<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 September 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 October 31, 2000, there were 45,592,369 shares of the registrant's Common
Stock outstanding.
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 29
Item 2. Changes in Securities and Use of Proceeds. 29
Item 3. Defaults Upon Senior Securities. 29
Item 4. Submission of Matters to a Vote of Security Holders. 29
Item 5. Other Information. 30
Item 6. Exhibits and Reports on Form 8-K. 30
SIGNATURES 31
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
3
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HealthCentral.com
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,989,747 $ 83,690,072
Accounts receivable, net of allowance for doubtful accounts of
$77,044 and $64,609, respectively 2,733,297 1,149,020
Other receivables 53,725 620,583
Prepaid expenses and other current assets 1,444,116 4,051,766
Inventory 8,886,384 5,464,633
--------------- ----------------
Total current assets 40,107,269 94,976,074
Property and equipment, net 11,877,493 6,253,153
Other assets 712,821 1,535,799
Intangible assets, net 43,558,933 46,072,969
--------------- ----------------
Total assets
$ 96,256,516 $ 148,837,995
=============== ================
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,055,640 $ 8,360,133
Accrued expenses 5,837,457 2,321,608
Deferred revenue and other current liabilities 590,634 431,535
Current portion of obligations under capital leases 3,527,552 326,058
Note payable - 2,540,784
--------------- ----------------
Total current liabilities 24,011,283 13,980,118
Deferred rent 214,683 171,727
Obligations under capital leases 1,890,952 621,097
--------------- ----------------
Total liabilities 26,116,918 14,772,942
--------------- ----------------
Mandatorily redeemable convertible preferred stock, $.001 par value, 0 and
19,220,935 shares authorized at September 30, 2000 and December 31,
1999, respectively, 0 and 17,411,710 issued and outstanding at September
30, 2000 and December 31, 1999, respectively - 36,565,397
--------------- ----------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.001 par value, 5,875,000 shares authorized at
September 30, 2000 and December 31, 1999, 480,000 and 0 issued and
outstanding at September 30, 2000 and December 31, 1999, respectively 7,274,880 -
Common stock, $0.001 par value, 100,000,000 authorized, 45,581,453 and
27,602,336 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 45,397 27,417
Additional paid-in capital 205,472,618 169,646,821
Note receivable from stockholder (465,457) (465,457)
Deferred stock compensation (2,056,786) (5,005,965)
Accumulated deficit (140,131,054) (66,703,160)
--------------- ----------------
Total stockholders' equity 70,139,598 97,499,656
--------------- ----------------
Total liabilities, mandatorily redeemable convertible preferred stock
and stockholders' equity
$ 96,256,516 $ 148,837,995
=============== ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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HealthCentral.com
Condensed Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
e-Commerce and other product sales $ 10,270,240 $ 4,926,930 $ 30,262,692 $ 8,821,945
Advertising, content and other 799,687 362,100 2,189,173 488,646
------------- ------------ ------------- ------------
Total revenues 11,069,927 5,289,030 32,451,865 9,310,591
------------- ------------ ------------- ------------
Operating and other expenses:
Cost of e-Commerce and other product sales 7,464,770 2,842,350 22,613,658 5,251,874
Content and product development 2,450,399 1,254,048 8,527,251 1,750,246
Sales and marketing 8,332,795 6,528,809 47,791,946 9,503,294
General and administrative 2,406,521 1,425,796 7,639,692 2,233,354
Amortization of intangible assets 3,782,699 519,017 10,881,946 519,017
Stock compensation 358,380 3,227,866 1,476,207 5,436,925
Acquired in-process technology - 554,901 - 554,901
Acquisition and contract termination costs 6,796,029 - 9,258,375 -
------------- ------------ ------------- ------------
Total operating and other expenses 31,591,593 16,352,787 108,189,075 25,249,611
------------- ------------ ------------- ------------
Loss from operations (20,521,666) (11,063,757) (75,737,210) (15,939,020)
Other expense, net - (23,212) (19,923) (23,212)
Interest income, net 538,325 175,414 2,329,239 222,683
------------- ------------ ------------- ------------
Net loss (19,983,341) (10,911,555) (73,427,894) (15,739,549)
Preferred stock dividend - (22,275,542) - (22,275,542)
------------- ------------ ------------- ------------
Net loss attributable to common stockholders $ (19,983,341) $(33,187,097) $ (73,427,894) $(38,015,091)
============= ============ ============= ============
Basic and diluted net loss per share
attributable to common stockholders $ (0.44) $ (3.19) $ (2.14) $ (4.17)
============= ============ ============= ============
Shares used in computing basic and
diluted net loss per share attributable
to common stockholders 45,232,674 10,388,195 34,368,315 9,108,152
============= ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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HealthCentral.com
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (73,427,894) $ (15,739,549)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock compensation expense 1,476,207 5,436,925
Amortization of prepaid contracts 946,295 275,927
Stock issued for termination of contracts 937,500 -
Write-off of intangible asset and website development costs 5,119,890 -
Loss on disposal of property and equipment 19,923 23,211
Depreciation and amortization expense 12,475,729 860,370
Acquired in-process research and
development - 554,901
Changes in assets and liabilities:
Accounts and other receivables (1,744,416) (121,222)
Prepaid expenses and other assets 2,079,628 (2,342,927)
Inventory (1,164,151) (1,370,353)
Accounts payable 4,159,090 1,570,901
Accrued expenses 3,418,571 2,089,091
Deferred revenue and other liabilities 166,443 (19,262)
-------------- --------------
Net cash used in operating activities (45,537,185) (8,781,987)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (5,950,412) (1,349,862)
Proceeds from sale of property and equipment 21,121 1,625
Cash paid in connection with acquisitions, net of
cash received (3,258,217) (6,030,931)
Cash paid for domain name - (290,583)
Payments from (to) related party (2,157,398) 2,307,099
-------------- --------------
Net cash used in investing activities (11,344,906) (5,362,652)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred
stock - 41,581,649
Payments on capital leases (222,780) (107,925)
Proceeds from the issuance of common stock 404,546 15,500
Proceeds from issuance of notes payable - 1,500,000
-------------- --------------
Net cash provided by financing activities 181,766 42,989,224
-------------- --------------
Net increase (decrease) in cash and cash equivalents (56,700,325) 28,844,585
Cash and cash equivalents at beginning of period 83,690,072 4,102,047
-------------- --------------
Cash and cash equivalents at end of period $ 26,989,747 $ 32,946,632
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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<TABLE>
<S> <C> <C>
Supplemental disclosures of non-cash investing
and financing activities:
Deferred stock compensation $ (1,344,348) $ 9,943,618
Warrants and options issued in connection with agreements 12,878 1,909,840
Cancellation of warrants issued in connection with agreements (57,177) -
Common stock purchased with notes receivable - 459,526
Issuance of stock in connection with acquisitions 7,274,880 16,811,514
Forgiveness of note from stockholder - (1,175,780)
Assets acquired under capital leases 35,612 12,644
Remeasurement of stock warrants issued for agreements 586,245 -
Preferred stock dividend - 22,275,542
Conversion of note payable to preferred stock - 1,500,000
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<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, RxList.com and DrugEmporium.com and through
the Vitamins.com catalog and retail stores. In addition, through the
HealthCentral.com Enterprise Web Services, we enable healthcare institutions to
provide healthcare information and products to their patients and consumers.
