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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-27567
================================================================================
HEALTHCENTRAL.COM
(Exact name of registrant as specified in its charter)
Delaware 94-3250851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6001 Shellmound Street, Suite 800
Emeryville, CA 94608
(Address of principal executive offices, including zip code)
(510) 250-2500
(Registrant's telephone number, including area code)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No [_]
As of April 30, 2000, there were 22,703,659 shares of the registrant's
Common Stock outstanding.
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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HealthCentral.com
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 57,502,304 $ 77,654,947
Accounts receivable, net of allowance for doubtful accounts of
$85,533 and $64,609, respectively 590,373 578,314
Other receivables 202,126 67,080
Prepaid expenses 3,385,730 3,144,149
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Total current assets 61,680,533 81,444,490
Property and equipment, net 2,568,138 1,784,879
Intangible assets 30,442,493 33,763,444
Other assets 980,900 1,150,288
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Total assets $ 95,672,064 $118,143,101
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,773,187 $ 1,787,428
Accrued expenses 2,849,514 1,052,910
Deferred revenue 86,257 149,367
Current portion of obligations under capital leases 154,180 147,498
Note payable - 2,540,784
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Total current liabilities 5,863,138 5,677,987
Obligations under capital leases 250,575 292,010
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Total liabilities 6,113,713 5,969,997
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Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, $0.001 par value, 100,000,000 authorized
22,653,921 and 22,581,238 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 22,469 22,396
Additional paid-in capital 151,828,624 152,397,459
Note receivable from stockholder (405,931) (405,931)
Deferred stock compensation (3,804,316) (5,005,965)
Accumulated deficit (58,082,495) (34,834,855)
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Total stockholders' equity 89,558,351 112,173,104
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Total liabilities and stockholders' equity $ 95,672,064 $118,143,101
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HealthCentral.com
Condensed Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
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Revenues:
eCommerce $ 702,214 $ -
Advertising 336,725 27,909
Content subscription and license 262,716 -
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Total revenues 1,301,655 27,909
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Operating and other expenses:
Cost of eCommerce revenues 1,593,088 -
Content and product development 2,812,661 166,837
Sales and marketing 15,143,525 30,000
General and administrative 2,060,773 88,728
Amortization of intangible assets 3,320,951 -
Stock compensation 587,440 297,150
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Total operating and other expenses 25,518,438 582,715
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Loss from operations (24,216,783) (554,806)
Interest income, net 969,143 5,245
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Net loss attributable to common stockholders $(23,247,640) $ (549,561)
============ ==========
Basic and diluted net loss per share $ (1.03) $ (0.12)
============ ==========
Shares used in computing basic and diluted net loss per share 22,597,059 4,689,906
============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HealthCentral.com
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
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Cash flows from operating activities:
Net loss $(23,247,640) $ (549,561)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock compensation expense 587,440 297,150
Depreciation and amortization expense 3,511,100 -
Changes in assets and liabilities:
Accounts and other receivables (12,060) (4,343)
Prepaid expenses and other assets (194,360) (19,090)
Accounts payable 985,759 (28,482)
Accrued expenses 1,879,327 (31,729)
Deferred revenue (63,110) -
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Net cash used in operating activities (16,553,544) (336,055)
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Cash flows from investing activities:
Purchase of property and equipment (973,409) -
Payments to related party (2,623,507) (520,195)
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Net cash used in financing activities (3,596,916) (520,195)
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Cash flows from financing activities:
Proceeds from stock option exercises 32,569 -
Payments on capital leases (34,752) -
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Net cash used in financing activities (2,183) -
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Net decrease in cash and cash equivalents (20,152,643) (856,250)
Cash and cash equivalents at beginning of period 77,654,947 1,091,552
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Cash and cash equivalents at end of period $ 57,502,304 $ 235,302
============ ==========
Supplemental disclosures of cash flows information:
Cash paid for interest $ 102,822 $ -
============ ==========
Supplemental disclosures of non-cash investing and financing
activities:
Deferred stock compensation $ (614,209) $1,302,860
============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HEALTHCENTRAL.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
HealthCentral.com (the "Company") provides original, up-to-date and
personalized online healthcare information and sells health-related products to
consumers through the HealthCentral.com network of websites. In addition, the
Company enables healthcare institutions to provide healthcare information to
their patients and consumers through the Company's enterprise web services
business.
Through the HealthCentral.com network, the Company derives revenues from
advertisements and the online sale of health-related products, or eCommerce.
Through the HealthCentral.com enterprise web services, the Company derives
revenues from annual license fees for applications, content, hosting and
maintenance services, as well as from development fees for customization
services. The Company operates in one business segment.
Note 2 Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's report to the
Securities and Exchange Commission on Form 10-K, as amended, for the year ended
December 31, 1999. Operating results for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 2000. The unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for financial statements.
Note 3 Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A to defer for one quarter
the effective date of implementation of SAB No. 101 with earlier application
encouraged. The Company is required to adopt SAB 101 in the second quarter of
fiscal 2000. The Company does not expect the adoption of SAB 101 to have a
material effect on its financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44
clarifies the application of Opinion 25 for (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
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FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000.
Management believes that the impact of FIN 44 will not have a material effect on
the financial position or results of operations of the Company.
Note 4 Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards 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 attributable to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common stock if their effect is anti-dilutive. Potential common stock
consists of restricted common stock, and incremental common shares issuable upon
the exercise of stock options and warrants.
The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the periods indicated:
Three Months Ended
March 31, 2000 March 31, 1999
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Series A Convertible preferred stock - 1,012,500
Series B Convertible preferred stock - -
Convertible preferred stock warrants - 486,000
Convertible common stock warrants 86,145 -
Outstanding common stock options 3,013,831 853,657
Common shares subject to repurchase 312,500 11,958
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Total 3,412,476 2,364,115
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Note 5 Commitments and Contingencies
On March 15, 2000, the Company signed a definitive agreement to merge with
Vitamins.com. Under the terms of the agreement, the Company will acquire all the
shares of capital stock of Vitamins.com in exchange for up to $103,500,000 in
the Company's common stock. The exchange ratio will be determined by dividing
the lesser of:
. $103,500,000, less certain transaction expenses over $100,000 incurred by
Vitamins.com, divided by the average closing price of the Company's common
stock for the ten days preceding the business day prior to the merger; or
. the number of shares of the Company's common stock outstanding immediately
prior to the merger, less one share,
by the number of shares of Vitamins.com outstanding immediately prior to the
effective time of the merger. Under the terms of the agreement, the number of
shares of the Company's common stock that Vitamins.com stockholders may
receive in exchange for their shares is capped so that such stockholders may
not receive more than the number of shares of the Company's common stock
outstanding immediately prior to the closing of the merger, less one.
