paid in full in September 1999.
In August 1999, we issued promissory notes in the aggregate principal amount
of $300,000 and warrants to purchase 9,332 shares of Series B preferred stock
at a purchase price of $3.21 per share to MedVenture Associates III, L.P., a 5%
stockholder, and MedVen Affiliates III, L.P., both of which are affiliated with
Annette Campbell-White, one of our directors. The promissory note bore an
interest rate of 10.00%. The principal amount of this note was converted into
shares of Series B preferred stock and the interest of $1,315 was paid in full
in September 1999.
In connection with our acquisition of Windom Health in August 1999, we
issued shares of our common stock and promissory notes to the following
individuals who are directors or executive officers:
. 1,839,345 shares of common stock and a promissory note in the principal
amount of $357,684 to Michael D. McDonald, the co-chairman of our board
of directors;
. 229,434 shares of common stock and a promissory note in the principal
amount of $44,617 to Deryk Van Brunt, our Senior Vice President of
Operations; and
. 91,492 shares of common stock and a promissory note in the principal
amount of $17,792 to Marcos A. Athanasoulis, our Vice President of
Engineering.
The amounts due under these promissory notes were paid in full in August
1999.
In September 1996, we issued 1,290,800 shares to Preview Travel in exchange
for the assignment to us of distribution rights for content produced by Dr.
Dean S. Edell under a contract between Dr. Edell and News Travel Network, which
then was a subsidiary of Preview Travel. These shares were purchased in August
1997 by James J. Hornthal, one of our directors and a holder of 5% or more of
our outstanding stock. Mr. Hornthal is Preview Travel's Chief Executive Officer
and chairman of its board of directors and is also chairman of the board of
directors of NewsNetCentral, for which News Travel Network was a predecessor
entity.
In May 1999, we entered into a fifteen-year agreement with Dr. Edell, a
director and 5% stockholder, in which he granted us the exclusive right to the
use of his name in connection with our business and exclusive commercialization
rights to his services over the Internet, except for publication of radio
transcripts and Internet broadcasts of his radio program. Under this agreement,
we own all content that Dr. Edell creates for our HealthCentral.com network.
Dr. Edell has the right to review and reasonably approve all content and
advertising in the Dr. Dean section of our HealthCental.com website.
In August 1999, we entered into a Joint Development Agreement with Global
Health Initiatives providing for our joint collaboration in the performance of
services and development of products. Among other provisions, the agreement
provides that, other than with respect to consumer health informatics, we may
not compete with Global Health Initiatives in the areas of (1) health care
systems consulting, (2) enterprise engineering, (3) health information systems
or (4) virtual health management. Dr. McDonald, the co-chairman of our board of
directors and a holder of 5% or more of our outstanding stock, is the President
and chairman of the board of directors of Global Health Initiatives.
In August 1999, we entered into a services agreement with NewsNet Central
and Dr. Edell, providing for the joint marketing of a consumer health
programming service that will include health-related video clips produced by
Dr. Edell. Mr. Hornthal is the co-chairman of our board of directors and the
chairman of the board of directors of NewsNet Central.
In February 1999, we granted to Albert L. Greene an option to purchase 5,357
shares of common stock at an exercise price of $0.22 per share, which shares
have fully vested, and an immediately exercisable option to purchase 503,055
shares of common stock at an exercise price of $0.22 per share, which shares
vest over a 36 month period beginning in August 1999.
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<PAGE>
In June 1999, we granted to C. Fred Toney immediately exercisable options to
purchase an aggregate of 350,000 shares of our common stock at an exercise
price of $1.14 per share, which shares vest over a 48 month period beginning in
January 1999, the option's vesting commencement date. In connection with
Mr. Toney's early exercise of these options in July 1999, Mr. Toney entered
into restricted stock purchase agreements with us and issued to us promissory
notes in the aggregate principal amount of $400,000 bearing interest at 5.74%
per annum, compounded annually, with principal and interest due upon the
earliest of July 12, 2003 or the termination of Mr. Toney's service provider
relationship with us. Upon his termination, we may purchase unvested shares at
cost. The amount currently outstanding under the promissory notes is $400,000,
plus accrued interest.
In August 1999, we granted to Marcos A. Athanasoulis an immediately
exercisable option to purchase 70,000 shares of our common stock at an exercise
price of $1.14 per share, which shares vest over a 48 month period beginning in
February 1999. In August 1999, we granted to Deryk Van Brunt an immediately
exercisable option to purchase 112,000 shares of our common stock at an
exercise price of $1.14 per share, which shares vest over a 48 month period
beginning in February 1999, and in September 1999, we granted to Dr. Van Brunt
an immediately exercisable option to purchase 28,000 shares of our common stock
at an exercise price of $7.31 per share, which shares vest over a 48 month
period beginning in September 1999. In August 1999, we granted to Ann-Marie
Buddrus an immediately exercisable option to purchase 70,000 shares of our
common stock at an exercise price of $1.14 per share, which shares vest over a
48 month period beginning in September 1998.
In August 1999, in connection with the closing of our acquisition of Windom
Health, we entered into a three-year consulting agreement with Michael D.
McDonald, a member of our board of directors, which provided for an $85,000
bonus to be paid to him on the closing of our Series B preferred stock
financing and a monthly fee of $5,000 for his provision of consulting services.
If we terminate the consulting agreement without releasing Dr. McDonald from a
noncompetition provision, Dr. McDonald will continue to receive as severance
the monthly fee due for the remainder of the initial term of the consulting
agreement.
Stock option grants to our directors are described under the caption
"Management--Board Compensation." Stock option grants and restricted stock
awards to Mr. Greene, our Chief Executive Officer, prior to January 1, 1999 are
described under the caption "Management--Executive Compensation." See
"Management--Employment and Consulting Agreements." We have entered into
indemnification agreements with all of our officers and directors. See
"Management--Limitation of Liability and Indemnification Matters." Some of our
shareholders are entitled to have their shares registered by us for resale. See
"Description of Capital Stock--Registration Rights."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of August 31, 1999, as adjusted to
reflect the sale of common stock offered hereby, by:
. each person (or group of affiliated persons) known by us to own
beneficially more than 5% of our outstanding common stock,
. each director,
. our Chief Executive Officer, and
. all directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table is
c/o HealthCentral.com, 6001 Shellmound Street, Suite 800, Emeryville, CA 94608.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. To our knowledge, except under applicable community
property laws or as otherwise indicated, the persons named in the table have
sole voting and sole investment control with respect to all shares beneficially
owned. The applicable percentage of ownership for each stockholder is based on
13,528,790 shares of common stock outstanding as of August 31, 1999 and an
assumed shares outstanding after the completion of this offering, in each
case together with applicable options for that stockholder. Shares of common
stock issuable upon exercise of options and other rights beneficially owned
that are exercisable within 60 days after August 31, 1999 are deemed
outstanding for the purpose of computing the percentage ownership of the person
holding those options and other rights but are not deemed outstanding for
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
Percent
Beneficially
Owned
Total -----------------
Number of Before After
Name and Address Shares Offering Offering
- ---------------- --------- -------- --------
<S> <C> <C> <C>
James J. Hornthal(1) ............................. 2,689,128 19.9%
Dean S. Edell .................................... 2,581,600 19.1
Michael D. McDonald(2) ........................... 1,842,261 13.6
Entities affiliated with Delphi Ventures
3000 Sand Hill Road, Building One, Suite 315
Menio Park, CA 94025(3).......................... 1,076,923 8.0
Entities affiliated with InterWest Partners
3000 Sand Hill Road, Building Three, Suite 225
Menlo Park, CA 94025(4) ......................... 1,076,923 8.0
Entities affiliated with MedVenture Associates
Four Orinda Way, Building D, Suite 150
Orinda, CA 94563(5) ............................. 763,178 5.6
Albert L. Greene(6) .............................. 797,081 5.6
Louis M. Andersen(7) ............................. 2,332 *
Sheryle J. Bolton(8) ............................. 38,220 *
Annette Campbell-White(5) ........................ 763,178 5.6
Wesley D. Sterman(9) ............................. 158,105 1.2
Robin Wolaner(10) ................................ 58,240 *
All directors and executive officers as a group
(13 persons)(11) ................................. 9,921,563 73.0
</TABLE>
- --------
* Less than one percent.
(1) Represents 2,659,137 shares held by an investment entity and trust
controlled by Mr. Hornthal, and 29,991 shares that the investment entity
and trust have the right to acquire pursuant to the exercise of a warrant.
(2) Includes 2,916 shares issuable pursuant to the exercise of stock options.
Does not include 197,072 shares held by the Vincent P. and Zaida McDonald
Trust. Vincent and Zaida McDonald are Dr. McDonald's parents, and Dr.
McDonald does not have voting or dispositive power over these shares.
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<PAGE>
(3) Includes 1,055,170 shares held by Delphi Venture IV, L.P. and 21,753 shares
held by Delphi BioInvestments IV, L.P.
(4) Includes 1,030,184 shares held by InterWest Partners VII, L.P. and 46,739
shares held by InterWest Investors VII, L.P.
(5) Includes 723,090 shares held by MedVenture Associates III, L.P., 30,756
shares held by MedVen Affiliates III, L.P. Also includes 8,952 shares that
MedVenture Associates III, L.P. has the right to acquire and 380 shares
that MedVen Affiliates III, L.P. has the right to acquire pursuant to the
exercise of warrants. Annette Campbell-White, a director of
HealthCentral.com, is a managing member of the general partner of each of
these partnerships. Ms. Campbell-White disclaims beneficial ownership of
these shares.
(6) Includes 676,097 shares issuable pursuant to the exercise of outstanding
options and 6,720 shares issuable pursuant to the exercise of a warrant. A
portion of the shares issued and issuable upon exercise of stock options is
subject to repurchase by us at the original exercise price in the event of
termination of Mr. Greene's employment with us, which repurchase right
lapses over time.
(7) Represents shares issuable pursuant to the exercise of stock options.
(8) Includes 6,720 shares issuable pursuant to the exercise of a warrant and
17,500 shares issuable pursuant to the exercise of stock options.
(9) Includes 40,320 shares issuable pursuant to the exercise of a warrant and
12,248 shares issuable pursuant to the exercise of stock options.
(10) Includes 13,440 shares issuable pursuant to the exercise of a warrant and
17,500 shares issuable pursuant to the exercise of stock options.
(11) Includes an aggregate of 106,523 shares issuable pursuant to the exercise
of warrants and an aggregate of 980,593 shares issuable pursuant to the
exercise of outstanding options. A portion of the shares issued to
officers or issuable upon exercise of options by officers is subject to
repurchase by us at the original exercise price in the event of
termination of such officers' employment, which repurchase right lapses
over time.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock does not purport to be complete and is qualified in its
entirety by our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
Common Stock
As of August 31, 1999, there were 13,528,790 shares of common stock
outstanding, held of record by approximately 46 stockholders, which reflects
the conversion of all outstanding shares of preferred stock into common stock.
Upon completion of this offering, there will be shares of common stock
outstanding, assuming no exercise of the underwriters' overallotment option or
additional exercise of outstanding options or warrants after August 31, 1999.
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, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive or conversion rights, other
subscription rights, or redemption or sinking fund provisions. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
Preferred Stock
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 5,657,065 shares of common stock and automatically
retired. Thereafter, the board of directors will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to designate the rights, preferences,
privileges and restrictions of each such series. The issuance of preferred
stock could have the effect of restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock or delaying or preventing our change in control without
further action by the stockholders. We have no present plans to issue any
shares of preferred stock.
Warrants
As of August 31, 1999, warrants were outstanding to purchase an aggregate of
744,361 shares of common stock at a weighted average exercise price of $2.57
per share. Of these warrants, warrants to purchase an aggregate of 649,857
shares of common stock at a weighted average exercise price of $2.19 per share
will terminate upon the completion of this offering if not exercised prior to
such time. In addition, as of August 31, 1999, we have committed to issue to
Yahoo!, on or after March 2001, a warrant to purchase that amount of shares
equal to 0.5% of the shares of our common stock outstanding as of March 2001,
assuming the exercise and conversion of all convertible and exercisable
securities outstanding on that date, unless our content license agreement with
Yahoo! is terminated prior to this date.
Registration Rights
As of August 31, 1999, the holders of 12,660,093 shares of common stock and
warrants to purchase 558,040 shares of common stock (the "registrable
securities") are entitled to have their shares registered by us under the
Securities Act under the terms of an agreement between us and the holders of
the registrable securities. Subject to limitations specified in the agreement,
these registration rights include the following:
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<PAGE>
. The holders of registrable securities may require, on two occasions
beginning six months after the date of this offering, that we use our
best efforts to register the registrable securities for public resale,
provided that the aggregate offering price for such registrable
securities is at least $15,000,000. This right is subject to the ability
of the underwriters to limit the number of shares included in the
offering in view of market conditions.
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such
registration. This right is subject to the ability of the underwriters to
limit the number of shares included in the offering in view of market
conditions.
. The holders of registrable securities may require us to register all or a
portion of their registrable securities on Form S-3 when use of such form
becomes available to us, provided that the proposed aggregate offering
price is at least $1,000,000. The holders of registrable securities may
not exercise this right more than twice in any twelve-month period.
We will bear all registration expenses other than underwriting discount and
commissions, except in the case of registrations on Form S-3. All registration
rights terminate on the date five years following the closing of this offering,
or, with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
In addition to the registration rights described above, holders of 25% of
the shares of our common stock issued to the former ePills.com stockholders in
connection with our acquisition of ePills.com may request that we register
their shares to allow them to resell their shares in the public market on a
registration statement on Form S-1. These demand registration rights may be
exercised, subject to various restrictions, beginning 180 days after the
closing of our initial public offering.
Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation
and Bylaws
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult our acquisition by a third party and the removal of
our incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of HealthCentral.com to
first negotiate with us. We believe that the benefits of increased protection
of our ability to negotiate with the proponent of an unfriendly or unsolicited
acquisition proposal outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation could result in an improvement of
their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a business combination with an
interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders.
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A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permit the board of directors to issue preferred stock with
voting or other rights without any stockholder action. Our certificate of
incorporation provides for the board of directors to be divided into three
classes, with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of stockholders. Each of the
two other classes of directors will continue to serve for the remainder of its
respective three-year term. These provisions, which require the vote of
stockholders holding at least two-thirds of the outstanding common stock to
amend, may have the effect of deterring hostile takeovers or delaying changes
in our management.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation. The Transfer Agent's address and telephone number is 1745 Gardena
Avenue, Glendale, CA, 91204 (818) 502-1404.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares of
common stock, based upon shares outstanding as of August 31, 1999 and assuming
no exercise of options or warrants. Of these shares, the shares sold in the
offering, plus any shares issued upon exercise of the underwriters'
overallotment option, will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act. In general, affiliates include officers,
directors or 10% stockholders.
The remaining 13,528,790 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
promulgated under the Securities Act. Sales of the restricted securities in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Lehman Brothers Inc.
Notwithstanding possible earlier eligibility for sale under exemptions from
registration promulgated under the Securities Act, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by
Lehman Brothers Inc. Taking into account the lock-up agreements, and assuming
Lehman Brothers Inc. does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the
following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
. Beginning 180 days after the effective date, approximately 5,095,195
shares will be eligible for sale pursuant to Rule 144. All but 938,000 of
such shares are held by affiliates.
. Between 180 days and 365 days after the effective date, approximately
7,142,795 shares under Rule 144 at various times. All but 3,756,345
shares are held by affiliates.
. Beginning 365 days after the effective date approximately 1,290,800
additional shares will be eligible for sale under rule 144. All of these
shares are held by Dr. Dean Edell, an affiliate, and are subject to an
agreement with us preventing the sale or other transfer of these shares
for a period of 365 days from the effective date of this offering.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding
which will equal approximately shares immediately after the offering;
or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
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Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us.
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144 but without compliance
with specific restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell such shares in reliance on Rule
144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1999 Stock Plan, the 1998 Stock Plan, the 1999
Employee Stock Purchase Plan, the 1999 Directors' Stock Option Plan or any
other benefit plan after the effectiveness of the registration statements will
also be freely tradable in the public market. However, such shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of August 31, 1999, there were outstanding options
for the purchase of 1,890,177 shares of common stock.
75
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC, Pacific Growth
Equities, Inc. and Wit Capital Corporation are acting as representatives, have
each agreed to purchase from us the respective number of shares of common stock
set forth opposite its name below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Lehman Brothers Inc. .................................................
Hambrecht & Quist LLC.................................................
Pacific Growth Equities, Inc. ........................................
Wit Capital Corporation ..............................................
-----
Total...............................................................
=====
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement, must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
No Full
Paid by HealthCentral.com Exercise Exercise
------------------------- -------- --------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at the public offering price less a selling concession not in
excess of $ share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share to brokers and dealers. After the
offering, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not directly or indirectly offer, sell or otherwise dispose of any shares
of common stock or any securities which may be converted into or exchanged for
any such shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors and certain other
stockholders, including all of the holders of the preferred stock and warrants,
have agreed under lock-up agreements that, without the prior written consent of
76
<PAGE>
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities which may be
converted into or exchanged for any such shares for the period ending 180 days
after the date of this prospectus. Please see "Shares Eligible for Future
Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price has been negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and
capital structure, estimates of our business potential and earning prospects,
an overall assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
We have applied to the Nasdaq National Market for listing approval under the
symbol "HCEN."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ million.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
77
<PAGE>
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
At our request, the underwriters have reserved up to % shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates at the
initial public offering price set forth on the cover page of this prospectus.
These persons must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares.
A prospectus in electronic format is being made available on an Internet
website maintained by Wit Capital. In addition, all dealers purchasing shares
from Wit Capital in the offering have agreed to make a prospectus in electronic
format available on websites maintained by each of these dealers. Purchases of
shares from Wit Capital are to be made through an account at Wit Capital in
accordance with Wit Capital's procedures for opening an account and transacting
in securities.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the representatives. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-manager or selected dealer in over 125 public offerings. Except
for its participation as a representative in the offering, Wit Capital has no
relationship with us or any of our affiliates.
78
<PAGE>
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for
HealthCentral.com by Venture Law Group, A Professional Corporation, 2800 Sand
Hill Road, Menlo Park, California 94025. Mark Medearis, a Director of Venture
Law Group, is the Secretary of HealthCentral.com. Legal matters in connection
with this offering will be passed upon for the underwriters by Brobeck, Phleger
& Harrison LLP, 550 West C Street, Suite 1300, San Diego, California 92101. As
of the date of this prospectus, attorneys of Venture Law Group and an
investment partnership controlled by Venture Law Group beneficially own an
aggregate of 8,614 shares of HealthCentral.com's common stock.
EXPERTS
The financial statements of HealthCentral.com as of December 31, 1997 and
1998 and for the period from August 12, 1996 (date of inception) to December
31, 1996 and for each of the two years in the period ended December 31, 1998,
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.
The financial statements of Windom Health Enterprises, Inc. as of December
31, 1997 and 1998 and for each of the two years in the period ended December
31, 1998, 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.
The financial statements of RxList.com as of December 31, 1997 and 1998 and
September 30, 1999 and for each of the two years in the period ended December
31, 1998 and the nine months in the period ended September 30, 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, which includes any amendments to the registration statement, on Form
S-1 under the Securities Act with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement. Certain items are contained in exhibits to the
registration statement as permitted by the rules and regulations of the
Securities and Exchange Commission. For further information with respect to
HealthCentral.com and the common stock offered by this prospectus, reference is
made to the registration statement and its exhibits, and the financial
statements and notes filed as a part of the registration statement. Statements
made in this prospectus concerning the contents of any document are not
necessarily complete. With respect to each such document filed with the
Securities and Exchange Commission 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, including the exhibits, financial
statements and notes filed as a part of the registration statement, as well as
reports and other information filed with the Securities and Exchange
Commission, 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 Securities and
Exchange Commission located at Seven World Trade Center, 13th Floor, New York,
New York, 10048, and the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Securities and Exchange Commission upon payment of certain fees prescribed
by the Securities and Exchange Commission. Such reports and other information
may also be inspected without charge at a website maintained by the Securities
and Exchange Commission. The address of such site is http://www.sec.gov.
79
<PAGE>
HEALTHCENTRAL.COM
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
HealthCentral.com ----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Windom Health Enterprises, Inc.
Report of Independent Accountants.......................................... F-19
Balance Sheets............................................................. F-20
Statements of Operations................................................... F-21
Statements of Shareholders' Deficit........................................ F-22
Statements of Cash Flows................................................... F-23
Notes to Financial Statements.............................................. F-24
ePills Inc.
Balance Sheet.............................................................. F-29
Statement of Operations.................................................... F-30
Statement of Stockholders' Deficit......................................... F-31
Statement of Cash Flows.................................................... F-32
Notes to Financial Statements.............................................. F-33
</TABLE>
<TABLE>
<S> <C>
RxList.com
Balance Sheets............................................................. F-37
Statements of Operations................................................... F-38
Statements of Partners'/Shareholders' Equity............................... F-39
Statements of Cash Flows................................................... F-40
Notes to Financial Statements.............................................. F-41
Pro forma Combined Financial Statements (unaudited)
Unaudited Pro Forma Combined Financial Statements.......................... F-44
Unaudited Pro forma Combined Balance Sheet................................. F-45
Unaudited Pro forma Combined Statements of Operations...................... F-46
Unaudited Pro forma Combined Statements of Operations...................... F-47
Notes to Unaudited Pro Forma Combined Statement of Operations.............. F-48
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
The reincorporation and stock split described in Note 1 to the financial
statements has not been consummated at September 24, 1999. When it has been
consummated, we will be in a position to furnish the following report:
"To the Board of Directors and Stockholders of
HealthCentral.com
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of HealthCentral.com (a development
stage company) at December 31, 1997 and 1998, and the results of its operations
and its cash flows for the period from August 12, 1996 (date of inception) to
December 31, 1996, and for each of the two years ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits 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 statements
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above."
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 24, 1999, except
as to the second paragraph
of Note 1 which is as of
November , 1999
F-2
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
-------------------- June 30, Equity at
1997 1998 1999 June 30, 1999
------- ----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 6,773 $ 1,091,551 $ 69,383
Accounts receivable.......... -- 15,189 42,167
Prepaid expenses............. -- -- 106,382
------- ----------- -----------
Total current assets......... 6,773 1,106,740 217,932
Receivable from related
party........................ -- 563,541 1,361,730
------- ----------- -----------
Total assets................ $ 6,773 $ 1,670,281 $ 1,579,662
======= =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable............. $ -- $ 28,482 $ 406,789
Accrued expenses............. -- 39,166 12,500
Deferred revenue............. -- -- 113,318
------- ----------- -----------
Total current liabilities... -- 67,648 532,607
Convertible note payable to
related party................ -- -- 500,000
------- ----------- -----------
Total liabilities........... -- 67,648 1,032,607
------- ----------- -----------
Commitments (Note 7)
Stockholders' equity:
Convertible preferred stock,
$0.001 par value, 2,100,000
shares authorized, 1,134,000
issued and outstanding at
December 31, 1998 and
June 30, 1999 (unaudited);
none issued and outstanding
pro forma (aggregate
liquidation preference
$2,025,000) ................ -- 1,134 1,134 $ --
Common stock, $0.001 par
value, 14,000,000 shares
authorized at December 31,
1997, 26,600,000 shares
authorized at December 31,
1998 and June 30, 1999
(unaudited), 5,163,200,
5,252,695, 5,252,695 and
6,386,695 shares issued and
outstanding at December 31,
1997 and 1998, June 30, 1999
(unaudited) and pro forma,
respectively ............... 4,379 4,468 4,468 5,602
Additional paid-in capital... 3,628 2,334,912 5,390,465 5,390,465
Note receivable from
stockholder................. -- (5,931) (5,931) (5,931)
Deferred stock compensation.. -- (284,481) (2,437,103) (2,437,103)
Accumulated deficit.......... (1,234) (447,469) (2,405,978) (2,405,978)
------- ----------- ----------- -----------
Total stockholders' equity.. 6,773 1,602,633 547,055 $ 547,055
------- ----------- ----------- ===========
Total liabilities and
stockholders' equity..... $ 6,773 $ 1,670,281 $ 1,579,662
======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended June
December 31, 30,
---------------------- ----------------------- Cumulative
Period from Period from
Inception to Inception
December 31, to June 30,
1996 1997 1998 1998 1999 1999
------------ ---------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Advertising................. $ -- $ -- $ 15,259 $ -- $ 126,546 $ 141,805
--------- ---------- ---------- ---------- ----------- -----------
Operating expenses:
Production, content and
product development........ -- -- 136,788 -- 496,197 632,985
Sales and marketing......... -- 848 141,516 -- 435,458 577,822
General and administrative.. 86 300 78,549 2,619 257,988 336,923
Stock compensation.......... -- -- 104,641 -- 902,931 1,007,572
--------- ---------- ---------- ---------- ----------- -----------
Total operating expenses.. 86 1,148 461,494 2,619 2,092,574 2,555,302
--------- ---------- ---------- ---------- ----------- -----------
Loss from operations.......... (86) (1,148) (446,235) (2,619) (1,966,028) (2,413,497)
Interest income, net ......... -- -- -- -- 7,519 7,519
--------- ---------- ---------- ---------- ----------- -----------
Net loss...................... $ (86) $ (1,148) $ (446,235) $ (2,619) $(1,958,509) $(2,405,978)
========= ========== ========== ========== =========== ===========
Basic and diluted net loss
per share.................... $ -- $ -- $ (0.09) $ -- $ (0.37) $ (0.46)
========= ========== ========== ========== =========== ===========
Shares used in computing basic
and diluted net loss per
share........................ 4,318,144 5,163,200 5,221,800 5,215,400 5,238,187 5,196,581
========= ========== ========== ========== =========== ===========
Pro forma basic and diluted
net loss per share (Note 1).. $ (0.09) $ (0.31)
========== ===========
Shares used in computing pro
forma basic and diluted net
loss per share............... 5,246,655 6,372,187
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION TO DECEMBER 31, 1996, THE TWO YEARS ENDED
DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Note
Preferred Stock Common Stock Additional Receivable Deferred
---------------- ---------------- Paid-In from Stock Accumulated
Shares Amount Shares Amount Capital Stockholder Compensation Deficit
--------- ------ --------- ------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders
in August 1996....... -- $ -- 3,872,400 $3,872 $ 3,628 $ -- $ -- $ --
Net loss.............. -- -- -- -- -- -- -- (86)
--------- ------ --------- ------ ---------- ------- ----------- -----------
Balance at December
31, 1996............. -- -- 3,872,400 3,872 3,628 -- -- (86)
Issuance of common
stock for cash....... -- -- 1,290,800 507 -- -- -- --
Net loss.............. -- -- -- -- -- -- -- (1,148)
--------- ------ --------- ------ ---------- ------- ----------- -----------
Balance at December
31, 1997............. -- -- 5,163,200 4,379 3,628 -- -- (1,234)
Issuance of Series A
preferred stock and
warrants, net........ 1,134,000 1,134 -- -- 1,933,891 -- -- --
Issuance of common
stock................ -- -- 89,495 89 8,271 (5,931) -- --
Deferred compensation
expense in connection
with issuance of
stock options........ -- -- -- -- 389,122 -- (389,122) --
Amortization of
deferred
compensation......... -- -- -- -- -- -- 104,641 --
Net loss.............. -- -- -- -- -- -- -- (446,235)
--------- ------ --------- ------ ---------- ------- ----------- -----------
Balance at December
31, 1998............. 1,134,000 1,134 5,252,695 4,468 2,334,912 (5,931) (284,481) (447,469)
Deferred compensation
expense in connection
with issuances of
stock options
(unaudited).......... -- -- -- -- 3,055,553 -- (3,055,553) --
Amortization of
deferred compensation
(unaudited).......... -- -- -- -- -- -- 902,931 --
Net loss (unaudited).. -- -- -- -- -- -- -- (1,958,509)
--------- ------ --------- ------ ---------- ------- ----------- -----------
Balance at June 30,
1999 (unaudited)..... 1,134,000 $1,134 5,252,695 $4,468 $5,390,465 $(5,931) $(2,437,103) $(2,405,978)
========= ====== ========= ====== ========== ======= =========== ===========
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Issuance of common stock to founders
in August 1996....... $ 7,500
Net loss.............. (86)
-------------
Balance at December
31, 1996............. 7,414
Issuance of common
stock for cash....... 507
Net loss.............. (1,148)
-------------
Balance at December
31, 1997............. 6,773
Issuance of Series A
preferred stock and
warrants, net........ 1,935,025
Issuance of common
stock................ 2,429
Deferred compensation
expense in connection
with issuance of
stock options........ --
Amortization of
deferred
compensation......... 104,641
Net loss.............. (446,235)
-------------
Balance at December
31, 1998............. 1,602,633
Deferred compensation
expense in connection
with issuances of
stock options
(unaudited).......... --
Amortization of
deferred compensation
(unaudited).......... 902,931
Net loss (unaudited).. (1,958,509)
-------------
Balance at June 30,
1999 (unaudited)..... $ 547,055
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Year Ended Six Months Ended Cumulative
Inception to December 31, June 30, Period from
December 31, --------------------- --------------------- Inception to
1996 1997 1998 1998 1999 June 30, 1999
------------ -------- ----------- ------- ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $ (86) $ (1,148) $ (446,235) $(2,619) $ (1,958,509) $(2,405,978)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Common stock issued
for services ........ -- -- 2,429 2,429 -- 2,429
Stock compensation
expense.............. -- -- 104,641 -- 902,931 1,007,572
Changes in assets and
liabilities:
Accounts receivable.. -- -- (15,189) -- (26,978) (42,167)
Prepaid expenses..... -- -- -- -- (106,382) (106,382)
Accounts payable..... -- -- 28,482 -- 378,307 406,789
Accrued expenses..... -- -- 39,166 -- (26,666) 12,500
Deferred revenue..... -- -- -- -- 113,318 113,318
------- -------- ----------- ------- ------------ -----------
Net cash used in
operating
activities......... (86) (1,148) (286,706) (190) (723,979) (1,011,919)
------- -------- ----------- ------- ------------ -----------
Cash flows from
investing activities:
Note receivable from
related party........ -- -- (563,541) -- (798,189) (1,361,730)
------- -------- ----------- ------- ------------ -----------
Net cash used in
investing
activities......... -- -- (563,541) -- (798,189) (1,361,730)
------- -------- ----------- ------- ------------ -----------
Cash flows from
financing activities:
Proceeds from issuance
of convertible note
payable.............. -- -- -- -- 500,000 500,000
Proceeds from sale of
common stock......... 7,500 507 -- -- -- 8,007
Proceeds from issuance
of preferred stock,
net.................. -- -- 1,935,025 -- -- 1,935,025
------- -------- ----------- ------- ------------ -----------
Net cash provided by
financing
activities......... 7,500 507 1,935,025 -- 500,000 2,443,032
------- -------- ----------- ------- ------------ -----------
Net increase (decrease)
in cash and cash
equivalents........... 7,414 (641) 1,084,778 (190) (1,022,168) 69,383
Cash and cash
equivalents at
beginning of period... -- 7,414 6,773 6,773 1,091,551 --
------- -------- ----------- ------- ------------ -----------
Cash and cash
equivalents at end of
period................ $ 7,414 $ 6,773 $ 1,091,551 $ 6,583 $ 69,383 $ 69,383
======= ======== =========== ======= ============ ===========
Supplemental
disclosures of non-
cash investing and
financing activities:
Deferred stock
compensation......... $ -- $ -- $ 389,122 $ -- $ 3,055,553 $ 3,444,675
======= ======== =========== ======= ============ ===========
Warrants issued in
connection with
leases............... $ -- $ -- $ -- $ -- $ 58,036 $ 58,036
======= ======== =========== ======= ============ ===========
Common stock purchased
with note
receivable........... $ -- $ -- $ 5,931 $ -- $ -- $ 5,931
======= ======== =========== ======= ============ ===========
Warrants issued in
connection with sale
of preferred stock .. $ -- $ -- $ 408,629 $ -- $ -- $ 408,629
======= ======== =========== ======= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
HealthCentral.com (the "Company") was incorporated in California on August
12, 1996. The Company commenced operations in 1998 and provides online
healthcare information and products to consumers through the Company's
HealthCentral.com network. The Company operates in one business segment.
