<PAGE>
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 June 30, 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 July 31, 2000, there were 45,148,235 shares of the registrant's Common
Stock outstanding.
<PAGE>
INDEX
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Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 25
Item 2. Changes in Securities and Use of Proceeds. 25
Item 3. Defaults Upon Senior Securities. 26
Item 4. Submission of Matters to a Vote of Security Holders. 26
Item 5. Other Information. 26
Item 6. Exhibits and Reports on Form 8-K. 26
SIGNATURES 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
3
<PAGE>
HealthCentral.com
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 41,738,312 $ 83,690,072
Accounts receivable, net of allowance for doubtful accounts of
$145,554 and $64,609, respectively 2,097,663 1,149,020
Other receivables 69,988 620,583
Prepaid expenses and other current assets 2,350,617 4,051,766
Inventory 5,899,671 5,464,633
-------------- --------------
Total current assets 52,156,251 94,976,074
Property and equipment, net 8,593,588 6,253,153
Other assets 983,667 1,535,799
Intangible assets 41,772,019 46,072,969
-------------- --------------
Total assets $ 103,505,525 $ 148,837,995
============== ==============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,630,418 $ 8,360,133
Accrued expenses 6,791,941 2,321,608
Deferred revenue and other current liabilities 689,900 431,535
Current portion of obligations under capital leases 329,748 326,058
Note payable - 2,540,784
-------------- --------------
Total current liabilities 21,442,007 13,980,118
Deferred rent 222,233 171,727
Obligations under capital leases 483,430 621,097
-------------- --------------
Total liabilities 22,147,670 14,772,942
-------------- --------------
Mandatorily redeemable convertible preferred stock, $.001 par value, 0 and
19,220,935 shares authorized at June 30, 2000 and December 31, 1999, respectively,
0 and 17,411,710 issued and outstanding at June 30, 2000 and December 31,
1999, respectively - 36,565,397
-------------- --------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.001 par value, 100,000,000 authorized,
45,127,839 and 27,602,336 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 44,943 27,417
Additional paid-in capital 204,906,945 169,646,821
Note receivable from stockholder (465,457) (465,457)
Deferred stock compensation (2,980,863) (5,005,965)
Accumulated deficit (120,147,713) (66,703,160)
-------------- --------------
Total stockholders' equity 81,357,855 97,499,656
-------------- --------------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity $ 103,505,525 $ 148,837,995
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
HealthCentral.com
Condensed Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Revenues:
e-Commerce and other product sales $ 10,087,490 $ 2,007,056 $ 19,992,452 $ 3,895,015
Advertising, content and other 757,577 98,637 1,389,486 126,546
------------ ------------ ------------- ------------
Total revenues 10,845,067 2,105,693 21,381,938 4,021,561
------------ ------------ ------------- ------------
Operating and other expenses:
Cost of e-Commerce and other product sales 8,735,299 1,246,671 18,065,703 2,409,524
Content and product development 3,269,415 329,361 6,076,852 496,198
Sales and marketing 13,931,889 1,893,093 36,542,334 2,974,485
General and administrative 2,591,899 498,977 5,233,174 807,558
Amortization of intangible assets 3,555,445 - 7,099,247 -
Stock compensation 530,387 1,911,909 1,117,827 2,209,059
Acquisition costs 2,427,677 - 2,462,346 -
------------ ------------ ------------- ------------
Total operating and other expenses 35,042,011 5,880,011 76,597,483 8,896,824
------------ ------------ ------------- ------------
Loss from operations (24,196,944) (3,774,318) (55,215,545) (4,875,263)
Other expense, net (19,923) - (19,923) -
Interest income, net 793,813 25,921 1,790,915 47,269
------------ ------------ ------------- ------------
Net loss $(23,423,054) $ (3,748,397) $ (53,444,553) $ (4,827,994)
============ ============ ============= ============
Basic and diluted net loss per share $ (0.77) $ (0.44) $ (1.85) $ (0.57)
============ ============ ============= ============
Shares used in computing basic and
diluted net loss per share 30,378,429 8,601,165 28,881,986 8,439,529
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
HealthCentral.com
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (53,444,553) $ (4,827,994)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock compensation expense 1,117,827 2,209,059
Depreciation and amortization expense 8,332,480 569,661
Changes in assets and liabilities:
Accounts and other receivables (1,108,783) (74,778)
Prepaid expenses and other assets 1,933,274 (388,069)
Inventory (435,038) (569,879)
Accounts payable 5,270,285 (304,125)
Accrued expenses 4,470,333 209,685
Deferred revenue and other current liabilities 308,871 154,724
-----------------------------------
Net cash used in operating activities (33,555,304) (3,021,716)
-----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (3,538,057) (1,068,534)
Cash paid for domain name - (290,583)
Payments from (to) related party (4,785,577) 2,561,811
-----------------------------------
Net cash provided by (used in) investing activities (8,323,634) 1,202,694
-----------------------------------
Cash flows from financing activities:
Payments on capital leases (169,589) (58,144)
Proceeds from issuance of note payable - 500,000
Proceeds from the issuance of common stock 96,767 -
Net cash provided by (used in) financing activities -----------------------------------
(72,822) 441,856
-----------------------------------
Net decrease in cash and cash equivalents (41,951,760) (1,377,166)
Cash and cash equivalents at beginning of period 83,690,072 4,102,047
-----------------------------------
Cash and cash equivalents at end of period $ 41,738,312 $ 2,724,881
===================================
Supplemental disclosures of non-cash investing
and financing activities:
Deferred stock compensation $ (907,275) $ 3,055,553
Stock warrants and options issued in connection with agreements 12,878 58,036
Common stock purchased with notes receivable - 59,526
Issuance of stock in connection with acquisition - 1,250,000
Forgiveness of note from stockholder - (1,175,780)
Assets acquired under capital leases 35,612 12,644
Remeasurement of stock warrants issued in connection with agreements (329,977) -
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
HEALTHCENTRAL.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
HealthCentral.com sells health-related products to consumers and
provides original, up-to-date and personalized online healthcare information
through the HealthCentral.com network of websites which includes
HealthCentral.com, HealthCentralRx.com, Vitamins.com, and RxList.com and through
the Vitamins.com catalog and retail stores. In addition, through
HealthCentral.com enterprise web services, we enable healthcare institutions to
provide healthcare information and products to their patients and consumers
through our enterprise web services business.
Through our HealthCentral.com network, we derive revenues from the online sale
of health-related products and nutraceuticals. We also derive revenues from the
sale of reading glasses and nutraceuticals through our catalog and retail stores
and from advertisements. Through HealthCentral.com enterprise web services, we
derive revenues from annual license fees for applications, content, hosting and
maintenance services, as well as from development fees for content and e-
Commerce websites. We operate in three business segments.