The transaction is expected to be recorded using the pooling of interest method
of accounting and is to be a tax-free reorganization under Section 369 of the
Internal Revenue Code of 1986, as amended. The merger is subject to regulatory
approval and the approval of the Company's stockholders.
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Note 6 Subsequent Events
On April 11, 2000, the Company acquired the exclusive license rights to
market and sell "Dr. Dean Edell Eyewear" through 2006. Payment for the product
license was $2.7 million in cash. Simultaneously, the Company entered into a
license and distribution agreement with Cable Car Eyewear to sell the Dr. Dean
Edell Eyewear to brick and mortar pharmacies and grocery chains. This
agreement requires minimum purchases of products from the Company for the years
2000 through 2006 starting at $5 million in 2000 and increasing each subsequent
year. In addition, the Company entered into a supply agreement with Invision
Optical Products through 2006 for Invision to supply the Company with the Dr.
Dean Edell Eyewear products.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included elsewhere in this
Form 10-Q. This discussion and analysis and other parts of this Form 10-Q
contain forward-looking statements that involve risks, uncertainties and
assumptions These forward-looking statements are based on our current
expectations and are not guarantees of future performance. Actual results may
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including but not limited to those discussed in the
section entitled "Factors That May Affect Future Results and Market Price of
Stock." The cautionary statements made in this Report should be read as being
applicable to all related forward-looking statements wherever they appear in
this Report. Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis only as of the date
hereof. We undertake no obligation to revise or publicly release the results of
any revision to these forward-looking statements.
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 company providing website development and
consulting services to healthcare institutions, entered into a License and
Management Agreement under which we 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
August 1999, we acquired Windom Health, and in October 1999 we acquired
HealthCentralRx.com, an online drug store, and RxList.com, an online
pharmaceutical database company.
We recognize revenues for sales of over-the-counter and health and beauty aid
products, net of discounts, when products are shipped to customers. Further, we
recognize commissions for the use of our website from sales made by Medi-Mail
for all prescription drugs. Our online drug store, HealthCentralRx.com, is
responsible for all refunds relating to sales where a customer is not satisfied
with the products received. We provide an allowance for returns in the period
when the sales are made. We retain the ultimate credit risk for all sales made
through Bergen Brunswig and Medi-Mail.
We derive revenues from advertising activities consisting of short-term
banner advertisements. As of March 31, 2000, we had not entered into any barter
arrangements. We record advertising revenues in the
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period the advertising impressions are delivered to customers. We currently use
an outside vendor, DoubleClick, to solicit potential advertisers, to serve the
ads to HealthCentral.com's website and to bill and collect for these services.
This outside vendor provides monthly reports indicating impressions delivered,
the amount billed for advertising services and the related administrative fee.
We record advertising revenues, as reported by the outside vendor, net of this
administrative fee because we bear no collection risk for the gross amount of
the advertising fees. Our advertising contracts do not guarantee a minimum
number of impressions to be delivered.
We enter into exclusive sponsorship agreements and in the future intend to
provide customers with enhanced promotional opportunities and customized co-
branded web pages. We recognize advertising revenues ratably over the term of
the sponsorship agreement. Costs incurred in connection with sponsorship
agreements will be included in content and product development expense.
We also act as an application service provider, which means that we design,
host and maintain private label websites for healthcare institutions. Revenues
derived from our application service contracts principally consist of license
fees for website development applications, consulting fees from custom website
development and hosting, and website maintenance fees. Our license, hosting and
maintenance fees are recognized ratably over the term of the license, generally
between 12 and 24 months. For consulting projects, revenues are recognized at
the time services are rendered based on charges for time and materials.
On March 15, 2000, we signed a definitive agreement to merge with
Vitamins.com, a retailer that provides vitamins, minerals and other nutritional
supplements, as well as related health and wellness products and information.
We intend to integrate Vitamins.com into the HealthCentral.com network of
websites. Under the terms of the agreement, we will acquire all the shares of
capital stock of Vitamins.com in exchange for up to $103,500,000 in our common
stock. The stock-for-stock acquisition is expected to be recorded using the
pooling of interest method of accounting and is to be a tax-free reorganization
under Section 369 of the Internal Revenue Code of 1986, as amended. The merger
is expected to close in the second quarter of 2000 and is subject to regulatory
approval and the approval of our stockholders, among other customary closing
conditions. We have agreed to advance amounts in cash, up to a maximum of
$3,000,000, to enable Vitamins.com to operate in the ordinary course of business
until the effective time of the merger. It has been agreed that each advance
will be represented by a promissory note payable to us at an annual interest
rate equal to the Wells Fargo prime rate plus 3%. If the merger is not
consummated, Vitamins.com has agreed to repay all promissory notes payable to us
on the earlier of one year after the date of each promissory note or upon the
closing of a financing pursuant to which Vitamins.com raises at least
$10,000,000. As of May 5, 2000, we had advanced Vitamins.com $1,500,000, all of
which was advanced during the second quarter of 2000. If the contemplated
merger is completed, we expect to incur significant additional expenses in
integrating Vitamins.com into the HealthCentral.com network and in expanding the
operational capabilities of the combined company.
We incurred a net loss of approximately $23.2 million for the quarter ended
March 31, 2000 compared to $550,000 for the quarter ended March 31, 1999. We
anticipate incurring additional operating losses for the foreseeable future.
Results of Operations
Quarter Ended March 31, 2000 and 1999
Revenues. Revenues consist of eCommerce sales of over-the-counter and health
and beauty aid products and prescription drugs, advertising revenues from banner
advertisements and sponsorship agreements and institutional revenues derived
from designing, hosting and maintaining private label websites for healthcare
institutions. We acquired HealthCentral Enterprise Web Services, Inc.
(formerly Windom Health Enterprises), in August 1999 and HealthCentralRx.com
(formerly ePills.com) in October 1999 in order to implement our institutional
and eCommerce strategies. Total revenues were $1,302,000
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for the quarter ended March 31, 2000 compared to $28,000 for the quarter ended
March 31, 1999. Revenue in the quarter ended March 31, 2000 consisted of
$702,000 in eCommerce revenues, $337,000 in advertising revenues, and $263,000
in institutional sales revenues. In 1999, revenue consisted solely of
advertising revenues.
