<PAGE>
UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 14, 2000
HEALTHCENTRAL.COM
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 000-27567 94-3250851
-------- ------------------------ -------------------
(Jurisdiction of (Commission file number) (I.R.S. Employer
incorporation) Identification No.)
HealthCentral.com
6001 Shellmound Street, Suite 800
Emeryville, CA 94608
---------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 250-2500
Not Applicable
---------------------------------------------------------------------------
(Former name or address, if changed since last report)
ITEM 2. Acquisition or Disposition of Assets
On September 28, 2000, Registrant filed a Current Report on Form 8-K
announcing the acquisition of the assets of DrugEmporium.com, Inc., a Delaware
corporation. This amendment to Registrant's Current Report on Form 8-K is being
filed to include the Financial Statements and Pro Forma Financial Information
required by Item 7 of Form 8-K.
ITEM 7. Financial Statements and Exhibits.
(a) Financial Statements of the Business Acquired
See Page F-1 of this Report
(b) Pro Forma Financial Information
See Page F-20 of this Report
(c) Exhibits
23.1 Consent of Independent Auditors
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 duly
authorized undersigned.
Date: November 28, 2000 HealthCentral.com
/s/ C. Fred Toney
------------------
C. Fred Toney
Chief Financial Officer
<PAGE>
FINANCIAL STATEMENTS
DrugEmporium.com, Inc.
Period from April 13, 1999 (inception) to February 26, 2000
and the Six Months Ended August 26, 2000
with Report of Independent Auditors
F-1
<PAGE>
DrugEmporium.com, Inc.
Financial Statements
Period from April 13, 1999 (inception) to February 26, 2000
and Six Months Ended August 26, 2000 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.................................................................... F-3
Financial Statements
Balance Sheets.................................................................................... F-4
Statements of Operations.......................................................................... F-5
Statement of Stockholders' Equity (Deficit)....................................................... F-6
Statements of Cash Flows.......................................................................... F-7
Notes to Financial Statements..................................................................... F-8
</TABLE>
F-2
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
DrugEmporium.com, Inc.
We have audited the accompanying balance sheet of Drug Emporium.com, Inc. as of
February 26, 2000 and the related statements of operations, stockholders' equity
(deficit), and cash flows for the period from April 13, 1999 (inception) to
February 26, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DrugEmporium.com, Inc. at
February 26, 2000, and the results of its operations and its cash flows for the
period from April 13, 1999 (inception) to February 26, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Columbus, Ohio
April 18, 2000, except for
Note 10, as to which the date
is September 14, 2000
F-3
<PAGE>
DrugEmporium.com, Inc.
Balance Sheets
<TABLE>
<CAPTION>
February 26, August 26,
2000 2000
-------------- --------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,825 $ 85,810
Accounts receivable, net of allowances for returns
and doubtful accounts 25,542 79,584
Inventories 2,752,055 2,719,453
Prepaid expenses and other current assets 1,115,678 508,528
------------- --------------
Total current assets 3,898,100 3,393,375
Property and equipment, net 11,302,406 9,374,364
Deposits and other assets 65,005 91,514
------------- --------------
Total assets $ 15,265,511 $ 12,859,253
============= ==============
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 4,018,864 $ 2,836,167
Accrued expenses 2,880,188 4,180,584
Accrued exit costs (Note 10) - 2,264,795
Current portion of capital lease obligations 2,096,985 2,833,125
Current portion of notes payable 1,358,889 1,596,944
------------- --------------
Total current liabilities 10,354,926 13,711,615
Capital lease obligations, long-term portion 1,600,020 1,280,449
Notes payable, long-term portion 950,643 203,859
Note payable - Drug Emporium, Inc. 9,427,347 25,710,724
Stockholders' Equity (Deficit):
Preferred Stock, $0.001 par value:
Authorized shares - 21,000,000
Issued and outstanding shares - 21,000,000 21,000 21,000
Liquidation preference - $7,500,000
Common stock, $0.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 2,900,000 and 1,875,000 at
February 26, 2000 and August 26, 2000, respectively 2,900 1,875
Additional paid-in capital 7,557,300 7,529,625
Accumulated deficit (14,567,425) (35,547,394)
Notes receivable from stockholders (81,200) (52,500)
------------- --------------
Total stockholders' equity (deficit) (7,067,425) (28,047,394)
-------------- --------------
Total liabilities and stockholders' equity (deficit) 15,265,511 $ 12,859,253
============== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
DrugEmporium.com, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Period From
April 13, 1999 Six Months
(Inception) to Ended
February 26, August 26,
2000 2000
--------------- --------------
(Unaudited)
<S> <C> <C>
Revenues $ 1,052,705 $ 2,343,015
Cost of sales 1,239,817 2,537,722
------------ -------------
Gross loss (187,112) (194,707)
Selling, general and administrative expenses 14,035,124 13,501,004
------------ -------------
Loss from operations (14,222,236) (13,695,711)
Loss on sale of net assets (Note 10) - (6,014,795)
Interest expense (345,189) (1,269,463)
------------ -------------
Net loss $(14,567,425) $(20,979,969)
============ =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
DrugEmporium.com, Inc.