Note 2 Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting of the retroactive restatement of all
periods presented to reflect our merger with Vitamins.com, which was accounted
for as a pooling of interests (see Note 5), and 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 six months ended June 30, 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.
Revenue Recognition
E-Commerce and other product sales are recognized for over-the-counter health
and beauty aid products and vitamins and vitamin supplements, net of discounts,
when products are shipped to customers. Net sales include outbound shipping and
handling charged to the customer and are shown net of sales discounts. Costs of
outbound shipping and fulfillment from us are included in cost of e-Commerce and
other product sales in the accompanying consolidated statements of operations.
We recognize commission revenue for the use of our website related to sales made
by Medi-Mail for prescription drugs. We are responsible for all refunds relating
to sales where a customer is not satisfied with the products received. We
provide an estimated allowance for such returns in the period of sale. We also
retain the ultimate credit risk for all sales.
Advertising revenues are recorded in the period the advertising impressions are
delivered to customers. We use an outside vendor to solicit customers to use our
advertising services, to serve the ads to our website and to bill and collect
for these services. This outside vendor provides monthly reports indicating the
impressions delivered, amounts billed for our advertising services and the
related administrative fee. We record advertising revenues, as reported by the
outside vendor, net of this administrative fee as 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.
Content and other revenues are derived from contracts with healthcare providers,
health product resellers, and third party organizations and principally consist
of license fees for website development applications, consulting fees from
custom website development and hosting and maintenance fees related to the
websites' maintenance. We recognize software license revenue under Statement of
Position 97-2, Software Revenue Recognition, and SOP 98-9, Modifications of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
When contracts contain multiple elements and vendor-specific objective
evidence exists for all undelivered elements, we account for the delivered
elements in accordance with the "Residual Method" prescribed by SOP 98-9. To
date, vendor-specific objective evidence has not been available for all
undelivered elements and, accordingly, we have recognized the revenues from
licenses, hosting and maintenance ratably over the term of the agreement,
generally 12 to 24 months. For consulting projects, revenues are recognized at
the time services are rendered based on charges for time and materials.
Deferred revenues represent the amount of cash received or invoices rendered
prior to revenue recognition.
Inventory
Inventory, which consists primarily of finished goods, is priced at the lower of
cost or market, with cost determined using the weighted-average method.
Note 3 Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 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, and in June 2000
issued SAB 101B to defer for an additional two quarters, the effective date of
implementing SAB No. 101, with earlier application encouraged. We are required
to adopt SAB 101 in the fourth quarter of fiscal 2000. We do not expect the
adoption of SAB 101 to have a material effect on our financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." 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.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. We believe that
the impact of FIN 44 has not and will not have a material effect on our
financial position or results of operations.
Note 4 Net Loss Per Share
We compute net loss per share in accordance with Statement of Financial
Accounting Standards 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 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, mandatorily
redeemable convertible preferred stock, convertible preferred 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 because to do so would be
anti-dilutive for the periods indicated:
7
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
<S> <C> <C>
2000 1999
---- ----
Series A Convertible preferred stock - 1,012,500
Convertible preferred stock warrants - 572,145
Convertible common stock warrants 86,145 -
Outstanding common stock options 3,118,845 881,782
Common shares subject to repurchase 201,823 5,979
--------- ---------
Total 3,406,813 2,472,406
--------- ---------
</TABLE>
Note 5 Acquisitions
On April 11, 2000, we acquired the exclusive licensing rights to market and sell
"Dr. Dean Edell Eyewear" through 2006. Payment for the product license was $2.8
million in cash. Simultaneously, we 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 Cable
Car Eyewear to make minimum purchases of products from us for the years 2000
through 2006 starting at $5.0 million in 2000 and increasing each subsequent
year to $7.2 million in 2006. In addition, we entered into a supply agreement
with Invision Optical Products through 2006 to supply us with the Dr. Dean
Edell Eyewear products.
On June 16, 2000, we completed a merger with Vitamins.com, a retailer that
provides vitamins, minerals and supplements, related health and wellness
products and information to consumers, for consideration consisting of
22,432,801 shares of our common stock and acquisition and related costs of
approximately $2.5 million. Each share of Vitamins.com stock was exchanged for
0.387 shares of HealthCentral.com common stock. Vitamins.com is our wholly
owned subsidiary. The transaction was recorded using the pooling of interests
method of accounting and was a tax-free reorganization under Section 369 of
the Internal Revenue Code of 1986, as amended.
Our total revenue and net loss excluding Vitamins.com for the first six months
of 2000 were $3.9 million and $41.1 million, respectively, as compared to
$127,000 and $2.0 million, respectively, for the first six months of 1999. Our
total revenue and net loss excluding Vitamins.com for the three months ended
June 30, 2000 were $2.6 million and $17.9 million, respectively, as compared to
$99,000 and $1.4 million, respectively, for the three months ended June 30,
1999.
Note 6 Segment Information
Based on the criteria established by SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," we now operate in three principal
business segments as a result of our merger with Vitamins.com. Our three
segments are e-Commerce and other product sales, retail store sales and
advertising, content and other. e-Commerce and other product sales consist of
online and catalog sales of health-related products, including Dr. Dean Edell
Eyewear. Retail store sales include sales of health-related products through our
brick-and-mortar stores. Advertising, content and other revenues primarily
include amounts derived from delivering advertising impressions to companies and
from providing website development and related services to healthcare providers
and other commercial organizations. We do not allocate any operating costs to
our business segments as management does not produce such information to measure
the performance of segments.
Revenues by business segment are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
Segment: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
e-Commerce and other product sales $ 8,216,602 $ 22,681 $16,092,116 $ 22,681
Retail store sales 1,870,888 1,984,375 3,900,336 3,872,334
Advertising, content and other 757,577 98,637 1,389,486 126,546
----------- ---------- ----------- ----------
Total revenue $10,845,067 $2,105,693 $21,381,938 $4,021,561
=========== ========== =========== ==========
</TABLE>
Note 7 Commitments and Contingencies
On May 19, 2000, we entered into a three year agreement with XOR, Inc., an
application service provider, whereby XOR, Inc. will provide web development
services, maintenance services and systems management services to us. Under the
terms of the agreement, we pay XOR, Inc. on a time and materials basis for
services performed. We may modify or terminate the contract for a fee without
cause and for convenience upon ninety days prior written notice to XOR, Inc.
8
<PAGE>
Note 8 Subsequent Events
On July 24, 2000, we entered into an asset purchase agreement with Drug
Emporium, Inc. and its online drugstore subsidiary, DrugEmporium.com. Under the
terms of the asset purchase agreement, we will acquire substantially all of the
assets and assume certain liabilities, primarily trade payables and
hardware/software leases, of DrugEmporium.com in exchange for the issuance of
shares of our non-voting preferred stock, which does not carry a liquidation
preference and which will be convertible into 2,400,000 shares of common stock.