Cost of eCommerce Revenues. Cost of eCommerce revenues consists of
merchandise, shipping and fulfillment charges. Total cost of eCommerce revenues
was $1.6 million for the quarter ended March 31, 2000. In the quarter ended
March 31, 1999, we did not generate eCommerce sales and there was no cost of
eCommerce revenues.
Content and Product Development. Content and product development expenses
consist primarily of personnel costs for engineering and production personnel,
expenditures related to editorial content, payments to editorial consultants,
server maintenance costs, and software development and operations expenses.
Content and product development expenses increased to $2.8 million for the
quarter ended March 31, 2000 compared to $167,000 for the first quarter of 1999.
The increase in expenses for the quarter ended March 31, 2000 was primarily
attributable to $2.1 million in production and engineering staff costs as
compared to $74,000 in production and engineering costs during the first quarter
of 1999. We expect content and product development expenses to increase
substantially in the future as we enhance our websites by developing and
licensing additional content.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising, public relations and personnel expenses. Sales and marketing
expenses were $15.1 million for the quarter ended March 31, 2000 compared to
$30,000 for the first quarter of 1999. The increase in the quarter ended March
31, 2000 was primarily attributable to $13.3 million in advertising and public
relations expenses, including payments to AltaVista and America OnLine. In
1999, these expenses consisted primarily of sales and marketing personnel
expenses. Future sales and marketing expenses will decrease as a result of the
lowering of our discretionary advertising expenses and the restructuring of our
payments to AltaVista to reduce our fixed payments for the balance of the
agreement's term from $26.4 million to $7.4 million.
General and Administrative. General and administrative expenses consist
primarily of personnel costs and related costs for general corporate functions,
including executive management and finance fees for legal, audit and other
professional services. General and administrative expenses were $2.1 million for
the quarter ended March 31, 2000 and $89,000 for the first quarter of 1999.
These increases were primarily due to $1.8 million in personnel-related costs,
and legal and accounting expenses incurred to support the growth of our
business. General and administrative expenses in the first quarter of 1999
consisted of $41,000 in personnel expenses. We expect general and administrative
expenses to increase in the future as we hire additional personnel and incur
additional costs related to the growth and operations as a public company. In
addition, we expect to expand facilities and incur associated expenses to
support our anticipated growth.
Stock Compensation. For the quarter ended March 31, 2000, we amortized
$587,000 in stock compensation expense compared to $297,000 for the first
quarter of 1999. Deferred stock compensation is being amortized over the
respective vesting periods of the outstanding options which is generally four
years.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through our initial
public offering, the sale of preferred stock and the issuance of notes payable.
As of March 31, 2000, we had $57.5 million in cash and cash equivalents. Net
cash used in financing activities for the quarters ended March 31, 2000 and 1999
was $2,000 and $0, respectively.
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Net cash used in operating activities was $16.6 million for the quarter ended
March 31, 2000 and $336,000 for the first quarter of 1999. Net cash used in
operating activities in the quarter ended March 31, 2000 was comprised primarily
of a $23.2 million net operating loss, increases of $206,000 in prepaid expenses
and receivables, and $63,000 in deferred revenue during the first quarter of
2000. This was partially offset by $587,000 in non-cash stock compensation
expense, $3.5 million in depreciation and amortization of fixed and intangible
assets, and an aggregate increase of $2.9 million in accounts payables and
accrued expenses during the first quarter of 2000. In comparison, net cash used
in operating activities in the quarter ended March 31, 1999 was comprised
primarily of a $550,000 net operating loss and an increase of $23,000 in prepaid
expenses and receivables. This was offset by stock compensation expense of
$297,000 and an aggregate decrease in accounts payable and accrued liabilities
of $60,000.
Net cash used in investing activities was $3.6 million for the quarter ended
March 31, 2000 and $520,000 for the first quarter of 1999. Cash used in
investing activities in the quarter ended March 31, 2000 was primarily
attributable to cash paid related to the acquisition of RxList. In addition, we
purchased $973,000 in property and equipment during the quarter ended March 31,
2000. Cash used in the first quarter of 1999 was related to bridge loans made to
Windom Health.
Although we have no material commitments for capital expenditures, we
anticipate substantial increases in capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.
Our capital requirements depend on numerous factors, including market
acceptance of the HealthCentral.com network, and the resources we allocate to
integrating acquisitions, building the network, marketing and selling products
and services and promoting the HealthCentral.com brand name. We have experienced
substantial increases in expenditures since inception, consistent with growth in
operations and personnel, and we anticipate that expenditures will continue to
increase for the foreseeable future. We currently expect to use our existing
cash balances to fund website and content development, infrastructure
improvements and operating losses and to integrate existing acquisitions.
Additionally, we are continuing to evaluate possible acquisitions or investments
in complementary businesses, technologies, services or products. We currently
believe that our available cash, cash equivalents and revenues generated from
operations will be sufficient to meet our anticipated needs for at least the
next twelve months. We may need additional cash sooner than currently
anticipated and/or may need to raise additional capital in order to fund a more
rapid expansion; to develop new or enhanced services or products; to respond to
competitive pressures; to enter into significant partnerships; or to acquire or
invest in complementary businesses, technologies, services or products. In
addition, in order to meet long term liquidity needs, we may need to raise
additional funds, establish a credit facility or seek other financing
arrangements, although additional funding may not be available on favorable
terms or at all.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A to defer for one quarter
the effective date of implementation of SAB No. 101 with earlier application
encouraged. We are required to adopt SAB No. 101 in the second quarter of 2000.
We do not expect the adoption of SAB No. 101 to have a material effect on our
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-
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compensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000.
Management believes that the impact of FIN 44 will not have a material effect on
the financial position or results of operations of the Company.
Factors That May Affect Future Results and Market Price of Stock.
You should carefully consider the following risk factors, in addition to the
other information in this report. We believe the following risks and
uncertainties are material to our business and our industry.
Risks Related to Our Business and Our Industry
We only launched our HealthCentral.com website in November 1998 and our
HealthCentralRx.com website in September 1999, and thus have a limited operating
history.