In September 1999, the Company's Board of Directors authorized 1) the
reincorporation of the Company in Delaware, and 2) a 1.4-for-1 stock split of
its common and preferred stock, both subject to shareholder approval.
The Company has a limited operating history and its prospects are subject to
risks, expenses and uncertainties frequently encountered by companies in the
new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and expand the Company's online brands,
the rejection of the Company's products and services by Internet consumers,
vendors and/or advertisers, the inability of the Company to maintain and
increase the levels of traffic on its HealthCentral.com network of websites, as
well as other risks and uncertainties.
Development stage enterprise
For the period from inception through June 30, 1999, the Company was a
development stage company, as planned principal operations had not yet begun to
generate significant revenue. In the development stage, all pre-operating costs
have been expensed as incurred.
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.
Interim financial statements (unaudited)
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited and should be read in conjunction with the
Company's annual financial statements for the year ended December 31, 1998.
Such interim financial statements have been prepared in conformity with the
rules and regulations of the Securities and Exchange Commission. Certain
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations pertaining to interim financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation have been included.
The results of operations of any interim period are not necessarily indicative
of the results of operations for the full year.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company maintains
its cash in bank deposit accounts which, at times, may exceed federally insured
limits.
F-7
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma stockholders' equity
The pro forma stockholders' equity as of June 30, 1999 reflects the
conversion of all outstanding shares of convertible preferred stock into an
aggregate of 1,134,000 shares of common stock.
Comprehensive income
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This statement
requires companies to classify items of other comprehensive income by their
nature in the financial statements and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. To date, the Company has
not had any transactions that are required to be reported in comprehensive
income.
Revenue recognition
The Company records advertising revenues in the period the advertising
services are provided to customers. The Company uses an outside vendor to
solicit customers to use its advertising services, to serve the ads to its
website and to bill and collect for these services. This outside vendor
provides monthly reports indicating the amounts billed for the Company's
advertising services and the related administrative fee. Advertising revenues,
as reported by the outside vendor, are recorded net of this administrative fee
as the Company bears no collection risk for the gross amount of the advertising
fees.
Advertising expenses
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 contact. There were no
advertising expenses for the period from inception to December 31, 1996 or the
years ended December 31, 1997 and 1998. Advertising expense for the six months
ended June 30, 1999 was $157,374 (unaudited).
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Basic
and diluted net loss per share are computed by dividing the net loss available
to holders of common stock for the period by the weighted average number of
shares of common stock outstanding during the period. The calculation of
diluted net loss per share excludes potential common stock if their effect is
antidilutive. Potential common stock consists of restricted common stock,
incremental common shares issuable upon the exercise of stock options and
warrants and shares issuable upon conversion of the Series A convertible
preferred stock.
F-8
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share because to do so would be
antidilutive for the periods indicated:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Series A convertible preferred stock................ 1,134,000 1,134,000
Convertible preferred stock warrants................ 544,320 558,040
Common stock options................................ 307,685 1,337,597
Common stock subject to repurchase.................. 20,090 6,697
---------- ---------
2,006,095 3,036,334
========== =========
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999 are computed using the weighted average number
of shares of common stock outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A convertible preferred stock into
shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1998, or at the date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
pro forma basic net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999. The calculation of pro forma diluted net loss
per share excludes potential shares of common stock as their effect would be
antidilutive.
Income taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Financial instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accrued liabilities
and accounts payable, approximate fair value due to their short maturities.
Stock options
The Company accounts for employee stock compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, stock compensation is based on the difference,
if any, on the date of grant, between the estimated fair value of the Company's
common stock and the exercise price. Deferred stock compensation is amortized
in accordance with Financial Accounting Standards Board ("FASB") Interpretation
No. ("FIN") 28. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
New accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
F-9
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 during its
year ending December 31, 2001. To date, the Company has not engaged in
derivative or hedging activities.
NOTE 2--RELATED PARTY TRANSACTIONS
In August 1998, in association with a letter of intent relating to a merger
transaction (Note 8), the Company entered into a License and Management
Agreement (the "Agreement") with Windom Health Enterprises, Inc. ("Windom
Health"). Pursuant to the Agreement, the Company had full management
responsibility for the operations of Windom Health. In this capacity, the
Company advanced Windom Health funds to finance its operations. At December 31,
1998 and June 30, 1999, the net outstanding balance due from Windom Health
amounted to $563,541 and $1,361,730 (unaudited), respectively. The cumulative
amount due from Windom Health at the merger date (August 12, 1999) was
eliminated in consolidation.
NOTE 3--CONVERTIBLE PREFERRED STOCK:
Convertible preferred stock at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
Proceeds
Shares Net of
---------------------- Liquidation Issuance
Authorized Outstanding Amount Costs
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A....................... 2,100,000 1,134,000 $2,025,000 $1,935,025
</TABLE>
The holders of preferred stock have various rights and preferences as
follows:
Voting
Each share of Series A convertible preferred stock has voting rights equal
to an equivalent number of shares of common stock into which it is convertible
and votes together as one class with the common stock.
As long as at least 1,400,000 shares of convertible preferred stock remain
outstanding, the Company must obtain approval from a majority of the holders of
convertible preferred stock in order to alter the Articles of Incorporation as
they relate to convertible preferred stock, authorize a dividend for any class
or series other than convertible preferred stock, create a new class of stock
or effect a merger, consolidation or sale of assets where the existing
shareholders retain less than 50% of the voting stock of the surviving entity.
Dividends
Holders of Series A convertible preferred stock are entitled to receive
noncumulative dividends at the per annum rate of $0.14 per share, when and if
declared by the Board of Directors. The holders of Series A will also be
entitled to participate in dividends on common stock, when and if declared by
the Board of Directors, based on the number of shares of common stock held on
an as-if converted basis. No dividends on convertible preferred stock or common
stock have been declared by the Board from inception through December 31, 1998.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's common stock and convertible preferred stock own less than 51%
of the resulting voting power of the surviving entity, the holders of Series A
convertible
F-10
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
preferred stock are entitled to receive an amount of $1.79 per share, plus any
declared but unpaid dividends, prior to and in preference to any distribution
to the holders of common stock. The remaining assets, if any, shall be
distributed ratably to the common stockholders. Should the Company's legally
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed ratably to the Series A convertible preferred
stockholders.
Conversion
Each share of Series A convertible preferred stock is convertible into
shares of the Company's common stock, at the option of the holder, on a one to
one basis subject to adjustment for dilution. Each share of Series A
convertible preferred stock automatically converts into the number of shares of
common stock into which such shares are convertible at the then effective
conversion ratio upon (1) the closing of a public offering of common stock at a
per share price of at least $3.57 per share with gross proceeds of at least
$7,500,000, (2) a merger, sale of substantially all of the assets or other
transactions which result in a change in control, or (3) the consent of 66 2/3%
of convertible preferred stock.
Warrants for convertible preferred stock
In connection with the sale of Series A convertible preferred stock in
December 1998, the Company issued warrants to purchase 544,320 shares of Series
A convertible preferred stock at an exercise price of $1.79 per share. These
warrants are outstanding and exercisable at December 31, 1998 and expire in
five years. The Company valued the warrants using the Black-Scholes option
pricing model, applying an expected life of five years, a weighted average
risk-free rate of 4.36%, an expected dividend yield of zero percent, a
volatility of 70% and a deemed value of common stock of $1.36 per share. The
estimated fair value of the warrants of $408,629 has been netted against the
proceeds of the offering.
In May 1999, in connection with entering into facility leases, the Company
issued an aggregate of 13,720 Series A convertible preferred stock warrants at
an exercise price of $1.79 per share. The warrants expire at the earlier of (a)
two years following the closing of an initial public offering, or (b) May 2009.
The Company valued the warrants using the Black-Scholes option pricing model,
applying an expected life of ten years, a weighted average risk free rate of
5.39%, an expected dividend yield of zero percent, a volatility of 70% and a
deemed value of common stock of $4.10 per share. The fair value of the warrants
of $49,372 is being amortized over the period of the leases.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 26,600,000 shares of $0.001 par value common stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting over a one year period. At December 31, 1998, there were 20,090 shares
subject to this repurchase provision at the original issuance price.
In April 1999, in connection with a content license agreement, the Company
issued a warrant to purchase 80,784 shares of the Company's common stock at an
exercise price of $5.81 per share. The warrant is exercisable at the earlier of
a) May 2002, b) the one year anniversary of an initial public offering, c) the
sale of 50% of the Company's equity, or d) the date of termination of the
content license agreement or the date in which all of the Company's material is
removed from the website according to the agreement. The Company valued the
warrant using the Black-Scholes option pricing model, applying an expected life
of three years, a weighted average risk-free rate of 5.43%, an expected
dividend yield of zero percent, an expected volatility of 70% and a deemed
value of common stock of $4.44 per share. The fair value of the warrant of
$152,843 will be amortized over the period of the content license agreement.
F-11
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1999, the Company granted an officer immediately exercisable
options to purchase an aggregate of 350,000 shares of common stock at an
exercise price of $1.14 per share, which vest over four years. In connection
with the early exercise of these options, the officer entered into a
restricted stock purchase agreement and issued a promissory note in the amount
of $400,000 bearing interest of 5.74% per annum due upon the earliest of July
12, 2003 or the termination of his employment.
The Company has reserved shares of common stock for future issuance in
connection with the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Stock option plan................................... 3,360,000 3,360,000
Warrants............................................ 544,320 638,824
Convertible stock................................... 1,134,000 1,134,000
</TABLE>
NOTE 5--STOCK OPTION PLAN:
In August 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan"). The 1998 Plan provides for the granting of stock options to employees
and consultants of the Company. Options granted under the 1998 Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may be granted only to employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to employees and consultants.
Options under the 1998 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 a) 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 b) the exercise price of an ISO and NSO granted to a 10%
stockholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant.
During the period from January 1, 1998 through June 30, 1999, the Company
recorded $3,444,675 of deferred stock compensation in accordance with SFAS 123
and Emerging Issues Task Force 96-18, related to options granted to
consultants in 1998 and 1999. During this period the Company determined the
fair value of each option grant using the Black-Scholes option pricing model
with the following assumptions: expected lives of one to four years; weighted
average risk-free rates between 4.2% and 5.9%; expected dividend yield of zero
percent; expected volatility of 70% and deemed values of common stock between
$1.36 and $5.36 per share. Stock compensation expense is being recognized in
accordance with FIN 28 over the vesting periods of the related options,
generally four years. The Company recognized stock compensation expense of
$104,641 and $902,931 (unaudited) for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively. The Company will recognize
material amounts of stock compensation expense in the future resulting from
additional options granted after June 30, 1999.
F-12
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the 1998 Plan from inception
through June 30, 1999:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Number of Exercise
for Grant Shares Price
---------- --------- --------
<S> <C> <C> <C>
Balances, December 31, 1997................... -- -- $ --
Shares reserved for grant................... 3,360,000 -- --
Options granted............................. (307,685) 307,685 0.22
Restricted stock granted.................... (26,759) -- 0.22
---------- ---------
Balances, December 31, 1998................... 3,025,556 307,685 0.22
Options granted (unaudited)................. (1,029,912) 1,029,912 0.56
---------- ---------
Balances, June 30, 1999 (unaudited)........... 1,995,644 1,337,597 0.48
========== =========
</TABLE>
During 1998, the Company issued stock options under the 1998 Plan with the
following weighted average fair values:
<TABLE>
<CAPTION>
Weighted
Average
Options Fair
Granted Value
------- --------
<S> <C> <C>
Below fair value............................................ 307,685 $1.36
</TABLE>
The following table summarizes information under the 1998 Plan at December
31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
-------- ----------- ------------ -------- ----------- --------
$ 0.22 307,685 9.7 $ 0.22 5,834 $ 0.22
</TABLE>
NOTE 6--INCOME TAXES:
As of December 31, 1998, the Company has net operating loss carryforwards of
approximately $239,000 for federal and state income tax purposes. The federal
net operating loss carryforwards expire primarily in the year 2018 for federal
and 2003 for state purposes.
The Company's ability to utilize its net operating loss carryforwards to
offset future taxable income will be subject to annual limitations resulting
from changes in ownership, as defined in the Tax Reform Act of 1986.
F-13
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Net operating loss carryforwards................................ $ 95,600
Other........................................................... 42,900
---------
Gross deferred tax asset...................................... 138,500
Valuation allowance............................................. (138,500)
---------
Net deferred tax assets and liabilities....................... $ --
=========
</TABLE>
Due to uncertainty surrounding the realization of deferred tax assets, a
full valuation allowance has been provided against the deferred tax asset.
NOTE 7--COMMITMENTS:
In April 1999, the Company entered into an advertising agreement with
Excite, Inc. Excite, Inc. is to provide advertising to the Company ratably over
a one year period in exchange for total payments of approximately $139,000. As
of June 30, 1999, the Company had paid approximately $71,856 (unaudited) under
this agreement.
In April 1999, the Company entered into a one year agreement with a
publisher of physician rating information to jointly develop a co-branded
website. The Company will pay the greater of $100,000 due in quarterly
payments, and a marketing and advertising allowance in the amount of $50,000 or
30% of all net advertising revenue generated from the publisher's content
pages. The publisher will pay the Company 30% of net advertising revenues
derived from HealthCentral.com content pages.
In May 1999, the Company entered into an agreement to provide advertising to
the Company ratably over a one year period for a fee not to exceed $480,000.
The agreement will be adjusted based on the actual number of impressions
delivered. As of June 30, 1999, the Company had paid approximately $27,000
(unaudited) under this agreement.
In June 1999, the Company entered into a two year agreement with MediaLinx
Interactive, L.P. Pursuant to the terms of the agreement, the companies will
jointly develop a co-branded website and the Company is to receive the net
revenues from advertising and e-commerce transactions generated by Canadian
companies up to a maximum amount of $150,000 per year, and 50% for any amounts
thereafter. The Company is obligated to pay $300,000 per year in equal monthly
payments to MediaLinx Interactive, L.P.
NOTE 8--SUBSEQUENT EVENTS:
Acquisitions
On May 6, 1999, the Company entered into a definitive merger agreement with
Windom Health Enterprises, Inc. ("Windom Health") and completed the merger on
August 12, 1999. Windom Health is engaged in offering institutions the ability
to license specialized tools and services to provide their members with
personalized online health information and health risk assessments.
F-14
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
This transaction was recorded using the purchase method of accounting. The
allocation of the aggregate purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed in connection with this
acquisition was based on estimated fair values as determined by management. The
allocation is summarized below:
<TABLE>
<S> <C>
Goodwill........................................................ $11,900,000
Identifiable assets............................................. 781,000
Core technology................................................. 375,000
Acquired workforce.............................................. 180,000
In-process research and development............................. 555,000
-----------
Total purchase price............................................ $13,791,000
===========
</TABLE>
The total purchase price of $13.8 million consisted of cash of $51,000, a
note payable of $458,000, 2,357,341 shares of the Company's common stock valued
at $9,311,514, assumed liabilities of $3,956,000 and estimated transaction
costs of $65,000. The deemed value of the Company's common stock on the date
the definitive merger agreement was signed was $3.95 per share.
The valuation of the purchased in-process research development of $555,000
was based on the result of an independent appraisal using the income approach.
The income approach estimates the value of the asset based on its expected
economic benefit. The valuation analysis considered the contribution of the
core technology as well as the percentage completion of the in-process research
and development. The expected cash flows associated with the in-process
research and development were discounted to the present value using a rate of
return that is commensurate with the risk of the asset. The purchased
in-process technology was not considered to have reached technological
feasibility and had no alternative future use.
Goodwill and other intangibles are being amortized on a straightline basis
over the estimated period of benefit of two to three years.
In September 1999, the Company entered into an acquisition agreement with
ePills, Inc. ("ePills"). ePills operates an online drug store which provides
retail sales of prescription pharmaceuticals, over-the-counter products and
health and beauty aids on the Internet.
This transaction was recorded using the purchase method of accounting. The
allocation of the aggregate purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed in connection with this
acquisition was based on estimated fair values as determined by management. The
allocation is summarized below:
<TABLE>
<S> <C>
Goodwill........................................................ $10,146,000
Identifiable assets............................................. 1,460,000
Contracts....................................................... 1,189,000
Core technology................................................. 1,242,000
Tradename....................................................... 443,000
Acquired workforce.............................................. 177,000
In-process research and development............................. 250,000
-----------
Total purchase price............................................ $14,907,000
===========
</TABLE>
F-15
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The total purchase price of $14,907,000 consisted of 1,776,923 shares of the
Company's common stock valued at $14,393,076, assumption of 11,844 employee
stock options valued $6.93 per share, assumed liabilities of $332,000 and
estimated transaction costs of $100,000. The deemed value of the Company's
common stock on the date the definitive merger agreement was signed was $8.10
per share.
The valuation of the purchased in-process research development of $250,000
was based on the result of an independent appraisal using the income approach.
The income approach estimates the value of the asset based on its expected
economic benefit. The valuation analysis considered the contribution of the
core technology as well as the percentage completion of the in-process research
and development. The expected cash flows associated with the in-process
research and development were discounted to the present value using a rate of
return that is commensurate with the risk of the asset. The purchased
in-process technology was not considered to have reached technological
feasibility and had no alternatives future use.
Goodwill and other intangibles are being amortized on a straightline basis
over the estimated period of benefit of two to three years.
Related party transactions
In July 1999, the Company borrowed $100,000 from an officer in the Company
pursuant to a convertible promissory note. The note bears interest at the rate
of ten percent per annum. In August 1999, the note was cancelled upon the
issuance of 21,539 shares of the Company's Series B convertible preferred stock
at $4.64 per share.
In July 1999, the Company borrowed an aggregate of $600,000 from four
stockholders in the form of promissory notes. The notes bear interest at the
rate of ten percent per annum. In connection with these notes, the Company
issued warrants to purchase an aggregate of 18,666 shares of the Company's
common stock at $3.21 per share. The warrants expire upon the earliest of (a)
July 1, 2003, (b) the closing of an acquisition, or (c) immediately prior to
the effective date of the Company's registration statement under the Securities
Act of 1933 with respect to an initial public offering. The Company valued the
warrants using the Black-Scholes option pricing model, applying an expected
life of four years, a weighted average risk-free rate of 5.7%, an expected
dividend yield of zero percent, a volatility of 70% and deemed values of common
stock of $5.42 and $6.18 per share. The estimated fair value of the warrants of
$64,017 will be amortized over the period the notes become exercisable and
included within interest expense in the statement of operations. In August
1999, the notes were canceled upon the issuance of 129,230 shares of the
Company's Series B convertible preferred stock at $4.64 per share.
In August 1999 in connection with the acquisition of Windom Health, the
Company entered into a three-year consulting agreement with Michael D.
McDonald, a member of our Board of Directors, which provided for an $85,000
bonus to be paid to him on the closing of our Series B preferred stock
financing and a monthly fee of $5,000 for consulting services. If the Company
terminates the consulting agreement without releasing Dr. McDonald from its
noncompetition provision, Dr. McDonald will continue to receive as severance
the monthly fee due for the remainder of the initial term of the consulting
agreement.
In April 1999, the Company borrowed an amount of $500,000 in the form of
convertible notes from a related party. The notes bore interest at 4.99% per
annum. In August 1999, the notes were canceled upon the issuance of 107,692
shares of the Company's Series B convertible preferred stock at $4.64 per
share. In August 1999, the Company borrowed an additional $300,000 under the
same agreement. The new notes bore interest at the rate of ten percent per
annum. In connection with this additional borrowing the Company issued warrants
F-16
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
to purchase 9,332 shares of the Company's Series B convertible preferred stock
at an exercise price of $3.21 per share. The warrants expire at the earlier of
(a) August 2002, (b) the closing of an acquisition or (c) the effective date of
the Company's initial public offering. The Company valued the warrants using
the Black-Scholes option pricing model using an expected life of two years, a
weighted average risk-free rate of 5.76% an expected dividend yield of zero
percent, a volatility of 70% and a deemed value of the common stock of $6.60
per share. The estimated fair value of the warrants of $39,008 was amortized
over the period of the borrowing until the notes were canceled in August 1999
upon the issuance of 64,614 shares of the Company's Series B convertible stock
at $4.64 per share.
Options
In August 1999, the Company granted 56,000 options to consultants at an
exercise price of $1.14 per share. The options vest over four years and have an
option term of ten years. The Company valued the options using the Black-
Scholes option pricing model, applying an expected life of four years, a
weighted average risk-free rate of 5.9%, an expected dividend yield of zero
percent, a volatility of 70% and a deemed value of common stock of $6.39 per
share. The estimated fair value of the options of $312,760 will be amortized
over their vesting period based on FIN 28.
In August 1999, the Company granted 832,580 options to employees and
recorded $4,365,527 of deferred stock compensation for the excess of the deemed
value over the exercise price at the date of grant. The exercise price of the
options was $1.14 per share. The deferred stock compensation will be amortized
over the vesting period of the options based on FIN 28.
Series B preferred stock
In August and September 1999, the Company sold a total of 4,523,065 shares
of Series B preferred stock at a price of $4.64 per share, for total net
proceeds of approximately $19.8 million. In August, 1999, in connection with
investment banking services provided during this offering, the Company issued
warrants to purchase an aggregate of 77,539 shares of Series B preferred stock
at an exercise price of $4.64 per share. The warrants expire at the earlier of
(a) August 2001 (b) the closing of an acquisition or (c) immediately prior to
the effective date of the Company's registration statement under the Securities
Act of 1933 with respect to an initial public offering. The Company valued the
warrants using the Black-Scholes option pricing model, applying an expected
life of two years, a weighted average risk-free rate of 5.74%, an expected
dividend yield of zero percent, a volatility of 70% and a deemed value of
common stock of $7.10. The estimated fair value of the warrants of $301,317
will be netted against the proceeds from the offering.
On August 6, 1999, the Company's Articles of Incorporation were amended to
a) increase the amount of authorized shares of preferred stock and common stock
to 6,580,000 and 31,080,000, respectively, and b) increase the amount upon
which preferred stock automatically converts to $15,000,000 in proceeds from
an IPO.
Agreements
In September 1999, the Company entered into a three-year agreement with
AltaVista to develop a co-branded health channel. The agreement provides that,
in exchange for a minimum number of user impressions on the co-branded health
channel, The Company is obligated to pay AltaVista approximately $65.6 million
in cash and stock over the three-year term of the agreement; however either
AltaVista or the Company may terminate the relationship after two years, in
which case the aggregate payment obligation over the first two years in cash
and stock would be $34.5 million. In addition, if AltaVista meets given
performance thresholds under the agreement, the Company will issue to AltaVista
warrants to purchase shares of common stock, with the number of shares
depending on the amount by which they exceed the thresholds. These warrants
will have varying exercise prices. If the market value of our
F-17
<PAGE>
HEALTHCENTRAL.COM
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
common stock exceeds the warrant exercise price on the date of issuance or
during the exercise period, there would be a deferred compensation charge
associated with these warrants.