DrugEmporium, Inc. will also have an opportunity to receive additional shares of
convertible preferred stock, which does not carry a liquidation preference, if
certain revenue targets are met relating to new opportunities in the early
stages of development. In connection with this acquisition, we are also
entering into a 10-year services agreement with DrugEmporium, Inc., under which
we will receive in-store promotional and advertising support and access to
DrugEmporium, Inc.'s electronic purchasing system and in-store order pickup
capabilities at certain DrugEmporium, Inc. retail stores.
On August 2, 2000, we amended our agreement with AltaVista to issue 300,000
shares of our common stock in exchange for the termination of all our cash
payment obligations under the amended agreement dated May 15, 2000. We will
continue to provide content for the AltaVista health channel and AltaVista
will continue to provide services to us until September 15, 2000, at which
time our business relationship will terminate.
Our agreement with Bergen Brunswig relating to the fulfillment of orders
placed on our HealthCentralRx.com website for non-prescription medication and
health and beauty products was terminated after continuing disputes between
Bergen Brunswig and us had not been resolved and after both parties had issued
notices of breach. We may be subject to significant costs and other
liabilities as a result of the termination of this contract. We are taking
steps to mitigate effects on our business stemming from the termination by
entering into an Internet Services Agreement dated August 8, 2000 with
DrugEmporium, Inc. Under this Internet Services Agreement, DrugEmporium, Inc.
has agreed to operate a website through which our customers can place non-
prescription medication and health and beauty product orders and to provide
customer service and fulfillment services related to those orders. This
agreement will terminate upon the closing of our asset acquisition agreement
with DrugEmporium, Inc., which we expect to occur by the end of August 2000,
at which time we expect to acquire access to the facilities, inventory,
licenses and distribution capabilities necessary for us to manage fulfillment
of these product orders internally.
In August 1999, HealthCentralRx.com entered into an agreement with America
Online regarding HealthCentralRx.com's tenancy on America Online's HealthOnline
Pharmacy Channel. Both we and America Online have claimed material breach of the
agreement by the other party, and we gave notice to America Online that,
effective June 2000, we were terminating the agreement. The status of the
business relationship and dispute is currently inactive, however, until the
issue has been finalized it is possible that we may have to make substantial
cash payments or incur other liabilities to America Online in connection with
this matter.
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 founded 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. 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.
On April 11, 2000, we acquired the exclusive licensing rights to market and sell
"Dr. Dean Edell Eyewear" through 2006. Payment for the product license was
$2.8 million in cash. Simultaneously, we 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
Cable Car Eyewear to make minimum purchases of products from us for the years
2000 through 2006 starting at $5.0 million in 2000 and increasing each
subsequent year. In addition, we entered into a supply agreement with Invision
Optical Products through 2006 to supply us with the Dr. Dean Edell Eyewear
products.
On June 16, 2000, we completed a merger with Vitamins.com, a retailer that
provides vitamins, minerals and supplements, related health and wellness
products and information to consumers, for consideration consisting of
22,432,801 shares of our common stock and acquisition and related costs of
approximately $2.5 million. Each share of Vitamins.com stock was exchanged for
0.387 shares of Healthcentral.com common stock. Vitamins.com is our wholly-
owned subsidiary. The transaction was recorded using the pooling of interests
method of accounting and was a tax-free reorganization under Section 369 of
the Internal Revenue Code of 1986, as amended. The financial statements for
all periods presented have been retroactively restated to reflect this merger.
On July 24, 2000, we entered into an asset purchase agreement with DrugEmporium,
Inc. and its online drugstore subsidiary, DrugEmporium.com. Under the terms of
the asset purchase agreement, we will acquire substantially all of the assets
and assume some liabilities, primarily trade payables and hardware/software
leases, of DrugEmporium.com in exchange for the issuance of shares of our non-
voting preferred stock, which does not carry a liquidation preference and which
will be convertible into 2,400,000 shares of common stock. DrugEmporium, Inc.
will also have an opportunity to receive additional shares of convertible
preferred stock, which does not carry a liquidation preference, if certain
revenue targets are met relating to new opportunities in the early stages of
development. In connection with this acquisition, we are also entering into a
10-year services agreement with DrugEmporium, Inc., under which we will receive
in-store promotional and advertising support and access to DrugEmporium Inc.'s
electronic purchasing system and in-store order pickup capabilities at certain
DrugEmporium, Inc. retail stores.
Our agreement with Bergen Brunswig relating to the fulfillment of orders
placed on our HealthCentralRx.com website for non-prescription medication and
health and beauty products was terminated after continuing disputes between
Bergen Brunswig and us had not been resolved and after both parties had issued
notices of breach. We may be subject to significant costs and other
liabilities as a result of the termination of this contract. We are taking
steps to mitigate effects on our business stemming from the termination by
entering into an Internet Services Agreement dated August 8, 2000 with
DrugEmporium, Inc. Under this Internet Services Agreement, DrugEmporium Inc.
has agreed to operate a website through which our customers can place non-
prescription medication and health and beauty product orders and to provide
customer service and fulfillment services related to those orders. This
agreement will terminate upon the closing of our asset acquisition agreement
with DrugEmporium, Inc., which we expect to occur by the end of August 2000,
at which time we expect to acquire access to the facilities, inventory,
licenses and distribution capabilities necessary for us to manage fulfillment
of these product orders internally.
In August 1999, HealthCentralRx.com entered into an agreement with America
Online regarding HealthCentralRx.com's tenancy on America Online's HealthOnline
Pharmacy Channel. Both we and America Online have claimed material breach of the
agreement by the other party, and we gave notice to America Online that,
effective June 2000, we were terminating the agreement. The status of the
business relationship and dispute is currently inactive, however, until the
issue has been finalized it is possible that we may have to make substantial
cash payments or incur other liabilities to America Online in connection with
this matter.
e-Commerce and other product sales are recognized for over-the-counter health
and beauty aid products and vitamins and vitamins supplements, net of discounts,
when products are shipped to customers. Net sales include outbound shipping and
handling charged to the customer and are shown net of sales discounts. Costs of
outbound shipping and fulfillment from us are included in cost of e-Commerce and
other product sales in the accompanying consolidated statements of operations.
We recognize commission revenue for the use of our website related to sales made
by Medi-Mail for prescription drugs. We are responsible for all refunds relating
to all sales where a customer is not satisfied with the products received. We
provide an estimated allowance for such returns in the period of sale. We also
retain the ultimate credit risk for all sales.