Statement of Stockholders' Equity (Deficit)
Period from April 13, 1999 (Inception) to February 26, 2000
and Six Months Ended August 26, 2000 (Unaudited)
<TABLE>
<CAPTION>
Notes Total
Preferred Stock Common Stock Additional Receivable Stockholders'
------------------------------------------ Paid-In From Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Deficit Equity
----------- -------- ---------- ------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock, $0.001
par value, at $0.028 per share $ - $ - 2,900,000 $ 2,900 $ 78,300 $ (81,200) $ - $ -
Issuance of Series A preferred
stock, $0.001 par value, at
$0.357 per share 21,000,000 21,000 - - 7,479,000 - - 7,500,000
Net loss and comprehensive loss
for period from inception
(April 13, 1999) to February - - - - - - (14,567,425) (14,567,425)
26, 2000
----------- -------- ---------- ------- ---------- ----------- ------------ -------------
Balance at February 26, 2000 21,000,000 21,000 - 2,900 7,557,300 (81,200) (14,567,425) (7,067,425)
Common stock redeemed with
cancellation of note receivable
(Unaudited) - - (1,025,000) (1,025) (27,675) 28,700 - -
Net loss and comprehensive loss
for the six months ended August
26, 2000 (Unaudited) - - - - - - (20,979,969) (20,979,969)
----------- -------- ---------- ------- ---------- ----------- ------------ -------------
Balance at August 26, 2000
(Unaudited) 21,000,000 $21,000 1,875,000 $ 1,875 $7,529,625 $ (52,500) $(35,547,394) $ (28,047,394)
=========== ======== ========== ======= ========== =========== ============ =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
DrugEmporium.com, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
April 13, 1999 Six Months
(Inception) to Ended
February 26, August 26,
2000 2000
----------------- -----------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss $(14,567,425) $(20,979,969)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,515,757 1,294,347
Impairment of assets -- 3,750,000
Changes in operating assets and liabilities:
Accounts receivable (25,542) (54,042)
Prepaid and other current assets (1,115,678) 112,150
Inventory (2,752,055) 32,602
Other assets (65,005) (26,509)
Accounts payable 4,018,864 (1,182,697)
Accrued expenses 2,880,188 3,565,191
----------------- ----------------
Net cash used in operating activities (10,110,896) (13,488,927)
Investing activities
Purchases of property and equipment (8,272,610) (1,280,605)
----------------- ----------------
Net cash used in investing activities (8,272,610) (1,280,605)
Financing activities
Payments on capital lease obligations (848,548) (924,131)
Proceeds from issuance of notes payable 2,790,973 --
Payment on notes payable (481,441) (508,729)
Proceeds from note payable - Drug Emporium, Inc. 9,427,347 16,283,377
Proceeds from issuance of common stock 7,500,000 --
----------------- ----------------
Net cash provided by financing activities 18,388,331 14,850,517
Change in cash and cash equivalents 4,825 80,985
Cash and cash equivalents at beginning of period -- 4,825
----------------- ----------------
Cash and cash equivalents at end of period $ 4,825 $ 85,810
================= ================
Supplemental cash flow information
Cash paid for interest $ 331,481 $ 148,074
================= ================
Supplemental non-cash transactions
Common stock issued in exchange for note receivable $ 81,200 $ --
================= ================
Common stock redeemed with cancellation of note receivable $ -- $ 28,700
================= ================
Capital lease obligations incurred $ 4,545,553 $ 1,340,700
================= ================
</TABLE>
See accompanying notes.