We have a limited operating history and are subject to 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,
such as Healtheon/WebMD (which has announced an acquisition of
OnHealth.com), drkoop.com, drugstore.com and planetRx;
. gain advertising and sponsorship revenue from vendors of health-related
products and services;
. implement a successful eCommerce strategy through our HealthCentralRx.com
subsidiary;
. create and maintain successful strategic alliances with provider groups,
content providers and other third parties;
. develop our enterprise web services business;
. develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
We had an accumulated deficit of $58.1 million at March 31, 2000 and expect our
expenses to increase, and thus we may never become profitable.
We expect our operating expenses to substantially exceed revenues for the
foreseeable future, and we may never become profitable. Since our inception, we
have had very limited revenues and have incurred net losses in each year. While
we are unable to predict accurately our future operating expenses, these
expenses could increase, as we, among other things:
. make payments to both our existing and future business partners
to gain advertising revenue, traffic or otherwise expand our
HealthCentral.com network;
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. promote our HealthCentral brand;
. develop or acquire health-related content, technologies or other
complementary businesses;
. hire additional employees;
. develop and expand our systems infrastructure and support functions; and
. offer product promotions.
A failure to build our brand names quickly and significantly will result in
lower than expected revenues.
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 Healtheon/WebMD (which has announced an
acquisition of OnHealth.com), drkoop.com, drugstore.com and planetRx may have
stronger name recognition than us. The increasing competition in our markets
makes building a brand more expensive and difficult than it otherwise would be.
To increase brand recognition, we may 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 intend to market our HealthCentralRx.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 HealthCentralRx.com brand.
Consumer protection privacy concerns may result in a decrease in traffic or
decrease in revenues.
Our network of websites captures information regarding our users in order to
personalize our websites for them and to assist advertisers in targeting their
advertising campaigns to particular demographic groups. Any changes in privacy
policies and practices, whether self-imposed or imposed by government
regulation, could affect the way in which we conduct our business, especially
those aspects that involve the collection, use and access to personal
identifying information. For example, limitations on or elimination of the use
of cookies could limit our ability to personalize our website for the user, and
could limit the effectiveness of the targeting of advertisements, both of which
could impair our ability to generate advertising revenue. Any perception of
security and privacy concerns by the public, whether or not valid, could inhibit
market acceptance of our network of websites. Privacy concerns may cause users
not to visit our websites or, if they visit, not to provide the personal data
necessary to target our content and advertising.
In response to a verbal request by the FTC, in February 2000, we voluntarily
met with the staff of the FTC and discussed privacy policies and practices. We
have provided and continue to provide additional information regarding our
privacy policy to the FTC in response to a more formal request from the FTC
after our meeting. The FTC may have follow-up questions for us regarding these
issues. There can be no assurance that either we, any other ehealth company or
the ehealth industry in general will not become either a target of or a witness
in, a formal FTC investigation or state agency or private party claim regarding
privacy issues, any of which could be expensive and time-consuming, could divert
the attention of senior management from our core business and could harm our
business.
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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. Dr. Edell is not
contractually obligated to provide content or drive traffic to our network, and
he is not compensated for such activity. 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.
In addition, under his agreement with Premiere Radio Networks, the syndicator
of his radio show, 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. Although we maintain key person life
insurance for Dr. Edell, his role in our company is sufficiently critical that
the insurance would not adequately protect us in the event of his death.
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,
content and product providers, institutional clientele and other sources of
online revenue. We compete with other dedicated healthcare websites, such as
Healtheon/WebMD (which has announced an acquisition of OnHealth.com),
drkoop.com, and DiscoveryHealth.com. In addition, we compete with online portal
companies, healthcare providers and payors and consumer affinity groups.
Through HealthCentralRx.com, we compete with:
. other online drug stores, such as drugstore.com and planetRx,
. pharmacy benefit managers, or PBMs, that sell pharmaceuticals directly,
. traditional brick-and-mortar drug stores, including drug store chains,
supermarkets, mass market retailers and independent drug stores, many of
whom have begun or have announced their intention to offer online services,
and
. hospitals, HMOs and mail order prescription drug providers, many of whom
are beginning to offer 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
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. larger production and technical staffs.
We believe that we may face a significant competitive challenge from our
online competitors forming alliances with brick and mortar drug stores, HMOs,
PBMs or other competitors, which could both strengthen our competitors and/or
preclude us from entering into similar relationships with their partners. For
instance, drugstore.com has formed an alliance with RiteAid, and planetRx has
formed a strategic alliance with Express Scripts, Inc. Increased competition
could result in price reductions, fewer customer orders, reduced margins and
loss of, or failure to build, market share.
In the market for enterprise web 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 and Healtheon/WebMD.
Healthcare participants may determine that our tools and website development and
maintenance services are inferior to those of our competitors, that our product
mix is inappropriate for their needs, or that it would be better for them to
independently develop and manage their own websites.
We need to generate substantial revenues from our eCommerce business for
healthcare products, this market is unproven, and we have limited experience in
it.
The healthcare eCommerce market is unproven.
Our rate of revenue growth could be significantly less than that of online
merchants in other industries because 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.
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, or additional steps required
to obtain reimbursement from, insurance carriers or pharmacy benefit
managers;
. lack of consumer awareness of our online drug store;
. longer delivery times for Internet orders, delays in responses to customer
inquiries and/or difficulties in returning products, as compared to brick-
and-mortar drug stores;
. shipping charges and problems related to shipping, such as product damage
or failure to ship the correct order;
. lack of face-to-face interaction with a pharmacist or other drug store
personnel;
. failure to meet shoppers' pricing expectations for prescription drugs,
over-the-counter medicines and health and beauty products;
. customer concerns about security and privacy with regard to transmitting
personal health information over the Internet; and
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. inability to meet immediate delivery or pick-up requirements for
prescriptions for acute conditions.
We have limited experience in the healthcare eCommerce market.
Our HealthCentralRx.com website was launched in September 1999, and thus we
have limited experience to date in the sale of healthcare products and services
online. We may need to expand the breadth and depth of our product offerings,
which could be both expensive and time-consuming.
We are dependent on Bergen Brunswig and Medi-Mail for fulfillment of our orders
and access to pharmacy benefit managers.