Advertising revenues are recognized in the period the advertising impressions
are delivered to customers. We use an outside vendor to solicit customers to use
our advertising services, to serve the ads to our website and to bill and
collect for these services. This outside vendor provides monthly reports
indicating the impressions delivered, amounts billed for our advertising
services and the related administrative fee. We recognize advertising revenues,
as reported by the outside vendor, net of this administrative fee as 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
also enter into sponsorship agreements and provide customers with enhanced
promotional opportunities and co-branded web pages.
Content and other revenues are derived from contracts with healthcare
providers, health product resellers, and third party organizations and
principally consist of license fees for website development applications,
consulting fees from custom website development and hosting and maintenance fees
related to the websites' maintenance. We recognize software license revenue
under Statement of Position 97-2, "Software Revenue Recognition", and SOP 98-9,
"Modifications of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions". When contracts contain multiple elements and vendor-
specific objective evidence exists for all undelivered elements, we account for
the delivered elements in accordance with the "Residual Method" prescribed by
SOP 98-9. To date, vendor-specific objective evidence has not been available for
all undelivered elements and, accordingly, we have recognized the revenues from
licenses, hosting and maintenance ratably over the term of the agreement,
generally 12 to 24 months. For consulting projects, revenues are recognized at
the time services are rendered based on charges for time and materials.
Deferred revenues represent the amount of cash received or services performed
and billed prior to revenue recognition.
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We incurred a net loss of approximately $23.4 million and $53.4 million for the
three and six months ended June 30, 2000, respectively, compared to $3.7 million
and $4.8 million for the three months and six months ended June 30, 1999,
respectively. We anticipate incurring additional operating losses for the
foreseeable future.
In July 2000, we announced basic and diluted net loss per share for the three
and six months ended June 30, 2000 of $0.52 and $1.19, respectively. In
connection with filing this quarterly report on Form 10-Q, we have revised these
basic and diluted net loss per share amounts to $0.77 and $1.85, respectively.
These net loss per share amounts have been revised to reflect a change in the
mathematical calculation of the weighted average number of shares used to
calculate net loss per share resulting from our merger with Vitamins.com.
Vitamins.com preferred stock had not yet converted into shares of our common
stock until the acquisition closing date and therefore was required to be
excluded from the calculation. Because the revisions relate only to the weighted
average number of shares outstanding, all other information in our press release
dated July 25, 2000 remains unaffected. These revisions also had no impact on
our previously reported revenues, net loss, cash flows or balance sheets for any
period.
Results of Operations
Three Months and Six Months Ended June 30, 2000 and 1999
e-Commerce and other product sales. e-Commerce and other product sales include
sales of health and beauty and over-the-counter products, dietary supplements
and prescription drugs through our websites and catalogue activities. For the
three months ended June 30, 2000, revenue also included the sales of "Dr. Dean
Edell Eyewear" brand of eyeglasses. Revenues are recognized net of allowances
for product returns, promotional discounts and coupons at the time the products
are shipped to the customer. We recognize commission revenues for the use of our
website on the sales made by our pharmacy fulfillment partner for all
prescription drugs. Outbound shipping and fulfillment charges that are charged
to the customer are included in revenues. E-Commerce and other product sales
increased to $8.2 million and $16.1 million for the three and six months ended
June 30, 2000, respectively, compared to $23,000 for the three and six months
ended June 30, 1999. Substantially all of the growth in e-Commerce and other
product sales during the six months ended June 30, 2000 was the result of
increased catalog and e-Commerce sales, an increased customer base, repeat
purchases from existing customers and new product offerings.
Retail store sales. Retail store sales consist of brick-and-mortar sales of
healthcare and related over-the-counter products and were $1.9 million and $3.9
million for the three and six months ended June 30, 2000, respectively, compared
to $2.0 million and $3.9 million for the three and six months ended June 30,
1999, respectively.
Advertising, content and other revenues. Advertising, content and other revenues
consist of advertising revenues, content subscription and license revenues.
Advertising revenues are recognized in the period the advertising impressions
are delivered to customers. Content subscription and license revenues consist of
license fees for website development applications, consulting fees from custom
website development, and hosting and website maintenance. Advertising, content
and other revenues were $758,000 and $1.4 million for the three and six months
ended June 30, 2000, respectively, compared to $99,000 and $127,000 for the
three and six months ended June 30, 1999, respectively. The growth in revenues
during the six months ended June 30, 2000 was primarily a result of increased
revenues from sponsorships and advertisements on our sites of $573,000 and an
increase in the number of page views.
Cost of e-Commerce and other product sales. Cost of e-Commerce and other product
sales consist of the cost of products sold to customers, certain promotion
costs, inbound shipping charges and fulfillment costs. Fulfillment costs include
the external fulfillment fee charged by our third party fulfillment partner and
the internal cost of operating and staffing the distribution center. Cost of e-
Commerce and other product sales was $8.7 million and $18.1 million for the
three and six months ended June 30, 2000, respectively, compared to $1.2 million
and $2.4 million for the three and six months ended June 30, 1999, respectively.
Cost of e-Commerce and other product sales increased 600% and 650% for the three
and six months ended June 30, 2000, respectively, from the comparable periods in
1999. The increased cost of e-commerce and other product sales during the six
months ended June 30, 2000 was a result of increased promotion costs associated
with new customer acquisitions. We expect that our e-Commerce and product sales
margins will fluctuate in the future.
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Content and product development. Content and product development expenses
consist primarily of payroll and related expenses for development, editorial,
systems and telecommunications operations personnel and consultants, systems and
telecommunications infrastructure and cost of acquired content. Content and
product development costs were $3.3 million and $6.1 million for the three and
six months ended June 30, 2000, respectively, compared to $329,000 and $496,000
for the three and six months ended June 30, 1999, respectively. Content and
product development costs increased 893% and 1125% for the three and six months
ended June 30, 2000, respectively, from the comparable periods in 1999. The
increase in content and product development expenses during the six months ended
June 30, 2000 was primarily attributable to $4.3 million in increased staffing
and associated costs related to enhancing the content and maintaining our
websites and $1.1 million in overhead allocation. Product development costs are
generally expensed as incurred, except for costs relating to the development of
internal-use software, which are capitalized and depreciated over the estimated
useful lives. In the short term, we expect product development expenses to
increase, then stabilize by the beginning of 2001 as we complete certain
engineering projects.
Sales and marketing. Sales and marketing expenses consist primarily of
advertising and certain promotional expenditures, payroll and related expenses
for personnel engaged in marketing and customer service activities. Sales and
marketing expenses were $13.9 million and $36.5 million for the three and six
months ended June 30, 2000, respectively, compared to $1.9 million and $3.0
million for the three and six months ended June 30, 1999, respectively. Sales
and marketing expenses increased 636% and 1129% for the three and six months
ended June 30, 2000, respectively, from the comparable periods in 1999. The
increase in sales and marketing expenses during the six months ended June 30,
2000 was primarily attributable to $9.0 million in increased expenses as a
result of payments to America Online and AltaVista and $13.3 million in other
online and offline advertising expenses. We expect advertising expenses to
decrease for the remainder of 2000 as we direct our marketing efforts to e-
Commerce and away from content and to alternative types of more cost-effective
advertising.