Through our HealthCentral.com network, we derive revenues from the online sale
of health and beauty-aid products, pharmaceuticals, and nutraceuticals. We
also derive revenues from the sale of reading glasses and nutraceuticals
through our catalog and retail stores and from the sale of 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 in June 2000, which
was accounted for as a pooling of interests (see Notes,) 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 nine
months ended September 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 dietary supplements, net of discounts, when products
are shipped to customers. Net sales include outbound shipping and handling fees
charged to customers. Prior to September 2000, we recognized commission revenue
for the use of our website related to sales made by Medi-Mail for prescription
drugs. However, our acquisition of DrugEmporium.com has enabled us to sell and
ship prescription drugs directly to the consumer. Accordingly, beginning in
September 2000, we began to recognize gross sales from the sale of
pharmaceutical products. Revenue also includes the wholesale revenue from the
sale of "Dr. Dean Edell Eyewear" brand eyeglasses to our brick-and-mortar
distribution partner. All revenues are recognized net of allowances for product
returns, promotional discounts and coupons at the time the products are shipped
to the customer. 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 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, the 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 ("SOP") 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-
8
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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. 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.
Inventory
Inventory, which consists primarily of finished goods, is valued at the lower of
cost or market, with cost determined using the weighted-average method.
Reclassifications
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue 00-10, "Accounting for Shipping and Handling Revenues and Costs."
This consensus indicates that amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenue to the vendor and
should be classified as revenue. The EITF did not reach a consensus with respect
to the classification of costs related to shipping and handling incurred by the
seller. Accordingly, we have decided to reclassify our shipping and fulfillments
costs to sales and marketing expense from cost of e-Commerce and other product
sales as we believe this to be a preferred presentation, which is consistent
with the treatment of such costs by our competitors. This treatment is now
reflected in the accompanying unaudited condensed consolidated financial
statements for all periods presented. As a result of the reclassification, sales
and marketing expense increased $1.1 million and $4.1 million for the three and
nine months ended September 30, 2000, respectively, and increased $256,000 for
both the three and nine months ended September 30, 1999, while cost of
e-Commerce and other product sales decreased by $1.1 million, $4.1 million and
$256,000 for the same periods.
Note 3 Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No.
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 No. 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 No. 101 in the fourth quarter of fiscal 2000. We do not
expect the adoption of SAB No. 101 to have a material effect on our financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 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 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.
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:
9
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<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Series A convertible preferred stock 2,400,000 1,012,500
Series B convertible preferred stock - 4,038,455
Convertible preferred stock warrants - 666,373
Convertible common stock warrants 12,249 -
Outstanding common stock options 4,341,664 2,203,920
Common shares subject to repurchase 182,295 312,500
--------- ---------
Total 6,936,208 8,233,748
========= =========
</TABLE>
Note 5 Acquisitions
Dr. Dean Edell Eyewear
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.
Vitamins.com
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, 2000
DrugEmporium.com
On September 14, 2000, we consummated an asset purchase agreement with
DrugEmporium, Inc. and its online drugstore subsidiary, DrugEmporium.com. Under
the terms of the asset purchase agreement, we acquired substantially all of the
assets and assumed 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 is convertible into 2,400,000 shares of common stock.
DrugEmporium, Inc. also has an opportunity to receive additional shares of our
convertible preferred stock, which do not carry a liquidation preference, if
certain revenue targets are met. In connection with this acquisition, we also
entered into a 10-year services agreement with DrugEmporium, Inc., under which
we 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. In consideration of
DrugEmporium, Inc.'s services, we will pay DrugEmporium, Inc. a fee of 2% of
the retail price net of any fees for shipping and handling.
This transaction was recorded using the purchase method of accounting. The
preliminary allocation of the aggregate purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed in connection
with this acquisition was based on the estimated fair values as determined by
management. The purchase price allocation is summarized below:
Goodwill.................................. $ 887,647
Identifiable assets....................... 1,939,549
Contracts................................. 1,700,000
Customer list............................. 1,100,000
Tradename................................. 870,000
Acquired workforce........................ 1,300,000
----------
Total purchase price............. $7,797,196
==========
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The total purchase price of $7.8 million consisted of 480,000 shares of
preferred stock, convertible into 2.4 million shares of common stock, valued at
$7,274,880 based upon the fair market value of our common stock of $3.0312 per
share on the date the asset purchase agreement was signed. The purchase price
also included transaction costs of $522,316. Goodwill and other intangibles are
being amortized on a straight-line basis over the estimated period of benefit of
three to four years.
The following unaudited pro forma financial information presents the
consolidated results as if the acquisition had occurred at the beginning of each
period, and includes adjustments for amortization of intangibles. This pro forma
financial information is not intended to be indicative of future results.