In September 1999, the Company entered into a four year agreement with The
People's Pharmacy in which a co-branded website will be developed. The Company
is entitled to all advertising revenues from the website, in exchange for an
annual $50,000 payment as well as an option to purchase a maximum
280,000 shares of the Company's common stock at $1.14 per share. If the Company
is acquired, all remaining unvested shares will vest immediately. The Company
valued the option using the Black-Scholes option pricing model, applying an
expected life of four years, a weighted average risk-free rate of 5.77%, an
expected dividend yield of zero percent, a volatility of 70% and a deemed value
of common stock of $7.74 per share. The estimated fair value of the warrants of
$1,936,760 will be expensed over the term of the agreement.
Employee Stock Purchase Plan
In September 1999, the Company adopted an Employee Stock Purchase Plan (the
"ESPP") to provide substantially all employees whose customary employment is
more than 20 hours per week for more than five months in any calendar year
eligibility to purchase shares of its common stock through payroll deductions,
up to 10% of eligible compensation. Participant account balances are used to
purchase shares of the Company's common stock at the lesser of 85 percent of
the fair market value of shares on either the first day or the last day of the
designated payroll deduction period (the Offering Period), as chosen by the
Board of Directors at its discretion, whichever is lower. The aggregate number
of shares purchased by an employee may not exceed 1,000 shares in any one
Offering Period, generally 12 months or less (subject to limitations imposed by
the Internal Revenue Code). A total of 1,400,000 shares are available for
purchase under the ESPP.
1999 Directors' Stock Option Plan
The 1999 Directors' Stock Option Plan was adopted by the Board of Directors
in September 1999. It will become effective upon the effective date of the
initial public offering. A total of 250,000 shares of common stock have been
reserved for issuance under the 1999 directors' plan, all of which remain
available for future grants. The directors' plan provides for the grant of
nonstatutory stock options to non-employee directors.
1999 Stock Option Plan
The 1999 Plan provides for the grant of incentive stock options to
employees, including employee directors, and of nonstatutory stock options and
stock purchase rights to employees, directors (including
employee directors) and consultants. The 1999 Plan was originally adopted by
the Board of Directors in August 1999. At the time of adoption, 280,000 shares
of common stock were reserved for issuance under the 1999 Plan. The 1999 Plan
was amended by the Board of Directors in September 1999 to increase the total
number of shares reserved for issuance by 4,900,000 shares, and to incorporate
certain other changes, after which amendment a total of 5,180,000 shares of
common stock has been reserved for issuance under the 1999 Plan.
F-18
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Windom Health Enterprises, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Windom Health Enterprises,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
September 24, 1999
F-19
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1997 1998 1999
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................... $ 5,335 $ 24,459 $ 37,140
Accounts receivable, net of allowance of
$0, $0 and $41,271 (unaudited),
respectively............................. 69,135 114,695 105,035
Prepaid expenses and other current
assets................................... 292 292 19,945
--------- --------- -----------
Total current assets.................... 74,762 139,446 162,120
Property and equipment, net................. 20,039 88,000 376,747
Other assets................................ -- -- 47,227
--------- --------- -----------
Total assets............................ $ 94,801 $ 227,446 $ 586,094
========= ========= ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................... $ 10,741 $ 34,070 $ 397,304
Accrued expenses.......................... 72,137 130,330 148,462
Deferred revenue.......................... 132,744 102,728 170,569
Payable to related party.................. -- 563,541 1,361,730
Current portion of obligations under
capital leases........................... 1,061 15,362 44,784
Note payable.............................. -- 25,000 --
--------- --------- -----------
Total current liabilities............... 216,683 871,031 2,122,849
Obligations under capital leases, net of
current portion............................ 2,504 40,588 110,448
Due to shareholder.......................... 10,500 70,500 5,500
Deferred revenue............................ 50,000 -- 10,164
--------- --------- -----------
Total liabilities....................... 279,687 982,119 2,248,961
--------- --------- -----------
Commitments (Note 3)
Shareholders' deficit:
Common stock, no par value, 3,000,000
shares authorized, 1,076,563 shares
issued and outstanding at December 31,
1997 and 1998 and June 30, 1999
(unaudited).............................. 54,563 54,563 54,563
Accumulated deficit....................... (239,449) (809,236) (1,717,430)
--------- --------- -----------
Total shareholders' deficit............. (184,886) (754,673) (1,662,867)
--------- --------- -----------
Total liabilities and shareholders'
deficit.............................. $ 94,801 $ 227,446 $ 586,094
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- --------------------
1997 1998 1998 1999
----------- ------------ --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Content subscription and
license.................... $ 272,355 $ 552,630 $ 272,334 $ 257,975
----------- ------------ --------- ---------
Operating expenses:
Production, content and
product development........ 207,971 642,317 375,501 610,799
Sales and marketing......... 91,913 83,187 15,570 277,080
General and administrative.. 195,021 378,888 82,235 227,687
----------- ------------ --------- ---------
Total operating expenses.. 494,905 1,104,392 473,306 1,115,566
----------- ------------ --------- ---------
Loss from operations.......... (222,550) (551,762) (200,972) (857,591)
Interest expense.............. (5,573) (18,025) (5,887) (50,603)
----------- ------------ --------- ---------
Net loss...................... $ (228,123) $ (569,787) $(206,859) $(908,194)
=========== ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Total
----------------- Accumulated Shareholders'
Shares Amount Deficit Deficit
--------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.... 1,076,563 $54,563 $ (11,326) $ 43,237
Net loss........................ -- -- (228,123) (228,123)
--------- ------- ----------- -----------
Balance at December 31, 1997.... 1,076,563 54,563 (239,449) (184,886)
Net loss........................ -- -- (569,787) (569,787)
--------- ------- ----------- -----------
Balance at December 31, 1998.... 1,076,563 54,563 (809,236) (754,673)
Net loss (unaudited)............ -- -- (908,194) (908,194)
--------- ------- ----------- -----------
Balance at June 30, 1999
(unaudited).................... 1,076,563 $54,563 $(1,717,430) $(1,662,867)
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
---------------------- ----------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating ac-
tivities:
Net loss...................... $ (228,123) $ (569,787) $ (206,859) $ (908,194)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization................. 8,283 16,934 8,467 31,467
Provision for doubtful
accounts..................... -- -- -- 41,271
Changes in assets and
liabilities:
Accounts receivable.......... 168,860 (45,560) (44,883) (31,611)
Prepaid expenses and other
current assets.............. (292) -- -- (19,653)
Other assets................. -- -- -- (47,227)
Accounts payable............. (59,252) 23,329 54,874 363,234
Accrued expenses............. 55,515 58,193 6,625 18,132
Deferred revenue............. 89,711 (80,016) 13,431 78,005
---------- ---------- ---------- ----------
Net cash provided by (used
in) operating activities... 34,702 (596,907) (168,345) (474,576)
---------- ---------- ---------- ----------
Cash flows from investing ac-
tivities:
Purchase of property and
equipment.................... (8,504) (31,179) (1,131) (213,393)
---------- ---------- ---------- ----------
Net cash used in investing
activities................. (8,504) (31,179) (1,131) (213,393)
---------- ---------- ---------- ----------
Cash flows from financing
activities:
Bank overdraft................ (15,864) -- 49,781 --
Proceeds from borrowings...... -- 57,500 57,500 --
Payments on notes payable..... -- (32,500) (2,500) (25,000)
Proceeds from advances from
related party................ -- 563,541 -- 798,189
Proceeds from note payable to
a shareholder................ -- 60,000 60,000 --
Payments on capital leases.... (499) (1,331) (640) (7,539)
Payments on notes payable to
related party................ (4,500) -- -- (65,000)
---------- ---------- ---------- ----------
Net cash provided by (used
in) financing activities... (20,863) 647,210 164,141 700,650
---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents.......... 5,335 19,124 (5,335) 12,681
Cash and cash equivalents at
beginning of period........... -- 5,335 5,335 24,459
---------- ---------- ---------- ----------
Cash and cash equivalents at
end of period................. $ 5,335 $ 24,459 $ -- $ 37,140
========== ========== ========== ==========
Supplemental disclosures of
cash flows information:
Cash paid for interest........ $ 3,948 $ 7,970 $ 850 $ 39,868
========== ========== ========== ==========
Cash paid for income taxes.... $ 800 $ 800 $ -- $ --
========== ========== ========== ==========
Noncash investing and financing
activities:
Property and equipment
acquired under capital lease
obligations.................. $ 4,064 $ 53,716 $ -- $ 106,821
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Windom Health Enterprises, Inc. (the "Company") was formed in 1984 and was
incorporated in California in 1988. The Company provides institutions,
including healthcare organizations, employers and pharmaceutical companies
specialized tools and services for the design, hosting and maintenance of
private label websites. In August 1999, the Company merged with
HealthCentral.com (See Note 5).
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.
Interim financial statements (unaudited)
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 are unaudited and should be read in conjunction with the
Company's annual financial statements for the year ended December 31, 1998.
Such interim financial statements have been prepared in conformity with the
rules and regulations of the Securities and Exchange Commission. Certain
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations pertaining to interim financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation have been included.
The results of operations of any interim period are not necessarily indicative
of the results of operations for the full year.
Revenue recognition
Institutional revenues derived from contracts with healthcare providers,
health product resellers, and third party organizations principally consist of
license fees for website development applications, consulting fees from custom
website development and hosting and maintenance fees related to the websites
maintenance. License revenues are recognized ratably over the term of the
license, generally between 12 to 24 months. For consulting projects, revenues
are recognized at the time services are rendered based on charges for time and
materials. Deferred revenues represent the amount of cash received or invoices
rendered prior to revenue recognition.
Production, content and product development expense
Production, content and product development expenses consist primarily of
salaries and benefits, consulting fees and other costs related to content
acquisition and licensing, software development, application development and
website operations.
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. To date, costs incurred following
the establishment of technological feasibility, but prior to general product
release, have been insignificant.
F-24
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. The
Company's accounts receivable are derived from revenues earned from customers
located in the U.S. The Company performs ongoing credit evaluation of its
customers' financial condition and, generally, requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable.
The Company has the following concentrations of revenues and trade accounts
receivables:
<TABLE>
<CAPTION>
Year Ended
December
31, Six Months
------------------------ Ended June
1997 1998 30, 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Revenues:
Customer A............................. 33% -- --
Customer B............................. 16% -- --
Customer C............................. 18% 17% 11%
Customer D............................. 18% 18% 13%
Customer E............................. -- -- 33%
<CAPTION>
December 31,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts Receivable:
Customer B............................. 79% -- --
Customer C............................. -- 16% --
Customer E............................. -- 14% 27%
Customer F............................. -- 17% --
Customer G............................. -- 35% --
Customer H............................. -- -- 32%
Customer I............................. -- -- 16%
</TABLE>
Financial instruments
Carrying amounts of certain of the Company's financial instruments,
including accounts receivable, accounts payable, accrued expenses and other
liabilities approximate fair value due to their short maturities. Based upon
borrowing rates currently available to the Company for leases with similar
terms, the carrying value of capital lease obligations approximate fair value.
Property and equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives which range from three to
five years. Leasehold improvements and equipment held under capital leases are
amortized using the straight-line method over the term of the lease or
estimated useful lives, whichever is shorter. Repairs and maintenance costs are
charged to expense when incurred. When assets are sold or retired, the cost and
the related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in operations.
F-25
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
The Company evaluates the recoverability of 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 No. 121"). SFAS No. 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.
Income taxes
The Company elected to be treated as an S corporation for federal and
California income tax purposes in 1992. As a result, minimal income taxes were
payable at the corporate level. Rather, the Company's shareholders included
their respective portions of the Company's taxable income in their individual
income tax returns. On August 12, 1999, in connection with the merger with
HealthCentral.com, the Company became subject to the C corporation provisions
of the Internal Revenue Code. Accordingly, any earnings after this date will be
taxed at HealthCentral's federal and state corporate income tax rates.
NOTE 2--BALANCE SHEET COMPONENTS:
Property and equipment are comprised of:
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment and software............ $ 40,540 $125,435 $354,577
Office equipment........................... 574 574 23,327
Furniture and fixtures..................... 39,177 39,177 107,496
-------- -------- --------
80,291 165,186 485,400
Less accumulated depreciation and
amortization.............................. (60,252) (77,186) (108,653)
-------- -------- --------
$ 20,039 $ 88,000 $376,747
======== ======== ========
</TABLE>
Depreciation expense was $8,283 and $16,934 for the years ended December 31,
1997 and 1998, respectively. Cost and accumulated amortization of equipment
held under capital lease at December 31, 1997 was $4,062 and $498,
respectively. Cost and accumulated amortization of equipment held under capital
lease at December 1998 was $73,979 and $8,625, respectively. Cost and
accumulated amortization of equipment held under capital leases at June 30,
1999 aggregated $175,606 (unaudited) and $22,877 (unaudited), respectively.
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued liabilities are comprised of:
Due to shareholder........................... $ 53,539 $ 79,500 $ 79,500
Professional services........................ 12,500 44,732 25,000
Payroll and related expenses................. 6,098 6,098 43,962
-------- -------- --------
$ 72,137 $130,330 $148,462
======== ======== ========
</TABLE>
F-26
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 3--COMMITMENTS:
The Company leases various office space and office equipment under non-
cancelable operating and capital leases with initial or remaining terms of one
year or more. Total rent expense under operating leases was $17,223 and $15,570
for the years ended 1997 and 1998, respectively. At December 31, 1998, the
total remaining commitment under all lease arrangements is as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ----------
<S> <C> <C>
1999................................................... $31,115 $ 127,960
2000................................................... 30,402 340,516
2001................................................... 23,605 344,884
2002................................................... -- 352,432
2003................................................... -- 359,348
Thereafter............................................. -- 87,335
------- ----------
Total minimum lease payments........................... 85,122 $1,612,475
==========
Less amount representing interest...................... (29,172)
-------
Present value of net minimum lease payments............ 55,950
Less current portion of obligations under capital
leases................................................ (15,362)
-------
Obligations under capital leases....................... $40,588
=======
</TABLE>
NOTE 4--RELATED PARTY TRANSACTIONS:
Related party transactions are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Due to HealthCentral.com........................ $ -- $563,541 $1,361,730
Accrued liability due to a shareholder.......... 53,539 79,500 79,500
Shareholder note payable........................ 10,500 70,500 5,500
</TABLE>
In August 1998, in association with the letter of intent relating to the
merger (Note 5), the Company entered into a License and Management Agreement
with HealthCentral.com. Pursuant to the agreement, HealthCentral.com had full
management responsibility for the operations of the Company. In this capacity,
HealthCentral.com advanced the Company funds to finance its operations. At
December 31, 1998 and June 30, 1999, the net amount due to HealthCentral.com
was $563,541 and $1,361,730 (unaudited), respectively.
At December 31, 1997 and 1998 and June 30, 1999, the Company had an
outstanding balance of $53,539, $79,500 and $79,500 (unaudited), respectively,
due to a shareholder for past consulting services. This amount was repaid
concurrent with the merger. The Company also paid an additional $27,500 to the
shareholder for consulting services in 1998.
Shareholder notes payable of $10,500 and $70,500 at December 31, 1997 and
1998, respectively, relate to advances made to the Company from a shareholder
to fund the Company's operations. The notes bear interest at 10%. In March
1999, $65,000 of this amount was repaid and the rest of the principal and
accrued interest was repaid concurrent with the merger.
F-27
<PAGE>
WINDOM HEALTH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--SUBSEQUENT EVENTS:
In July 1999, a common stock bonus was granted by a shareholder on behalf of
the Company to two employees for past services rendered in the amounts of
104,779 and 41,784 shares of the Company's common stock. The deemed value of
these shares was $10.21 per share, resulting in compensation expense of
approximately $1.5 million in July 1999. The deemed value of the Company's
stock was determined based upon the deemed value of HealthCentral.com common
stock, the per share exchange ratio and the proximity of timing in closing the
merger with HealthCentral.com.
On August 12, 1999, the Company merged with HealthCentral.com. The purchase
price paid by HealthCentral.com was comprised of notes payable of $458,000,
cash of $51,000 and 2,357,341 shares of HealthCentral.com common stock valued
at $3.95 per share. All the Company's outstanding stock was surrendered and the
Company's shareholders received their pro rata share of the purchase price.
F-28
<PAGE>
EPILLS INC.
(A development stage company)
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
June 30,
1999
---------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 30,521
Total current assets............................................. 30,521
Property and equipment, net.......................................... 29,708
Other assets......................................................... 15,550
---------
Total assets..................................................... $ 75,779
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................... $ 108,286
Accrued expenses................................................... 9,917
Convertible notes payable to stockholders.......................... 270,000
---------
Total liabilities................................................ 388,203
---------
Commitments (Note 5)
Stockholders' deficit:
Common stock, no par value, 1,250,000 shares
authorized, 562,500 shares issued
and outstanding................................................... 225
Accumulated deficit................................................ (312,649)
---------
Total stockholders' deficit...................................... (312,424)
---------
Total liabilities and stockholders' deficit...................... $ 75,779
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
EPILLS INC.
(A development stage company)
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from
Inception to
June 30,
1999
------------
<S> <C>
Operating expenses:
Production, content and product development...................... $ 113,387
Sales and marketing.............................................. 5,000
General and administrative expenses.............................. 192,634
----------
Total operating expenses....................................... 311,021
----------
Loss from operations............................................... (311,021)
Interest expense................................................... (1,628)
----------
Net loss........................................................... $ (312,649)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
EPILLS INC.
(A development stage company)
STATEMENT OF STOCKHOLDERS' DEFICIT
Period from Inception to June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Common Shares Total
-------------- Accumulated Stockholders'
Shares Amount Deficit Deficit
------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock for cash..... 562,500 $225 $ -- $ 225
Net loss.............................. -- -- (312,649) (312,649)
------- ---- --------- ---------
Balance at June 30, 1999.............. 562,500 $225 $(312,649) $(312,424)
======= ==== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
EPILLS INC.
(A development stage company)
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Period from
Inception to
June 30,
1999
-------------
<S> <C>
Cash flows from operating activities:
Net loss....................................................... $(312,649)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 2,700
Changes in assets and liabilities:
Other assets............................................... (15,550)
Accounts payable........................................... 108,286
Accrued expenses........................................... 9,917
---------
Net cash used in operating activities.................... (207,296)
---------
Cash flows from investing activities:
Purchase of property and equipment............................. (32,408)
---------
Net cash used in investing activities.................... (32,408)
---------
Cash flows from financing activities:
Proceeds from issuance of common stock......................... 225
Proceeds from issuance of convertible notes payable............ 270,000
---------
Net cash provided by financing activities................ 270,225
---------
Net increase in cash and cash equivalents........................ 30,521
Cash and cash equivalents at beginning of period................. --
---------
Cash and cash equivalents at end of period....................... $ 30,521
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
EPILLS INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
ePills Inc. (the "Company") was incorporated on January 27, 1999 (date of
inception) as a Delaware corporation. The Company is engaged in the development
of an online drug store to provide for retail sales of prescription
pharmaceuticals, over-the-counter products and health and beauty aids on the
Internet. Since inception, the Company has been primarily involved in securing
financing, recruiting personnel and developing its website. In September 1999,
the Company began operating its online drug store.
Development stage enterprise
For the period from inception (January 27, 1999) through June 30, 1999, the
Company was a development stage company, as planned principal operations had
not yet generated significant revenue. In the development stage, all pre-
operating costs have been expensed as incurred.
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.
Unaudited interim financial statements
The financial statements as of June 30, 1999 and for the period from
inception to June 30, 1999 are unaudited. Such interim financial statements
have been prepared in conformity with the rules and regulations of the
Securities and Exchange Commission. Certain disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations pertaining to interim financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included. The results of operations
of any interim period are not necessarily indicative of the results of
operations for the full year.
Cash and cash equivalents
Cash and cash equivalents consist primarily of cash. The Company considers
all highly liquid investments with an original maturity of three months or less
to be cash equivalents. The Company maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits.
Fair value
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts payable and accrued expenses
approximate fair value due to their short maturities.
Property and equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives which range from three to five
years. Leasehold improvements and equipment held under capital leases are
amortized using the straight-line method over the term of the lease or
estimated useful lives, whichever is shorter. Repairs and maintenance costs are
charged to expense when incurred. When assets are sold or retired, the cost and
the related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in operations.
F-33
<PAGE>
EPILLS INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(unaudited)
Income taxes
The Company accounts for income taxes under the asset and liability method
which recognizes deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the tax basis of assets and
liabilities and their financial statement reported amounts. The Company records
a valuation allowance against deferred tax assets when it is more likely than
not that such assets will not be realized.
Revenue recognition
The Company will recognize revenues for sales of over-the-counter and health
and beauty aid products, net of discounts, when products are shipped to
customers. The Company will recognize commission revenues for the use of its
website related to sales made by its pharmacy fulfillment partner for all
prescription drugs. The Company is responsible for all refunds relating to
sales where a customer is not satisfied with the products received. The Company
provides an estimated allowance for such returns in the period of the sale. The
Company also retains credit risk for sales of all products made by its
fulfillment partners.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
June 30,
1999
--------
<S> <C>
Computer equipment and software.................................... $ 32,321
Office equipment................................................... 87
--------
32,408
Less accumulated depreciation and amortization..................... (2,700)
--------
$ 29,708
========
</TABLE>
Depreciation expense was $2,700 for the period ended June 30, 1999.
NOTE 3--NOTE PAYABLE TO STOCKHOLDERS:
During the period from January 27, 1999 to June 30, 1999, stockholders of
the Company advanced the Company $270,000 in exchange for convertible notes
payable. The notes bear interest at 4.6% and are due on the earlier of 10 days
after the Company completes an initial public offering ("IPO") or one year
after the closing of the purchase of the Company by HealthCentral.com (Note 6).
Upon the completion of an IPO by HealthCentral.com, the notes are no longer
convertible. As of August 31, 1999, the balance due under the convertible notes
payable was $1,250,000.
NOTE 4--STOCK OPTION PLAN:
In February 1999, the Company adopted the 1999 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees,
officers, directors and consultants of the Company. Options granted under the
Plan may be either incentive stock options ("ISO") or nonqualified stock
options ("NSO"). ISOs may be granted only to Company employees. NSO's may be
granted to employees and consultants. The Company has reserved 240,000 shares
of common stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 100% of the estimated fair value of the shares at the time
of grant of such option, or not less than 110% of estimated fair value for
options granted to a 10% stockholder.
From inception through June 30, 1999, the Company granted a total of 69,690
options to employees. Deferred stock compensation based on the deemed value of
common stock over the exercise prices on the dates of grant was not
significant.
F-34
<PAGE>
EPILLS INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(unaudited)
In February 1999, the Company granted 55,810 of fully vested options to non-
employees. The Company valued these options using the Black-Scholes option
pricing model applying an expected life of two years, a weighted average risk-
free rate of 4.76%, an expected dividend yield of zero percent, a volatility of
70% and a deemed value of common stock of $0.23 per share. The estimated fair
value of these options was not significant.
NOTE 5--COMMITMENTS:
The Company leases its office space under a non-cancelable operating lease.
Total rent expense was $27,742 for the period from inception to June 30, 1999.
At June 30, 1999, the total remaining commitment under this lease arrangement
is as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................. $ 62,196
2000............................................................. 126,336
2001............................................................. 130,224
2002............................................................. 66,084
---------
$ 384,840
=========
</TABLE>
NOTE 6--SUBSEQUENT EVENTS:
Agreements
In August 1999, the Company entered into an agreement with Bergen Brunswig
Drug Company to be its fulfillment service provider for over-the-counter and
health and beauty aid products and provide related services to the Company's
customers in the United States. In September 1999, in connection with the
agreement, the Company sold Bergen Brunswig 337,500 shares of common stock for
cash of $5.215 per share for an aggregate purchase price of $1.76 million.
In August 1999, the Company also entered into an agreement with Medi-Mail,
Inc. (a subsidiary of Bergen Brunswig) in which Medi-Mail is to provide
pharmacy dispensing and related support services for the Company and its
consumers, including the processing, adjudication or verification and
fulfillment of prescription drug orders received by the Company through its
website and their delivery to the Company's shipper. In August 1999, in
connection with this agreement, the Company issued Medi-Mail a warrant to
purchase 52,630 shares of common stock at an exercise price of $3.70 per share,
which was exercised in connection with the signing of the acquisition agreement
with HealthCentral.com. The Company valued the warrant using the Black-Scholes
option pricing model, applying an expected life of one year, a weighted average
risk free rate of 5.88%, an expected dividend yield of zero percent, a
volatility of 70% and a deemed value of common stock of $8.10 per share. The
estimated fair value of the warrant of $253,045 will be amortized over the
period of the agreement.
In August 1999, the Company entered into a two year agreement with America
Online, Inc. ("AOL"), under which the Company will appear as one of five
health-related anchor tenants on the AOL HealthOnline Pharmacy. The Company is
required to pay AOL approximately $14.1 million over the term of the agreement.
Acquisition
In September 1999, all of the Company's outstanding common stock was
acquired by HealthCentral.com for consideration of 1,776,923 shares of
HealthCentral.com common stock valued at $8.10 per share, the assumption of
8,460 stock options valued at $9.70 per share and the assumption of $332,000 of
liabilities.