General and administrative. General and administrative expenses consist of
payroll and related expenses for finance, human resources, business development,
investor relations, executive and administrative personnel, professional
services and other general corporate expenses. General and administrative
expenses were $2.6 million and $5.2 million for the three and six months ended
June 30, 2000, respectively, compared to $499,000 and $808,000 for the three and
six months ended June 30, 1999, respectively. General and administrative
expenses increased 419% and 548% for the three and six months ended June 30,
2000, respectively, from the comparable periods in 1999. The increase in general
and administrative expenses during the six months ended June 30, 2000 was
primarily attributable to an increase of $2.8 million in finance, human
resources and business development personnel and $900,000 in professional
services expenses related to our operations as a public company and projects
other than our acquisition of Vitamins.com. We expect these expenses to
stabilize as we manage costs in this area.
Amortization of intangibles. Amortization of intangibles relates to the
amortization of intellectual property related to domain names and intangible
assets resulting from the acquisitions of Windom Health, ePills, RxList.com, Dr.
Dean Edell Eyewear license, and L&H Vitamins, Inc., a subsidiary of
Vitamins.com. Amortization of intangibles was $3.6 million and $7.1 million for
the three and six months ended June 30, 2000, respectively. As of June 30, 1999,
there were no intangible assets; therefore we had no amortization expense during
the first half of 1999.
Stock compensation. Stock compensation expense was $530,000 and $1.1 million for
the three and six months ended June 30, 2000, respectively, compared to $1.9
million and $2.2 million for the three and six months ended June 30, 1999,
respectively. Deferred stock compensation is amortized over the respective
vesting periods of the outstanding options, which is generally four years. Stock
compensation expense decreased 72% and 49% for the three and six months ended
June 30, 2000, respectively, from comparable periods in 1999.
Acquisition costs. Acquisition costs were $2.5 million for the six months ended
June 30, 2000. We had no acquisition costs during this period in 1999. These
expenses relate to the merger with Vitamins.com and consist of legal and
professional fees, financial advisory fees, regulatory filing fees and
integration costs. We expect that the transaction and other cash costs
associated with the acquisition of DrugEmporium.com will be substantially offset
by sales of inventory acquired in that transaction.
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 June 30, 2000, we had $41.7 million in cash and cash equivalents. Net cash
used in financing activities for the six months ended June 30, 2000 was $73,000
as a result of capital lease payments of $170,000, partially offset by proceeds
from the issuance of common stock of $97,000. Net cash provided by financing
activities for the six months ended June 30, 1999 was $442,000 as a result of
the issuance of a $500,000 note payable, partially offset by capital lease
payments of $58,000.
Net cash used in operating activities was $33.6 million and $3.0 million for the
six months ended June 30, 2000 and 1999, respectively. Net cash used in
operating activities in the six months ended June 30, 2000 was comprised
primarily of a $53.4 million net loss, increases of $1.1 million in accounts and
other receivables and $435,000 in inventory. This increase in use of cash was
partially offset by $1.1 million in non-cash stock compensation expense, $8.3
million in depreciation and amortization of fixed
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and intangible assets and increases of $9.7 million in accounts payable and
accrued expenses and $309,000 in non-current liabilities, and a decrease of $1.9
million in prepaid expenses and other assets during the six months ended June
30, 2000. In comparison, net cash used in operating activities for the six
months ended June 30, 1999 was comprised primarily of a $4.8 million net
loss and increases of $75,000 in accounts and other receivables, $570,000 in
inventory, $388,000 in prepaid expenses and other assets and a decrease of
$304,000 in accounts payable. This increase in use of cash was partially offset
by non-cash stock compensation expense of $2.2 million, $570,000 in depreciation
expense, increases of $210,000 in accrued expenses and $155,000 in deferred
revenues and other current liabilities.
Net cash used in investing activities was $8.3 million for the six months ended
June 30, 2000. Net cash provided by investing activities was $1.2 million for
the six months ended June 30, 1999. Cash used in investing activities in the six
months ended June 30, 2000 was comprised of $3.5 million for the purchase of
property and equipment, $2.8 million for the purchase of the Dr. Dean Edell
Eyewear license, and $2.5 million for the note payable associated with the
acquisition of RxList.com. This increase in use of cash was partially offset by
the receipt of approximately $550,000 related to a reduction in the final
purchase price of L&H Vitamins. For the six months ended June 30, 1999, $2.6
million was provided by a related party payment to Vitamins.com, which was
partially offset by $1.4 million for the purchase of a domain name and property
and equipment.
In an effort to realize efficiencies from acquisitions, reduce expenses,
preserve our cash, and improve operational efficiencies, we have eliminated over
50 positions since January 2000. In addition, in August 2000, we amended our
agreement with AltaVista, an internet portal, to issue 300,000 shares of our
common stock in exchange for the termination of all our payment obligations
under the amended agreement dated May 15, 2000. Our relationship with Alta Vista
will formally terminate on September 15, 2000.
Our capital requirements depend on numerous factors, including our ability to
integrate our acquired technology and the technology that we will acquire on the
closing of our acquisition of DrugEmporium.com and improve our transaction
processing and fulfillment systems and our website infrastructure without
substantial additional capital expenditures. We have no material commitments for
capital expenditures at present, and we do not anticipate entering into any new
capital commitments in the foreseeable future.
We have experienced substantial increases in expenditures since inception,
consistent with growth in operations and personnel, both internally and through
multiple acquisitions. However, we are not targeting significant growth in our
cost structure in the future. We currently expect to use our existing cash
balances to fund operating losses, costs associated with integrating
acquisitions and website development. 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 the next twelve months, provided that we are
able to restructure some partnership arrangements and achieve our targeted
efficiencies and cost reductions from recent and pending acquisitions. We may
need additional cash sooner than currently anticipated and/or may need to raise
additional capital in order to fund unanticipated revenue shortfalls, excess
expenses or additional acquisitions of businesses or technologies, to develop
new or enhanced services or products, to enter into significant partnerships or
to respond to competitive pressures.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 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, and in June 2000, issued SAB
101B to defer for an additional two quarters, the effective date implementing of
SAB No. 101, with earlier application encouraged. We are required to adopt SAB
101 in the fourth quarter of fiscal 2000. We do not expect the adoption of SAB
101 to have a material effect on our financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." 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.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998 or January 12, 2000. We
believe that the impact of FIN 44 has not and not have a material effect on
our financial position or results of operations.
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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.