F-7
<PAGE>
1. Organization and Business
DrugEmporium.com, Inc. (the Company) is an Internet-based retailer of health,
wellness, nutrition, beauty, personal care and pharmacy products. The Company
was incorporated on April 13, 1999 in the state of Delaware and launched its
full-scale Web-store and commercial operations on August 30, 1999.
The Company was founded by DrugEmporium, Inc, a national drug store chain, which
owns approximately 88% of the outstanding stock. The remaining shares are owned
by executive management of the Company.
On September 14, 2000, the Company sold substantially all of its assets and
assigned certain liabilities to HealthCentral.com in exchange for preferred
stock. (See Note 10)
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company has a fiscal year ending on the last Saturday in the month of
February. The Company's fiscal quarters end on the last Saturday of May,
August, November and February.
Unaudited Interim Financial Information
The financial information as of August 26, 2000 and for the six months then
ended is unaudited, but has been prepared on the same basis as the annual
financial statements and, in the opinion of management includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for the fair presentation of the financial position at that date and
its results of operations and cash flows for that period. Operating results for
the six-month period ended August 26, 2000 are not necessarily indicative of
results that may be expected for any future periods.
The Company's operations during its start-up period from April 13, 1999
(inception) to the fiscal quarter ended August 28, 1999 are summarized as
follows (Unaudited):
Revenues $ 71,593
Cost of sales 57,051
-----------
Gross profit 14,542
Operating expenses 1,408,797
-----------
Net loss $(1,394,255)
===========
F-8
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (using the weighted average cost
method) or market.
Prepaid and Accrued Marketing Expenses
The Company has entered into advertising agreements with various web portals.
Some of these agreements require the Company to pre-pay advertising services to
be provided within a twelve month period while other agreements require payment
as the services are provided. The costs associated with these web portal
advertising contracts are amortized on a straight-line basis over the period
such advertising is expected to be used.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
lease. Depreciation and amortization is provided using the straight-line method
over the estimated useful lives of the related assets, which generally range
from three to seven years. Fixed assets purchased under capital leases and
leasehold improvements are amortized over the shorter of the lease term or
estimated useful life.
F-9
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Accounting for Internal Use Software
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1) in March 1998. SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use and identifies characteristics of internal-use software. The
Company's accounting policy with respect to accounting for computer software
developed or obtained for internal use is consistent with SOP 98-1. The Company
purchased and capitalized approximately $9.7 million for the period April 13,
1999 (inception) to February 26, 2000 of internal use software. Software is
amortized for financial reporting purposes using the straight-line method over
the estimated life of three years.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Impairment is measured by comparing the carrying value of the long-lived assets
to the estimated undiscounted future cash flows expected to result from use of
the assets and their ultimate disposition. In circumstances where impairment is
determined to exist, the Company will write down the asset to its fair value
based on the present value of estimated expected future cash flows.
Revenues
Revenues includes gross revenues from sales of product and related shipping
fees, net of discounts and provision for sales returns, and other allowances.
The Company generally refunds to customers all or a portion of the selling
price, including related shipping fees if applicable, in the event a customer is
not satisfied with the product purchased or the quality of customer service
provided. Sales returns and allowances have not been significant to date.
Revenues from sales of product shipped to customers, and related shipping fees,
are recognized upon shipment.