F-35
<PAGE>
Report of Independent Accountants
To the Shareholders of
RxList.com
In our opinion, the accompanying balance sheets and the related statements
of operations, of partners'/shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of RxList.com at
December 31, 1997 and 1998 and at September 30, 1999, and the results of its
operations and its cash flows for each of the two years ended December 31, 1998
and the nine months ended September 30, 1999 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
October 25, 1999
F-36
<PAGE>
RXLIST.COM
BALANCE SHEETS
<TABLE>
<CAPTION>
December
31,
----------- September 30,
1997 1998 1999
---- ------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $260 $1,116 $ 37,828
Accounts receivable............................... -- 1,299 111,967
Prepaid expenses.................................. -- 3,750 --
---- ------ --------
Total current assets............................ 260 6,165 149,795
---- ------ --------
Equipment........................................... -- 2,716 2,716
Less accumulated depreciation....................... -- (830) (1,509)
---- ------ --------
New equipment................................... -- 1,886 1,207
---- ------ --------
Total assets.................................... $260 $8,051 $151,002
==== ====== ========
LIABILITIES AND PARTNERS'/SHAREHOLDERS' EQUITY
Current liabilities:
Accrued professional fees and other............... $-- $ -- $ 26,910
---- ------ --------
Total current liabilities....................... -- -- 26,910
---- ------ --------
Partners'/shareholders' equity:
Partners' capital................................. 260 8,051 --
Common stock, $0.001 par value, 10,000,000 shares
authorized, 2,000 shares issued and outstanding
at September 30, 1999............................ -- -- --
Additional paid-in capital........................ -- -- 102,716
Accumulated earnings.............................. -- -- 21,376
---- ------ --------
Total shareholders' equity...................... 260 8,051 124,092
---- ------ --------
Total liabilities and partners'/shareholders'
equity....................................... $260 $8,051 $151,002
==== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
RXLIST.COM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
---------------- --------------------
1997 1998 1998 1999
------- ------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Advertising revenue................... $ 4,500 $11,988 $10,690 $231,336
------- ------- ------- --------
Operating expenses:
Production, content and product
development.......................... 3,840 17,346 7,473 61,423
Sales and marketing................... 2,300 3,844 3,844 37,791
General and administrative............ 180 115 104 19,049
------- ------- ------- --------
Total operating expenses............ 6,320 21,305 11,421 118,263
------- ------- ------- --------
Income (loss) from operations........... (1,820) (9,317) (731) 113,073
Interest income......................... 14 20 11 121
------- ------- ------- --------
Net income (loss)....................... $(1,806) $(9,297) $ (720) $113,194
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
RXLIST.COM
STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Partners'
Common Stock Additional Capital/
Partners' ------------- Paid-In Retained Shareholders'
Capital Shares Amount Capital Earnings Equity
--------- ------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $ 26 -- $ -- $ -- $ -- $ 26
Contributions of
capital................ 4,040 -- -- -- -- 4,040
Distributions to
shareholders........... (2,000) -- -- -- -- (2,000)
Net loss................ (1,806) -- -- -- -- (1,806)
-------- ----- ----- -------- -------- --------
Balance at December 31,
1997................... 260 -- -- -- -- 260
Contributions of
capital................ 17,088 -- -- -- -- 17,088
Net loss................ (9,297) -- -- -- -- (9,297)
-------- ----- ----- -------- -------- --------
Balance at December 31,
1998................... 8,051 -- -- -- -- 8,051
Contributions of
capital................ 18,634 -- -- -- 18,634
Distributions to
shareholders........... (4,379) -- -- -- (4,379)
Net income through June
30..................... 71,818 -- -- -- 71,818
Issuance of common stock
upon conversion to S
corporation............ (94,124) 2,000 -- 94,124 -- --
Contributions of
capital................ -- -- -- 8,592 -- 8,592
Distributions to
shareholders........... -- -- -- -- (20,000) (20,000)
Net income.............. -- -- -- -- 41,376 41,376
-------- ----- ----- -------- -------- --------
Balance at September 30,
1999................... $ -- 2,000 $ -- $102,716 $ 21,376 $124,092
======== ===== ===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
RXLIST.COM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------- ---------------------
1997 1998 1998 1999
------- -------- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................. $(1,806) $ (9,297) $ (720) $ 113,194
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.... -- 830 604 679
Changes in assets and
liabilities:
Accounts receivable............ -- (1,299) (6,000) (110,668)
Prepaid expenses............... -- (3,750) -- 3,750
Accrued professional fees and
other......................... -- -- -- 26,910
------- -------- ------- ---------
Net cash provided by (used
in) operating activities.... (1,806) (13,516) (6,116) 33,865
------- -------- ------- ---------
Cash flows from investing activities:
Purchase of property and
equipment......................... -- (2,716) (2,716) --
------- -------- ------- ---------
Net cash used in investing
activities.................. -- (2,716) (2,716) --
------- -------- ------- ---------
Cash flows from financing activities:
Proceeds from capital
contributions..................... 4,040 17,088 9,240 27,226
Distributions to shareholders...... (2,000) -- -- (24,379)
------- -------- ------- ---------
Net cash provided by
financing activities........ 2,040 17,088 9,240 2,847
------- -------- ------- ---------
Net increase in cash and cash
equivalents......................... 234 856 408 36,712
Cash and cash equivalents at
beginning of period................. 26 260 260 1,116
------- -------- ------- ---------
Cash and cash equivalents at end of
period.............................. $ 260 $ 1,116 $ 668 $ 37,828
======= ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
RXLIST.COM
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
RxList.com (the "Company") was formed in 1995 as a partnership and was
incorporated in California in July 1999. The Company maintains a website that
allows visitors to search for information regarding prescription medication.
The Company's website also provides links to other prescription medication and
general medical websites.
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.
Interim financial statements (unaudited)
The financial statements for the nine months ended September 30, 1998 are
unaudited and should be read in conjunction with the Company's annual financial
statements for the year ended December 31, 1998. The interim financial
statements have been prepared in conformity with the rules and regulations of
the Securities and Exchange Commission. Certain disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations pertaining to interim financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included. The results of operations
of any interim period are not necessarily indicative of the results of
operations for the full year.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company maintains
its cash in bank deposit accounts which, at times, may exceed federally insured
limits.
Revenue recognition
The Company records advertising revenues in the period the advertising
services are provided to customers. The Company uses an outside vendor to
solicit customers to use its advertising services, to serve the ads to its
website and to bill and collect for these services. This outside vendor
provides monthly reports indicating the amounts billed for the Company's
advertising services and the related administrative fee. Advertising revenues,
as reported by the outside vendor, are recorded net of this administrative fee
as the Company bears no collection risk for the gross amount of the advertising
fees.
Production, content and product development expense
Production, content and product development expenses consist primarily of
consulting fees and other costs related to content acquisition and licensing
and website operations.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. The
Company's accounts receivable are derived from revenues earned from customers
located in the U.S. The Company performs ongoing credit evaluation of its
customers' financial condition and, generally, requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable.
F-41
<PAGE>
RXLIST.COM
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company currently has the following concentrations of revenues and
accounts receivables:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
--------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C> <C>
Revenues:
Customer A............................... 100% -- --
Customer B............................... -- 75% --
Customer C............................... -- 11% 46%
Customer D............................... -- -- 44%
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C> <C>
Accounts Receivable:
Customer C............................... -- 100% 48%
Customer D............................... -- -- 52%
</TABLE>
Financial instruments
Carrying amounts of certain of the Company's financial instruments,
including accounts receivable and accrued expenses approximate fair value due
to their short maturities.
Equipment
Equipment is recorded at cost and depreciated using the straight-line method
over the estimated useful life which is three years. Repairs and maintenance
costs are charged to expense when incurred. When assets are sold or retired,
the cost and the related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in operations.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". SFAS No. 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.
Income taxes
The Company elected to be treated as an S corporation for federal and
California income tax purposes in July 1999. As a result, minimal income taxes
were payable at the corporate level. Rather, the Company's shareholders
included their respective portions of the Company's taxable income in their
individual income tax returns. From inception through June 1999 the Company's
partners recorded their respective portions of the Company's taxable income
(loss) in their individual tax returns.
NOTE 2--RELATED PARTIES:
During the years ended December 31, 1997, 1998 and the nine months ended
September 30, 1999, IRC Medical Publishing ("IRC") paid expenses of $3,840,
$17,088 and $27,226, respectively, on behalf of the Company. Such amounts were
not reimbursed by the Company and, accordingly, were recorded as contributed
capital in the accompanying financial statements. One of the Company's founders
is an officer of IRC.
F-42
<PAGE>
RXLIST.COM
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 3--SUBSEQUENT EVENT:
In October 1999, the Company was acquired by HealthCentral.com. The purchase
price was comprised of 942,200 shares of HealthCentral.com common stock valued
at $9.00 per share, an aggregate of $2.6 million in notes payable which bear
interest at 5% per annum, and the assumption of approximately $400,000 in
liabilities. All the Company's outstanding stock was surrendered and the
Company's shareholders received their pro rata share of the purchase price.
F-43
<PAGE>
HEALTHCENTRAL.COM
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On August 12, 1999 and October 5, 1999, HealthCentral.com acquired Windom
Health Enterprises, Inc. ("Windom Health") and ePills Inc. ("ePills.com"),
respectively, in transactions accounted for using the purchase method of
accounting. On October 25, 1999, HealthCentral.com entered into an agreement to
acquire RxList.com, which will also be accounted for using the purchase method
of accounting. Under the purchase method of accounting, the aggregate purchase
price is allocated to the tangible and identifiable intangible assets acquired
and liabilities assumed on the basis of their fair values on the acquisition
date. The unaudited pro forma combined balance sheet is based on the balance
sheet of the Company at June 30, 1999 and the balance sheets of Windom Health,
ePills.com and RxList.com at June 30, 1999 assuming the transactions were
consummated on June 30, 1999. The unaudited pro forma combined statements of
operations are based on the individual statements of operations of the Company
for the year ended December 31, 1998 and the six months ended June 30, 1999.
The operations of Windom Health and RxList.com have been included in the
unaudited pro forma combined statements of operations as though these
acquisitions had been consummated on January 1, 1998. The operations of
ePills.com have been included in the unaudited pro forma combined statement of
operations from its inception (January 27, 1999).
The pro forma information has been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and is provided for
illustrative purposes only. The pro forma information does not purport to be
indicative of the results that actually would have occurred had the
combinations been effected on the dates indicated above. The unaudited pro
forma financial statements, including the notes thereto, are qualified in their
entirety by reference to, and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the financial statements and notes thereto, which are included elsewhere
herein.
F-44
<PAGE>
HEALTHCENTRAL.COM
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------------
As Reported Acquisitions Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 69,383 $ 96,716 $ (51,000)(J) $ 115,099
Accounts receivable,
net.................. 42,167 167,416 -- 209,583
Prepaid expenses and
other current
assets............... 106,382 21,199 -- 127,581
----------- ----------- ----------- -----------
Total current
assets............. 217,932 285,331 (51,000) 452,263
Receivable from related
party.................. 1,361,730 -- (1,361,730)(F) --
Property and equipment,
net.................... -- 407,888 -- 407,888
Other intangible
assets................. -- -- 3,729,317 (A) 3,729,317
Goodwill................ -- -- 34,885,115 (B) 34,885,115
Other assets............ -- 62,777 -- 62,777
----------- ----------- ----------- -----------
Total assets........ $ 1,579,662 $ 755,996 $37,201,702 $39,537,360
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable...... $ 406,789 $ 505,590 $ -- $ 912,379
Accrued expenses...... 12,500 158,379 1,820,675 (G)(K) 1,991,554
Deferred revenue...... 113,318 170,569 -- 283,887
Current portion of
obligations under
capital leases....... -- 44,784 -- 44,784
Notes payable......... -- -- 3,389,422 (J) 3,389,422
----------- ----------- ----------- -----------
Total current
liabilities........ 532,607 879,322 5,210,097 6,622,026
Obligations under
capital leases, net of
current portion........ -- 110,448 -- 110,448
Related party payables.. -- 1,361,730 (1,361,730)(F) --
Convertible note payable
to related party....... 500,000 270,000 -- 770,000
Due to stockholder...... -- 5,500 -- 5,500
Deferred revenue........ -- 10,164 -- 10,164
----------- ----------- ----------- -----------
Total liabilities... 1,032,607 2,637,164 3,848,367 7,518,138
----------- ----------- ----------- -----------
Stockholders' equity
(deficit):
Convertible preferred
stock................ 1,134 -- -- 1,134
Common stock.......... 4,468 54,788 (51,327) (H)(I) 7,929
Additional paid-in
capital.............. 5,390,465 94,123 32,179,583 (I) 37,664,171
Notes receivable from
stockholders......... (5,931) -- -- (5,931)
Deferred stock
compensation......... (2,437,103) -- -- (2,437,103)
Accumulated deficit... (2,405,978) (2,030,079) 1,225,079 (C)(H) (3,210,978)
----------- ----------- ----------- -----------
Total stockholders'
equity (deficit)... 547,055 (1,881,168) 33,353,335 32,019,222
----------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity
(deficit)........ $ 1,579,662 $ 755,996 $37,201,702 $39,537,360
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
F-45
<PAGE>
HEALTHCENTRAL.COM
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------------
As
Reported Acquisition Adjustments Pro Forma
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Content subscription
and license.......... $ -- $ 552,630 $ -- $ 552,630
Advertising........... 15,259 11,988 -- 27,247
---------- ---------- ------------ ------------
15,259 564,618 -- 579,877
---------- ---------- ------------ ------------
Operating expenses:
Production, content
and product
development.......... 136,788 659,663 -- 796,451
Sales and marketing... 141,516 87,031 -- 228,547
General and
administrative....... 78,549 379,003 -- 457,552
Stock compensation.... 104,641 -- -- 104,641
Amortization of other
intangibles.......... -- -- 276,500 (D) 276,500
Amortization of
goodwill............. -- -- 8,005,872 (E) 8,005,872
---------- ---------- ------------ ------------
Total operating
expenses........... 461,494 1,125,697 8,282,372 9,869,563
---------- ---------- ------------ ------------
Loss from operations.... (446,235) (561,079) (8,282,372) (9,289,686)
Interest expense, net... -- (18,005) -- (18,005)
---------- ---------- ------------ ------------
Net loss................ $ (446,235) $ (579,084) $ (8,282,372) $ (9,307,691)
========== ========== ============ ============
Basic and diluted net
loss per share......... $ (0.09) $ (1.09)
========== ============
Shares used in computing
basic and diluted net
loss per share......... 5,221,800 8,521,345
========== ============
Pro forma basic and
diluted
net loss per share..... $ (0.09) $ (1.09)
========== ============
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 5,246,655 8,546,196
========== ============
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
F-46
<PAGE>
HEALTHCENTRAL.COM
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-------------------------------------------------------
As Reported Acquisitions Adjustments Pro Forma
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Content subscription
and license.......... $ -- $ 257,975 $ -- $ 257,975
Advertising........... 126,546 108,933 -- 235,479
----------- ----------- ------------ -----------
126,546 366,908 -- 493,454
----------- ----------- ------------ -----------
Operating expenses:
Production, content
and product
development.......... 496,197 749,803 -- 1,246,000
Sales and marketing... 435,458 288,598 -- 724,056
General and
administrative....... 257,988 425,341 -- 683,329
Stock compensation.... 902,931 -- -- 902,931
Amortization of other
intangibles.......... -- -- 656,861 (D) 656,861
Amortization of
goodwill............. -- -- 5,512,311 (E) 5,512,311
----------- ----------- ------------ -----------
Total operating
expenses........... 2,092,574 1,463,742 6,169,172 9,725,488
----------- ----------- ------------ -----------
Loss from operations.... (1,966,028) (1,096,834) (6,169,172) (9,232,034)
Interest income
(expense), net......... 7,519 (52,191) -- (44,672)
----------- ----------- ------------ -----------
Net loss................ $(1,958,509) $(1,149,025) $ (6,169,172) $(9,276,706)
=========== =========== ============ ===========
Basic and diluted net
loss per share......... $ (0.37) $ (0.90)
=========== ===========
Shares used in computing
basic and diluted net
loss per share......... 5,238,187 10,314,651
=========== ===========
Pro forma basic and
diluted net loss per
share.................. $ (0.31) $ (0.81)
=========== ===========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 6,372,187 11,448,651
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
F-47
<PAGE>
HEALTHCENTRAL.COM
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
Windom Health
On May 6, 1999, the Company entered into a definitive merger agreement with
Windom Health Enterprises, Inc. ("Windom Health") and completed the merger on
August 12, 1999. Windom Health offers institutions, including healthcare
organizations, employers and pharmaceutical companies the ability to license
specialized tools and services to provide their members with personalized on-
line health information and health risk assessments.
This transaction was recorded using the purchase method of accounting. The
allocation of the aggregate purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed in connection with this
acquisition was based on estimated fair values as determined by management. The
preliminary allocation is summarized below:
<TABLE>
<CAPTION>
Amortization
Life
------------
<S> <C> <C>
Goodwill............................................. $12,095,000 3 years
Identifiable assets.................................. 586,000 --
Core technology...................................... 375,000 3 years
Acquired workforce................................... 180,000 2 years
In-process research and development.................. 555,000 --
-----------
Total purchase price................................. $13,791,000
===========
</TABLE>
The total purchase price of $13.8 million consisted of cash of $51,000, a
note payable of $458,000, 2,357,341 shares of the Company's common stock valued
at $9,311,514, assumed liabilities of $3,905,000 and estimated transaction
costs of $65,000. The deemed value of the Company's common stock on the date
the definitive merger agreement was signed was $3.95 per share.
The valuation of the purchased in-process research development of $555,000
was based on the result of an independent appraisal using the income approach.
The income approach estimates the value of the asset based on its expected
economic benefit. The valuation analysis considered the contribution of the
core technology as well as the percent complete of the in-process research and
development. The expected cash flows associated with the in-process research
and development were discounted to the present value using a rate of return
that is commensurate with the risk of the asset. The purchased in-process
technology was not considered to have reached technological feasibility and had
no alternatives future use.
Goodwill and other intangibles are being amortized on a straightline basis
over the estimated period of benefit of two to three years.
ePills.com
In September 1999, the Company entered into an acquisition agreement with
ePills. ePills is engaged in the development of an online drug store to provide
retail sales of prescription pharmaceuticals, over-the-counter products and
health and beauty aids on the Internet.
F-48
<PAGE>
HEALTHCENTRAL.COM
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(unaudited)
This transaction was recorded using the purchase method of accounting. The
allocation of the purchase price to the tangible and identifiable intangible
assets acquired and liabilities assumed in connection with this acquisition
were based on estimated fair values as determined by management. The
preliminary allocation is summarized below:
<TABLE>
<CAPTION>
Amortization
Life
------------
<S> <C> <C>
Goodwill............................................ $11,530,000 3 years
Identifiable assets................................. 76,000 --
Contracts........................................... 1,189,000 2 years
Core technology..................................... 1,242,000 3 years
Tradename........................................... 443,000 3 years
Acquired workforce.................................. 177,000 2 years
In-process research and development................. 250,000 --
-----------
Total purchase price................................ $14,907,000
===========
</TABLE>
The total purchase price of $14.9 million consisted of 1,776,923 shares of
the Company's common stock valued at $14,393,076, assumption of 11,844 shares
of employee stock options valued at $6.93 per share, assumed liabilities of
$332,000 and estimated transaction costs of $100,000. The deemed value of the
Company's common stock on the date the acquisition agreement was signed was
$8.10 per share.
The valuation of the purchased in-process research development of $250,000
was based on the result of an independent appraisal using the income approach.
The income approach estimates the value of the asset based on its expected
economic benefit. The valuation analysis considered the contribution of the
core technology as well as the percentage completion of the in-process research
and development. The expected cash flows associated with the in-process
research and development were discounted to the present value using a rate of
return that is commensurate with the risk of the asset. The purchased in-
process technology was not considered to have reached technological feasibility
and had no alternatives future use.
Goodwill and other intangibles are being amortized on a straightline basis
over the estimated period of benefit of two to three years.
RxList.com
In October 1999, the Company entered into an acquisition agreement with
RxList.com. RxList.com maintains a website that allows visitors to search for
information regarding prescription and other medications.
This transaction was recorded using the purchase method of accounting. The
allocation of the purchase price to the tangible and identifiable intangible
assets acquired and liabilities assumed in connection with this acquisition was
based on estimated fair values as determined by management. The preliminary
allocation is summarized below:
<TABLE>
<CAPTION>
Amortization
Life
------------
<S> <C> <C>
Goodwill............................................ $11,260,000 3 years
Identifiable assets................................. 123,000 --
Pharmaceutical database............................. 123,000 2 years
-----------
Total purchase price................................ $11,506,000
===========
</TABLE>
F-49
<PAGE>
HEALTHCENTRAL.COM
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(unaudited)
The total purchase price of $11.5 million consisted of 942,200 shares of the
Company's common stock valued at $8,479,800, an aggregate of $2.6 million in
notes payable issued to RxList.com shareholders discounted at a deemed interest
rate of 10% over 6 months, the assumption of $400,000 in liabilities and
estimated transaction costs of $95,000. The deemed value of the Company's
common stock on the date the acquisition agreement was signed was $9.00.
Goodwill and other intangibles are being amortized on a straightline basis
over the estimated period of benefit of two to three years.
The unaudited pro forma condensed statements of operations exclude the
effect of the charges for in-process research and development. These amounts
are reflected as charges to the accumulated deficit in the unaudited pro forma
balance sheet.
There were no material differences in the accounting policies of the
Company, Windom Health, ePills.com or RxList.com for the periods presented.
NOTE 2--UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE:
The net loss per share and shares used in computing the net loss per share
for the year ended December 31, 1998 and the six months ended June 30, 1999 are
based upon the historical weighted average common shares outstanding. Common
stock issuable upon the exercise of the stock options and warrants has been
excluded from the computation of net loss per share as their effect would be
anti-dilutive. In addition to the shares used in computing the net loss per
share above, pro forma net loss per share is calculated as if the outstanding
shares of convertible preferred stock were converted to common stock at the
time of issuance.
The 5,076,464 shares of common stock issued in connection with the
acquisitions have been included in the calculation of pro forma basic and
diluted net loss per share as follows:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
1998 1999
------------ ---------------
<S> <C> <C>
Shares used in computing basic and diluted net
loss per share............................... 5,221,800 5,238,187
Adjustment to reflect assumed conversion of
preferred stock.............................. 24,855 1,134,000
Adjustment to reflect common stock issued in
acquisitions................................. 3,299,541 5,076,464
--------- ----------
Shares used in computing pro forma basic and
diluted net loss per share................... 8,546,196 11,448,651
========= ==========
</TABLE>
NOTE 3--PRO FORMA ADJUSTMENTS:
The following pro forma adjustments are based upon management's preliminary
estimates of the value of the tangible and intangible assets acquired. These
estimates are subject to finalization.
(A) Represents $3,729,000 of other intangible assets, summarized as
follows:
<TABLE>
<S> <C>
Core technology....................................... $1,617,000
Contracts............................................. 1,189,000
Trade name............................................ 443,000
Other................................................. 480,000
----------
$3,729,000
==========
</TABLE>
F-50
<PAGE>
HEALTHCENTRAL.COM
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(unaudited)
(B) Represents $34,885,000 of goodwill.
(C) Represents $805,000 of acquired in-process research and
development. Management concluded that technological feasibility of
the acquired in-process technologies was not established and that
the in-process technology had no alternative future use. Such
amounts are reflected as a charge to accumulated deficit in the
unaudited pro forma balance sheet at June 30, 1999.
(D) Represents amortization of other intangible assets over two to
three years.
(E) Represents amortization of goodwill over three years.
(F) Represents elimination of balances between HealthCentral.com and
Windom Health.
(G) Represents accrued transaction costs associated with the
acquisitions.
(H) Represents the elimination of equity accounts of the acquired
companies.
(I) Represents the common stock issued in connection with the
acquisitions.
(J) Represents the cash paid and notes payable issued in connection
with the Windom Health and RxList.com acquisitions.
(K) Represents the rollforward of actual net liabilities of Windom
Health, ePills.com and RxList.com from the pro forma financial
statement date of June 30, 1999 to the respective acquisition dates
on which the purchase price was established and allocated.
F-51
<PAGE>
Inside Back Cover
HealthCentral.com logo and URL
HealthCentral.com Strategic Partners include:
Yahoo!
AltaVista
Snap!
Excite
[Looksmart]
Ask Jeeves!
Broadcast.com
NetPulse
<PAGE>
Shares
[HEALTHCENTRAL.COM LOGO]
Common Stock
-----------
PROSPECTUS
, 1999
-----------
Lehman Brothers Hambrecht & Quist
Pacific Growth Equities, Inc.
Wit Capital Corporation
<PAGE>
The purpose of this Amendment No. 1 is solely to file certain exhibits to
the Registration Statement, as set forth below in Item 16(a) of Part II.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by HealthCentral.com in
connection with the sale of the common stock being registered. All amounts are
estimates except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
Securities and Exchange Commission registration fee .............. 23,977.50
NASD filing fee................................................... *
Nasdaq National Market listing fee................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Blue Sky qualification fees and expenses.......................... *
Transfer Agent and Registrar fees................................. *
Miscellaneous fees and expenses................................... *
Total......................................................... *
</TABLE>
- --------
* To be filed by amendment.
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, as amended. Article XII of
our certificate of incorporation (Exhibit 3.3 hereto) and Article VI of our
Bylaws (Exhibit 3.5 hereto) provide for indemnification of HealthCentral.com's
directors, officers, employees and other agents to the maximum extent
permitted by Delaware Law. In addition, HealthCentral.com has entered into
Indemnification Agreements (Exhibit 10.24 hereto) with certain officers and
directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-
indemnification among HealthCentral.com and the underwriters with respect to
certain matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since September 1, 1996, the Registrant has issued and sold the
following unregistered securities:
(1) In December 1998, the Registrant issued and sold shares of Series A
Preferred Stock convertible into an aggregate of 1,134,000 shares of
common stock, and warrants to purchase 544,320 shares of Series A
Preferred Stock at a purchase price of $1.79 to investors.
(2) In May 1999, the Registrant issued a warrant to purchase 13,720 shares
of Series A Preferred Stock at a purchase price of $1.79 per share to
individuals affiliated with a lender in connection with a financing
transaction.
(3) In April 1999, the Registrant issued a warrant to purchase 80,784
shares of Common Stock at a purchase price of $5.81 per share to a
strategic partner.
(4) In July 1999, the Registrant issued promissory notes in the aggregate
principal amount of $600,000 to investors and warrants to purchase an
aggregate of 18,666 shares of common stock at a purchase price of $3.21
per share to investors.
II-1
<PAGE>
(5) In July 1999, we issued a promissory note in the principal amount of
$100,000 to an individual. The principal amount of this note was
converted into shares of Series B Preferred Stock and the interest was
paid in full in September 1999.
(6) In August 1999, the Registrant issued 2,357,341 shares of its common
stock to individuals in connection with an acquisition of a company.
(7) In August and September 1999, the Registrant issued and sold shares of
Series B Preferred Stock convertible into an aggregate of 4,523,065
shares of common stock to investors for an aggregate purchase price of
$20,999,998.50.
(8) In August 1999, we issued promissory notes in the aggregate principal
amount of $300,000 and warrants to purchase 9,332 shares of Series B
Preferred Stock at a purchase price of $3.21 per share to a stockholder
in connection with a bridge financing. The principal amount of this
note was converted into shares of Series B Preferred Stock and the
interest was paid in full in September 1999.
(9) In August, 1999 the Registrant issued to Hambrecht & Quist LLC a
warrant to purchase 77,539 shares of Series B Preferred Stock at a
purchase price of $4.64 per share.
(10) As of August 31, 1999, 376,758 shares of common stock had been issued
upon exercise of options or pursuant to restricted stock purchase
agreements and 1,890,177 shares of common stock were issuable upon
exercise of outstanding options under the Registrant's 1998 Stock
Plan.
(11) In August 1998, the Registrant effected a 1.844-for-1 split of its
outstanding common stock in which every outstanding share of common
stock was split into 1.844 shares of common stock.
(12) Prior to the completion of this offering, the Registrant intends to
effect a 1.4-for-1 split of its outstanding common stock in which
every outstanding share of common stock will be split into 1.4 shares
of common stock.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
All of the foregoing information gives effect to the 1.4-for-1 split of the
Registrant's common stock to be effected prior to completion of the offering.
The issuances described in Items 15(a)(1) through 15(a)(9) were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof as transactions by an issuer not involving any public offering. The
issuances described in Items 15(a)(10) were deemed exempt from the registration
under the Securities Act in reliance upon Rule 701 promulgated thereunder in
that they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The issuances described in Items
15(a)(11) and (12) were or will be exempt from registration under Section 2(3)
of the Securities Act on the basis that such transaction did not involve a
"sale" of securities. 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 where affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Second Amended and Restated Articles of Incorporation of the
Registrant (current).
3.2** Amended and Restated Certificate of Incorporation of the Registrant
(as proposed for reincorporation in Delaware).
3.3** Amended and Restated Certificate of Incorporation of the Registrant
(as proposed for public company).
3.4** Bylaws of the Registrant, as amended (current).
3.5** Amended and Restated Bylaws of the Registrant (as proposed for public
company).
4.1* Specimen Stock Certificate.
5.1* Opinion of Venture Law Group regarding the legality of the common
stock being registered.