We only launched our HealthCentral.com website in November 1998, our
Vitamins.com website in March 1999 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 drugstore.com, planetRx, drkoop.com,
VitaminShoppe.com, MotherNature.com, Healtheon/WebMD, DiscoveryHealth.com,
AllHealth.com, IntelliHealth.com, MedicaLogic/medscape.com and OnHealth.com;
. gain advertising and sponsorship revenue from vendors of health-related
products and services;
. implement a successful e-Commerce strategy through our HealthCentralRx.com
and Vitamins.com subsidiaries;
. create and maintain successful strategic alliances with provider groups,
content providers and other third parties;
. develop and expand our enterprise web services business;
. develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
We had an accumulated deficit of $120 million at June 30, 2000, and 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 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;
. promote our HealthCentral and Vitamins.com brands;
. 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, drugstore.com, planetRx, drkoop.com,
VitaminShoppe.com, MotherNature.com, Healtheon/WebMD, IntelliHealth.com,
MedicaLogic/medscape.com, OnHealth.com and DiscoveryHealth.com have stronger
name recognition than do we. 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 offer product promotions and
discounts, and to increase substantially our sales and marketing efforts, our
third party alliances, and our content, product and service offerings, all of
which are expensive.
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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
provided 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.
Dr. Dean Edell provides 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.
Dr. Dean Edell provides us with unique content for, and drives 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.
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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 information websites, such
as Healtheon/WebMD, drkoop.com, DiscoveryHealth.com, AllHealth.com,
InteliHealth, Medscape.com and OnHealth.com. In addition, we compete with:
. traditional brick-and-mortar drug stores, including drug store chains,
supermarkets, mass market retailers, nutraceutical stores and independent
drug stores, many of whom have begun or have announced their intention to
offer online services,
. other online drug stores, such as drugstore.com and planetRx,
. other online dietary supplement stores, such as MotherNature.com and
VitaminShoppe.com,
. pharmacy benefit managers, or PBMs, that direct sales of pharmaceuticals,
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
. larger production and technical staffs.
The intense competition in the online drug store business has resulted in price
discounting and difficulty in building customer loyalty. 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, Merck/Medco has
recently entered into an alliance with CVS.com; drugstore.com has formed an
alliance with RiteAid, and planetRx has formed an alliance with Express Scripts,
Inc. Increased competition in the online drug store business has resulted in,
and could continue to 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. We also
compete with drugstore.com and planetRx in the sale of e-Commerce solutions to
healthcare institutions. 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 e-Commerce business for
healthcare products, this market is unproven, and we have limited experience in
it.
The healthcare e-Commerce 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 and is highly fragmented and intensely
competitive. 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 or vitamin 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;
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. 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
. inability to meet immediate delivery or pick-up requirements for
prescriptions for acute conditions.
We have limited experience in the healthcare e-Commerce market.
Our Vitamins.com website was launched in March 1999 and 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. In addition, our rate of revenue growth could be
less than that of other online merchants in the healthcare e-Commerce market,
many of whom have longer operating histories, greater name recognition and
otherwise enjoy competitive advantages.
Some of our major contractual relationships have been terminated or are in the
process of being terminated or renegotiated, which could result in disruption of
our business and/or payment obligations.
Our agreement with Bergen Brunswig relating to the fulfillment of orders placed
on our HealthCentralRx.com website for non-prescription medication and health
and beauty products was terminated effective August 8, 2000 after continuing
disputes between Bergen Brunswig and us had not been resolved and after both
parties had issued notices of breach. We may be subject to significant costs and
other liabilities as a result of the termination of this contract.
In August 1999, HealthCentralRx.com entered into an agreement with America
Online regarding HealthCentralRx.com's tenancy on America Online's HealthOnline
Pharmacy Channel. Both we and America Online have claimed material breach of the
agreement by the other party, and we gave notice to America Online that,
effective June 2000, we were terminating the agreement. The status of the
business relationship and dispute is currently inactive; however, until the
issue has been finalized it is possible that we may have to make substantial
cash payments or incur liabilities to America Online in connection with this
matter.
In addition, we are in the process of renegotiating certain other major
contractual relationships, and may renegotiate certain additional contracts, any
of which could disrupt our business and/or cause us to incur additional costs or
make additional payments.
We are currently dependent on Medi-Mail and DrugEmporium, Inc. for
fulfillment of our HealthCentral.Rx orders and access to pharmacy benefit
managers.
We are party to an agreement with Medi-Mail, relating to the fulfillment of
orders placed on our HealthCentralRx.com website for healthcare products which
require a prescription and access to the PlusCare Provider Network of pharmacy
benefit managers, or PBMs.
Medi-Mail is currently our exclusive third-party provider of certain pharmacy-
related services. Any failure by Medi-Mail to supply sufficient quantities and
types of products in a timely manner could result in customer dissatisfaction
and harm our e-Commerce business. Because we are currently in a dispute with
Bergen Brunswig, Medi-Mail's parent company, we face the risk of that dispute
impacting our relationship with Medi-Mail. In addition, our agreement with Medi-
Mail expires in August 2002, and it may not be renewed on favorable terms, or at
all. If for any reason we could not renew this agreement, enter into similar
contractual arrangements with a licensed pharmacy, or become a licensed pharmacy
ourselves, we could not operate our on-line pharmacy business. If the intended
benefits are not realized from our relationship with Medi-Mail, customer
perceptions, revenues and our ability to execute our e-Commerce strategy may be
jeopardized.
Medi-Mail 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 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 the consumers
and payors. Finally, Medi-Mail 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.
In addition, on August 8, 2000, we entered into an Internet Services Agreement
with Drug Emporium, Inc., under which Drug Emporium, Inc. has agreed to operate
a website through which our customers can place non-prescription medication and
health and beauty product orders and to provide customer service and fulfillment
services related to those orders. This agreement will terminate upon the closing
of our asset acquisition agreement with DrugEmporium, Inc., which we expect to
occur by the end of August 2000, at which time we expect to acquire access to
the facilities, inventory, licenses and distribution capabilities necessary for
us to manage fulfillment of these product orders internally. Prior to entering
into the Internet Services Agreement with DrugEmporium, Bergen Brunswig had
provided fulfillment services for non-prescription medication and health and
beauty products. This agreement has been terminated. Disruption in order
fulfillment services may result due to the transition complexities related to
the transfer of fulfillment services from Bergen Brunswig to DrugEmporium, Inc.,
and any failure by Drug Emporium, Inc. to supply sufficient quantities and types
of products in a timely manner could result in customer dissatisfaction and
could significantly harm our e-Commerce business. In addition, if for any reason
the Internet Services Agreement is terminated prior to the closing of our
acquisition agreement with DrugEmporium, Inc., and if we are unable to enter
into similar contractual arrangements, our non-prescription medication and heath
and beauty e-Commerce business would be inoperable.