The Company acts as a principal in connection with orders shipped to customers
as the Company establishes the retail prices of its non-pharmaceutical and non-
insured pharmaceutical products (and accepts contractual reimbursement amounts
from third-party payors for insured pharmaceutical products) and shipping fees;
contractually takes title to, and assumes risk of loss of, products prior to
their shipment; bears credit and collection risk from the customer or third
party payors; and bears the risk that the product will be returned.
F-10
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Cost of Sales
Cost of sales consists primarily of the cost of products sold to our customers,
including allowances for shrinkage and slow moving and expired inventory.
Selling, General and Administrative Expenses
The Company records shipping and handling costs in selling, general and
administrative expenses. Shipping and handling costs for the period from April
13, 1999 (inception) to February 26, 2000 were approximately $486,000.
Advertising Costs
Advertising costs are expensed as incurred. Costs associated with web portal
advertising contracts are amortized on a straight-line basis over the period
such advertising is expected to be used. Advertising expense for the period
from April 13, 1999 (inception) to February 26, 2000 was approximately
$3,400,000.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to be recovered. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
Stock-Based Compensation
The Company accounts for employee stock options using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25 , "Accounting for
Stock Issued to Employees" (APB 25), and has adopted the "disclosure-only"
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). The effect of applying the fair value
method under SFAS 123 to the Company's stock options would not result in net
losses that would be materially different from those recorded by the Company for
the period from April 13, 1999 (inception) to February 26, 2000.
F-11
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss)
The Company follows the provision of SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes rules for the reporting and presentation
of comprehensive income (loss) and its components. To date, the Company has no
components of other comprehensive income (loss), and therefore comprehensive
loss is equal to net loss.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. SAB 101 is
required to be implemented in the fourth quarter financial statements for the
fiscal years that began on or after December 15, 1999 with earlier application
encouraged. Management believes that the impact of SAB 101 will not have a
material effect on the financial position or results of operations of the
Company.
3. Property and Equipment
Property and equipment, net, consist of the following at February 26, 2000:
Computer software $10,119,325
Computer hardware 1,628,516
Furniture and fixtures 500,856
Leasehold improvements 569,466
-----------
12,818,163
Accumulated depreciation (1,515,757)
-----------
$11,302,406
===========
As of February 26, 2000, total computer software and equipment and accumulated
amortization under capital lease obligations (included above) were $4,279,786
and $636,414, respectively.
F-12
<PAGE>
4. Leases and Commitments
In July 1999, the Company entered into a capital lease agreement with an
equipment leasing company. Under the terms of the agreement, the Company leased
computer software and equipment of $3,186,253, of which $265,767 was expensed in
accordance with SOP 98-1. The Company is required to make monthly payments of
$131,583 from August 1999 through July 2001 and $17,000 from August 2001 through
July 2002.
In February 2000, the Company entered into a capital lease agreement with an
equipment leasing company. Under the terms of the agreement, the Company leased
computer software and equipment totaling $1,359,300. The Company is required to
make twenty-four monthly payments of $59,877 from April 2000 through March 2002.
The Company leases office space and a distribution facility under non-cancelable
operating leases, which call for fixed payments through September 2002 and
August 2004, respectively. Also, the Company leases certain office equipment
under operating leases. Rent expense was approximately $1,400,000 for the
period from April 13, 1999 (inception) to February 26, 2000.
The Company entered into advertising agreements with various Web portals, which
require the Company to make fixed payments to such portals over the term of the
agreements. The costs associated with these Web portal advertising contracts are
amortized on a straight-line basis over the period such advertising is expected
to be used. The Company has future commitments under these advertising
agreements of $3,245,000 in fiscal 2001.
Also, the company has entered in a web hosting agreement with a web hosting
services provider, which calls for fixed monthly payments through June 2001.
Future minimum commitments under this agreement for fiscal years 2001 and 2002
are $1,500,000 and $438,000, respectively.