In August and September 1999, HealthCentralRx.com entered into a series of
agreements with Bergen Brunswig and its Medi-Mail subsidiary relating to the
fulfillment of orders placed on our HealthCentralRx.com website for healthcare
products and access to the PlusCare Provider Network of pharmacy benefit
managers, or PBMs. This fulfillment mechanism is complex and will require us to
develop reporting systems and integrate Bergen Brunswig's fulfillment systems
with our web-based systems. Developing and integrating operational systems is
technically difficult and may be delayed, which could delay our receipt of
revenues and diminish customer acceptance. Because Bergen Brunswig is our
exclusive fulfillment partner for some products, any failure by Bergen Brunswig
to supply sufficient quantities and types of products in a timely manner could
result in customer dissatisfaction and harm our eCommerce business. In addition,
these agreements expire in August 2002 and September 2004, 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 our relationship with Bergen
Brunswig, customer perceptions, revenues and our ability to execute our
eCommerce strategy may be jeopardized.
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.
Many PBMs are in the early stages of evaluating the impact of the Internet and
online pharmacies on their businesses. Thus, 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, Bergen Brunswig may 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.
Because we need to make substantial cash outlays, 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 currently expect to be able to meet our anticipated cash needs for the
next twelve months out of existing cash and cash equivalents and revenues from
operations. We may enter into additional business relationships that require us
to make additional cash payments.
The sale of additional equity or convertible debt securities could result in
dilution to our stockholders. Any debt securities issued could have rights
senior to holders of common stock and could contain
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covenants that would restrict our operations. Any additional financing may not
be available in amounts or on terms acceptable to us, if at all.
We are currently obligated to pay AltaVista and America Online combined
approximately $16.2 million in cash over the next two years.
Our arrangements with AltaVista and America Online require us to make payments
to them. Under our restructured payments to AltaVista, we are obligated to pay
approximately $7.4 million in cash to AltaVista over a period ending December
31, 2001 (see "Other Information"). Incentive payments could increase these
amounts. In addition, we are obligated to pay $8.8 million in cash to America
Online over the period ending August 2001. As of April 30, 2000, $11.3 million
has been paid to these two companies.
In general the purpose of these agreements is to drive traffic to our websites
and to generate revenue from that traffic. There is no guarantee either that
traffic in anticipated volumes will be generated from these arrangements, or if
such traffic does materialize, that the anticipated revenues will result. If we
do not receive the revenues we currently expect from these relationships, the
substantial amounts we are paying to AltaVista and America Online may not be
recovered.
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. 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 HealthCentralRx.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. We also plan to post product information
on our HealthCentralRx.com and RxList.com websites, which creates additional
potential for claims to be made against us. 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.
Prescription orders are currently 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 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 HealthCentralRx.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
HealthCentralRx.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 health-related products we sell
through HealthCentralRx.com.
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
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case of some product liability claims. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages and
could seriously damage our reputation.
Extensive and changing government regulation of the healthcare and pharmacy
industries is expensive to comply with and exposes us to the risk of substantial
government penalties.
Numerous state and federal laws regulate our health business covering areas
such as:
. storage, transmission and disclosure of medical information and healthcare
records;
. 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;
. advertising drugs, cosmetics and nutritional supplements; and
. state insurance regulations.
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.
In order to gain market share, we need to continue to provide unique content,
which is expensive and difficult to obtain.
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 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, it could delay
market acceptance of the HealthCentral.com network.
If consumers perceive our healthcare content to be influenced by our
relationships with advertisers or health-related product vendors, our reputation
could suffer.
We receive sponsorship revenues from advertisers of health-related products on
our websites and revenues from sales of health-related products. However, our
success in attracting and retaining users to our websites depends on our being a
trusted source of independent health-related information. There has been recent
press attention focused on possible conflicts of interest within the online
healthcare information industry. Any consumer perception that our editorial
content is influenced by our commercial relationships could harm our reputation
and business.
We rely on relationships with other Internet companies, which are short-term or
non-exclusive, to drive traffic and build brand awareness.
We have entered into agreements with third parties such as Microsoft, NetPulse
Communications, Snap.com and Yahoo! to provide them with content in exchange
for either impressions or traffic. Many of
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our current agreements are, or possible future agreements may be, short-term,
non-exclusive or may be terminated at the convenience of either party. We may be
unable to develop and maintain these relationships and generate sufficient
traffic and revenues from them. In addition, these third parties may never
achieve market acceptance themselves.
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.
Any systems problems in the HealthCentral.com network, including our
HealthCentralRx.com online drug store, such as system disruptions, slower system
response times, and degradation in customer service levels, could result in
negative publicity, cause our users to use our competitors' services, and reduce
our revenues. Additionally, if we fail to meet the website performance standards
in our contracts with our institutional clients, they may terminate their
agreements, require refunds or fail to renew contracts with us, any of which
could decrease our institutional revenues.
We have experienced system interruptions in the performance of our
HealthCentralRx.com online drug store. We are in the process of upgrading the
eCommerce software platform. To the extent we do not effectively address the
scalability and performance of our eCommerce software platform, our eCommerce
business could suffer. We are also vulnerable to breaches in our security and
natural disasters. 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. We have no formal disaster recovery
plan, and our insurance may not adequately compensate us for losses that may
occur due to systems interruptions.
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, 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; 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 relationships 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.
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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. Widespread
adoption of filter software, which limits or prevents advertising from being
delivered to an Internet user's computer, 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. In addition,
advertising and product claims of companies marketing or 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 as a result of a variety of
factors, including:
. shifts in user traffic levels on HealthCentral.com and HealthCentralRx.com
and associated costs;
. shifts in the rate at which visitors to our HealthCentralRx.com website
convert into customers;
. demand for our products and mix of products sold;
. shifts in the nature and amount of publicity about us or our competitors;
. changes in our pricing policies or the pricing policies of our competitors;
. changes in the frequency and size of repeat purchases by customers of our
online drug store;
. shifts in our ability, and that of our fulfillment partners, Bergen
Brunswig and Medi-Mail, to ensure sufficient product supply;
. seasonal patterns of spending by advertisers and sponsors and trends in
advertising rates;
. long sales cycles and delays in website development for institutional
projects;
. costs related to acquisitions of businesses or the timing of payments to
our strategic partners;
. fluctuations in expected revenues from our strategic relationships;
. changes in reimbursement policies and practices of pharmacy benefit
managers and other third party payors;
. systems problems, such as disruptions, slower system response times and
degradation in customer service; and
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. changes in government regulation.
If we do not meet the expectations of investors and analysts in any given
quarter, our stock price could decline.
Our recent growth has strained our existing personnel and other resources, and
any failure to manage this growth could increase our operating costs.
We have experienced and are currently experiencing a period of significant
growth, which has placed, and will continue to place, a significant strain on
our resources. Any failure to successfully manage our growth could distract
management attention and result in our failure to execute on our business plan.