Upon the closing of our asset acquisition with DrugEmporium, Inc., we will own
fulfillment capabilities for e-Commerce product orders, and we have limited
experience in providing these services.
Upon the closing of our asset acquisition with DrugEmporium, Inc., we will
acquire access to the facilities, inventory, licenses and distribution
capabilities necessary for us to manage fulfillment of our e-Commerce product
orders internally. To date, we have relied upon third parties to manage most of
our product fulfillment responsibilities and therefore have limited experience
in providing these services. Disruption in order fulfillment services may result
in our inability to supply sufficient quantities and types of products in a
timely manner, which could result in customer dissatisfaction and could
significantly harm our e-Commerce business.
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.
As of June 30, 2000, we had cash and cash equivalents of $41.7 million. 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, provided that we are able to restructure some partnership
arrangements and achieve our targeted efficiencies and cost reductions from
recent and pending acquisitions. We may enter into additional business
relationships that require us to make additional cash payments.
We expect to continue to spend substantial amounts of capital to finance our
operations and distribution efforts, and these expenditures may increase due to,
among other things,
. delays or costs arising from engineering design changes and technological
and other risks relating to the integration of Vitamins.com and
DrugEmporium.com, upon the closing of that pending acquisition;
. additional acquisitions by HealthCentral.com and the integration of these
acquisitions;
. customer acquisition costs resulting from heightened competition in the
e-health marketplace; and
. our inability to restructure some of our partnership arrangements or
achieve our targeted efficiencies and cost reductions from recent and
pending acquisitions
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 covenants that would
restrict our operations. Any additional financing may not be available in
amounts or on terms acceptable to us, or at all.
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Any errors in filling or packaging the prescription drugs for our customers 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. 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 post
product information on our HealthCentralRx.com, RxList.com and Vitamins.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 they may make errors. In addition, we
may be exposed to liability if we are held responsible for pharmacy errors.
Pharmacy errors may produce significant adverse publicity either for us or the
entire online pharmacy industry. 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 and Vitamins.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. 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, dietary
supplements 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, dietary supplements
and other healthcare products;
. prohibitions against the offer, payment or receipt of remuneration to induce
referrals to and from entities providing healthcare services or goods;
. dispensing and delivering prescription, over-the-counter drugs and other
medical products;
. advertising drugs, cosmetics, dietary supplements; and
. state insurance regulations.
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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 attract and retain users to our HealthCentral.com network, 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 and Yahoo!
to provide them with content in exchange for either impressions or traffic. Many
of 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 have experienced systems interruptions and capacity constraints on the
HealthCentral.com network, which can result in adverse publicity, revenue
losses and erosion of customer trust.
We have experienced significant system interruptions in the performance or our
HealthCentralRx.com online drug store. We are in the process of upgrading the e-
Commerce software platform. To the extent we do not effectively address the
scalability and performance of our e-Commerce software platform, our e-Commerce
business could suffer. In addition, if our proposed acquisition of assets from
DrugEmporium, Inc. is consummated, we will need to further integrate our
operations and provide product fulfillment services internally, which may
require us to upgrade our software and other technology. Any continued or
additional systems problems in the HealthCentral.com network, including our
HealthCentralRx.com online drug store and our Vitamins.com online vitamin 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 competitor's 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 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 on our relationship with DoubleClick to generate advertising revenues,
and DoubleClick can terminate this relationship on short notice.
A 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.
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.
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We expect to derive a portion of our revenues from license and development fees
related to the designing, hosting and maintenance of private label content and
e-Commerce 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. As a
result, we may have to spend significantly to improve our product offerings or
make them more cost-effective. In addition, in the face of increasing
competition, we may be forced to price our services such that we make little or
no profit on them. Moreover, these healthcare industry participants may be
unwilling to allow sensitive information to be stored in our databases.
If the Internet does not prove to be an effective or profitable marketing media
for advertisers, especially those in the health industry, our business model
could fail.
The Internet is a relatively new advertising medium.
Our success depends on the increased use of the Internet as an advertising
medium. This advertising medium is unproven and may not become an effective
medium as compared to traditional advertising media. If the market for Internet
advertising fails to develop or develops more slowly than we anticipate, then
our ability to generate advertising revenue would be diminished. Various pricing
models are currently used to sell advertising on the Internet. It is difficult
to predict which, if any, will emerge as the industry standard, thereby making
it difficult to project our future advertising rates and revenues. 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.
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 dietary supplements, are subject
to regulation and enforcement by the FDA, FTC and similar state agencies.
Therefore, our advertising and sponsorship target market may not allocate
significant portions of their marketing budgets to the HealthCentral.com network
or elsewhere on the Internet, and we may not meet our revenue targets as a
result.
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, RxList.com,
HealthCentralRx.com and Vitamins.com and associated costs;
. shifts in the rate at which visitors to our HealthCentralRx.com and
Vitamins.com websites 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, retail stores and online vitamin store;
. shifts in our ability, and that of our fulfillment partners 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;
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. 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
. 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 in our business, which has placed, and will continue to place, a
significant strain on our resources. In addition, we have reduced our headcount
by approximately 50 positions since January 2000. As we continue to rationalize
our cost-structure, we will need to improve our efficiency, which we may not be
able to accomplish. Any failure to successfully manage our growth and increase
our efficiency could distract management attention and result in our failure to
execute on our business plan. As a result of the acquisition of our online
vitamins store, Vitamins.com, we need to assimilate the operations of
Vitamins.com into our operations. In addition, on the closing of our acquisition
of the Drug Emporium online drug store, we will need to integrate those
operations as well. In order to manage this growth effectively, we will need 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. Our
integration and operational efforts are complicated by the fact that
Vitamins.com operates in the Washington DC area and the DrugEmporium.com
operations, which we will acquire upon the closing of our asset acquisition of
DrugEmporium.com, will be based in Kentucky. Thus, we have to manage an
enterprise operating over a wide geographical area. We will need to expend
significant amounts of our time and financial resources if we consolidate these
operations and otherwise restructure these operations to achieve efficiencies
from these acquisitions, which may distract management and further strain our
technology and staffing resources. We also need to devote significant 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.
Virtually our entire management team is relatively new and have been working
together for a relatively short period of time. 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
Vitamins.com and DrugEmporium employees into our existing team.
In order to execute our business 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.
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. Recent layoffs within our
company may make it harder to attract and retain key employees.
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 e-commerce and 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.
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 our
existing 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
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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 Vitamins.com,
or upon the closing of our pending acquisition, DrugEmporium.com, and their
integration 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 Vitamins.com operations or
accomplish the execution of our e-Commerce business plan. The integration of
Vitamins.com into our business may strain our existing technology and operations
systems as we continue to assimilate Vitamins.com into our existing operations.
In addition, Vitamins.com personnel may decide not to continue working for us.