10.1** First Amended and Restated Investors' Rights Agreement dated August
27, 1999 between the Registrant and certain investors.
10.2* 1999 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3** Amended and Restated 1998 Stock Plan, and form of stock option
agreement and restricted stock purchase agreement.
10.4* 1999 Employee Stock Purchase Plan, and form of subscription
agreement.
10.5* 1999 Directors' Stock Option Plan, and form of stock option
agreement.
10.6** Form of Common Stock Agreement between the Registrant and each of
Dean S. Edell M.D. and James J. Hornthal.
10.7** Engagement Letter between the Registrant and Hambrecht & Quist dated
March 22, 1999.
10.8** Consulting Agreement between the Registrant and Michael D. McDonald
dated August 12, 1999.
10.9** Employment Agreements between the Registrant and each of Deryk Van
Brunt and Marcos A. Athanasoulis.
10.10** Employment Agreement between the Registrant and Albert Greene dated
August 16, 1999.
10.11** Offer Letter from the Registrant to C. Fred Toney dated June 16,
1999.
10.12** Letter Agreement between the Registrant and Ann Marie Buddrus dated
August 4, 1999.
10.13** Lock-Up Agreement between the Registrant and Dr. Dean S. Edell dated
August 27, 1999.
10.14** Form of Change of Control Agreement between the Registrant and Albert
L. Greene.
10.15** License and Confidential Information Agreement between the Registrant
and Dr. Dean S. Edell dated May 14, 1999.
10.16** Office Lease between the Registrant and Christie Avenue Partners JS
dated March 26, 1999.
10.17** Landlord's Consent and Agreement (Sublease) between the Registrant
and Burnham Pacific Operating Partnership, L.P. dated July 22, 1999.
10.18** Joint Development Agreement/Base Agreement by and between the
Registrant, Windom Health Enterprises and Global Health Initiatives
dated August 12, 1999.
10.19+** Co-Branded Site Agreement by and between the Registrant, Graedon
Enterprises, Inc., and Joe Graedon and Teresa Graedon dated September
9, 1999.
10.20+** Agreement between the Registrant and AltaVista Company dated
September 1999.
10.21+** Agreement and Plan of Reorganization by and between the Registrant,
HC2 Acquisition Corporation and ePills, Inc. dated September 28,
1999.
10.22+** Internet Fulfillment Services Agreement between ePills, Inc. and
Bergen Brunswig Drug Company dated September 16, 1999.
10.23+** Pharmacy Services Fulfillment Agreement between ePills, Inc. and
Medi-Mail, Inc. dated August 1999.
10.24** Form of Indemnification Agreement.
10.25 Agreement and Plan of Reorganization by and between Registrant and
RxList.com dated October 25, 1999.
21.1** List of subsidiaries.
23.1** Form of Consent of Independent Accountants.
23.1b Consent of Independent Accountants.
23.1c Consent of Independent Accountants.
23.2 Consent of Attorney (See Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions of this Exhibit.
II-3
<PAGE>
(b) Financial Statement Schedules
All financial statement schedules have been omitted because they are not
required, are not applicable or because the information required to be included
in such schedules is included in the financial statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Emeryville, State of California, on October 26, 1999.
HEALTHCENTRAL.COM
/s/ C. Fred Toney
By:__________________________________
C. Fred Toney
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive October 26, 1999
____________________________________ Officer and Director
Albert L. Greene (Principal Executive
Officer)
/s/ C. Fred Toney Chief Financial Officer October 26, 1999
____________________________________ (Principal Financial and
C. Fred Toney Accounting Officer)
* Co-Chairman of the Board October 26, 1999
____________________________________
James J. Hornthal
* Co-Chairman of the Board October 26, 1999
____________________________________
Michael D. McDonald
* Director October 26, 1999
____________________________________
Louis M. Andersen
* Director October 26, 1999
____________________________________
Sheryle J. Bolton
* Director October 26, 1999
____________________________________
Annette Campbell-White
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director October 26, 1999
____________________________________
Dean S. Edell
* Director October 26, 1999
____________________________________
Wesley D. Sterman
* Director October 26, 1999
____________________________________
Robin Wolaner
</TABLE>
*Power of Attorney
/s/ C. Fred Toney
By: ___________________________
C. Fred Toney
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Second Amended and Restated Articles of Incorporation of the
Registrant (current).
3.2** Amended and Restated Certificate of Incorporation of the Registrant
(as proposed for reincorporation in Delaware).
3.3** Amended and Restated Certificate of Incorporation of the Registrant
(as proposed for public company).
3.4** Bylaws of the Registrant, as amended (current).
3.5** Amended and Restated Bylaws of the Registrant (as proposed for public
company).
4.1* Specimen Stock Certificate.
5.1* Opinion of Venture Law Group regarding the legality of the common
stock being registered.
10.1** First Amended and Restated Investors' Rights Agreement dated August
27, 1999 between the Registrant and certain investors.
10.2* 1999 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3** Amended and Restated 1998 Stock Plan, and form of stock option
agreement and restricted stock purchase agreement.
10.4* 1999 Employee Stock Purchase Plan, and form of subscription
agreement.
10.5* 1999 Directors' Stock Option Plan, and form of stock option
agreement.
10.6** Form of Common Stock Agreement between the Registrant and each of
Dean S. Edell M.D. and James J. Hornthal.
10.7** Engagement Letter between the Registrant and Hambrecht & Quist dated
March 22, 1999.
10.8** Consulting Agreement between the Registrant and Michael D. McDonald
dated August 12, 1999.
10.9** Employment Agreements between the Registrant and each of Deryk Van
Brunt and Marcos A. Athanasoulis.
10.10** Employment Agreement between the Registrant and Albert Greene dated
August 16, 1999.
10.11** Offer Letter from the Registrant to C. Fred Toney dated June 16,
1999.
10.12** Letter Agreement between the Registrant and Ann Marie Buddrus dated
August 4, 1999.
10.13** Lock-Up Agreement between the Registrant and Dr. Dean S. Edell dated
August 27, 1999.
10.14** Form of Change of Control Agreement between the Registrant Albert L.
Greene.
10.15** License and Confidential Information Agreement between the Registrant
and Dr. Dean S. Edell dated May 14, 1999.
10.16** Office Lease between the Registrant and Christie Avenue Partners JS
dated March 26, 1999.
10.17** Landlord's Consent and Agreement (Sublease) between the Registrant
and Burnham Pacific Operating Partnership, L.P. dated July 22, 1999.
10.18** Joint Development Agreement/Base Agreement by and between the
Registrant, Windom Health Enterprises and Global Health Initiatives
dated August 12, 1999.
10.19+** Co-Branded Site Agreement by and between the Registrant, Graedon
Enterprises, Inc., and Joe Graedon and Teresa Graedon dated September
9, 1999.
10.20+** Agreement between the Registrant and AltaVista Company dated
September 1999.
10.21+** Agreement and Plan of Reorganization by and between the Registrant,
HC Acquisition Corporation and ePills, Inc. dated September 28, 1999.
10.22+** Internet Fulfillment Services Agreement between ePills, Inc. and
Bergen Brunswig Drug Company dated September 16, 1999.
10.23+** Pharmacy Services Fulfillment Agreement between ePills, Inc. and
Medi-Mail, Inc. dated August 1999.
10.24** Form of Indemnification Agreement.
10.25 Agreement and Plan of Reorganization by and between Registrant and
RxList.com dated October 25, 1999.
21.1** List of subsidiaries.
23.1** Form of Consent of Independent Accountants.
23.1b Consent of Independent Accountants.
23.1c Consent of Independent Accountants.
23.2 Consent of Attorney (See Exhibit 5.1).
24.1** Power of Attorney
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
** Previously filed.
+Confidential treatment requested as to certain portions of this Exhibit.
<PAGE>
Exhibit 10.25
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
HEALTHCENTRAL.COM,
AND
RXLIST.COM, INC.
October 25, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
SCHEDULES
Company Disclosure Schedule
Buyer Disclosure Schedule
-i-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of October 25, 1999, by and among HealthCentral.com, a
California corporation ("Buyer"), RxList.com, Inc., a California corporation
-----
("Company"), and the Company Shareholders listed on the signature page hereto.
-------
RECITALS
--------
A. The Boards of Directors of the Company and Buyer believe it is in the
best interests of their respective companies and the shareholders of their
respective companies that Company and Buyer combine into a single company
through the statutory merger of Company with and into Buyer (the "Merger") and,
------
in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, all outstanding shares of
common stock of the Company shall be converted into shares of common stock of
the Buyer (the "Buyer Common Stock") at the rate specified herein.
------------------
C. The Company and Buyer desire to make certain representations and
warranties and other agreements in connection with the Merger.
D. As a condition and inducement to Buyer's willingness to enter into
this Agreement, the Company shareholders holding all of the issued and
outstanding capital stock of the Company have, concurrently with the execution
of this Agreement, executed and delivered a Written Consent of Shareholders in
the form attached as Exhibit A (the "Shareholder Consent"), pursuant to which
--------- -------------------
such shareholders have, among other things, approved this Agreement, the Merger
and the transactions contemplated hereby.
E. As a condition and inducement to Buyer's willingness to enter into
this Agreement, the Company and Thomas Weisel Partners ("TWP") have,
concurrently with the execution of this Agreement, executed and delivered an
amendment to that certain engagement letter dated July 1, 1999 between Weisel
and the Company, in the form attached as Exhibit B.
---------
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
----------
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement, the Agreement of
Merger attached hereto as Exhibit 1.1 (the "Agreement of Merger") and the
----------- -------------------
applicable provisions of the California General Corporations Law ("California
----------
Law"), Company shall be merged with and into Buyer, the separate corporate
- ---
existence of Company shall cease and Buyer shall continue as the surviving
<PAGE>
corporation. Buyer as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."
---------------------
1.2 Closing; Effective Time. The closing of the transactions contemplated
-----------------------
hereby (the "Closing") shall take place as soon as practicable after the
-------
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the "Closing Date"). The
-----------
Closing shall take place at the offices of Venture Law Group, 2775 Sand Hill
Road, Menlo Park, California, or at such other location as the parties hereto
agree. In connection with the Closing, the parties hereto shall cause the Merger
to be consummated by filing the Agreement of Merger, together with the required
officers' certificates, with the Secretary of State of the State of California,
in accordance with the relevant provisions of California Law (the time of such
filing being the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of California Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Company shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Company shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Charter Documents; Bylaws.
-------------------------
(a) At the Effective Time, the Articles of Incorporation of Buyer,
as in effect immediately prior to the Effective Time, shall become the Articles
of Incorporation of the Surviving Corporation until thereafter amended as
provided by California Law and such Articles of Incorporation.
(b) The Bylaws of Buyer, as in effect immediately prior to the
Effective Time, shall become the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. At the Effective Time, the directors of
----------------------
Buyer, as in effect immediately prior to the Effective Time, shall become the
directors of the Surviving Corporation, until their respective successors are
duly elected or appointed and qualified. The officers of Buyer, as in effect
immediately prior to the Effective Time, shall become the officers of the
Surviving Corporation until their respective successors are duly elected or
appointed and qualified.
1.6 Effect on Capital Stock.
-----------------------
(a) Merger Consideration
--------------------
(i) Merger Share Number. Subject to Section 1.6(b) below, the
-------------------
aggregate number of shares of Buyer Common Stock to be issued in exchange for
all outstanding shares of common stock of the Company immediately prior to the
Effective Time, after the conversion of all options, warrants and rights to
purchase shares of Company Common Stock, if any (the "Aggregate Company
-----------------
Shares") shall be 673,000 shares (before giving effect to the Buyer's proposed
- ------
1.4 for 1 stock split), as shall be appropriately adjusted to reflect the effect
of
-2-
<PAGE>
any stock split, reverse stock split, stock dividend or the like with respect
to the Buyer Common Stock occurring after the date hereof and prior to the
Effective Time (the "Merger Share Number").
-------------------
(ii) Note. In addition, at the Effective Time, each shareholder of
----
the Company immediately prior to the Effective Time (a "Company Shareholder"
-------------------
and, collectively, the "Company Shareholders") shall receive a promissory note
--------------------
executed by the Buyer (a "Note," and, collectively, the "Notes") in the form
---- -----
attached as Exhibit 1.6(a) in an amount equal to: the product of (1) $2,600,000
--------------
(the "Aggregate Cash Consideration") multiplied by (2) the quotient of (i) the
----------------------------
number of shares of Company Common Stock owned by such shareholder immediately
prior to the Effective Time, divided by (ii) the Aggregate Company Shares.
(b) Conversion of Company Common Stock. Subject to the terms and
----------------------------------
conditions of this Agreement and the Agreement of Merger as of the Effective
Time, by virtue of the Merger and without any action on the part of the holder
of any shares of Company Common Stock, at the Effective Time, each share of
Company Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares to be canceled pursuant to Section 1.6(d)) shall be
converted into the right to receive, subject to the provisions of Section 1.6(e)
and Section 1.11:
(i) that number of shares of Buyer Common Stock determined by
dividing (i) the Merger Share Number less the Excess Expense Shares (as defined
in Section 5.7) and less the TWP Shares (as defined in Section 5.11) (ii) by the
Aggregate Company Shares, and
(ii) a Note, as determined in accordance with Section
1.6(a)(ii).
The aggregate number of shares of Buyer Common Stock issued to holders of
Company Common Stock in the Merger are the "Merger Shares."
-------------
(c) No Conversion of Warrants, Options or Other Rights to Purchase
--------------------------------------------------------------
Company Common Stock. Immediately prior to the Effective Time, each warrant,
- --------------------
option and other right to purchase Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be exercised (to the extent such
option, warrant or right is exercisable at such time) or terminated.
(d) Cancellation of Company Common Stock Owned by Company. At the
-----------------------------------------------------
Effective Time, all shares of Company Common Stock that are owned by Company as
treasury stock immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(e) Fractional Shares. No fraction of a share of Buyer Common Stock
-----------------
will be issued, but in lieu thereof each holder of shares of Company Common
Stock who would otherwise be entitled to a fraction of a share of Buyer Common
Stock (after aggregating all fractional shares of Buyer Common Stock to be
received by such holder) shall receive from Buyer such whole number of shares of
Buyer Common Stock as is equal to the precise number of shares of Buyer Common
Stock to which such person would be entitled, rounded up or down to
-3-
<PAGE>
the nearest whole number (with a fractional interest equal to .5 rounded to the
next greater number).
1.7 Surrender of Certificates.
-------------------------
(a) Buyer to Provide Merger Shares and Notes. Promptly after the
----------------------------------------
Effective Time, Buyer shall make available for exchange in accordance with this
Article I, through such reasonable procedures as Buyer may adopt, (A) the shares
of Buyer Common Stock issuable pursuant to Section 1.6(b) in exchange for shares
of Company Common Stock outstanding immediately prior to the Effective Time,
less the Escrow Shares, and (B) the Notes. The portion of the Escrow Shares
contributed on behalf of each Company Shareholder shall be in proportion to the
aggregate number of Merger Shares which such Company Shareholder would otherwise
be entitled to receive in the Merger by virtue of such Company Shareholder's
percentage ownership of outstanding shares of Company Common Stock immediately
prior to the Effective Time (the "Pro Rata Portion").
----------------
(b) Exchange Procedures. The Company will deliver to Buyer at
-------------------
closing all certificates (the "Certificates") which immediately prior to the
------------
Effective Time represented outstanding shares of Company Common Stock, whose
shares were converted into the right to receive Merger Shares and a Note
pursuant to Section 1.6, with duly and validly executed stock powers
transferring such Certificates to Buyer. Upon surrender of a Certificate for
cancellation to Buyer, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Buyer Common Stock which such holder has the right to receive pursuant
to Section 1.6 (less the number of Escrow Shares pursuant to Section 1.11
hereof) and a Note, and the Certificate so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Company Common Stock will be deemed from
and after the Effective Time, for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full shares of Buyer
Common Stock into which such shares of Company Capital Stock shall have been so
converted in accordance with Section 1.6 and a Note. Buyer shall be responsible
for the payment of all transfer or other taxes required by reason of the
issuance of certificates for shares of Buyer Common Stock to Company
Shareholders who are United States residents.
(c) Transfers of Ownership. If any certificate for shares of Buyer
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Buyer any transfer or other taxes required by reason
of the issuance of a certificate for shares of Buyer Common Stock in any name
other than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Buyer or any agent designated by it that such
tax has been paid or is not payable.
(d) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Buyer, the Surviving Corporation or any party hereto
shall be liable to any person for
-4-
<PAGE>
any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. The shares of
---------------------------------------------------
Buyer Common Stock and Note issued upon the surrender for exchange of shares of
Company Common Stock in accordance with the terms hereof (together with the
Escrow Shares) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.9 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code and the parties hereto agree to report it as such for all tax purposes.
1.10 Escrow Agreement. At the Effective Time, Buyer will, on behalf of
----------------
the Company Shareholders deposit in escrow certificates representing fifteen
percent (15%) of the Merger Shares (the "Escrow Shares"). The Escrow Shares
-------------
shall be held in escrow on behalf of the Company Shareholders in accordance with
each holder's Pro Rata Portion. The Escrow Shares shall be held and applied
pursuant to the provisions of an escrow agreement (the "Escrow Agreement") to be
----------------
executed pursuant to Sections 6.2 and 6.3. The Escrow Agreement shall terminate
six (6) months after the Closing, provided that if a proper notice of claim is
given in accordance with the Escrow Agreement before the expiration of such six
month period, an amount equal to any claimed amount which has not been resolved
at such termination date shall be retained in escrow until the resolution of
such claim. All calculations to determine the number of Escrow Shares to be
delivered by each Company Shareholder into escrow as aforesaid shall be rounded
up or down to the nearest whole share.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
-----------------------------------------
The Company and each of the Company Shareholders represents and warrants to
the Buyer that the statements contained in this Article II are true and correct,
except as set forth in the disclosure schedule attached hereto (the "Company
-------
Disclosure Schedule"). The Company Disclosure Schedule shall be arranged in
- -------------------
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article II, and the disclosures in any paragraph of the Company Disclosure
Schedule shall qualify any other paragraph in this Article II where such
disclosure would be appropriate to the extent that it is clear from such
disclosure that it relates to such other paragraph.
2.1 Organization, Qualification and Corporate Power. The Company is a
-----------------------------------------------
corporation duly incorporated or formed, validly existing and in corporate and
tax good standing under the laws of the state of California. The Company is
duly qualified to conduct business and is in
-5-
<PAGE>
corporate and tax good standing under the laws of each jurisdiction in which the
failure to be so qualified would have a Material Adverse Effect. The Company has
all requisite corporate power and authority to carry on the businesses in which
it is engaged and to own and use the properties owned and used by it. The
Company has furnished to the Buyer true and complete copies of its Articles of
Incorporation and Bylaws, each as amended and as in effect on the date hereof.
The Company is not in default under or in violation of any provision of its
Articles of Incorporation or Bylaws.
2.2 Capitalization. The authorized capital stock of the Company
--------------
consists of 10,000,000 shares of Common Stock of the Company, of which 2,000
shares are issued and outstanding and no shares are held in the treasury of the
Company. Section 2.2 of the Company Disclosure Schedule sets forth a complete
and accurate list of all Company Shareholders, indicating the number of shares
of Company Common Stock held by each Company Shareholder. All of the issued and
outstanding shares of Company Common Stock are duly authorized, validly issued,
fully paid, nonassessable and free of all preemptive rights. There are no
outstanding or authorized options, warrants, rights, agreements or commitments
to which the Company is a party or which are binding upon the Company providing
for the issuance, disposition or acquisition of any of its capital stock. There
are no outstanding or authorized stock appreciation, phantom stock or similar
rights with respect to the Company. There are no agreements, voting trusts,
proxies, or understandings with respect to the voting, or registration under the
Securities Act of 1933, as amended (the "Securities Act"), of any shares of
Company Common Stock. All of the issued and outstanding shares of Company
Common Stock were issued in compliance with applicable federal and state
securities laws.
2.3 Authorization of Transaction. The Company has all requisite corporate
----------------------------
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder and under each of the other agreements and instruments to
be executed and delivered by some or all of the parties hereto in connection
with the consummation of the transactions contemplated hereby (the "Transaction
-----------
Documents") to which the Company is a party. All corporate action on the part of
- ---------
the Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement , the Transaction
Documents and the performance of all obligations of the Company hereunder and
thereunder has been taken or will be taken prior to the Closing, and this
Agreement constitutes, and each of the Transaction Documents to which the
Company will be a party, will constitute, a valid and legally binding obligation
of the Company, enforceable in accordance with its respective terms, except (i)
as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other general equitable remedies .
2.4 Compliance with Laws and Other Instruments. The Company is not in
------------------------------------------
violation or default of any provision of Articles of Incorporation or Bylaws,
or, to the best of its knowledge, of any instrument, judgment, order, writ,
decree, lease, license, permit, contract or other arrangement to which it is a
party or by which it is bound. The Company is not in violation of copyright
laws with respect to the Company's use and posting of information on its
website, and, to the best of its knowledge, the Company is not in violation of
any other provision of any federal or state statute, rule or regulation
applicable to the Company. The execution, delivery
-6-
<PAGE>
and performance of this Agreement, and the consummation of the transactions
contemplated hereby, will not result in any such violation or default, or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree, lease, license, permit, contract or other arrangement or an event
that results in the creation of any lien, charge or encumbrance upon any assets
of the Company or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any permit, license, authorization, or approval applicable to the
Company, its business or operations or any of its assets or properties, or
result in the acceleration of, or create in any party the right to accelerate,
terminate, modify or cancel, or require any notice, consent or waiver under, any
contract, lease, license, permit or other arrangement to which the Company is a
party or by which the Company is bound or to which its assets are subject. For
purposes of this Agreement, a "Material Adverse Effect" means, with respect to a
-----------------------
party, any material adverse effect on the assets, business, financial condition
or the results of operations of such party and its subsidiaries, if any, taken
as a whole.
2.5 Subsidiaries. The Company does not have and has never had any
------------
subsidiaries or entities which it controls (as defined under federal securities
laws) and does not otherwise own and has never otherwise owned any shares of
stock or any interest in, or control of, directly or indirectly, any other
corporation, partnership, association, joint venture or entity.
2.6 Company Financial Statements. The Company has attached hereto as
----------------------------
Section 2.6 to the Company Disclosure Schedule the unaudited balance sheet and
statements of income, changes in shareholders' equity and cash flows for the
period from the Company's incorporation through September 30, 1999 for the
Company (the "Company's Most Recent Balance Sheet Date"). Such financial
----------------------------------------
statements (collectively, the "Company Financial Statements") have been prepared
----------------------------
in accordance with United States generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods covered thereby,
----
fairly present the financial condition, results of operations and cash flows of
the Company as of the respective dates thereof and for the periods referred to
therein and are consistent with the books and records of the Company; provided,
--------
however, that the Company Financial Statements are subject to normal recurring
- -------
year-end adjustments (which will not be material) and do not include footnotes.
2.7 Absence of Certain Changes. Since the Company's Most Recent Balance
--------------------------
Sheet Date, there has not been any material adverse change in the assets,
business, financial condition or results of operations of the Company, nor has
there occurred any event or development which could reasonably be foreseen to
result in such a material adverse change in the future.
2.8 No Undisclosed Liabilities. The Company has no liability (whether
--------------------------
known or unknown, whether absolute or contingent, whether liquidated or
unliquidated and whether due or to become due), and there is no existing
condition, situation or set of circumstances which could reasonably be expected
to result in such a liability, except for (a) liabilities shown on the September
30, 1999 (the "Company's Most Recent Balance Sheet Date") balance sheet (the
----------------------------------------
"Company's Most Recent Balance Sheet"), (b) liabilities which have arisen since
-----------------------------------
the Company's Most Recent Balance Sheet Date in the ordinary course of business
consistent with past custom and practice (including with respect to frequency
and amount) ("Ordinary Course of Business"), (c) contractual liabilities
---------------------------
incurred in the Ordinary Course of Business which are not required by
-7-
<PAGE>
GAAP to be reflected on a balance sheet and (d) liabilities for accounting,
investment banking and legal fees incurred in connection with the Merger and the
transactions contemplated thereby in an amount not in excess of $830,000.
2.9 Tax Matters.
-----------
(a) The Company has filed all Tax Returns (as defined below) that
it was required to file and all such Tax Returns were correct and complete in
all material respects. The Company has paid all Taxes (as defined below) owed in
respect of the periods covered by such Tax Returns whether or not shown as due
on such Tax Return. The unpaid Taxes of the Company for tax periods through the
date of the Company's Most Recent Balance Sheet do not exceed the accruals and
reserves for Taxes set forth on the Company's Most Recent Balance Sheet, and no
Taxes have been or prior to the Closing will be incurred by the Company. The
Company has no actual or potential liability for any Tax obligation of any
taxpayer (including without limitation any affiliated group of corporations or
other entities that included the Company during a prior period) other than the
Company. All Taxes that the Company is or was required by law to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Entity (as defined below). For purposes of
this Agreement, "Taxes" means all taxes, charges, fees, levies or other similar
-----
assessments or liabilities, including without limitation income, gross receipts,
ad valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, payroll and franchise taxes
imposed by the United States of America or any state, local or foreign
government, or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties, assessments
or additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof. For purposes of this Agreement,
"Tax Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes. For purposes of this Agreement, "Governmental Entity" means any
government, municipality or political subdivision thereof, whether federal,
state, local or foreign, or any governmental or quasi-governmental agency,
authority, board, bureau, commission, department, instrumentality or public
body, or any court, arbitrator, administrative tribunal or public utility.
(b) The Company has not yet been obligated to file any federal
income Tax Returns. The Company has never had any examination reports or
statements of deficiencies assessed against it. No Tax Returns of the Company
have been audited by any Governmental Entity. No examination or audit of any Tax
Returns of the Company by any Governmental Entity is currently in progress or,
to the knowledge of the Company, threatened or contemplated. The Company has not
waived any statute of limitations with respect to taxes or agreed to an
extension of time with respect to a tax assessment or deficiency.
(c) The Company is not a "consenting corporation" within the meaning
of Section 341(f) of the Internal Revenue Code ("Code") and none of the assets
of the Company are subject to an election under Section 341(f) of the Code. The
Company has not been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(l)(A)(ii) of the Code. The Company is not a party to
any Tax allocation or sharing agreement.
-8-
<PAGE>
(d) The Company is not and has never been a member of an "affiliated
group" of corporations (within the meaning of Section 1504 of the Code). The
Company has not made an election under Treasury Reg. Section 1.1502-20(g). The
Company is not and has not been required to make a basis reduction pursuant to
Treasury Reg. Section 1.1502-20(b) or Treasury Reg. Section 1.337(d)-2T(b).
(e) As of the date of this Agreement and as of the Closing Date, the
Company has not, and will not have, taken any action that could reasonably be
expected to cause the Merger to fail to qualify as a reorganization within the
meaning of Section 368(a) of the Code.