Unaudited pro forma consolidated results of operations are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Total revenue $ 35,641,521 $ 9,310,591
Net loss attributable to common stockholders $ (104,288,026) $ (38,845,353)
Basic and diluted net loss per share
Attributable to common stockholders $ (3.03) $ (4.26)
</TABLE>
Note 6 Segment Information
Based on the criteria established by SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," we now report 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, and all sales of Dr. Dean
Edell Eyewear both online and through retail pharmacies. Retail store sales
include sales of health-related products through our brick-and-mortar vitamin
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 Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
Segment: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
e-Commerce and other product sales $ 8,474,339 $2,725,215 $24,566,455 $2,747,896
Retail store sales 1,795,901 2,201,715 5,696,237 6,074,049
Advertising, content and other 799,687 362,100 2,189,173 488,646
----------- ---------- ----------- ----------
Total revenue $11,069,927 $5,289,030 $32,451,865 $9,310,591
=========== ========== =========== ==========
</TABLE>
Note 7 Commitments and Contingencies
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 business
relationship and the dispute are both currently inactive.
Note 8 Contracts
In August 2000, we terminated our contract with Bergen Brunswig. An expense of
$99,000 was incurred in association with the termination of this contract.
In August 2000, we also amended our agreement with AltaVista, an internet
portal, to issue 300,000 shares of our common stock, valued at $937,500 to
AltaVista in exchange for the termination of all our payment obligations under
the amended agreement dated May 15, 2000. Our relationship with AltaVista was
formally terminated on September 15, 2000.
11
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Note 9 Subsequent Events
On October 23, 2000, we entered into an asset purchase agreement with more.com,
Inc. and Comfort Living, Inc. Under the terms of the asset purchase agreement,
we acquired all of the assets and properties and assumed certain liabilities
associated with more.com's Comfort Living subsidiary, including its website,
inventory and a leased 18,000 square foot warehouse and distribution center in
Gaithersburg, Maryland. We also acquired all of more.com's trademarks, trade
names, websites, customer lists, and an affiliate agreement with PharMor.com and
Phar-Mor, Inc., in exchange for the issuance of 5,002,525 shares of our common
stock. The total purchase price approximates $6.2 million, including transaction
costs. We expect to account for the acquisition using the purchase method of
accounting.
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 is a leading provider of online healthcare e-Commerce and
content to consumers through our network of websites which includes
HealthCentral.com, HealthCentralRx.com, Vitamins.com, RxList.com and
DrugEmporium.com and through our Vitamins.com catalog and retail stores. In
addition, we provide website development to hospitals, hospital groups and
healthcare organizations though our Enterprise Web Services. HealthCentral.com
offers more than 25,000 SKU's of health, beauty and personal care products and
provides user-friendly interactive tools, customized health information pages,
personalized health risk assessments and topical newsletters.
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 business
relationship and the dispute are 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.
In August 2000, we terminated our contract with Bergen Brunswig. An expense
$99,000 was incurred in association with the termination of this contract. We
also amended our agreement with AltaVista, an internet portal, to issue 300,000
shares of our common stock, valued at $937,500, to AltaVista in exchange for the
termination of all our payment obligations under the amended agreement dated May
15, 2000. Our relationship with AltaVista was formally terminated on September
15, 2000.
On September 14, 2000, we consummated an asset purchase agreement with
DrugEmporium, Inc. and its online drugstore subsidiary, DrugEmporium.com. Under
the terms of the asset purchase agreement, we acquired substantially all of the
assets and assumed 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 is convertible into 2,400,000 shares of common stock.
DrugEmporium, Inc. also has an opportunity to receive additional shares of our
convertible preferred stock, which do not carry a liquidation preference, if
certain revenue targets are met. In connection with this acquisition, we also
entered into a 10-year services agreement with DrugEmporium, Inc., under which
we 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. The total purchase
price of $7.8 million consisted of 480,000 shares of preferred stock,
convertible into 2.4 million shares of common stock, valued at $7,274,880 based
upon the fair market value of our common stock of $3.0312 per share on the date
the asset purchase agreement was signed. The purchase price also included
transaction costs of $522,316. Goodwill and other intangibles are being
amortized on a straight-line basis over the estimated period of benefit of three
to four years.
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On October 23, 2000, we entered into an asset purchase agreement with more.com,
Inc. and Comfort Living, Inc. Under the terms of the asset purchase agreement,
we acquired all of the assets and properties and certain liabilities associated
with more.com's Comfort Living subsidiary, including its website, inventory and
a leased 18,000 square foot warehouse and distribution center in Gaithersburg,
Maryland. We also acquired all of more.com's trademarks, trade names, websites,
customer lists, and an affiliate agreement with PharMor.com and Phar-Mor, Inc.,
in exchange for the issuance of 5,002,525 shares of our common stock. The total
purchase price approximates $6.2 million, including transaction costs.
e-Commerce and other product sales are recognized for over-the-counter health
and beauty aid products and dietary supplements, net of discounts, when products
are shipped to customers. Net sales include outbound shipping and handling fees
charged to customers. Prior to September 2000, we recognized commission revenue
for the use of our website related to sales made by Medi-Mail for prescription
drugs. However, our acquisition of DrugEmporium.com has enabled us to sell and
ship prescription drugs directly to the consumer. Accordingly, beginning in
September 2000, we began to recognize gross sales from the sale of
pharmaceutical products. Revenue also includes the wholesale revenue from the
sales of the "Dr. Dean Edell Eyewear" brand eyeglasses to our brick-and-mortar
distribution partner. All revenues are recognized net of allowances for product
returns, promotional discounts and coupons at the time the products are shipped
to the customer. 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 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, the 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 ("SOP") 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. 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.
On October 24, 2000, we announced total intangible assets of $48.2 million and
accrued expenses of $10.5 million as of September 30, 2000. In connection with
filing this quarterly report on Form 10-Q, we have revised the intangible assets
and accrued expenses to $43.6 million and $5.8 million, respectively. These
amounts were revised to reflect a change in the valuation of certain assets and
liabilities associated with the DrugEmporium.com acquisition. As a result of
this revision, total intangible assets changed from $48.2 million to $43.6
million, total current liabilities changed from $28.7 million to $24.0 million,
total liabilities changed from $30.8 million to $26.1 million and total assets
as well as total liabilities and stockholders' equity changed from $100.9
million to $96.3 million. All other information in our press release dated
October 24, 2000 remains unchanged. These revisions had no impact on our
previously reported revenues, net loss, cash flows or balance sheets for any
period.