These difficulties could disrupt our ongoing business, distract our management
and employees or increase our expenses.
Our merger with Vitamins.com 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. 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.
In addition, we will face similar risks, including the integration of
facilities, systems, technology, and fulfillment operations, with regard to the
integration of the operations of DrugEmporium.com upon the closing of that
pending asset acquisition.
We may be exposed to liabilities that are not covered by the indemnification
available under the Vitamins.com merger agreement, which may harm our results
of operation and financial condition.
Upon consummation of our Vitamins.com merger, we assumed 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 equal to the lesser of twelve months after
the effective time or within two business days after the escrow holder receives
written notification that we have issued our first independent audit report
showing the combined results of operations of HealthCentral and Vitamins.com 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 escrow period, we will suffer financial losses, which may harm our
business, results of operation and financial condition.
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 four companies, Windom Health,
HealthCentralRx.com, RxList.com and
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Vitamins.com, as well as the license of the Dr. Dean Edell eyewear brand. In
addition, our proposed acquisition of Drug Emporium's online drug store is
currently pending. 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 our
proposed acquisition of Drug Emporium's online drug store business and in any
future acquisitions, we will likely face the same integration risks as discussed
in these risk factors with respect to the integration of the business of
Vitamins.com and 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
. 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.
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 HealthCentralRx.com, Vitamins.com and RxList.com
databases regarding dietary supplements, 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.
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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 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 41% of our outstanding common stock, based on shares outstanding
as of June 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 of voting power
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
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 e-Commerce 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
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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. 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
Sales of a substantial number of shares of common stock in the public
market, or the perception that these sales may occur, could adversely affect the
market price of the common stock by potentially introducing a large number of
sellers of our common stock into a market in which our common stock price is
already volatile and in which the daily trading volume of shares of our common
stock has historically been low. Such sales also might make it more difficult
for us to sell equity-related securities in the future at a time and price that
we deem appropriate, or at all.
We have 45,127,839 outstanding shares of common stock, based upon shares
outstanding as of June 30, 2000 and assuming no exercise of options or warrants.
Of these shares, approximately 7.6 million shares are freely tradable in the
public market without restriction under the Securities Act, unless the shares
are held by "affiliates" of HealthCentral.com, as that term is defined in rule
144 under the Securities Act. The approximately 37.5 million remaining shares
outstanding are "restricted securities" within the meaning of Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration promulgated under the Securities
Act. Of these 37.5 million shares, approximately 4.5 million will become
eligible for sale at various times through the beginning of October 2000, and
approximately 10.5 million will become eligible over a period beginning in
October and lasting until mid-December 2000, 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. The
remaining 22,432,801 shares, all of which were acquired by stockholders in
connection with our acquisition of Vitamins.com in June 2000, will not be
eligible for re-sale under rule 144 until June 2001. However, we have agreed to
register these shares for sale on the public market as early as January 2001. In
addition, approximately 7.4 million shares of our common stock issuable upon the
exercise of options held by employees and consultants or available for grant
them have been registered and may generally be sold upon exercise of these
options.
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.
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<PAGE>
Management has broad discretion over how our available cash is being used.
Our officers and directors have broad discretion with respect to the use of our
available cash. We currently expect to use our existing cash balances to fund
operating losses, costs associated with integrating acquisitions and website
development. In addition, we are continuing to evaluate possible acquisitions or
investments in complementary businesses. 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.
We may be subject to labor union disputes.
L&H Vitamins, Inc., a Vitamins.com company, is a party along with Local 804
International Brotherhood of Teamsters Chauffeurs, Warehousemen and Helpers of
America, to a collective bargaining agreement, effective February 16, 1999
through February 15, 2002. Although L&H Vitamins has never experienced a labor
disturbance, we may become subject to future labor disputes.
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 June 30, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material legal proceedings. However, from
time to time, we may become subject to lawsuits, arbitration proceedings, and
claims. Any material legal proceedings may distract our management and cause us
to incur substantial expenses, including but not limited to legal fees,
settlement and/or liability payments. Thus, they could cause substantial harm to
our business and financial position.
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,
generating net proceeds of approximately $74.6 million.
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<PAGE>
We have used $32.9 million of the net offering proceeds through June 30, 2000,
of which $7.8 million was used for the acquisition of businesses, $21.5 million
was used for the funding of working capital and operating losses and $3.6
million was used for capital expenditures. Other than $2.8 million paid for the
purchase of the Dr. Dean Edell Eyewear license, $1.4 million of which was paid
to Dr. Edell, a director, 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.
At the Company's Annual Meeting of stockholders held on June 16, 2000,
1. The following individuals were elected to the Board of Directors, with terms
expiring in 2003:
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
------------- ------------ ----------
<S> <C> <C> <C>
Annette Campbell-White 15,633,147 538,882 35,318
Robin Wolaner 15,633,147 538,882 35,318
</TABLE>
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
-------------- -------------- ----------
<S> <C> <C> <C>
2. Approve the merger of HCC acquisition Corp., a wholly 10,833,780 577,862 26,625
owned subsidiary of HealthCentral, with and into
Vitamins.com, Inc. and the issuance of shares pursuant to
the Agreement and Plan of Reorganization and Merger.
3. Ratify the appointment of PricewaterhouseCoopers LLP 16,163,580 22,265 21,502
as independent auditors for the fiscal year ending December
31, 2000.
</TABLE>
In connection with the approval of Item 2 above, Robert Haft and Sage Givens
were appointed as directors with terms expiring in 2003.
Immediately upon approval of Items 1 and 2 above, the directors of
HealthCentral.com consisted of the following individuals:
. Sheryle J. Bolton
. Annette Campbell-White
. Dean S. Edell
. Sage Givens
. Albert L. Greene
. Robert M. Haft
. James J. Hornthal
. Michael D. McDonald
. Wesley D. Sterman
. Robin Wolaner
In July 2000, Annette Campbell-White resigned as a member of our Board of
Directors.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.10++ Employment Agreement between the Company and Albert Greene,
dated August 16, 1999, as amended June 2000.
10.31 Employment Agreement between the Comapny and Robert M.
Haft, dated March 15, 2000 and effective as of
June 16, 2000.
27.1 Financial Data Schedule
++ Supercedes previously filed exhibit.
(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 June 19, 2000 to report the consummation of
the merger with Vitamins.com.
26
<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: August 14, 2000
27
<PAGE>
EXHIBIT INDEX
-------------
Number Description
------ -----------
10.10++ Employment Agreement between the company and Albert Greene,
dated August 16, 1999, as amended June 2000.
10.31 Employment Agreement between the company and Robert M. Haft, dated
March 15, 2000 and effective as of June 16, 2000.
27.1 Financial Data Schedule.
++Supercedes previously filed exhibit.
28