As a result of the acquisition of our online drug store and our impending
acquisition of Vitamins.com, we need to continue to assimilate the operations of
HealthCentralRx.com, and will need to assimilate the operations of Vitamins.com,
into our operations. Our senior management has no prior operational experience
in the online drug store business. In order to manage this growth effectively,
we expect to implement new transaction-processing, operational, reporting, and
financial systems, expand and train our employee base, and maintain close
coordination among our technical, finance, marketing, sales and editorial
staffs. We also need to devote significant management time and financial
resources to website and content development, strategic relationships,
technology infrastructure and operational infrastructure.
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
HealthCentralRx.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 could be severely harmed. We
need to hire additional personnel in virtually all operational areas, including
engineering, sales and marketing, production, research and development, customer
service and administration. Competition for personnel throughout the
Internet and healthcare industries is intense. 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 private label websites for healthcare institutions
could adversely affect our revenue growth.
We expect that the sales process for our institutional web site development
business will be lengthy and will involve a significant business and technical
evaluation and possible 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 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.
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We currently hold the Internet domain names healthcentral.com,
peoplespharmacy.healthcentral.com, healthcentralrx.com and rxlist.com. 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, healthcentralrx.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 brands, 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. Any confusion that may
result from information on or related to any websites with domain names relating
to our brands could impair both our ability to capitalize upon our brands and
our marketing strategy.
We may not achieve the expected benefits of the acquisition of
HealthCentralRx.com, and the integration of HealthCentralRx.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 HealthCentralRx.com
operations or fund or accomplish the execution of our eCommerce business plan.
The integration of HealthCentralRx.com into our business may strain our existing
technology and operations systems as we continue to assimilate
HealthCentralRx.com into our existing operations. In addition, several key
HealthCentralRx.com employees have ceased employment with us, and additional
HealthCentralRx.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 acquisitions of three companies, Windom Health,
HealthCentralRx.com and RxList.com, and have signed an agreement to acquire
Vitamins.com, and we have recently completed the acquisition of Dr. Dean Edell
Eyewear license. 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 integration risks as discussed above
with respect to the integration of the business of HealthCentralRx.com. In
addition, we may face additional risks, including but not limited to:
. expenses related to funding the operation, development and/or integration
of complementary businesses;
. expenses associated with the transactions;
. additional expenses associated with amortization of acquired intangible
assets;
. the difficulty of maintaining uniform standards, controls, procedures and
policies;
. the impairment of relationships with employees and customers as a result of
any integration of new management personnel;
. the potential unknown liabilities associated with acquired businesses; and
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. the issuance of convertible debt or equity securities, which could be
dilutive to our existing stockholders.
Our failure to adequately address these issues could harm our business. See
also "Risks Related to our Merger with Vitamins.com."
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. Any
breach of security from a physical break-in, computer virus, programming error
or attack by a third party or an unexpected natural disaster could subject us to
a lawsuit. We have engaged outside security consultants to
conduct a security audit of our systems. 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.
Any failure to protect our intellectual property rights could impair our ability
to establish our brands.
If we fail to adequately protect our proprietary rights in our content,
technology, products and services, 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 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. Unauthorized parties may attempt to copy aspects of our websites or
to obtain and use information that we regard as proprietary. Our competitors or
others may adopt service names similar to ours, thereby impeding our ability to
build our brand identity and potentially confusing consumers. We also rely on a
variety of technologies that are licensed from third parties, including our
database and Internet server software. These third-party licenses may not be
available to us on commercially reasonable terms in the future.
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 information contained in 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. 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 information regarding 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 various causes of action based on the nature and content of
materials that we publish. 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
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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, none of which we edit.
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 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.
Our executive officers and directors, and their respective affiliates own
approximately 35.4% of our outstanding common stock, based on shares outstanding
as of April 30, 2000. 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 stockholders view as
favorable.
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 purchase health-related
products online 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 important channel for the delivery of
healthcare information, products and services. 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, or delays in the adoption of new
standards required to handle increased levels of Internet activity.
If we do not respond to rapid technological changes affecting the Internet
healthcare industry, our products and services could become obsolete.
Any failure to respond to technological advances and emerging industry
standards could impair our ability to attract and retain customers. As the
Internet and online commerce industry evolve, we must 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.
Governmental regulation of the Internet could increase our operating costs.
We receive confidential medical and credit card information from our customers
and website visitors. Laws and regulations directly applicable to communications
or commerce over the Internet are becoming more prevalent, and compliance with
any new laws could increase our operating expenses. 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.
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
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<PAGE>
abroad, that may impose additional burdens on companies conducting business
online and, in particular, on companies that maintain medical or pharmaceutical
records.
A number of proposals have been made to impose additional taxes on the sale of
goods through the Internet. Taxation of online commerce could impair the growth
of our eCommerce business and add to the complexity of our transaction
processing system.
The health industry is extremely dynamic and constantly changing, and thus our
business may be affected by pricing pressures and healthcare reform initiatives.
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. Healthcare 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.
Our stock price, like that of many companies in the Internet industry, may be
volatile, and an active trading market for our stock may never develop.
We expect that the market price of our common stock will fluctuate as a result
of variations in our quarterly operating results. These fluctuations may be
exaggerated if the trading volume of our common stock is low. If an active
trading market does not develop for our stock, investors may have difficulty
selling shares of our stock at a desirable price, or at all. Investors may not
be able to resell their shares at or above the initial public offering price.
In addition, due to the technology-intensive and emerging nature of our
business, the market price of our common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant strategic partner or media personality to
our network; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
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.
Future sales of shares by existing stockholders could affect our stock price.
All of the 7,500,000 shares of common stock sold in the initial public
offering on December 7, 1999 are freely tradable. The remaining 15,203,659
shares of our common stock, based on shares outstanding as of April 30, 2000,
are subject to lock-up agreements of varying lengths with Lehman Brothers or us
and may only be sold upon the expiration of these lock-up agreements. All such
shares are "restricted securities" within the meaning of Rule 144, which means
that they may only be sold in the public market if registered or if they qualify
for an exemption from registration promulgated under the Securities Act. Subject
to restrictions with respect to the amount of shares that may be sold by any one
person, the manner in which such shares may be sold, notice and public
information limitations, approximately one-third of these restricted securities
will be eligible for sale in June 2000, and the remaining restricted securities
will be eligible for sale at various times between June and December 2000. In
addition, beginning in June 2000, some stockholders have the right, subject to
limitations, to require us to register their shares for sale on the
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public market. Should our stockholders sell substantial amounts of our common
stock in the public market, 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.