2.10 Assets. The Company has good and defensible title to all properties,
------
interests in properties and assets, real and personal, necessary for the conduct
of its business as presently conducted and as presently proposed to be
conducted, all of which are reflected in the Company's Most Recent Balance Sheet
(except properties, interests in properties and assets sold or otherwise
disposed of since the Company's Most Recent Balance Sheet Date in the ordinary
course of business) or acquired after the Most Recent Balance Sheet Date, or
with respect to leased properties and assets, valid leasehold interests in, free
and clear of all mortgages, liens, pledges, charges or encumbrances of any kind
or character, except the lien of current taxes not yet due and payable. The
plants, property and equipment of Company that are used in the operations of its
business are in good operating condition and repair subject to ordinary wear and
tear and to requirements for periodic maintenance. All properties used in the
operations of Company, except for those acquired after the Most Recent Balance
Sheet Date, are reflected in the Company's Most Recent Balance Sheet to the
extent required by GAAP. Section 2.10 of the Company Disclosure Schedule
identifies all personal property leases. No asset of the Company (tangible or
intangible) is subject to any Security Interest except as listed on Section 2.10
of the Company Disclosure Schedule. For purposes of this Agreement, "Security
--------
Interest" means any mortgage, pledge, security interest, encumbrance, charge, or
- --------
other lien (whether arising by contract or by operation of law), other than (i)
mechanic's, materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, (iii) liens on goods in transit incurred pursuant to documentary
letters of credit, and (iv) liens for Taxes not yet due and payable, in each
case arising in the Ordinary Course of Business of the Company and not material
to the Company. The Company does not own or lease any real property.
2.11 Intellectual Property.
---------------------
(a) The Company owns, or licenses or otherwise possesses legally
enforceable rights to use, all patents, trademarks, trade names, service marks,
Internet domain names, copyrights, and any applications for such patents,
trademarks, trade names, service marks, Internet domain names and copyrights,
schematics, technology, trade secrets, know-how, computer software programs or
applications, processes and other tangible or intangible proprietary information
or material that are used to conduct its business as currently conducted, or
currently planned to be conducted, including without limitation the technology,
information, databases, data lists, data compilations, and all proprietary
rights developed or discovered or used in connection with or contained in all
versions and implementations of any World Wide Web sites, free and clear of all
liens, claims and encumbrances (including without limitation licensing
-9-
<PAGE>
and distribution rights) all of which are "Intellectual Property." Section 2.11
---------------------
of the Company Disclosure Schedule contains an accurate and complete (i) list of
all patents and patent applications and all trademarks (indicating registered
and unregistered trademarks) and applications therefor, registered copyrights,
trade names, service marks and Internet domain names owned or licensed by the
Company, including the jurisdictions in which each such Intellectual Property
right has been issued or registered or in which any such application for such
issuance or registration has been filed, (ii) list of all written licenses,
sublicenses and other agreements to which the Company is a party and pursuant to
which any person is authorized to use any Intellectual Property rights of the
Company, and (iii) list of all written licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any third party Intellectual Property ("Company Third Party
-------------------
Intellectual Property Rights"). The Company is not a party to any oral license,
- ----------------------------
sublicense or agreement which, if reduced to written form, would be required to
be listed in Section 2.11 of the Company Disclosure Schedule under the terms of
this Section 2.11(a).
(b) All of the Company's patents, copyrights, trademarks, trade
names or Internet domain name registrations related to its current or currently
proposed business are valid and in full force and effect and will not be altered
or impaired by the consummation of the transactions contemplated hereby. The
Company is not, and will not be as a result of the execution and delivery of
this Agreement or the performance of the Company's obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Company's Intellectual Property or Company Third Party Intellectual Property
Rights.
(c) Neither the Company nor, to the Company's knowledge, any of the
Company's employees has received a claim, or is aware of a reasonable basis for
a claim, of infringement or violation of any Intellectual Property right of any
third party. The manufacturing, marketing, licensing or sale of the products or
performance of the service offerings of the Company do not infringe or violate
any Intellectual Property right of any third party; and, to the knowledge of the
Company, the Intellectual Property rights of the Company are not being infringed
or violated by activities, products or services of any third party.
2.12 Contracts. Section 2.12 of the Company Disclosure Schedule lists
---------
all material written agreements to which the Company is a party or by which it
is bound, including but not limited to:
(a) any written arrangement for the provision of products or
services to customers or other third parties;
(b) any written arrangement for the purchase of raw materials,
commodities, supplies, products or other personal property or for the receipt of
consulting or other services;
(c) any written arrangement establishing a partnership, joint
venture development, marketing or distribution arrangement;
(d) any written arrangement under which it has created, incurred,
assumed, or guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including capitalized lease
-10-
<PAGE>
obligations) or under which it has imposed (or may impose) a Security Interest
on any of its assets, tangible or intangible;
(e) any written arrangement concerning confidentiality or
noncompetition (other than standard confidentiality agreements between the
Company and any of its employees in the Ordinary Course of Business);
(f) any written agreement, contract or commitment that calls for
fixed and/or contingent payments or expenditures by or to the Company (including
without limitation any advertising or revenue sharing arrangement).
(g) any written outstanding sales or advertising contract,
commitment or proposal (including, without limitation, insertion orders,
slotting agreements or other agreements under which Company has allowed third
parties to advertise on or otherwise be included in Company's World Wide Web
sites)
(h) any written agreements, contracts or commitments with officers,
employees, agents, consultants, advisors, salesmen, sales representatives,
distributors or dealers that are not cancelable by Company "at will" and without
liability, penalty or premium.
(i) any written employment, independent contractor or similar
agreement, contract or commitment that is not terminable on thirty (30) days'
notice or less without penalty, liability or premium of any type, including,
without limitation, severance or termination pay.
(j) any written arrangement involving any of the Company
Shareholders or their affiliates ("Affiliates"), as defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is not a party to any oral contract, agreement or other
arrangement which, if reduced to written form, would be required to be listed in
Section 2.12 of the Company Disclosure Schedule. All of the agreements listed
in the Company Disclosure Schedule to which the Company is a party are valid,
binding, in full force and effect and enforceable by the Company in accordance
with their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefor may be brought (whether at law or in
equity). No such contract contains any liquidated damages, penalty or similar
provision. To the Company's knowledge, no party to any such contract intends to
cancel, withdraw, modify or amend such contract, agreement or arrangement. The
Company is not in default under or in breach or violation of, nor, to the
Company's knowledge, is there any valid basis for any claim of default by the
Company under, or breach or violation by the Company of, any material provision
of any contract listed on the Company Disclosure Schedule. To Company's
knowledge, no other party is in default under or in breach or violation of, nor
is there any valid basis for any claim of default by any other party under or
any breach or violation by any other party of, any such contract.
-11-
<PAGE>
2.13 Accounts Receivable. All accounts receivable of the Company
-------------------
reflected on the Company's Most Recent Balance Sheet are valid receivables, and,
to the Company's knowledge, are subject to no setoffs or counterclaims and are
current and collectible (within 90 days after the date on which it first became
due and payable), net of the applicable reserve for bad debts on the Company's
Most Recent Balance Sheet. All accounts receivable reflected in the financial or
accounting records of the Company that have arisen since the Company's Most
Recent Balance Sheet Date are valid receivables, and to the Company's knowledge,
subject to no setoffs or counterclaims and are collectible, net of a reserve for
bad debts in an amount proportionate to the reserve shown on the Company's Most
Recent Balance Sheet.
2.14 Insurance. Section 2.14 of the Company Disclosure Schedule sets
---------
forth a true, correct and complete list of all insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations, software
errors and omissions, employees, officers and directors of the Company and all
claims made under any insurance policy since January 1, 1996. There is no claim
by the Company pending under any of such policies or bonds as to which coverage
has been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in compliance in all material respects with
the terms of such policies and bonds. Such policies of insurance and bonds are
of the type and in amounts customarily carried by persons conducting businesses
similar to those of the Company. The Company has no knowledge of any threatened
termination of, or material premium increase with respect to, any of such
policies.
2.15 Litigation. Section 2.15 of the Company Disclosure Schedule
----------
identifies, and contains a brief description of, (a) any unsatisfied judgment,
order, decree, stipulation or injunction issued by or enforceable by a
Governmental Entity, (b) any written claim, demand, complaint, action, suit,
proceeding, or hearing or, to the Company's knowledge any investigation of or
in, any Governmental Entity or before any arbitrator to which the Company or is
a party or, to the knowledge of the Company, is threatened to be made a party,
and (c) any written or oral claims by third persons of which the Company is
aware and any reasonable basis for any third party claims. None of the demands,
claims, complaints, actions, suits, proceedings, hearings, and investigations
set forth in Section 2.15 of the Company Disclosure Schedule could reasonably be
expected to have a Material Adverse Effect.
2.16 Employees and Consultants. Section 2.16 of the Company Disclosure
-------------------------
Schedule contains a list of all current and former employees and consultants of
the Company, along with the position and the annual rate of compensation of each
such person. Except as specified on the Company Disclosure Schedule, each
current and former employee and consultant to the Company has entered into a
confidentiality and assignment of inventions agreement with the Company, a copy
of each of which has previously been delivered to the Buyer. To the knowledge
of the Company, no key employee or consultant or group of employees or
consultants has any plans to terminate employment or the provision of consulting
services with the Company. The Company is not a party to or bound by any
collective bargaining agreement, nor has it experienced any strikes, grievances,
claims of unfair labor practices or other collective bargaining disputes. The
Company has no knowledge of any organizational effort made or threatened, either
currently or since its inception, by or on behalf of any labor union with
respect
-12-
<PAGE>
to employees of the Company. The Company has no oral agreements with any
employees or consultants. The Company has no agreements or arrangements with
persons titled as independent contractors or consultants, as a result of which,
by virtue of the control exercised by the Company, the type of work performed by
the persons or any other circumstances, said persons could reasonably be deemed
to be employees of the Company. The Company has complied with all record keeping
and tax reporting obligations relating to income and employment taxes due with
respect to compensation paid to employees or independent contractors providing
services to the Company.
2.17 Employee Benefits.
-----------------
(a) The Company has no "Employee Benefit Plans" as defined in the
Employee Retirement Income Security Act of 1974 as amended.
(b) The Company has no: (i) written, and, to the Company's
knowledge, oral, agreement with any director, officer or other employee of the
Company and affiliates (A) the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving the
Company or its affiliates of the nature of any of the transactions contemplated
by this Agreement, (B) providing any term of employment or compensation
guarantee or (C) providing severance benefits or other benefits after the
termination of employment of such director, officer or employee; (ii) agreement,
plan or arrangement under which any person may receive payments from the Company
or its affiliates that may be subject to the tax imposed by Section 4999 of the
Code or included in the determination of such person's "parachute payment" under
Section 280G of the Code; and (iii) agreement or plan binding the Company or its
affiliates, including without limitation any stock option plan, stock
appreciation right plan, restricted stock plan, stock purchase plan, severance
benefit plan, or any Company Employee Benefit Plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement.
2.18 Intentionally omitted.
2.19 Permits. Section 2.19 of the Company Disclosure Schedule sets forth
-------
a list of all permits, licenses, registrations, certificates, orders or
approvals from any Governmental Entity (including without limitation those
issued or required under Environmental Laws and those relating to the occupancy
or use of owned or leased real property) ("Permits") issued to or held by the
-------
Company that are material to the operation of its business. Such listed Permits
are the only Permits that are required for the Company to conduct its business
as presently conducted or as currently proposed to be conducted, except for
those the absence of which could not reasonably be expected to have any Material
Adverse Effect. Each such Permit is in full force and effect.
2.20 Certain Business Relationships With Affiliates. No Affiliate of the
----------------------------------------------
Company (a) owns any property or right, tangible or intangible, which is used in
the business of the
-13-
<PAGE>
Company, (b) has any claim or cause of action against the Company, (c) owes any
money to the Company, or (d) has loaned any money to the Company. Section 2.20
of the Company Disclosure Schedule describes any transactions or relationships
between the Company and any Affiliate thereof.
2.21 Brokers' Fees. Except as listed on Section 2.21 of the Company
-------------
Disclosure Schedule, the Company has no liability or obligation to pay any fees
or commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement.
2.22 Minute Books. The minute books and other similar records of the
------------
Company contain true and complete records of all actions taken at any meetings
of the Company's shareholders, Board of Directors or any committee thereof and
of all written consents executed in lieu of the holding of any such meeting, and
all charter and bylaw documents and amendments thereto. All of these documents
have been delivered to counsel for the Buyer.
2.23 Customers and Suppliers. No material licensor to or supplier of the
-----------------------
Company has indicated to an officer of the Company since the Company's inception
that it will stop, or decrease the rate of, licensing intellectual property or
supplying materials, products or services to the Company (and no officer of the
Company is aware of any such indication) and no material customer of the Company
has indicated to an officer of the Company since the Company's inception that it
will stop, or decrease the rate of, buying, leasing or licensing materials,
products or services from the Company (and no officer of the Company is aware of
any such indication). Section 2.23 of the Company Disclosure Schedule sets forth
a list of each supplier that is the sole supplier of any significant product,
component or service to the Company
2.24 Corporate Approvals. The Board of Directors of Company has (i)
-------------------
approved this Agreement and the Merger and (ii) determined that the Merger is in
the best interests of the shareholders of the Company and is on terms that are
fair to such shareholders. The Shareholder Consent represents the only vote of
the holders of any of the shares of Company Common Stock necessary to approve
this Agreement and the transactions contemplated hereby. There will be no
shareholders or persons entitled to receive dissenters rights (as such term is
defined in the California Law) related to the transactions contemplated hereby.
2.25 Third Party Consents. No consent or approval is needed from any
--------------------
third party in order to effect the Merger, this Agreement or any of the
transactions contemplated hereby.
2.26 Disclosure. No representation or warranty by the Company contained
----------
in this Agreement, and no statement contained in the final Company Disclosure in
this Agreement, and no statement contained in the final Company Disclosure
Schedule or in the final form of any other Transaction Document delivered to or
to be delivered by the Company pursuant to this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was or
will be made, in order to make the statements herein or therein not misleading.
2.27 Year 2000 Compliance. The Company's worldwide website and business
--------------------
as presently conducted and as presently proposed to be conducted will be fully
compatible in normal operation with changes to outputs, data or other
information in relation to dates arising in
-14-
<PAGE>
the year 2000 and beyond, without a material loss of performance or use,
provided that third party software is also year 2000 compliant. The Company
estimates that the costs of fixing year 2000 issues faced by it (whether by
modification or replacement) shall not exceed $5,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
-------------------------------------------
The Buyer represents and warrants to the Company that the statements
contained in this Article III are true and correct, except as set forth in the
disclosure schedule attached hereto (the "Buyer Disclosure Schedule"). The
-------------------------
Buyer Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article III, and the
disclosures in any paragraph of the Buyer Disclosure Schedule shall qualify any
other paragraph in this Article III where such disclosure would be appropriate
to the extent that it is clear from such disclosure that it relates to such
other paragraph.
3.1 Organization, Qualification and Corporate Power. Buyer is a
-----------------------------------------------
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the state of its incorporation. Buyer is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the failure to be so qualified would have
a Material Adverse Effect. Buyer has all requisite corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The Buyer has furnished to the Company
true and complete copies of the charter documents and Bylaws of Buyer, each as
amended and as in effect on the date hereof. Buyer is not in default under or
in violation of any provision of its charter documents or Bylaws.
3.2 Capitalization. The authorized capital stock of the Buyer consists
--------------
of: (i) 22,200,000 shares of Buyer Common Stock, of which 6,929,422 shares of
Buyer Common Stock are issued and outstanding and (ii) 4,700,000 shares of
Preferred Stock, of which (A) 1,208,600 shares have been designated Series A
Preferred Stock, of which 810,000 shares are issued and outstanding and 398,600
shares are issuable on exercise of warrants to purchase Series A Preferred Stock
outstanding, and (B) 3,400,000 shares have been designated Series B Preferred
Stock, of which 3,230,769 shares are issued and outstanding and 62,051 shares
are issuable on exercise of warrants to purchase Series B Preferred Stock
outstanding. Buyer has reserved an aggregate of 2,400,000 shares of Buyer Common
Stock for issuance pursuant to the 1998 Stock Plan, of which 319,133 shares have
been issued directly or pursuant to option exercise (and are included in the
Common Stock outstanding number above), 1,722,642 shares are subject to
outstanding options and 358,225 shares are available for issuance. Subject to
the receipt of shareholder approval, the Buyer has reserved for issuance an
aggregate of 3,700,000 shares of Buyer Common Stock for issuance pursuant to the
1999 Stock Plan, of which 200,000 shares are subject to outstanding options and
3,500,000 shares are available for issuance. Under the assumed ePills 1999 Stock
Option Plan, there are options to purchase 69,575 shares of Common Stock
outstanding and 151,625 shares available for issuance. In addition, the Buyer
has issued warrants to purchase 72,449 shares of Buyer Common Stock and has
committed to issue warrants as described in the Buyer Disclosure Schedule. All
of the issued and outstanding shares of Buyer Common Stock and Preferred Stock
are, and all shares of Buyer Common Stock or Preferred
-15-
<PAGE>
Stock that may be issued upon exercise of options and warrants and conversion
thereof will be, duly authorized, validly issued, fully paid, nonassessable and
free of all preemptive rights. There are no outstanding or authorized options,
warrants, rights, agreements or commitments to which the Buyer is a party or
which are binding upon the Buyer providing for the issuance, disposition or
acquisition of any of its capital stock, other than pursuant to the above
referenced stock and option plans or as described in Section 3.2 of the Buyer
Disclosure Schedule. There are no outstanding or authorized stock appreciation,
phantom stock or similar rights with respect to the Buyer. There are no
agreements, voting trusts, proxies, or understandings with respect to the
voting, or registration under the Securities Act, of any shares of Buyer Common
Stock or Preferred Stock. All of the issued and outstanding shares of Buyer
Common Stock and Preferred Stock were issued in compliance with applicable
federal and state securities laws.
3.3 Authorization of Transaction. Buyer has all requisite corporate power
----------------------------
and authority to execute and deliver this Agreement and to perform its
obligations hereunder and under each of the Transaction Documents to which Buyer
is a party. All corporate action on the part of the Buyer, or its respective
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement, the Transaction Documents and the performance of
all obligations of the Buyer hereunder and thereunder has been taken or will be
taken prior to the Closing, and this Agreement constitutes, and each of the
Transaction Documents to which Buyer will be a party, will constitute, a valid
and legally binding obligation of the Buyer, enforceable in accordance with its
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other general
equitable remedies.
3.4 Compliance with Laws and Other Instruments. Buyer is not in violation
------------------------------------------
or default of any provision of its charter documents or Bylaws, or, to the best
of its knowledge, of any instrument, judgment, order, writ, decree, lease,
license, permit, contract or other arrangement to which it is a party or by
which it is bound, or, to the best of its knowledge, of any provision of any
federal or state statute, rule or regulation applicable to the Buyer. The
execution, delivery and performance of this Agreement, and the consummation of
the transactions contemplated hereby, will not result in any such violation or
default, or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree, lease, license, permit, contract or
other arrangement or an event that results in the creation of any lien, charge
or encumbrance upon any assets of the Buyer or its subsidiaries or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any permit,
license, authorization, or approval applicable to the Buyer or its subsidiaries,
its business or operations or any of its assets or properties, or result in the
acceleration of, or create in any party the right to accelerate, terminate
modify or cancel, or require any notice, consent or waiver under, any contract,
lease, license, permit or other arrangement to which the Buyer is a party or by
which the Buyer is bound or to which its assets are subject.
3.5 Subsidiaries. Except for Windom Health Enterprises, Inc. and
------------
ePills.com, Inc., the Buyer does not have and has never had any subsidiaries or
affiliated companies (other than 10% or greater shareholders in the Company) and
does not otherwise own and has never
-16-
<PAGE>
otherwise owned any shares of stock or any interest in, or control of, directly
or indirectly, any other corporation, partnership, association, joint venture or
entity.
3.6 Buyer Financial Statements. The Buyer has attached hereto as Section
--------------------------
3.6 to the Buyer Disclosure Schedule (a) the audited consolidated balance sheets
and statements of income, changes in shareholders' equity and cash flows for
each of 1997 and 1998 for the Buyer and its subsidiaries; and (b) the unaudited
consolidated balance sheet as of September 30, 1999 (the "Buyer's Most Recent
-------------------
Balance Sheet") and statements of income, changes in shareholders' equity and
- -------------
cash flows for the nine month period ending September 30, 1999 (the "Buyer's
-------
Most Recent Balance Sheet Date") Such financial statements (the "Buyer Financial
- ------------------------------ ---------------
Statements") have been prepared in accordance with GAAP applied on a consistent
- ----------
basis throughout the periods covered thereby, fairly present the financial
condition, results of operations and cash flows of the Buyer and its
subsidiaries as of the respective dates thereof and for the periods referred to
therein and are consistent with the books and records of the Buyer and its
subsidiaries; provided, however, that the Buyer Financial Statements referred to
-------- -------
in clause (b) above are subject to normal recurring year-end adjustments (which
will not be material) and do not include footnotes.
3.7 Absence of Certain Changes. Since the Most Recent Balance Sheet,
--------------------------
there has not been any material adverse change in the assets, business,
financial condition or results of operations of the Buyer or any subsidiary, nor
has there occurred any event or development which could reasonably be foreseen
to result in such a material adverse change in the future.
3.8 No Undisclosed Liabilities. None of the Buyer and its subsidiaries
--------------------------
has any liability (whether known or unknown, whether absolute or contingent,
whether liquidated or unliquidated and whether due or to become due), and there
is no existing condition, situation or set of circumstances which could
reasonably be expected to result in such a liability, except for (a) liabilities
shown on the Buyer's Most Recent Balance Sheet, (b) liabilities which have
arisen since the Buyer's Most Recent Balance Sheet Date in the Ordinary Course
of Business, (c) contractual liabilities incurred in the Ordinary Course of
Business which are not required by GAAP to be reflected on a balance sheet and
(d) liabilities for accounting, investment banking and legal fees incurred in
connection with the Merger and the transactions contemplated thereby and the IPO
Form S-1 and transaction contemplated thereby.
3.9 Tax Matters.
-----------
(a) Each of the Buyer and its subsidiaries has filed all Tax Returns
that it was required to file and all such Tax Returns were correct and complete
in all material respects. Each of the Buyer and its subsidiaries has paid all
Taxes owed in respect of the periods covered by such Tax Returns. The unpaid
Taxes of the Buyer and its subsidiaries for tax periods through the date of the
Buyer's Most Recent Balance Sheet do not exceed the accruals and reserves for
Taxes set forth on the Buyer's Most Recent Balance Sheet. Neither the Buyer nor
any subsidiary has any actual or potential liability for any Tax obligation of
any taxpayer (including without limitation any affiliated group of corporations
or other entities that included the Buyer or any subsidiary during a prior
period) other than the Buyer and its subsidiaries. All Taxes that the Buyer or
any subsidiary is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Entity.
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<PAGE>
(b) No Tax Returns of the Buyer nor any subsidiary has been audited
by the Internal Revenue Service. No examination or audit of any Tax Returns of
the Buyer or any subsidiary by any Governmental Entity is currently in progress
or, to the knowledge of the Buyer and its subsidiaries, threatened or
contemplated. Neither the Buyer nor any subsidiary has waived any statute of
limitations with respect to taxes or agreed to an extension of time with respect
to a tax assessment or deficiency.
(c) As of the date of this Agreement and the Closing Date, Buyer has
not taken and will not have taken any action that could reasonably be expected
to cause the Merger to fail to qualify as a reorganization within the meaning of
Section 368(a) of the Code.
3.10 Title to Property. Each of Buyer and its subsidiaries has good and
-----------------
defensible title to all properties, interests in properties and assets, real and
personal, necessary for the conduct of its business as presently conducted and
as presently proposed to be conducted, all of which are reflected in the Buyer's
Most Recent Balance Sheet (except properties, interests in properties and assets
sold or otherwise disposed of since the Buyer's Most Recent Balance Sheet Date
in the ordinary course of business) or acquired after the Buyer's Most Recent
Balance Sheet Date, or with respect to leased properties and assets, valid
leasehold interests in, free and clear of all mortgages, liens, pledges, charges
or encumbrances of any kind or character, except the lien of current taxes not
yet due and payable. The plants, property and equipment of Buyer and its
subsidiaries that are used in the operations of their businesses are in good
operating condition and repair subject to ordinary wear and tear and to
requirements for periodic maintenance. All properties used in the operations of
Buyer, except for those acquired after the Most Recent Balance Sheet Date, are
reflected in the Buyer's Most Recent Balance Sheet to the extent required by
GAAP. No asset of the Buyer (tangible or intangible) is subject to any Security
Interest. Neither the Buyer nor any of its subsidiaries owns any real property.
3.11 Intellectual Property.
---------------------
(a) Each of the Buyer and its subsidiaries owns, or licenses or
otherwise possesses legally enforceable rights to use, all Intellectual Property
that is used to conduct its business as currently conducted or currently planned
to be conducted.
(b) All of the Buyer's patents, copyrights, trademarks, trade names
or Internet domain name registrations related to its current or currently
proposed business are valid and in full force and effect and will not be altered
or impaired by the consummation of the transactions contemplated hereby. Neither
the Buyer nor any of its subsidiaries is, nor will any of them be as a result of
the execution and delivery of this Agreement or the performance of the Buyer's
obligations under this Agreement, in breach of any license, sublicense or other
agreement relating to the Buyer's Intellectual Property or any written licenses,
sublicenses and other agreements to which either Buyer or its subsidiary is a
party and pursuant to which Buyer or its subsidiary is authorized to use any
third party Intellectual Property (the "Buyer Third Party Intellectual Property
---------------------------------------
Rights").
- ------
(c) Neither the Buyer nor any of its subsidiaries (nor, to the
Buyer's knowledge, any of the Buyer's employees) has received a claim, or is
aware of a reasonable basis
-18-
<PAGE>
for a claim, of infringement or violation of any Intellectual Property right of
any third party. The manufacturing, marketing, licensing or sale of the products
or performance of the service offerings of the Buyer and its subsidiaries do not
infringe or violate any Intellectual Property right of any third party; and, to
the knowledge of the Buyer and its subsidiaries, the Intellectual Property
rights of the Buyer and its subsidiaries are not being infringed or violated by
activities, products or services of any third party.
3.12 Contracts. All of the agreements that are material agreements to
---------
the Buyer and its subsidiaries, when taken as a whole, are referenced in the IPO
Form S-1, as filed with the SEC on September 29, 1999, or have been provided to
the Company or its counsel. All such material agreements to which the Buyer or a
subsidiary is a party are valid, binding, in full force and effect and
enforceable by either Buyer or its subsidiaries in accordance with their
respective terms, except as such enforceability may be limited by applicable
bankruptcy and other similar laws affecting the enforcement of creditor's rights
generally and except that the availability of equitable remedies is subject to
the discretion of the court before which any proceeding therefor may be brought
(whether at law or in equity). To the knowledge of the Buyer, no party to any
such contract intends to cancel, withdraw, modify or amend such contract,
agreement or arrangement. Neither Buyer nor any of its subsidiaries is in
default under or in breach or violation of, nor, to the knowledge of the Buyer,
is there any valid basis for any claim of default by Buyer or any of its
subsidiaries under, or breach or violation by Buyer or any of its subsidiaries
of, any material provision of any contract referenced in the IPO Form S-1. To
the knowledge of the Buyer, no other party is in default under or in breach or
violation of, nor is there any valid basis for any claim of default by any other
party under or any breach or violation by any other party of, any such contract.
3.13 Accounts Receivable. All accounts receivable of the Buyer and the
-------------------
subsidiaries reflected on the Buyer's Most Recent Balance Sheet are valid
receivables, and to the Buyer's knowledge are subject to no setoffs or
counterclaims and are current and collectible (within 90 days after the date on
which it first became due and payable), net of the applicable reserve for bad
debts on the Buyer's Most Recent Balance Sheet. All accounts receivable
reflected in the financial or accounting records of the Buyer that have arisen
since the Buyer's Most Recent Balance Sheet Date are valid receivables, and to
the Buyer's knowledge, subject to no setoffs or counterclaims and are
collectible, net of a reserve for bad debts in an amount proportionate to the
reserve shown on the Buyer's Most Recent Balance Sheet.