We incurred a net loss of approximately $20.0 million and $73.4 million for the
three and nine months ended September 30, 2000, respectively, compared to $33.2
million and $38.0 million for the three months and nine months ended September
30, 1999, respectively. We anticipate incurring additional operating losses for
the foreseeable future.
Results of Operations
Three Months and Nine Months Ended September 30, 2000 and 1999
e-Commerce and other product sales. e-Commerce and other product sales increased
to $8.5 million and $24.6 million for the three and nine months ended September
30, 2000, respectively, compared to $2.7 million for both the three and nine
months ended September 30, 1999, representing an increase of 211% and 794% for
the three and nine months ended September 30, 2000, respectively. Substantially
all of the growth in e-Commerce and other product sales over the same periods
last year was the result of increased catalog and e-Commerce sales, an increased
customer base, repeat purchases from existing customers and new product
offerings. Revenues are expected to increase through 2001 as we continue to grow
our e-Commerce and retail customer
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base and our affiliate relationships, as well as focus our marketing efforts
on our existing customer base. However, in the future, the level of our sales
will depend upon a number of factors including the frequency of customer
purchases, the quantity and mix of products sold and the price we charge for our
products.
Retail store sales. Retail store sales consist of brick-and-mortar sales of
healthcare and related over-the-counter products and were $1.8 million and $5.7
million for the three and nine months ended September 30, 2000, respectively,
compared to $2.2 million and $6.1 million for the three and nine months ended
September 30, 1999, respectively. Retail store revenues decreased 18% and 6% for
the three and nine months ended September 30, 2000, respectively, from the
comparable periods in 1999. While product mix and margins remained relatively
constant, volumes were lower, when compared to the same periods in 1999, due to
a shift in the focus to internet and catalog sales. We anticipate retail store
sales to remain at their current levels for the foreseeable future.
Advertising, content and other revenues. Advertising, content and other revenues
were $800,000 and $2.2 million for the three and nine months ended September 30,
2000, respectively, compared to $362,000 and $489,000 for the three and nine
months ended September 30, 1999, respectively. Advertising, content and other
revenues increased 121% and 348% for the three and nine months ended September
30, 2000, respectively, from the comparable periods in 1999. This increase was
primarily due to increased revenues from sponsorships and advertisements on our
websites of $564,000 and an increase in content revenue of $1.1 million. We
expect our vendor sponsorship revenues to increase through 2001 as we focus on
providing vendors with opportunities in which to communicate their marketing
messages to customers.
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, and inbound shipping charges. Cost of e-Commerce and other product sales
was $7.5 million and $22.6 million for the three and nine months ended September
30, 2000, respectively, compared to $2.8 million and $5.3 million for the three
and nine months ended September 30, 1999, respectively. Cost of e-Commerce and
other product sales increased 163% and 331% for the three and nine months ended
September 30, 2000, respectively, from the comparable periods in 1999. These
increases were attributable to an increase in costs of products, inbound
shipping and promotion costs associated with new customer acquisitions. In the
third quarter of 2000, we reclassified outbound shipping and fulfillments costs
from cost of e-Commerce and other product sales to sales and marketing expense
in order to better conform with industry practice as permitted by the Emerging
Issues Task Force Issue 00-10, "Accounting For Shipping and Handling Revenues
and Costs." This treatment is now reflected in the unaudited condensed
consolidated financial statements for all periods presented. If we had not made
this change, cost of e-Commerce and other product sales would have increased by
an additional $1.1 million and $4.1 million for the three and nine months ended
September 30, 2000, respectively, and increased an additional $256,000 for both
the three and nine months ended September 30, 1999. We expect that our cost of
e-Commerce and product sales will continue to fluctuate ratably with changes in
e-Commerce and product sales.
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. 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 their estimated useful lives. Content and product development
costs were $2.5 million and $8.5 million for the three and nine months ended
September 30, 2000, respectively, compared to $1.3 million and $1.8 million for
the three and nine months ended September 30, 1999, respectively. Content and
product development costs increased 95% and 387% for the three and nine months
ended September 30, 2000, respectively, from the comparable periods in 1999. The
increase for the nine months ended September 30, 2000 was primarily attributable
to $5.9 million in increased staffing and associated costs related to enhancing
and maintaining our websites. We expect content and product development expenses
to stabilize in the fourth quarter 2000, and continuing into 2001.
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, outbound
shipping charges and certain 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. Sales and
marketing expenses were $8.3 million and $47.8 million for the three and nine
months ended September 30, 2000, respectively, compared to $6.5 million and $9.5
million for the three and nine months ended September 30, 1999, respectively.
Sales and marketing expenses increased 28% and 403% for the three and nine
months ended September 30, 2000, respectively, from the comparable periods in
1999. The increase for the nine months ended September 30, 2000 was primarily
attributable to $10.6 million in related expenses to America Online, AltaVista
and $16.0 million in other online and offline advertising expenses incurred to
increase awareness of our HealthCentral brands and $5.5 million for salary and
staff expenses. In the third quarter of 2000, outbound shipping and fulfillments
costs were reclassified to sales and marketing (from costs of e-Commerce and
other product sales) to reflect the classification allowed by the Emerging
Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Revenues
and Costs." This reclassification is now reflected in the unaudited condensed
consolidated financial statements for all periods presented. If we had not made
this change, sales and marketing expense would have been decreased by an
additional $1.1 million and $4.1 million for the three and nine months ended
September 30, 2000, respectively, and decreased an additional $256,000 for both
the three and nine months ended September 30, 1999. In the short term, we expect
sales and marketing expenses to increase slightly due to seasonality and the
addition of certain more.com, Inc. and Comfort Living assets, then stabilize in
2001.