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 and bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include the following:
. establishing a classified board in which only a portion of the total board
members will be elected at each annual meeting;
. authorizing the board to issue preferred stock;
. prohibiting cumulative voting in the election of directors;
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Management has broad discretion over how the proceeds of our initial public
offering are being used.
Our management has broad discretion with respect to the use of the net
proceeds from our initial public offering. Presently, anticipated uses of the
proceeds of our initial public offering include making substantial cash payments
under various contractual commitments and funding working capital, sales and
marketing, website and content development, infrastructure improvements,
operating losses, and potential acquisitions and strategic alliances.
Some shares in our initial public offering may have been offered in violation of
the Securities Act of 1933, which could give purchasers of these shares the
right to seek refunds or damages.
Prior to the effectiveness of our registration statement for our initial
public offering, Lehman Brothers sent a letter and other written materials,
accompanied by a preliminary prospectus, to approximately 114 employees,
consultants and directors of HealthCentral.com whom we had designated as
potential purchasers of up to 90,900 shares of common stock in a directed share
program in connection with the initial public offering. We then sent a follow-up
email to this group of people regarding the directed share program, which did
not contain a legend delineated under Rule 134 of the Securities Act, and which
thus may have constituted a prospectus that did not meet the requirements of the
Securities Act. If this follow-up email did constitute a violation of the
Securities Act of 1933, the recipients of the email who purchased common stock
in the initial public offering could have the right, for a period of one year
from the date of their purchase of common stock, to obtain recovery of the
consideration paid in connection with their purchase of common stock or, if they
already sold the stock, sue us for damages resulting from their purchase of
common stock. These refunds or damages could total up to $1 million, based on
the public offering price of $11.00 per share, if the investors suffer a total
loss of their investment during this period and seek refunds or damages. If this
were to occur, our results of operations and cash position could suffer.
Risks Related to Our Merger with Vitamins.com.
In addition to the matters described above, we will face additional risks
to our business if our merger with Vitamins.com is approved by our stockholders
and the merger is completed. We encourage you to carefully consider the
following factors, as well as the Proxy Statement describing the Vitamins.com
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merger filed with the Securities and Exchange Commission, in evaluating our
business and prospects in the event the merger is completed.
We may not be able to achieve the benefits we expect to result from the merger.
Achieving the benefits of the merger will depend in part on the ability of
management and key personnel of both companies to integrate the two businesses
in a timely and efficient manner. Such integration may be hampered by various
factors including but not limited to:
. expenses related to funding the operation, development and/or integration
of complementary businesses;
. expenses associated with the merger;
. additional expenses associated with amortization of acquired intangible
assets;
. the ability to meld the companies' respective corporate cultures;
. the difficulty of maintaining uniform standards, controls, procedures and
policies;
. the difficulty in integrating and the strains placed on the companies'
respective websites and technologies;
. the ability to turn Vitamins.com's catalog customers into online customers;
. the impairment of relationships with employees and customers as a result of
any integration of new management personnel; and
. the geographic distance between our headquarters and Vitamins.com's
headquarters.
The contemplated assimilation of the Vitamins.com personnel and the execution of
the combined company's eCommerce business plan will require substantial time and
effort on the part of our management, and may divert their attention from other
business issues. Our failure to adequately address these issues could harm our
business and adversely affect our revenues, level of expenses, operating results
and stock price. There can be no assurance that the anticipated benefits of the
merger will be realized.
The number of shares of our common stock that the Vitamins.com stockholders will
receive in the merger depends on the price of our stock for the ten days prior
to the closing of the merger, and thus we may have to issue more shares of our
stock to the Vitamins.com shareholders than originally contemplated.
Under the terms of the merger agreement, Vitamins.com stockholders will
receive $103,500,000 in our common stock, less certain transaction expenses over
$100,000 incurred by Vitamins.com and subject to specified limitations on the
number of shares to be issued, in exchange for their Vitamins.com capital stock.
The exact ratio will be based on the average closing price for our stock for the
ten trading days preceding the business day prior to the close of the merger.
Such trading price could vary from our stock price on the date the merger
agreement was signed or the proxy statement was filed or mailed. The price of
our common stock may vary because of any of the following factors, among others:
. changes in our business or operations or the timing of the merger;
. the effect of any conditions or restrictions imposed on or proposed with
respect to the combined company by regulatory agencies due to the merger;
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. the prospects of post-merger operations; and
. general market and economic conditions and other factors.
For example, if per share average closing price of our common stock for the
ten-day period were $5.00 per share, and there was no adjustment to the
$103,500,000 purchase price, stockholders of Vitamins.com would receive .357
shares of our common stock for each share of Vitamins.com stock they own, or an
aggregate of 20,700,000 shares. A decline in our stock price would result in
Vitamins.com stockholders receiving a greater number of shares of our common
stock. However, under the terms of the merger agreement the number of shares of
our common stock that Vitamins.com stockholders may receive in exchange for
their Vitamins.com cannot exceed the number of shares of our common stock
outstanding immediately prior to the closing of the merger, less one.
The stock market has recently experienced significant price and volume
fluctuations. These market fluctuations could have a material adverse effect on
the market price of our common stock in the ten-day period during which the
exchange ratio will be determined.
The merger could adversely affect our combined financial results or the market
price of our common stock.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to our stockholders resulting from the issuance
of shares in connection with the merger, our financial results, including
earnings per share, could be adversely affected. We expect that the merger will
result in merger-related costs of approximately $1.5 million after taxes. In
addition, if we do not achieve the perceived benefits of the merger as rapidly
as, or to the extent, anticipated by financial or industry analysts, the market
price of our common stock may decline.
Uncertainties associated with the merger may cause either Vitamins.com or us to
lose customers.
Customers of HealthCentral.com or Vitamins.com may, in response to the
announcement of the merger, delay or defer decisions concerning their use of
products and services from either company. Any such delay or deferral could have
an adverse effect on the combined business of HealthCentral.com and
Vitamins.com.
Failure to complete the merger could hurt our business.
In the event that the merger is not consummated, we will be subject to a
number of material risks including potential reputational harm and the failure
to meet the expectations of public market analysts and investors that the merger
would be consummated. As a result, the market price of our common stock may
decline and our business, results of operations and financial condition may be
harmed.