3.14 Insurance. Each of Buyer and its subsidiaries has in full force and
---------
effect all policies of insurance and bonds of the type and in amounts
customarily carried by persons conducting businesses similar to those of the
Buyer, including, but not limited to, fire and casualty insurance policies,
sufficient in amount (subject to reasonable deductibles) to allow it to replace
any of its or its subsidiaries properties that might be damaged or destroyed.
There is no claim by the Buyer or its subsidiaries pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds. All premiums payable under all
such policies and bonds have been paid and the Buyer and its subsidiaries are
otherwise in compliance with the terms of such policies and bonds. The Buyer
and its subsidiaries have no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
-19-
<PAGE>
3.15 Litigation. Section 3.15 of the Buyer Disclosure Schedule
----------
identifies, and contains a brief description of, (a) any unsatisfied judgment,
order, decree, stipulation or injunction issued by or enforceable by a
Governmental Entity, (b) any claim, demand, complaint, action, suit, proceeding,
hearing, or to the Buyer's knowledge any investigation, of or in any
Governmental Entity or before any arbitrator to which the Buyer or any
subsidiary is a party or, to the knowledge of the Buyer and the subsidiaries, is
threatened to be made a party, and (c) any written or oral claims by third
persons of which the Buyer is aware and any reasonable basis for any third party
claims. None of the demands, claims, complaints, actions, suits, proceedings,
hearings, and investigations set forth in Section 3.15 of the Buyer Disclosure
Schedule could reasonably be expected to have a Material Adverse Effect.
3.16 Employees. Each officer, current and former employee and consultant
---------
of the Buyer and its subsidiaries has entered into a confidentiality/assignment
of inventions agreement with the Buyer or a subsidiary of the Buyer. To the
knowledge of the Buyer and its subsidiaries, no key employee or consultant or
group of employees or consultants has any plans to terminate employment or the
provision of consulting services with the Buyer or any subsidiary of the Buyer.
Neither the Buyer nor any subsidiary of the Buyer is a party to or bound by any
collective bargaining agreement, nor has any of them experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. The Buyer and the subsidiaries of the Buyer have no knowledge of any
organizational effort made or threatened, either currently or within the past
two years, by or on behalf of any labor union with respect to employees of the
Buyer or any subsidiary of the Buyer.
3.17 Employee Benefits. For purposes of this Agreement, "Buyer Employee
-----------------
Benefit Plan" means any "employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), any "employee welfare benefit plan" (as defined in Section 3(1) of
ERISA), and any other written or oral plan, agreement or arrangement involving
direct or indirect compensation, including without limitation insurance
coverage, severance benefits, disability benefits, deferred compensation,
bonuses, stock options, stock purchase, phantom stock, stock appreciation or
other forms of incentive compensation or post-retirement compensation maintained
or contributed to, by the Buyer or any Buyer ERISA Affiliate. For purposes of
this Agreement, "Buyer ERISA Affiliate" means any entity which is a member of
(i) a controlled group of corporations (as defined in Section 414(b) of the
Code), (ii) a group of trades or businesses under common control (as defined in
Section 414(c) of the Code), or (iii) an affiliated service group (as defined
under Section 414(m) of the Code or the regulations under Section 414(o) of the
Code), any of which includes Buyer. Each Buyer Employee Benefit Plan has been
administered in all material respects in accordance with its terms, and each of
the Buyer and the Buyer ERISA Affiliates has in all material respects met its
obligations with respect to such Buyer Employee Benefit Plan and has made all
contributions thereto which are required to be made prior to the date hereof.
To the knowledge of the Buyer, Buyer and all Buyer Employee Benefit Plans are in
compliance in all material respects with the currently applicable provisions of
ERISA and the Code and the regulations thereunder.
(a) There are no investigations by any Governmental Entity,
termination proceedings or other claims (except claims for benefits payable in
the normal operation of the
-20-
<PAGE>
Buyer Employee Benefit Plans and proceedings with respect to qualified domestic
relations orders) suits or proceedings against or involving any Buyer Employee
Benefit Plan or asserting any rights or claims to benefits under any Buyer
Employee Benefit Plan that could give rise to any material liability.
(b) All the Buyer Employee Benefit Plans that are intended to be
qualified under Section 401(a) of the Code have received determination letters
from the Internal Revenue Service to the effect that such Buyer Employee Benefit
Plans are qualified and the plans and the trusts related thereto are exempt from
federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code, no such determination letter has been revoked, and revocation has not been
threatened, and no such Buyer Employee Benefit Plan has been amended since the
date of its most recent determination letter or application therefor in any
respect, and no act or omission has occurred, that would adversely affect its
qualification or materially increase its cost.
(c) Neither Buyer nor any Buyer ERISA Affiliate has ever maintained
a Buyer Employee Benefit Plan subject to Section 412 of the Code or Title IV of
ERISA.
(d) At no time has Buyer or any Buyer ERISA Affiliate been obligated
to contribute to any "multi-employer plan" (as defined in Section 4001(a)(3) of
ERISA).
(e) There are no unfunded obligations under any Buyer Employee
Benefit Plan providing benefits after termination of employment to any employee
of Buyer or any Buyer ERISA Affiliate (or to any beneficiary of any such
employee), including but not limited to retiree health coverage and deferred
compensation, but excluding continuation of health coverage required to be
continued under Section 4980B of the Code and insurance conversion privileges
under state law.
(f) To the knowledge of the Buyer, no act or omission has occurred
and no condition exists with respect to any Buyer Employee Benefit Plan that
would subject Buyer or any Buyer ERISA Affiliate to any material fine, penalty,
tax or fiduciary liability imposed under ERISA or the Code.
(g) No Buyer Employee Benefit Plan is funded by, associated with, or
related to a "voluntary employee's beneficiary association" within the meaning
of Section 501(c)(9) of the Code.
(h) No Buyer Employee Benefit Plan, plan documentation or agreement,
summary plan description or other written communication distributed generally to
employees by its terms prohibits Buyer or any Buyer ERISA Affiliate from
amending or terminating any such Buyer Employee Benefit Plan.
(i) Section 3.17 of the Buyer Disclosure Schedule discloses each:
(i) written and, to the Buyer's knowledge, oral agreement with any director,
officer or other employee of Buyer or any of its subsidiaries and affiliates (A)
the benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction involving the Buyer or any of its
subsidiaries or its affiliates of the nature of any of the transactions
contemplated by this
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<PAGE>
Agreement, (B) providing any term of employment or compensation guarantee or (C)
providing severance benefits or other benefits after the termination of
employment of such director, officer or employee; (ii) agreement, plan or
arrangement under which any person may receive payments from the Buyer or any of
its subsidiaries or its affiliates that may be subject to the tax imposed by
Section 4999 of the Code or included in the determination of such person's
"parachute payment" under Section 280G of the Code; and (iii) agreement or plan
binding the Buyer or any of its subsidiaries or its affiliates, including
without limitation any stock option plan, stock appreciation right plan,
restricted stock plan, stock purchase plan, severance benefit plan, or any Buyer
Employee Benefit Plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
3.18 Intentionally omitted.
3.19 Permits. The Buyer or its subsidiaries hold all Permits that are
-------
required for the operation of its business as presently conducted or as proposed
to be conducted, except for those the absence of which could not reasonably be
expected to have any Material Adverse Effect. Each such Permit is in full force
and effect.
3.20 Certain Business Relationships With Affiliates. No Affiliate of
----------------------------------------------
the Buyer or of any subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of the Buyer or any subsidiary, (b)
has any claim or cause of action against the Buyer or any subsidiary, (c) owes
any money to the Buyer or any subsidiary, or (d) has loaned any money to the
Buyer.
3.21 Brokers' Fees. Neither the Buyer nor any subsidiary has any
-------------
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
3.22 Minute Books. The minute books and other similar records of the
------------
Buyer contain true and complete records of all actions taken at any meetings of
the Buyer's shareholders, Board of Directors or any committee thereof and of all
written consents executed in lieu of the holding of any such meeting.
3.23 Customers and Suppliers. No material licensor to or supplier of
-----------------------
the Buyer or any subsidiary has indicated to an officer of the Buyer within the
past year that it will stop, or decrease the rate of, licensing intellectual
property or supplying materials, products or services to them (and no officer of
the Buyer is aware of any such indication) and no material customer of the Buyer
or any Subsidiary has indicated to an officer of the Buyer within the past year
that it will stop, or decrease the rate of, buying, leasing or licensing
materials, products or services from them (and no officer of the Buyer is aware
of any such indication).
3.24 Corporate Approvals. The Board of Directors of Buyer has (i)
-------------------
approved this Agreement and the Merger, and (ii) determined that the Merger is
in the best interests of the shareholders of Buyer and is on terms that are fair
to such shareholders.
-22-
<PAGE>
3.25 Third Party Consents. No consent or approval is needed from any
--------------------
third party in order to effect the Merger, this Agreement or any of the
transactions contemplated hereby.
3.26 Disclosure. No representation or warranty by the Buyer contained
----------
in this Agreement, and no statement contained in the final Buyer Disclosure
Schedule or in the final form of any other Transaction Document delivered to or
to be delivered by the Buyer pursuant to this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was or
will be made, in order to make the statements herein or therein not misleading.
3.27 Disclosure With Respect to the Amendment to Form S-1. The Amendment
----------------------------------------------------
to Form S-1 (except for the RxList Description), on the date it will be filed
with the Securities and Exchange Commission, will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.28 Year 2000 Compliance. The IPO Form S-1 summarizes the Buyer's
--------------------
reasonable judgment as to its exposure to the Year 2000 problem.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
-----------------------------------
4.1 Conduct of Business of Company and Buyer. During the period from
----------------------------------------
the date of this Agreement and continuing until the earlier of the termination
of this Agreement or the Effective Time, each of Company and Buyer agrees
(except to the extent expressly contemplated by this Agreement or as otherwise
consented to in writing by the other) to conduct its and its subsidiaries'
business in the usual, regular and ordinary course consistent with past
practices, to pay debts and perform obligations when due, and to use all
reasonable efforts consistent with past practice and policies to preserve intact
its and its subsidiaries' present business organization, keep available the
services of its and its subsidiaries' key employees and preserve its and its
subsidiaries' relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it or its subsidiaries, to
the end that its and its subsidiaries' goodwill and ongoing businesses shall be
unimpaired at the Effective Time. Each of Company and Buyer agrees not to take,
and not to agree in writing or otherwise to take, any action which would make
any of its representations or warranties contained in this Agreement untrue or
incorrect or prevent it from performing or cause it not to perform its covenants
hereunder.
4.2 No Solicitation.
---------------
(a) Neither the Company nor any of the officers, directors or
employees of the Company will, directly or indirectly, (i) take any action to
solicit, initiate, entertain or knowingly encourage any Proposal (defined below)
or (ii) participate in any negotiations regarding, or furnish to any person any
nonpublic information relating to Company to further, or afford access to the
properties, books or records of Company to further, or otherwise cooperate with,
facilitate or knowingly encourage any person that has advised Company that it
may be considering making, or
-23-
<PAGE>
that has made, a Proposal. Company will promptly notify Buyer after receipt of
any Proposal or any notice that any person is considering making a Proposal or
any request for nonpublic information relating to Company or for access to the
properties, books or records of Company by any person that has advised Company
that it may be considering making, or that has made, a Proposal. For purposes of
this Agreement, "Proposal" means any offer or proposal for, or any indication of
--------
interest in, a merger, consolidation, or other business combination involving
Company or the acquisition of any significant equity interest in, or a
significant portion of the assets of, Company other than the transactions
contemplated by this Agreement.
(b) Neither Buyer nor any of its subsidiaries, nor any of their
respective officers, directors, or employees, will, directly or indirectly, (i)
take any action to solicit, initiate, entertain or knowingly encourage any
proposal regarding Buyer's or any of its subsidiary's possible acquisition of a
significant portion of the equity or assets of an online pharmaceutical database
company other than the Company or (ii) participate in any negotiations
regarding, or furnish to any person any non public information relating to Buyer
or any of its subsidiaries to further, or afford access to the properties, books
or records of Buyer or any of its subsidiaries to further, or otherwise
cooperate with, facilitate or knowingly encourage any person that has advised
Buyer or any of its subsidiaries that it may be considering such a transaction.
Buyer will promptly notify Company after receipt of any such proposal or any
notice that any person is considering making such a proposal to the Buyer.
4.3 Reorganization Treatment. Neither party will take any action that
------------------------
could reasonably be expected to cause the Merger to fail to qualify as a
reorganization under Section 368(a).
4.4 Restrictions on Company's Actions. Without limiting the generality
---------------------------------
of Section 4.1, prior to the Closing, the Company shall not, without the written
consent of the Buyer:
(a) issue, sell, deliver or agree or commit to issue, sell or
deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize the
issuance, sale or delivery of, or redeem or repurchase, any stock of any class
or any other securities or any rights, warrants or options to acquire any such
stock or other securities, or amend any of the terms of any such convertible
securities or options or exercise any discretionary right in respect thereof;
(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(c) create, incur or assume any debt not currently outstanding
(including obligations in respect of capital leases); assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person or entity; or make any loans,
advances or capital contributions to, or investments in, any other person or
entity;
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<PAGE>
(d) enter into, adopt or amend any Employee Benefit Plan (except as
required under ERISA or the Code with respect to any Employee Benefit Plan
qualified under Code section 401(a)) or any employment or severance agreement or
arrangement of the type described in Section 2.17(j) or increase in any manner
the compensation or fringe benefits of, or materially modify the employment
terms of, its directors, officers or employees, generally or individually, or
pay any benefit not required by the terms in effect on the date hereof of any
existing Employee Benefit Plan;
(e) acquire, sell, lease, license, encumber or dispose of any assets
or property in excess of $15,000 for any single such transaction or series of
related transactions or in excess of $50,000 in the aggregate (including without
limitation any shares or other equity interests in or securities of any
subsidiary or any corporation, partnership, association or other business
organization or division thereof), other than purchases, sales and licenses of
assets in the Ordinary Course of Business;
(f) amend its charter or Bylaws;
(g) change in any material respect its accounting methods,
principles or practices, except insofar as may be required by a generally
applicable change in GAAP;
(h) discharge or satisfy any Security Interest or pay any obligation
or liability other than in the Ordinary Course of Business;
(i) mortgage or pledge any of its property or assets or subject any
such assets to any Security Interest;
(j) sell, assign, transfer or license any Intellectual Property,
other than in the Ordinary Course of Business;
(k) enter into, amend, terminate, take or omit to take any action
that would constitute a material violation of or default under, or waive any
material rights under, any material contract or agreement;
(l) make or commit to make any capital expenditure in excess of
$15,000 per item or $50,000 in the aggregate;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action would
result in (i) any of the representations and warranties of the Company set forth
in this Agreement becoming materially untrue or (ii) any of the conditions to
the Closing not being satisfied; or
(n) agree in writing or otherwise to take any of the foregoing
actions.
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<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS
---------------------
5.1 Access to Information.
---------------------
(a) Each party shall afford the other party and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of such party's
and its subsidiaries properties, books, contracts, commitments and records, and
(ii) all other information concerning the business, properties and personnel of
such party and its subsidiaries as the requesting party may reasonably request.
Each party agrees to provide to the other party and its accountants, counsel and
other representatives copies of internal financial statements promptly upon
request.
(b) No information or knowledge obtained in any investigation
pursuant to this Section 5.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
5.2 Confidentiality. The parties acknowledge that Buyer and Company have
---------------
executed a Mutual Non-Disclosure Agreement dated October 20, 1999 (the
"Confidentiality Agreement"), which Confidentiality Agreement shall continue in
-------------------------
full force and effect in accordance with its terms.
5.3 Public Disclosure. Unless otherwise permitted by this Agreement,
-----------------
Buyer and Company shall consult with each other before issuing any press release
or otherwise making any public statement or making any other public (or non-
confidential) disclosure (whether or not in response to an inquiry) regarding
the terms of this Agreement and the transactions contemplated hereby, and
neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law. The parties
acknowledge and agree that this agreement may be filed as a material agreement
to the Amendment to Form S-1 in connection with Buyer's initial public offering,
and the relationship between the parties shall be described in the Amendment to
Form S-1.
5.4 Consents; Cooperation.
---------------------
(a) Consents. Each of Buyer and Company shall promptly apply for or
--------
otherwise seek, and use its commercially reasonable efforts to obtain, all
consents, approvals, authorizations, and filings required to be obtained by it
from any Governmental Entity or other third person or entity for the
consummation of the Merger, and each party shall use its commercially reasonable
efforts and shall cooperate with the other party to obtain all necessary
consents, approvals, authorizations, and filings in connection with the Merger,
including as needed in connection with any material contracts of Company or
Buyer or otherwise.
(b) The Amendment to Form S-1. The Company and its officers,
-------------------------
employees and counsel shall use all reasonable, best efforts to cooperate with
Buyer in the drafting, reviewing and filing of the Amendment to Form S-1 and the
exhibits thereto, and the preparation
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<PAGE>
of any subsequent amendments to the IPO Form S-1, with the intent that the
RxList Description contained in the IPO Form S-1 on and as of the effective date
of such initial public offering, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
5.5 FIRPTA. Company shall, prior to the Closing Date, provide Buyer with
------
a properly executed Foreign Investment and Real Property Tax Act of 1980
("FIRPTA") Notification Letter, substantially in the form of Exhibit 5.5A
------ ------------
attached hereto, which states that shares of capital stock of Company do not
constitute "United States real property interests" under Section 897(c) of the
Code, for purposes of satisfying Buyer's obligations under Treasury Regulation
Section 1.1445-2(c)(3). ). In addition, simultaneously with delivery of such
Notification Letter, Company shall have provided to Buyer, as agent for Company,
a form of notice to the Internal Revenue Service in accordance with the
requirements of Treasury Regulation Section 1.897-2(h)(2) and substantially in
the form of Exhibit 5.5B attached hereto along with written authorization for
Buyer to deliver such notice form to the Internal Revenue Service on behalf of
Company upon the Closing of the Merger.
5.6 Securities Laws. Buyer shall take such steps as may be necessary to
---------------
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Buyer Common Stock in connection with the
Merger. Company shall use its commercially reasonable efforts to assist Buyer as
may be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable in connection with the issuance of Buyer
Common Stock in connection with the Merger. The Merger Shares will be issued
under a Section 4(2) "private placement" exemption from the registration
requirements of federal securities laws.
5.7 Expenses. Whether or not the Merger is consummated, $17.09. all costs
--------
and expenses incurred in connection with this Agreement, the Agreement of Merger
and the transactions hereby and thereby shall be paid by the party incurring
such expense; provided, however, that any transaction fees, including but not
-------- -------
limited to legal, accounting, banking and other advisory fees (the "Transaction
-----------
Fees") in excess of $20,000 in legal fees (including but not limited to all
- ----
filing fees and other non-fee disbursements and expenses (such as copy, fax and
word processing charges) incurred in connection with the consummation in this
Agreement) on behalf of the Company (other than those that are paid directly by
the Company Shareholders or any of their affiliates or are reimbursed to the
Company by the Company Shareholders or any of their affiliates) shall be
reimbursed to the Buyer at the Closing through a closing adjustment in the
number of shares to be issued to the Company Shareholders. The aggregate number
of shares of Buyer Common Stock to be issued to the Company Shareholders shall
be reduced by the Excess Expense Shares. The "Excess Expense Shares" means the
---------------------
quotient of: (i) the dollar amount of Transaction Fees incurred by the Company
in connection with the transactions contemplated hereby in excess of the stated
maximums above, divided by (ii)
5.8 Good Faith Efforts and Further Assurances. Each of the parties to
-----------------------------------------
this Agreement shall use its good faith efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and
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<PAGE>
do and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
5.9 Registration of Merger Shares issued to Company Shareholders.
------------------------------------------------------------
(a) Filing and Effectiveness. If, at any time after the date that is
------------------------
180 days after the closing of an initial public offering of Buyer, Buyer shall
receive from any Company Shareholder or the Company Shareholders (for the
purpose of this Section 5.9 each a "Holder") owning in the aggregate at least a
------
majority of the Merger Shares less the Escrow Shares a written request or
requests (the "Demand Notice") that the Buyer effect a registration on Form S-1
-------------
(the "Resale S1 Registration Statement") and any related qualification or
--------------------------------
compliance for the purpose of offering for resale the Merger Shares less the
Escrow Shares issued to the Company Shareholders in the Merger, the Buyer will:
(1) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holder(s) and any
other Buyer shareholders who would have the right to sell shares in such an
offering (who shall also be deemed to be "Holders" hereunder); and
(2) as promptly as practicable, but in any event within thirty
(30) business days after the date that Buyer receives the Demand Notice, file
with the Securities and Exchange Commission (the "SEC") under the Securities Act
---
a Registration Statement on Form S-1 (the "Resale S-1 Registration Statement")
---------------------------------
for the purpose of offering for resale (i) the Merger Shares less the Escrow
Shares and (ii) any other shares of Buyer Common Stock held by Buyer
shareholders who have the right to and elect to sell shares in such an offering
(the "Registrable Securities"), provided, however, that the Buyer shall not be
---------------------- -------- ------
obligated to file any such registration statement if Buyer shall furnish to the
Company Shareholders a certificate signed by the Chief Executive Officer of
Buyer stating that, in the good faith judgment of the Board of Directors or
Chief Executive Officer of Buyer, it would be seriously detrimental to Buyer and
its shareholders for the Resale S-1 Registration Statement to be filed on or
before the date filing would otherwise be required, and it is therefore in the
best interests of Buyer to defer the filing of the Resale S-1 Registration
Statement, in which case Buyer may delay the filing of the Resale S-1
Registration Statement not in excess of forty-five (45) calendar days after the
original filing deadline .
(3) as soon as practicable, effect such registration and all
such qualifications and compliances as may be reasonably so requested and as
would permit and facilitate the sale and distribution of all or such portion of
such Holder's or Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
other Holder(s) and other Buyer shareholders joining in such request as are
specified in a written request given within ten (10) calendar days after receipt
of such written notice from the Company; provided, however, that the Company
-------- -------
shall not be obligated to cause any such registration, qualification or
compliance, pursuant to this Section 5.9 to become effective:
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<PAGE>
(i) prior to the date six (6) months following the effective date
of the Buyer's initial public offering or later than the date eleven (11) months
after the Closing of the Merger.
(ii) if the Holder(s), together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities at an aggregate price to the public of less than
$1,500,000; o r
(iii) if the Company has already effected one (1) registration
for the Holder(s) pursuant to this Section 5.9 or as a result of the inclusion
of such Registrable Securities in another similar offering.
(b) Requirement to Keep Effective. Subject to Section 5.9(k), the
-----------------------------
Buyer shall use its reasonable best efforts to cause the Resale S-1 Registration
Statement to remain effective until the first to occur of (i) the one year
anniversary of the Closing Date of the Merger or (ii) the date by which all
Registrable Securities are sold.
(c) Expenses of Registration. Buyer shall pay all Registration
------------------------
Expenses (as hereafter defined) in connection with any registration,
qualification or compliance pursuant to this Section 5.9, and each Holder shall
pay all Selling Expenses (as hereafter defined) and other expenses that are not
Registration Expenses relating to the Registrable Securities resold by him or
her. For purposes of this Section 5.9 "Registration Expenses" shall mean all
---------------------
expenses, except as otherwise stated below, incurred by Buyer in complying with
Sections 5.9(a), 5.9(b) and 5.9(d), including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for Buyer, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
and the reasonable fees and expenses of one counsel for all of the selling
Holders up to a maximum of $25,000. For purposes of this Section 5.9(c),
"Selling Expenses" shall mean all selling discounts, commissions and stock
----------------
transfer or other Taxes applicable to the Registrable Securities and all fees
and disbursements of counsel for any Holder.
(d) Registration Procedures. In the case of any registration
-----------------------
effected by Buyer pursuant to this Section 5.9, Buyer will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. Buyer will:
(1) Promptly prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by the Registration Statement;
(2) Furnish such number of prospectuses (including preliminary
prospectuses) and other documents incident thereto, including any amendment of
or supplement to the prospectus, as a Holder from time to time may reasonably
request;
(3) Subject to Sections 5.9(h) and (i) hereof, notify each
Holder of Registrable Securities covered by the Registration Statement at any
time when a prospectus
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<PAGE>
relating thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, and, subject to Sections 5.9(h) and (i) hereof, at
the request of any such Holder, prepare and furnish to such Holder a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such shares,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(4) Cause all such Registrable Securities registered pursuant to
the Registration Statement to be listed on each securities exchange or quotation
system on which similar securities issued by Buyer are then listed or quoted,
and in connection therewith, file with the Nasdaq National Market an application
for listing of additional shares with respect to the Registrable Securities;
(5) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to the Registration Statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of the Registration Statement;
(6) Use its reasonable best efforts to register or qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdiction within the United States and
Puerto Rico as shall be reasonably appropriate for the distribution of the
Registrable Securities covered by the Registration Statement; provided, however,
-------- -------
that Buyer shall not be required in connection therewith or as a condition
thereto to qualify to do business in or file a general consent to service of
process in any jurisdiction wherein it would not but for the requirements of
this paragraph be obligated to do so; and
(7) Otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering a
period of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
(e) Information by Holder. Each Holder of Registrable Securities
---------------------
shall furnish to Buyer such information regarding such Holder and the
distribution proposed by such Holder as Buyer may reasonably request in
connection with any registration, qualification or compliance referred to in
this Section 5.9, but only to the extent that such information is required in
order for Buyer to comply with its obligations under all applicable securities
and other laws and to ensure that the Registration Statement relating to such
Registrable Securities conforms to the applicable requirements of the Securities
Act and the rules and regulations thereunder. Each Holder covenants that it
will promptly notify Buyer of any changes in the information set forth in the
Registration Statement or otherwise provided by such Holder to Buyer regarding
such Holder or such Holder's plan of distribution as a result of which the
Registration Statement or any
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<PAGE>
prospectus relating to the Registrable Securities contains or would contain an
untrue statement of a material fact regarding such Holder or its intended method
of distribution of such Registrable Securities or omits to state any material
fact regarding such Holder or its intended method of distribution of such
Registrable Securities required to be stated therein or necessary to make the
statements therein, not misleading.
(f) Indemnification and Contribution.
--------------------------------
(1) Buyer agrees to indemnify and hold harmless each Holder from
and against any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) to which such Holder may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement, alleged untrue statement, omission or alleged
omission of a material fact in the Registration Statement, any prospectus
included in the Registration Statement, or any amendment or supplement to the
Registration Statement or any such prospectus, or any violation or alleged
violation by Buyer of the Securities Act, the Exchange Act, any state law, rule
or regulation promulgated thereunder, and Buyer will, as incurred, reimburse
such Holder for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided, however, that the indemnity contained in this Section 5.9(f)(1)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of Buyer
(which consent shall not be unreasonably withheld), nor shall Buyer shall not be
liable in any such case to the extent that such loss, claim, damage or liability
arises out of, or is based upon (A) an untrue statement or alleged untrue
statement made in such Registration Statement in reliance upon and in conformity
with written information furnished to Buyer by such Holder in an instrument
executed by such Holder and specifically stated to be for use in the preparation
of the Registration Statement, (B) the failure of such Holder to comply with any
of the covenants and agreements contained in Sections 5.9(h) or 5.9(j) hereof,
or (C) any untrue statement in any prospectus that is corrected in any
subsequent prospectus that was delivered to the Holder prior to the pertinent
sale or sales by the Holder.