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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, as well as
professional services and other general corporate expenses. General and
administrative expenses were $2.4 million and $7.6 million for the three and
nine months ended September 30, 2000, respectively, compared to $1.4 million and
$2.2 million for the three and nine months ended September 30, 1999,
respectively, representing an increase of 69% and 242% for the three and nine
months ended September 30, 2000, respectively, from the comparable periods in
1999. The increase for the nine months ended September 30, 2000 was primarily
attributable to an increase of $3.6 million in personnel related costs and
$715,000 in professional services related to our operations as a public company.
As we continue to realize operational efficiencies, general and administrative
expenses are expected to stabilize through 2001.
Amortization of intangible assets. Amortization of intangible assets relates to
the amortization of intellectual property related to domain names and intangible
assets resulting from acquisitions. Amortization of intangibles was $3.8 million
and $10.9 million for the three and nine months ended September 30, 2000,
respectively, compared to approximately $519,000 for both the three and nine
months ended September 30, 1999, which represents an increase of 629% and 1997%,
respectively. We anticipate our amortization expense to increase due to the
recent acquisitions of certain assets of DrugEmporium.com, more.com, Inc. and
Comfort Living, Inc.
Stock compensation. Stock compensation expense was approximately $358,000 and
$1.5 million for the three and nine months ended September 30, 2000,
respectively, compared to $3.2 million and $5.4 million for the three and nine
months ended September 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 89% and
73% for the three and nine months ended September 30, 2000, respectively, from
comparable periods in 1999 as a result of a decrease in the number of employees
and a decrease in the market valuation of our stock.
Acquisition and contract termination costs. Acquisition and contract termination
costs were $6.8 million and $9.3 million for the three and nine months ended
September 30, 2000, respectively. We had no acquisition costs or contract
termination costs during 1999. Acquisition costs for the three months ended
September 30, 2000 were primarily attributable to the write-off of $4.5 million
in website development costs as a result of the DrugEmporium.com asset
acquisition. The contract termination costs for this same period included $1.6
million related to the termination of the Alta Vista contract, which includes
the issuance of 300,000 shares of our common stock valued at $937,500 in
exchange for the termination of all of our payment obligations; $603,000 related
to the termination of the America Online contract; and $99,000 associated with
the termination of the Bergen Brunswig contract. The acquisition costs for the
nine month period also included $2.5 million for the Vitamins.com merger, which
consisted of legal and professional fees, financial advisory fees, regulatory
filing fees and integration costs. We expect additional transaction and other
cash costs in association with the acquisition of more.com, Inc. and Comfort
Living, Inc.
Interest income, net. Net interest income consists of earnings on our cash and
cash equivalents offset by interest on capital lease obligations. Net interest
income was approximately $538,000 and $2.3 million for the three and nine months
ended September 30, 2000, respectively, compared to $175,000 and $223,000 for
the three and nine months ended September 30, 1999, respectively. The increase
for the nine months ended September 30, 2000 was due to higher interest-bearing
asset balances in 2000.
Preferred stock dividend. In August 1999, we sold 4,038,455 shares of Series B
convertible preferred stock at $5.20 per share, for total cash proceeds of
approximately $21 million. The difference between the sales price and the
deemed value per share of the common stock on the transaction date resulted in
a beneficial conversion feature in the amount of $11.4 million. The beneficial
conversion feature has been reflected as a preferred stock dividend in the
statement of operations in the year ended December 31, 1999. The remaining
$10.9 million was due to a recapitalization of Vitamins.com in August 1999 as
a result of converting the company from a LLC to a C corporation. All share
and per share amounts have been restated to reflect these events.
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 September 30, 2000, we had $27 million in cash and cash equivalents. Net
cash provided by financing activities for the nine months ended September 30,
2000 was $182,000 as a result of proceeds from the issuance of common stock of
$405,000, partially offset by capital lease payments of $223,000.
Net cash used in operating activities was $45.5 million and $8.8 million for the
nine months ended September 30, 2000 and 1999, respectively. Net cash used in
operating activities in the nine months ended September 30, 2000 was comprised
primarily of a $73.4 million net loss offset by $12.5 million in depreciation
and amortization of fixed and intangible assets, $946,000 million in
amortization of prepaid contracts, $938,000 for stock issued for termination of
contracts, $5.1 million in write-offs of intangible assets and website
development costs, and $1.5 million
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in non-cash stock compensation expense. The increase in the use of cash was
primarily attributable to the large net loss.
Net cash used in investing activities was $11.3 million and $5.4 million for the
nine months ended September 30, 2000 and September 30, 1999, respectively. The
increase was attributable to $6.0 million for the purchase of property and
equipment, $3.3 for acquisitions and $2.1 million for payments made to related
parties, which consisted of $1.4 million for the purchase of the Dr. Dean Edell
Eyewear license and $1.3 million for the note payable associated with the
acquisition of RxList.com, partially offset by the receipt of approximately
$550,000 related to a reduction in the final purchase price of L&H Vitamins.
Our capital requirements depend on numerous factors, including our ability to
integrate our acquired technology from the acquisition of certain assets of
DrugEmporium.com, more.com, Inc. and Comfort Living, Inc. 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. In an
effort to realize efficiencies from acquisitions, reduce expenses, preserve our
cash, and improve operational efficiencies, duplicate positions have been
eliminated. We will continue to look at gaining efficiencies, which may result
in the elimination of additional positions.
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 and costs associated with
integrating acquisitions. We currently believe that our available cash, cash
equivalents and revenues generated from operations will be sufficient to meet
our anticipated needs through approximately the first half of 2001, provided
that we achieve our targeted revenues efficiencies and cost reductions and
restructure certain partnerships and other creditor relationsips.
Any projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash and cash equivalents are insufficient to satisfy
our liquidity requirements, we may need additional cash sooner than currently
anticipated and/or may need to raise additional capital by obtaining a line of
credit from a lender, selling additional equity or selling debt securities 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. We cannot be certain that additional financing will be available to
us on acceptable terms when required, or at all.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No.