We may be exposed to liabilities that are not covered by the indemnification
available under the merger agreement, which may harm our results of operation
and financial condition.
Upon consummation of the merger, we will assume all the liabilities of
Vitamins.com. In addition, it is possible that liabilities may arise in the
future which we did not discover or anticipate. To the extent these liabilities
are inconsistent with representations and warranties made in the merger
agreement, we may have a claim for indemnification against the former
stockholders of Vitamins.com. The merger agreement provides that 10% of the
HealthCentral.com common stock to be issued in the merger will be placed in an
escrow account and held for a period of approximately one year to cover any
indemnification claims. The escrow amount will be our sole recourse for
indemnification claims other than in the case of fraud. However, Vitamins.com's
liabilities, both at the time of and arising after the consummation of the
merger, may exceed our expectations and the escrow amount may be insufficient to
cover these liabilities. If total liabilities for which indemnification is
available exceed the escrow amount, or if liabilities arise after the
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escrow period, we will suffer financial losses, which may harm our business,
results of operation and financial condition.
It is likely that we will continue to experience operating losses and negative
cash flow from operations.
We expect that, after the merger, we will continue to build our network and
expand our customer base, causing us to continue to incur significant operating
losses and to generate significant negative cash flow from operating activities
for the foreseeable future, which would adversely affect our results and could
adversely affect our financial condition. In addition, Vitamins.com has incurred
losses since its inception and expects to continue to incur losses for the
foreseeable future. There can be no assurance that the combined company will
achieve or sustain operating profitability or positive cash flow from operating
activities in the future.
The combined company's continuing need for significant capital could adversely
affect our earnings and cash flow.
After the merger, the operation and expansion of the combined company's
network and marketing and distribution efforts will continue to require
substantial capital for, among other things:
. unforeseen delays or costs, engineering design changes and technological
and other risks relating to the integration of Vitamins.com;
. additional acquisitions by HealthCentral.com and the integration of these
acquisitions; and
. unforeseen customer acquisition costs resulting from heightened competition
in the e-health marketplace.
As a consequence of the merger, our business may become subject to new or
increased risks.
As a consequence of the merger, a larger percentage of our revenue will be
generated from the sale of vitamins and other nutritional supplements and
therefore any increase in government regulation of nutritional supplements or
any negative publicity associated with nutritional supplements will have a
proportionately larger impact on our business and could have a material adverse
effect on the business, results of operations and financial condition of the
combined company.
Vitamins.com, through its subsidiary L&H Vitamins, depends on unionized
warehouse employees to package and ship its products. A strike or other
disruption in labor relations could, therefore, hamper or prevent timely
fulfillment of customer orders, and such disruptions could have an adverse
effect on our business.
Item 3. Quantitative and Qualitative 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 the cash
equivalents, we believe that we are not subject to any material interest rate
risk. We did not have any foreign currency hedging or other derivative financial
instruments as of March 31, 2000.
We do not enter into financial instruments for trading or speculative purposes
and do not currently utilize derivative financial instruments. Our operations
are conducted primarily in the United States and as such are not subject to
material foreign currency exchange rate risk. We have no long-term debt.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We have no pending legal proceedings, but we may become subject to lawsuits
from time to time.
Item 2. Changes in Securities and Use of Proceeds.
On December 7, 1999, in connection with our initial public offering, a
Registration Statement on Form S-1 (File No. 333-88019) was declared effective
by the Securities and Exchange Commission, pursuant to which 7,500,000 shares of
our common stock were offered and sold on December 7, 1999 for our account at a
price of $11.00 per share, generating aggregate proceeds of $82.5 million. The
managing underwriters for the offering were Lehman Brothers, Hambrecht & Quist,
Pacific Growth Equities, Inc., Wit Capital Corporation and Fidelity Capital
Markets. After deducting approximately $7.85 million in expenses, of which
$5.78 million represented underwriting discounts and commissions and the
remaining $2.07 million represented other offering-related expenses, the net
proceeds of the offering were approximately $74.6 million. None of our offering-
related expenses represented direct or indirect payments to our directors,
officers or other affiliates.
We used $20.2 million of the net offering proceeds during the quarter ended
March 31, 2000, of which $2.6 million was used for the acquisition of
businesses, $16.6 million was used for the funding of working capital and
operating losses and $1.0 million was used for capital expenditures. None of
these payments represented direct or indirect payments to our directors,
officers or other affiliates. The remaining initial public offering proceeds
have been invested in short-term, investment grade, interest bearing securities.
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
Item 5. Other Information.
As of May 9, 2000, we have restructured our payment obligations under
our agreement with AltaVista. We are obligated to pay approximately $7.4
million in cash to AltaVista over a period beginning May 15, 2000 to December
31, 2001. Incentive payments could increase this amount if AltaVista over
delivers. AltaVista will continue to publish our advertisements on the
AltaVista portal service. We are working with AltaVista on the form of an
amended agreement.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A current report on Form 8-K was filed with the Securities and
Exchange Commission by HealthCentral.com on March 16, 2000, as amended March 22,
2000, to report the announcement of the signing of a definitive agreement to
merge with Vitamins.com.
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<PAGE>
A current report on Form 8-K was filed with the Securities and
Exchange Commission by HealthCentral.com on March 17, 2000 to file analyst
presentation materials related to the proposed merger with Vitamins.com.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCENTRAL.COM
By: /s/ C. Fred Toney
------------------------------------
C. Fred Toney
Executive Vice President and Chief
Financial Officer
Date: May 15, 2000
<PAGE>
EXHIBIT INDEX
-------------
Number Description
- ------ -------------
27.1 Financial Data Schedule.
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 57,502,304
<SECURITIES> 0
<RECEIVABLES> 675,906
<ALLOWANCES> 85,533
<INVENTORY> 0
<CURRENT-ASSETS> 61,680,533
<PP&E> 2,910,326
<DEPRECIATION> 342,188
<TOTAL-ASSETS> 95,672,064
<CURRENT-LIABILITIES> 5,863,138
<BONDS> 0
0
0
<COMMON> 22,469
<OTHER-SE> 89,535,882
<TOTAL-LIABILITY-AND-EQUITY> 95,672,064
<SALES> 702,214
<TOTAL-REVENUES> 1,301,655
<CGS> 1,593,088
<TOTAL-COSTS> 1,593,088
<OTHER-EXPENSES> 23,925,350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,056
<INCOME-PRETAX> (23,247,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,247,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,247,640)
<EPS-BASIC> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