(2) Each Holder, severally and not jointly, agrees to indemnify
and hold harmless Buyer from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which Buyer may
become subject (under the Securities Act or otherwise) insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of, or are based upon (A) an untrue statement, alleged untrue
statement, omission or alleged omission of a material fact in the Registration
Statement, any prospectus included in the Registration Statement, or any
amendment or supplement to the Registration Statement or any such prospectus in
reliance upon and in conformity with written information furnished to Buyer by
such Holder in an instrument executed by such Holder and specifically stated to
be for use in preparation of the Registration Statement, or any violation or
alleged violation by Holder of the Securities Act, the Exchange Act, any state
law, rule or regulation promulgated thereunder, provided, however, the indemnity
contained in this Section 5.9(f)(2) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of Holder (which consent shall not be
unreasonably withheld), and provided that no Holder shall be liable in any such
case for any
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<PAGE>
untrue statement included in any Prospectus which statement has been corrected
in a writing delivered to Buyer at least two business days before the sale from
which such loss arose, (B) the failure of such Holder to comply with any of the
covenants and agreements contained in Sections 5.9(h) or 5.9(j) hereof, or (C)
any untrue statement in any Prospectus that is corrected in any subsequent
Prospectus that was delivered to the Holder prior to the pertinent sale or sales
by the Holder; and each Holder, severally and not jointly, will, as incurred,
reimburse Buyer for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim. In no event shall the amount payable by any Holder to Buyer pursuant to
this Section 5.9(f) by reason of a sale of Buyer Common Stock by such Holder
exceed the amount of the net proceeds to such Holder from the sale of Buyer
Common Stock from which such liability arose.
(3) Promptly after receipt by any indemnified person under
subsections (1) or (2) above of a notice of a claim or the beginning of any
action in respect of which indemnity is to be sought against an indemnifying
person pursuant to this Section 5.9(f), such indemnified person shall notify the
indemnifying person in writing of such claim or of the commencement of such
action (provided, however, that no failure to provide such notice shall relieve
any indemnifying person of any liability hereunder except to the extent that
such indemnifying person is prejudiced thereby), and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and the indemnifying person shall have been notified thereof,
the indemnifying person shall be entitled to participate therein, and, to the
extent that it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to the indemnified person. After notice from the
indemnifying person to such indemnified person of the indemnifying person's
election to assume the defense thereof, the indemnifying person shall not be
liable to such indemnified person for any legal expenses subsequently incurred
by such indemnified person in connection with the defense thereof; provided,
however, that, if the indemnifying person shall propose that the same counsel
represent it and the indemnified person, and if counsel for the indemnified
person shall reasonably have concluded that there is an actual conflict of
interest posed by the representation proposed by the indemnifying person, the
indemnified person shall be entitled to retain its own counsel reasonably
satisfactory to the indemnifying person at the expense of such indemnifying
person; provided, however that if more than one indemnified person makes a claim
against an indemnifying person based on substantially similar facts, the
indemnifying person shall not be responsible for the fees of more than one
counsel for all indemnified persons whose claims are based on substantially
similar facts.
(4) If the indemnification provided for in this Section 5.9(f) is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (1) or (2) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof), in such proportion as is
appropriate to reflect the relative fault of each such party, as well as any
other relevant equitable considerations, provided, however, that any
contribution by a Holder shall not exceed the net proceeds to such Holder for
the sale of Buyer Common Stock from which such liability arose, except in the
case of willful fraud by such Holder. The relative fault shall be determined by
reference to, among other things, whether the
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<PAGE>
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by Buyer on
the one hand or a Holder on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Buyer and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 5.9(f) were determined by any
method of allocation which does not take account of the equitable considerations
referred to above in this Section 5.9(f)(4). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, or liabilities (or
actions in respect thereof) referred to above in this Section 5.9(f)(4) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action,
proceeding or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(5) The obligations of the Buyer and the Holders under this
Section 5.9(f) shall be in addition to any liability which Buyer and the
respective Holders may otherwise have and shall extend, upon the same terms and
conditions, to each director and officer of Buyer or any Holder, and to each
person, if any, who controls Buyer or any Holder within the meaning of the
Securities Act or the Exchange Act.
(g) Restrictive Legend. Each certificate representing Merger Shares
------------------
shall bear substantially the following legends (in addition to any legends
required under applicable securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
ADDITIONALLY, THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO CERTAIN RESTRICTIONS SPECIFIED IN THE AGREEMENT AND PLAN OF
REORGANIZATION AMONG THE ISSUER AND RXLIST.COM, INC., AMONG OTHERS (THE
"AGREEMENT"), WHICH INCLUDES AN OBLIGATION TO NOTIFY THE ISSUER PRIOR TO
ANY SALE OR OTHER TRANSACTION, AND NO TRANSFER OF SHARES SHALL BE VALID OR
EFFECTIVE ABSENT COMPLIANCE WITH SUCH RESTRICTIONS. ALL SUBSEQUENT HOLDERS
OF THIS CERTIFICATE WILL HAVE AGREED TO BE BOUND BY CERTAIN OF THE TERMS OF
THE AGREEMENT, INCLUDING SECTION 5.9 OF THE AGREEMENT. COPIES OF THE
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
REGISTERED HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE ISSUER.
The legend contained in this Section 5.9(g) shall be removed from a certificate
in connection with any sale in compliance with the terms of this Agreement and
pursuant to the Resale S-1 Registration Statement, or pursuant to Rule 144 (if
accompanied by any legal opinion reasonably
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<PAGE>
required by the Buyer), but shall not be removed in any other circumstance
without Buyer's prior written consent (which consent shall not be unreasonably
withheld or delayed and shall be granted if such legend is no longer
appropriate).
(h) Transfer of Shares After Registration.
-------------------------------------
(1) Restriction. No Holder may make any sale of any Merger Shares
-----------
except (A) in accordance with the Resale S-1 Registration Statement, in which
case Holder must comply with the requirement of delivering a current prospectus,
(B) in accordance with Rule 144, or (C) pursuant to an exemption from the
registration requirements of the Securities Act, if accompanied by an opinion of
counsel that registration is not necessary, which opinion and counsel shall be
reasonably satisfactory to Buyer.
(2) Notice to Buyer of Proposed Sale and Right of Buyer to
------------------------------------------------------
Suspend Use of Registration Statement. If, at any time during the period after
- -------------------------------------
the Resale S-1 Registration Statement has been declared effective and on or
before the date that the Company withdraws the Resale S-1 Registration Statement
in accordance herewith, any Holder shall propose to sell any Registrable
Securities pursuant to the Resale S-1 Registration Statement, it shall submit
written notice to the Buyer (a "Notice of Sale") by facsimile transmission of
--------------
such intention which shall include the name of the Holder, the number of shares
of Registrable Securities that such holder intends to sell and the Holder's
telephone and facsimile numbers. (If the Notice of Sale is actually received on
a day other than a business day, it will be deemed received on the next business
day; the date on which the Notice of Sale is received is referred to as the
"Notice Date;" the time on which the Notice of Sale is received is referred to
-----------
as the "Notice Time".) Upon receiving a Notice of Sale from a Holder, the Buyer
-----------
will notify the Holder as soon as reasonably practicable (but in no event later
than the same time as the Notice Time on the next business day following the
Notice Date) whether (i) the Buyer believes that the prospectus contained in the
Registration Statement, as then amended or supplemented, is available for
immediate use, whereupon the Buyer shall so notify the Holder(s) and the
Holder(s) will have a period of five (5) trading days following such
notification in which to sell its Registrable Securities or (ii) the Buyer
believes that it is necessary or appropriate to file a supplement or file a
post-effective amendment to the registration statement or the prospectus or any
document incorporated therein by reference or file any other report or document
so that, as thereafter delivered to the purchasers of the Registrable
Securities, the prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading (a "Prospectus Update"). If the Buyer notifies the Holder(s) that
-----------------
it believes it may be necessary or appropriate to effectuate a Prospectus Update
and the Buyer is not exercising any right it may have under Section 5.9(i) to
postpone the Prospectus Update, the Buyer will thereupon use all reasonable
efforts to effectuate such Prospectus Update as soon as reasonably possible, and
not later than three (3) business days after the Notice of Sale is received by
the Buyer, except that the Buyer will have up to an additional two (2) business
days to effectuate such Prospectus Update if, because of the particular
circumstances involved, the Buyer could not effectuate the Prospectus Update
earlier, despite all reasonable diligence. As soon as the Prospectus Update has
been effectuated, the Buyer will notify each Holder who has submitted a Notice
of Sale that
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<PAGE>
the prospectus is available for use, whereupon each such Holder will have a
period of five (5) trading days in which to sell its Registrable Securities.
(i) The Buyer will be entitled to postpone, for the minimum period
provided below, the filing of any Prospectus Update otherwise required to be
prepared and filed by it pursuant hereto if, at the time it receives a Notice of
Sale, the Buyer determines in its reasonable judgment, after consultation with
counsel, that (i) the Buyer would be required to prepare and file any financial
statements (other than those it customarily prepares or before it customarily
files such financial statements), (ii) the Buyer would be required to file an
amendment to the registration statement to describe facts or events which
individually or in the aggregate represent a fundamental change in the
information contained in the registration statement within the meaning of Item
512 of Regulation S-K promulgated under the Securities Act, or (iii) the filing
would require the premature announcement of any financing, acquisition,
corporate reorganization, contract or other material corporate transaction or
development involving the Buyer such as the Buyer reasonably determines would be
materially detrimental to the interests of the Buyer and its shareholders. The
postponement will be for the minimum period reasonably required for the Buyer to
prepare and file the necessary documents, in the case of a postponement pursuant
to (i) or (ii) above, or the minimum period reasonably required to avoid such
premature disclosure, in the case of (iii) above, and which period will not be
in excess of thirty (30) calendar days unless, because of the unusual nature of
the particular circumstances, it is necessary that the period extend beyond
thirty (30) calendar days. The Buyer will promptly give each Holder who has
submitted a Notice of Sale notice of any postponement exercised pursuant to this
Section 5.9(i). As soon as the Prospectus Update has been effectuated following
a postponement effected pursuant to this Section 5.9(i), the Buyer will notify
each Holder who has submitted a Notice of Sale that the prospectus is available
for use, whereupon each such Holder will have a period of five (5) trading days
in which to sell its Registrable Securities.
(j) The Holder(s) may not sell shares of Registrable Securities
under this Section 5.9 without first (i) complying with the Notice of Sale
requirements of Section 5.9(h)(2) and (ii) allowing the Buyer to prepare
Prospectus Updates (including any permitted postponements thereof) as set forth
in Sections 5.9(h)(2) and 5.9(i). A Holder will submit a Notice of Sale only if
in good faith it actually intends to sell the Registrable Securities within such
five (5) trading day period and with the understanding that a Notice of Sale is
to be made only on the occasion that the sale of Registrable Securities is
actually contemplated and not on a continual basis. A Holder will notify the
Buyer by facsimile transmission promptly after it has completed or otherwise
ceased sales following submission of a Notice of Sale. The Holder(s) will
provide to the Buyer all information in the Holder(s)' possession or control,
and will take all actions, as may be required in order to permit the Buyer to
comply with all applicable requirements of the Securities Act and any applicable
state securities laws.
(k) Notwithstanding anything herein to the contrary, Buyer shall
keep a registration statement effective and available pursuant to this Section
5.9 for a minimum of thirty (30) days (after taking into account any periods of
delay permitted under Sections 5.9(h) and (i) above), shall permit the Holders
to sell the Merger Shares covered by such registration statement for a minimum
of thirty (30) days, and under no circumstances shall the Buyer be required to
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<PAGE>
keep a registration statement effective and available pursuant to this Section
5.9 for greater than thirty (30) days (after taking into account any periods of
delay permitted under Sections 5.9(h) and (i) above).
(l) Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the SEC which may at any time permit the
sale of the Registrable Securities to the public without registration, Buyer
agrees to use its reasonable best efforts to:
(1) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the Merger;
(2) File with the SEC in a timely manner all reports and other
documents required of Buyer under the Securities Act and the Exchange Act; and
(3) So long as a Holder owns any Registrable Securities, to
furnish to that Holder forthwith upon request a written statement by Buyer as to
its compliance with the reporting requirements of said Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of Buyer, and such other reports and documents of Buyer as such
Holder may reasonably request in availing itself of any rule or regulation of
the SEC allowing such Holder to sell any such Registrable Securities without
registration.
5.10 Confidentiality and Invention Assignment Agreements. Company
---------------------------------------------------
Shareholders will use their reasonable best efforts to ensure that all of the
Company's current independent contractors sign Buyer's standard form of
Confidentiality and Invention Assignment Agreement as soon as practicable
following the Closing Date.
5.11 TWP Shares. On the Closing, Buyer shall issue TWP 20,483 shares
----------
of Common Stock (the "TWP Shares") in partial payment of Company's obligations
to TWP pursuant to a letter agreement dated July 1, 1999 and amended October 23,
1999, as attached hereto as Exhibit B. TWP shall be considered a "Holder" for
---------
purposes of Section 5.9 hereof and shall be subject to the rights and
obligations of Section 5.9.
ARTICLE VI
CONDITIONS TO THE MERGER
------------------------
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) No Injunctions or Restraints; Illegality. No temporary restraining
----------------------------
order, preliminary or permanent injunction or other order or prohibition issued
by any Governmental Entity preventing the consummation of the Merger shall be in
effect. In the event an injunction
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<PAGE>
or other order shall have been issued, each party agrees to use its reasonable
diligent efforts to have such injunction or other order lifted.
(b) Governmental Approval. Buyer and Company and their respective
---------------------
subsidiaries shall have timely obtained from each Governmental Entity all
approvals, waivers and consents necessary for consummation of or in connection
with the Merger and the several transactions contemplated hereby, including such
approvals, waivers and consents as may be required under the Securities Act
under state blue sky laws and California Law.
6.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, by Company:
(a) Representations, Warranties and Covenants. (i) The
-----------------------------------------
representations and warranties of Buyer in this Agreement shall be true and
correct in all material respects (except for such representations and warranties
that are qualified by their terms by a reference to materiality which
representations and warranties as so qualified shall be true in all respects) on
and as of the Effective Time as though such representations and warranties were
made on and as of such time and (ii) Buyer shall have performed and complied in
all material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by them as of the Effective
Time, and Company shall have received a certificate signed on behalf of Buyer by
the Chief Executive Officer or the President and the Chief Financial Officer to
such effect.
(b) Legal Opinion. Company shall have received a legal opinion from
-------------
Buyer's legal counsel in a form typically given in transactions of this kind and
as reasonably agreed between Buyer's counsel and Company's counsel.
(c) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the condition (financial or otherwise), properties,
assets (including intangible assets), liabilities, business, operations, results
of operations or prospects of Buyer and its subsidiaries, taken as a whole.
(d) Third Party Consents. Company shall have been furnished with
--------------------
evidence reasonably satisfactory to it of the consent or approval of those
persons and entities whose consent or approval shall be required in order for
Buyer to consummate the Merger.
(e) Employment and Non-Competition Agreements. The Buyer shall have
-----------------------------------------
executed the Employment and Non-Competition Agreement substantially in the form
attached as Exhibit 6.2(e) (the "Employment and Non-Competition Agreement") with
-------------- ----------------------------------------
Neil Sandow.
(f) Escrow Agreement. The Buyer and Escrow Agent shall have
executed the Escrow Agreement substantially in the form attached Exhibit 6.2(f).
--------------
6.3 Additional Conditions to the Obligations of Buyer. The obligations
-------------------------------------------------
of Buyer to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject
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<PAGE>
to the satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Buyer:
(a) Representations, Warranties and Covenants. (i) The
-----------------------------------------
representations and warranties of Company and the Company Shareholders in this
Agreement shall be true and correct in all material respects (except for such
representations and warranties that are qualified by their terms by a reference
to materiality which representations and warranties as so qualified shall be
true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time and (ii) Company
shall have performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by it as of the Effective Time, and Buyer shall have received a
certificate signed on behalf of Company by the Chief Executive Officer or the
President and Chief Financial Officer to such effect.
(b) Legal Opinion. Buyer shall have received a legal opinion from
-------------
Company's legal counsel, in a form typically given in transactions of this kind
and as reasonably agreed between Buyer's counsel and Company's counsel.
(c) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the condition (financial or otherwise), properties,
assets (including intangible assets), liabilities, business, operations, results
of operations or prospects of Company other than the good faith use of cash
reasonably consistent with the past practices of the Company.
(d) FIRPTA Certificate. Company shall have provided Buyer with the
------------------
FIRPTA Notification Letter.
(e) Third Party Consents. Buyer shall have been furnished with
--------------------
evidence reasonably satisfactory to it of the consent or approval of those
persons and entities whose consent or approval shall be required in order for
Company to consummate the Merger or ensure the continuation of all contracts of
Company.
(f) Resignation of Directors. The directors of the Company in office
------------------------
immediately prior to the Effective Time shall have resigned as directors of the
Surviving Corporation effective as of the Effective Time.
(g) Employment and Non-Competition Agreement. Neil Sandow shall have
----------------------------------------
executed the Employment and Non-Competition Agreement.
(h) Confidentiality Agreements. The Company Shareholders and the
--------------------------
independent contractors of Company listed on Exhibit 6.3(h) shall have entered
into Confidential Information and Invention Assignment Agreements in the Buyer's
standard form, to be effective upon the Closing.
(i) Dissenting Shareholders. No Company Shareholders shall have
-----------------------
elected to, or continue to have contingent rights to, exercise dissenter's
rights under California Law as to such shares.
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<PAGE>
(j) Escrow Agreement. The Escrow Agent and Shareholders' Agent shall
----------------
have executed and delivered to Buyer the Escrow Agreement.
(k) IPO Lockup Agreement. Each of the Company Shareholders and TWP
--------------------
shall have executed Buyer's underwriters' standard form of 180 day lockup
agreement in connection with Buyer's proposed initial public offering in the
form attached as Exhibit 6.3(k).
--------------
(l) Certificates. Each of the Company Shareholders shall have
------------
executed and delivered to the Buyer the Certificates representing all of the
shares of Company Common Stock outstanding, together with duly executed stock
powers transferring such Certificates to Buyer.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
7.1 Termination. At any time prior to the Effective Time, whether before
-----------
or after approval of the matters presented in connection with the Merger by the
shareholders of Company, this Agreement may be terminated:
(a) by mutual consent of Buyer and Company;
(b) by Company or Buyer, by giving written notice to the other
party, if the other party is in material breach of any representation, warranty,
or covenant of such other party contained in this Agreement, which breach shall
not have been cured, if subject to cure, within 15 calendar days following
receipt by the breaching party of written notice of such breach by the other
party;
(c) by Buyer, by giving written notice to the Company, if the
Closing shall not have occurred on or before November 1, 1999 by reason of the
failure of any condition precedent under Section 6.1 or 6.3 (unless the failure
results primarily from a breach by Buyer of any representation, warranty, or
covenant of Buyer contained in this Agreement or Buyer's failure to fulfill a
condition precedent to closing or other default);
(d) by Company, by giving written notice to Buyer, if the Closing
shall not have occurred on or before November 1, 1999 by reason of the failure
of any condition precedent under Section 6.1 or 6.2 (unless the failure results
primarily from a breach by the Company of any representation, warranty, or
covenant of Company contained in this Agreement or the Company's failure to
fulfill a condition precedent to closing or other default);
7.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Buyer or Company or their
respective officers, directors, shareholders or affiliates, except to the extent
that such termination results from the material breach by a party hereto of any
of its representations, warranties or covenants set forth in this Agreement;
provided
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that, the provisions of Section 5.2 (Confidentiality) and this Section
7.2 shall remain in full force and effect and survive any termination of this
Agreement.
7.3 Amendment; Waiver. The boards of directors of the parties hereto
-----------------
may cause this Agreement to be amended at any time by execution of an instrument
in writing signed on behalf of each of the parties hereto. At any time prior to
the Effective Time any party hereto may, to the extent legally allowed, (i)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (ii) waive any inaccuracies in the representations and
warranties made to such party contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
ARTICLE VIII
INDEMNIFICATION
---------------
8.1 Survival of Representations, Warranties and Covenants.
-----------------------------------------------------
Notwithstanding any investigation conducted before or after the Closing Date,
Buyer and the Company will be entitled to rely upon the other party's
representations, warranties and covenants set forth in this Agreement. The
obligations of the Buyer and the Company with respect to its representations,
warranties, agreements and covenants will survive the Closing and continue in
full force and effect for a period of six (6) months after the Closing, provided
that if a written notice is given in accordance with the Escrow Agreement before
the expiration of such six (6) month period, then (notwithstanding the
expiration of such time period) the representation, warranty or covenant
applicable to such claim shall survive until, but only for the purpose of, the
resolution of such claim.
8.2 Indemnity by Company Shareholders. From and after the Closing Date,
---------------------------------
and subject to the other provisions of this Article 8, each Company Shareholder
shall jointly and severally indemnify and hold harmless Buyer and Surviving
Corporation (an "Indemnified Person") against, and reimburse Buyer and/or
------------------
Surviving Corporation for, any liability, damage, loss, obligation, demand,
judgment, fine, penalty, cost or expense, including reasonable attorneys' fees
and expenses, and the costs of investigation incurred in defending against or
settling such liability, damage, loss, cost or expense or claim therefor and any
amounts paid in settlement thereof (collectively "Damages") imposed on or
-------
reasonably incurred by Buyer as a result of: (i) any breach of any
representation or warranty or failure to perform any covenant on the part of
Company or a Company Shareholder under this Agreement or (ii) resulting from any
claim by a Company Shareholder or former Company shareholder based upon an
ownership right or alleged ownership right of any shares of stock of the
Company, the form of consideration payable in the Merger or any actions of the
board of directors of the Company in connection with the transactions
contemplated by this Agreement.
8.3 Method of Asserting Claims. All claims for indemnification by an
--------------------------
Indemnified Person pursuant to this Article VIII shall be made in accordance
with the provisions of the Escrow Agreement.
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<PAGE>
8.4 Limitations. Notwithstanding anything to the contrary herein,
-----------
(a) the aggregate liability of the Company Shareholders for Damages
under this Article VIII shall be limited to the Escrow Shares (or a portion
thereof, as set forth in the Escrow Agreement). Except with respect to claims
based on fraud, in the event the Merger occurs, the rights of an Indemnified
Person under this Article VIII shall be limited exclusively to the right to
receive the Escrow Shares (or a portion thereof, as set forth in the Escrow
Agreement) and such indemnification shall be the exclusive remedy of the
Indemnified Persons with respect to claims resulting from or relating to any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement of the Company or the Company Shareholders contained in this
Agreement. No Company Shareholder shall have any right of contribution against
the Company with respect to any breach by the Company of any of its
representations, warranties, covenants or agreements.
(b) Subject to Section 12(a) of the Escrow Agreement, the Company
Shareholders shall have no obligation to indemnify the Indemnified Person
pursuant to Section 8.2 hereof unless and until all Damages thereunder shall
exceed $25,000 in the aggregate, at which point the Company Shareholders shall
be responsible for all Damages (including the first $25,000 of such Damages)
imposed on or incurred by the Indemnified Person. As used in this Agreement,
"Damages" shall be determined after giving effect to the receipt by the
Indemnified Person of any insurance proceeds relating to such Damages.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Buyer, to:
HealthCentral.com
6001 Shellmound Street, Suite 800
Emeryville, CA 94608
Attn: Chief Executive Officer
Facsimile No.:
Telephone No.: 510-250-2500
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<PAGE>
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Mark A. Medearis
Facsimile No.: (415) 233-8386
Telephone No.: (415) 854-4488
(b) if to Company, to:
RxList.com
with a copy to:
Richard D. Harroch
Orrick, Herrington & Sutcliffe
400 Sansome Street
San Francisco, CA 94111-3143
(415) 392-1122 (voice)
(415) 773-5759 (fax)
(c) Each such notice or other communication shall be in writing and
shall be effective (i) if given by facsimile, when such facsimile is transmitted
to the facsimile number specified in Section 9.1 (with confirmation of
transmission); or (ii) if given by any other means, when delivered at the
address specified in Section 9.1. Any party by notice given in accordance with
this Section 9.1 to the other party may designate another address (or facsimile
number) or person for receipt of notices hereunder. Notices by a party may be
given by counsel to such party.
9.2 Interpretation. The table of contents and headings contained in
--------------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. In this Agreement, any
reference to a party's "knowledge" or "to the best of its knowledge" means such
party's actual knowledge after due and diligent inquiry of officers, directors
and other employees of such party reasonably believed to have knowledge of such
matters. In particular, and not by way of limitation of the foregoing, the term
the "Company's knowledge" or words to such effect shall mean the actual
knowledge of each of the Company Shareholders after due and diligent inquiry.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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<PAGE>
9.4 Entire Agreement; Nonassignability; Parties in Interest. This
-------------------------------------------------------
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Company Disclosure Schedule and the Buyer Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms; and (b) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided.
9.5 Severability. In the event that any provision of this Agreement, or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California. Each of the parties hereto
irrevocably consents to the exclusive jurisdiction of any court located in
Alameda County in the State of California, in connection with any matter based
upon or arising out of this Agreement or the matters contemplated herein, agrees
that process may be served upon them in any manner authorized by the laws of the
State of California for such persons and waives and covenants not to assert or
plead any objection which they might otherwise have to such jurisdiction and
such process.
9.7 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
9.8 Resolution of Conflicts; Arbitration. Any dispute arising out of or
------------------------------------
related to this agreement, which cannot be resolved by negotiation, shall be
settled by binding arbitration conducted by a single arbitrator, selected by
mutual agreement of the Company Shareholders and Buyer, conducted in Alameda
County, California in accordance with the rules then in effect of the American
Arbitration Association. Judgment upon any award rendered by the arbitrator may
be entered in any court having jurisdiction. The non-prevailing party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative fee of the American Arbitration Association, and the expenses,
including without limitation, attorneys' fees and costs, reasonably incurred by
the other party to the arbitration.
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<PAGE>
IN WITNESS WHEREOF, Buyer, the Company Shareholders and the Company have
caused this Agreement to be executed and delivered by their respective officers
thereunto duly authorized, all as of the date first written above.
HEALTHCENTRAL.COM
By: /s/ C. Fred Toney
---------------------------------------------
Name: C. Fred Toney
----------------
Title: Senior Vice President and Chief
-------------------------------------
Financial Officer
-------------------------------------
RXLIST.COM, INC.
By: /s/ Neil H. Sandow
---------------------------------------------
Name: Neil H. Sandow
---------------------------------------
Title: Chief Executive Officer
--------------------------------------
COMPANY SHAREHOLDER
/s/ Neil H. Sandow and Peggy Sandow
--------------------------------------------------
Neil H. Sandow and Peggy Sandow, jointly
/s/ Edgar A. Schlenker
--------------------------------------------------
Edgar A. Schlenker
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<PAGE>
EXHIBIT 23.1b
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-88019) of our report dated September 24,
1999, relating to the financial statements of Windom Health Enterprises, Inc.
which appears in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
October 25, 1999
<PAGE>
EXHIBIT 23.1c
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-88019) of our report dated October 25,
1999, relating to the financial statements of RxList.com, which appears in such
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
October 25, 1999