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 No. 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 No. 101 in the fourth quarter of fiscal 2000. We do not
expect the adoption of SAB No. 101 to have a material effect on our financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board 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 No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 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 does 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 LAUNCHED OUR HEALTHCENTRAL.COM WEBSITE IN NOVEMBER 1998, OUR VITAMINS.COM
WEBSITE IN MARCH 1999, AND OUR HEALTHCENTRALRX.COM WEBSITE IN SEPTEMBER 1999 AND
WE ACQUIRED ASSETS OF DRUGEMPORIUM.COM IN SEPTEMBER 2000, AND ENTERED INTO AN
AGREEMENT TO ACQUIRE ASSETS OF MORE.COM, INC. AND COMFORT LIVING, INC. IN
OCTOBER 2000, AND WE 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 other established Internet health
companies, such as drugstore.com, CVS.com, planetRx and WebMD;
. gain advertising and sponsorship revenue from vendors of health-
related products and services;
. implement a successful e-Commerce strategy through our websites and
through Comfort Living.com upon the closing of the asset acquisition
agreement with more.com, Inc. and Comfort Living;
. 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;
. attract, retain and motivate qualified personnel; and
. manage inventory levels and fulfillment operations effectively.
WE HAD AN ACCUMULATED DEFICIT OF $140 MILLION AT SEPTEMBER 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.com network brands;
. develop or acquire health-related content, technologies or other
complementary businesses;
. hire additional employees;
. offer product promotions;
. develop and expand our systems infrastructure and support functions;
and
. expand product offerings.
Even if we were to achieve profitability, we might not be able to sustain or
increase profitability on a quarterly or annual basis.
WE NEED TO GENERATE SUBSTANTIAL REVENUES AND PROFIT FROM OUR E-COMMERCE BUSINESS
FOR HEALTHCARE PRODUCTS, THIS MARKET IS UNPROVEN, AND WE HAVE LIMITED EXPERIENCE
IN IT.
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The healthcare e-Commerce market is unproven, and we have limited experience in
the sale of healthcare products and services online. Our rate of revenue growth
and profitability could be significantly less than that of other online
merchants, including those in other industries, many of which they have longer
operating histories and greater name recognition. 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 and profit margins, if any,
of the online pharmacy and health products market could be significantly less
than those for the online market for other products.
WE RECENTLY ACQUIRED OUR OWN FULFILLMENT CAPABILITIES FOR E-COMMERCE PRODUCT
ORDERS, AND WE HAVE LIMITED EXPERIENCE IN PROVIDING THESE SERVICES.
Through the acquisition of assets of DrugEmporium.com and the proposed
acquisition of assets of Comfort Living, Inc., we believe we will have acquired
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 primarily upon third parties to manage most of our product
fulfillment responsibilities and therefore have limited experience in providing
these services. A failure in the ability to purchase items on favorable terms,
obtain sufficient types and quantities of supplies, manage inventory levels
effectively, or fill and ship orders on a timely basis could result in customer
dissatisfaction and could significantly harm our e-Commerce business. In
addition, the distribution facilities are subject to fire, flood, power loss,
telecommunications failure, thefts, break-ins, tornadoes and other similar
events which could cause interruptions or delays in our business or loss of
data, or render us unable to accept and fulfill customer orders.
We also rely on third-party carriers for shipments to and from our distribution
facilities. We are therefore subject to the risks, including employee strikes
and inclement weather, associated with our distribution partners and our
carriers' ability to provide product fulfillment and delivery services to meet
our distribution and shipping needs. Failure to deliver products to our
customers in a timely manner could adversely affect our reputation, brand and
business.
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, CVS.com, planetRx, drkoop.com,
WebMD and medscape.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.
LENGTHY SALES CYCLES FOR OUR PRIVATE LABEL WEBSITES FOR HEALTHCARE INSTITUTIONS
COULD ADVERSELY AFFECT OUR REVENUE GROWTH.
The sales process for our institutional e-Commerce and web site development
business is lengthy and involves 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.
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.
Because of the interest in the privacy of health related information, we or any
other ehealth company or the ehealth industry in general, could become either a
target of, or a witness in, a federal or state agency or private party claim
regarding privacy issues,
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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.
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 WebMD, drkoop.com, DiscoveryHealth.com, InteliHealth, and Medscape.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, CVS.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,
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such as drkoop.com and 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.
CONSUMERS MAY REJECT THE CONCEPT OF AN ONLINE HEALTH PRODUCTS STORE IN FAVOR OF
A BRICK-AND-MORTAR 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 and health product stores 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 and health product
stores;
. longer delivery times for Internet orders, delays in responses to
customer inquiries and/or difficulties in returning products as
compared to brick-and-mortar stores;
. shipping charges and problems related to shipping, such as product
damage or failure to ship the correct order;
. lack of face-to-face interaction with a pharmacist or other retail
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.
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.
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 business
relationship and dispute are 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.
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 September 30, 2000, we had cash and cash equivalents of $27 million. We
currently expect to be able to meet our anticipated cash needs through
approximately the first half of 2001 out of existing cash and cash equivalents
and revenues from operations, provided that we are able to achieve our targeted
revenues, efficiencies and cost reductions and restructure certain partnerships
and other creditor relationships. 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, technological
and other risks relating to the integration of the acquisitions of
DrugEmporium.com assets and the proposed acquisition of more.com, and
Comfort Living, Inc. assets;
. additional acquisitions by HealthCentral.com and the integration of
these acquisitions;
. customer acquisition costs resulting from heightened competition in
the e-health marketplace; and
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. our ability to restructure some of our partnership agreements or
achieve our targeted efficiencies and cost reductions from recent and
pending acquisitions.
Any projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash and cash equivalents are insufficient to satisfy
our liquidity requirements, we will seek to sell additional equity or debt
securities, or to obtain credit facilities from lenders. 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.
WE FACE UNCERTAINTY RELATED TO PHARMACEUTICAL COSTS AND PRICING, WHICH COULD
AFFECT OUR REVENUES AND MARGIN.
Sales of our pharmaceutical products will depend in part on the availability of
reimbursement from third-party payors such as government health administration
authorities, private health insurers, health maintenance organizations and other
organizations. Because these organizations are traditionally focused on reduced
cost to employer groups, whereas we are focused more on direct customer service,
we must devote time and resources to develop third-party payor confidence in our
approach.
Additionally, third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. The efforts of third-party
payors to contain costs will place downward pressures on gross margins from
sales of prescription drugs. Our revenues from prescription drug sales may also
be affected by health care reform initiatives of federal and state governments,
including proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs, and changes in programs providing for
reimbursement for the cost of prescription drugs. Such initiatives could lead to
the enactment of federal and state regulations that may adversely impact our
prescription drug sales. We cannot be certain that our products or services may
not be considered cost effective, and adequate third-party reimbursement may not
be available to enable us to maintain price levels sufficient to realize
adequate profit margins.
ANY ERRORS IN FILLING OR PACKAGING THE PRESCRIPTION DRUGS FOR OUR CUSTOMERS OR
DISPENSING PRODUCTS ON OUR WEBSITES 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, Vitamins.com,
DrugEmporium.com websites and on the Comfort Living.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 our in-house pharmacists and we may
be exposed to liability 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 OUR HEALTHCENTRAL.COM NETWORK AND VITAMINS.COM RETAIL STORES.
Consumers may sue us if any of our products or services that are sold through
our websites or retail stores are defective, fail to perform properly or injure
the user, even if such goods and services are manufactured and 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;
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. 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.
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 AND/OR DEVELOP.
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 OUR
HEALTHCENTRAL.COM NETWORK, WHICH CAN RESULT IN ADVERSE PUBLICITY, REVENUE LOSSES
AND EROSION OF CUSTOMER TRUST.
In the past, we have experienced significant system interruptions in the
performance or our HealthCentralRx.com online drug store. Any additional system
problems in the HealthCentral.com network 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.
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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.
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.
In part because of our limited operating history, it is difficult to accurately
forecast our future revenues or results of operations. We have little meaningful
historical financial data upon which to base planned operating expenses. Our
sales and operating results are difficult to forecast because they generally
depend on the volume and timing of the orders we receive, which are themselves
unpredictable. A variety of factors may cause our annual and quarterly operating
results to fluctuate significantly including:
. shifts in user traffic levels on the HealthCentral.com, RxList.com,
HealthCentralRx.com, Vitamins.com, DrugEmporium.com and upon the
closing of our proposed acquisition, Comfort Living.com websites and
associated costs;
. fluctuations in the number of visitors to our websites and our ability
to convert visitors 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 stores and retail stores;
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. management of our inventory levels and fulfillment operations;
. shifts in our ability, and that of our vendors to ensure sufficient
product supply;
. fluctuations in the wholesale prices of the products we sell as well
as shipping costs or delivery times;
. seasonal patterns of spending by advertisers and sponsors and trends
in advertising rates;
. long sales cycles and delays in website development for institutional
projects;
. costs related to acquisitions of businesses or the timing of payments
to our strategic partners;
. fluctuations in expected revenues from our strategic relationships;
. changes in reimbursement policies and practices of pharmacy benefit
managers and other third party payors;
. systems problems, such as disruptions, slower system response times
and degradation in customer service; and
. 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. As we continue to rationalize our cost-
structure, including possible additional layoffs, 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 our completed and proposed acquisitions, we need to assimilate the operations
of Vitamins.com, DrugEmporium.com, more.com and Comfort Living into our
operations. 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, DrugEmporium.com operations are
based in Kentucky and the Compact Living, Inc. operations are out of Maryland.
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
as 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 DrugEmporium.com,
Comfort Living and more.com 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. Additionally,
the loss of any of our key executive officers could have a significant negative
impact on our operations.
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
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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 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,
DRUGEMPORIUM.COM, OR UPON THE CLOSING OF OUR PENDING ASSET ACQUISITION, OF
MORE.COM AND COMFORT LIVING, 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,
DrugEmporium.com, more.com or Comfort Living operations or accomplish the
execution of our e-Commerce business plan. The integration of these recent
acquisitions into our business may strain our existing technology and operations
systems as we continue to assimilate Vitamins.com and DrugEmporium.com into our
existing operations and begin integrating and the assets of more.com, Inc. and
Comfort Living into our existing operations. In addition, the personnel that we
have hired may decide not to continue working for us or otherwise may not
integrate successfully with our current staff. These difficulties could disrupt
our ongoing business, distract our management and employees or increase our
expenses.
Our merger with Vitamins.com, and our asset acquisition of DrugEmporium.com and
our proposed acquisition of more.com, Inc. and Comfort Living assets could
adversely affect our combined financial results or the market price of our
common stock. If the benefits of the merger or the acquisitions do not exceed
the costs associated with the them, including any dilution to our stockholders
resulting from the issuance of shares in connection with the merger and
acquisitions, our financial results, including earnings per share, could be
adversely affected. In addition, if we do not achieve the perceived benefits of
the merger or the acquisitions as rapidly as, or to the extent, anticipated by
financial or industry analysts, the market price of our common stock may
decline.
WE MAY BE EXPOSED TO LIABILITIES THAT ARE NOT COVERED BY THE INDEMNIFICATION
AVAILABLE UNDER THE VITAMINS.COM MERGER AGREEMENT, THE DRUGEMPORIUM.COM ASSET
PURCHASE AGREEMENT OR THE MORE.COM, INC. AND COMFORT LIVING ASSET PURCHASE
AGREEMENT, WHICH MAY HARM OUR RESULTS OF OPERATION AND FINANCIAL CONDITION.
Upon consummation of our merger and asset purchase agreements, we assumed all
the liabilities of Vitamins.com, certain accounts payables and liabilities of
DrugEmporium.com and if the pending acquisition of certain assets of more.com,
Inc. closes, certain liabilities of more.com, Inc. and Comfort Living, Inc.
associated with the asset purchase. 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 respective agreements, we may have a claim for indemnification against the
former stockholders of Vitamins.com, Drug Emporium, Inc. or more.com. The
Vitamins.com 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.com and Vitamins.com to cover any indemnification
claims. The DrugEmprorium.com and more.com agreements provide that 10% of the
HealthCentral.com stock issued or to be issued in the purchase will be placed in
an escrow account and held for period of one year. The escrow amount will be our
sole recourse for indemnification claims other than in the case of fraud.
However, the assumed liabilities, both at the time of and arising after the
consummation of the agreements, 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 mergers or asset acquisitions of five companies,
Enterprise Web Services, HealthCentralRx.com, RxList.com, Vitamins.com, and
DrugEmporium.com. In addition, we recently entered into an agreement to acquire
certain assets of more.com, Inc. and Comfort Living. 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 and will likely face integration risks as discussed below including
but are not limited to:
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. 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 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. See also
"We may not achieve the expected benefits of the acquisition of Vitamins.com,
DrugEmporium.com, or upon the closing of our pending asset acquisition, of
more.com and Comfort Living and their integration may result in a disruption
to our business or the distraction of our management and employees."
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 website network 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.
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
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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.
As of September 30, 2000, our executive officers and directors and their
respective affiliates owned approximately 38% of our outstanding common stock.
Accordingly, these stockholders may, as a practical matter, be able to exert
significant influence over matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combinations. This concentration 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 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.
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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 45,592,369 outstanding shares of common stock, based upon shares
outstanding as of October 31, 2000 and assuming no exercise of options or
warrants. Of these shares, approximately 21.2 million shares are either freely
tradable in the public market without restriction under the Securities Act, or
are otherwise eligible for sale under Rule 144 under the Securities Act, as of
October 31, 2000, subject to volume, manner or sale notice and public
information restrictions of Rule 144. Of the 24.4 million remaining shares,
approximately 1.7 million will become eligible for sale under Rule 144 in
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. Of the remaining 22.7 million
shares the 22.4 million shares that were issued to stockholders in connection
with our acquisition of Vitamins.com in June 2000, the 22.4 million shares
will not be eligible for re-sale under rule 144 until June 2001 and the
300,000 shares issued to Alta Vista in August 2000 will not be eligible for
sale under Rule 144 until August 2001. However, we have agreed to register
these shares for sale on the public market as early as December 2000. We also
issued 480,000 shares of Series A Preferred Stock in connection with our
acquisition of assets from Drug Emporium, Inc., which shares are convertible
into 2.4 million shares of our common stock. These shares will be eligible for
re-sale under Rule 144 in September 2001, although we have agreed to register
these shares for re-sale on the public market as early as March 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 to 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; and
. change of control clauses in the employment agreements with several
company officers.
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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.
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 September 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 June 16, 2000, in connection with a merger with Vitamins.com, a retailer that
provides vitamins, minerals and supplements, related health and wellness
products and information to consumers, we issued 22,432,801 shares of our common
stock to the shareholders of Vitamins.com. Each share of Vitamins.com stock was
exchanged for 0.387 shares of HealthCentral.com common stock and we spent
approximately $2.5 million in acquisition and related costs. These shares were
issued in reliance on Rule 506 under Regulation D.
On September 14, 2000, we issued 480,000 shares of non-voting preferred stock to
shareholders of DrugEmporium, Inc. in connection with an asset purchase
agreement with DrugEmporium, Inc. and its online drugstore subsidiary,
DrugEmporium.com. Under the terms of the asset purchase agreement, we acquired
substantially all of the assets and assumed 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 is convertible into 2,400,000 shares of common
stock either at the holder's option or automatically upon the closing price of
the common stock reaching a certain price. DrugEmporium, Inc. also has an
opportunity to receive additional shares of convertible preferred stock, which
do not carry a liquidation preference, if certain revenue targets are met
relating to new opportunities in the early stages of development. These shares
were issued in reliance on Rule 506 under Regulation D.
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. We have used $47.6
million of the net offering proceeds through September 30, 2000, of which $33.2
million was used for the funding of working capital and operating losses,
$6.0 million was used for capital expenditures and $5.7 million for acquisition
costs. Other than $1.4 million paid to Dr. Dean Edell, a director, for the
purchase of the Dr. Dean Edell Eyewear license, and $1.3 million paid to Neil
Sandow for the purchase of RxList, none of these payments represented direct or
indirect payments to our directors, officers or other affiliates. The remaining
initial public offering proceeds have been invested in short-term, investment
grade, interest bearing securities.
Item 3. Defaults Upon Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
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Item 5. Other Information.
On October 31, 2000, C. Sage givens resigned as a member of our Board
of Directors and on November 13, 2000, Robin Wolaner resigned as a
member of our Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
4.2 Registration Rights Agreement between the Company and
AltaVista Company, dated August 2, 2000.
10.31++ Employment Agreement between the Company and Robert M.
Haft, dated March 15, 2000 and effective as of June 16,
2000.
10.32 Assignment and Amendment Agreement among the Company,
Brand Optical Corporation and Dr. Dean Edell, dated
April 11, 2000.
27.1 Financial Data Schedule
++ Supercedes previously filed exhibit.
(b) Reports on Form 8-K:
A current report on Form 8-K/A was filed with the Securities and Exchange
Commission by HealthCentral.com on August 30, 2000 to include financial
statements for Vitamins merger.
A current report on Form 8-K was filed with the Securities and Exchange
Commission by HealthCentral.com on September 22, 2000 to report the issuance of
a press release on the Drug Emporium, Inc. asset acquisition.
A current report on Form 8-K was filed with the Securities and Exchange
Commission by HealthCentral.com on September 28, 2000 to report the consummation
of the acquisition of assets of Drug Emporium, Inc.
A current report on Form 8-K was filed with the Securities and Exchange
Commission by HealthCentral.com on October 27, 2000 to report the issuance of a
press release on the more.com, Inc. and Comfort Living, Inc. asset acquisition.
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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: November 14, 2000
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EXHIBIT INDEX
Number Description
------ -----------
4.2 Registration Rights Agreement between the Company and AltaVista
Company, dated August 2, 2000.
10.31++ Employment Agreement between the company and Robert M. Haft, dated
March 15, 2000 and effective as of June 16, 2000.
10.32 Assignment and Amendment Agreement among the Company, Brand Optical
Corporation and Dr. Dean Edell, dated April 11, 2000.
27.1 Financial Data Schedule.
++Supercedes previously filed exhibit.
32