F-13
<PAGE>
4. Leases and Commitments (continued)
Future minimum commitments for capital and operating leases at February 26, 2000
are as follows:
Capital Operating
Leases Leases
------------ ----------
2001 $2,237,645 $ 569,500
2002 1,495,441 569,500
2003 144,877 387,900
2004 - 133,700
2005 - 66,800
------------ ----------
Total minimum lease payments $3,877,963 $1,727,400
==========
Less amounts representing interest (180,958)
------------
Present value of minimum payments 3,697,005
Less current portion 2,096,985
------------
Long-term portion $1,600,020
============
5. Notes Payable
In April 1999, the Company entered into a note payable with a financial
institution. According to the terms of the agreement, the Company is required to
make eight quarterly principal and interest payments of $171,971 beginning June
1999. At February 26, 2000, the note payable principal balance was $809,532, of
which $641,080 and $168,452 is payable in fiscal years 2001 and 2002,
respectively.
In February 2000, the Company entered into a note payable for $1,500,000 with a
financial institution. According to the terms of the agreement, the Company is
required to make eight quarterly principal and interest payments of $209,664
beginning April 2000. As of February 26, 2000, the note payable principal
balance was $1,500,000, of which $717,809 and $782,191 is payable in fiscal
years 2001 and 2002, respectively.
Future principal payments of notes payable are as follows: $1,358,889 and
$950,643 in fiscal years ended 2001 and 2002, respectively.
F-14
<PAGE>
6. Note Payable - Drug Emporium, Inc.
In August 1999, the Company entered into a note payable with Drug Emporium, Inc.
Under the terms of the note agreement, Drug Emporium, Inc. has agreed to make
loans to the Company on a regular basis to fund its operations. The note bears
interest at the prime rate. No principal or interest payments are due until
maturity on November 1, 2005.
7. Income Taxes
No benefit for income taxes has been recorded due to operating losses with no
current benefit.
As of February 26, 2000, the Company has federal net operating loss carry-
forwards of approximately $14,300,000. The net operating loss carry-forwards
will begin expiring in 2012 through 2018, if not utilized. Utilization of the
net operating losses and credits may be subject to a substantial annual
limitation due to the ownership change provisions of the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and credit before utilization.
As of February 26, 2000, the Company has deferred tax assets of
approximately $5,800,000, which primarily relates to net operating loss carry-
forwards. The deferred tax assets have been fully offset by a valuation
allowance.
8. Stockholders' Equity (Deficit)
Common Stock
The Company is authorized to issue up to 50,000,000 shares of common stock. As
of February 26, 2000, 2,900,000 shares of common stock were issued and
outstanding.
At February 26, 2000, the Company has reserved 4,800,000 shares of common stock
for issuance upon exercise of outstanding options and shares reserved for future
grant of options to purchase common shares.
For the period from April 13, 1999 (inception) through February 26, 2000, the
Company sold 2,900,000 shares of common stock pursuant to restricted stock
purchase agreements containing provisions established by the Board of Directors.
At February 26, 2000, 2,175,000 outstanding shares were subject to repurchase.
F-15
<PAGE>
8. Stockholders' Equity (Deficit) (continued)
Common Stock
Common stock reserved for future issuance was as follows at February 26, 2000:
Stock option plan outstanding 2,845,000
Reserved for future stock options 1,955,000
Series A convertible preferred stock 21,000,000
-------------
Total common stock reserved for future issuance 25,800,000
=============
Preferred Stock
The Company is authorized to issue 21,000,000 shares of Series A preferred
stock. As of February 26, 2000, 21,000,000 shares were issued and outstanding.
Once issued, the holders of Series A cumulative convertible preferred stock
(preferred stock) are entitled to receive cumulative annual dividends of
$0.02143, when and if declared by the Board of Directors. Preferred stock
dividends are paid prior to dividends declared or paid on common stock. No
dividends have been declared. In the event of liquidation, any shares of
preferred stock that remain outstanding have a liquidation preference over
common stock of $0.357 per share plus all declared and unpaid dividends. After
the payment of the full liquidation preference of the preferred stock, the
remaining assets of the Company legally available for distribution, if any,
shall be distributed ratably to the holders of the common stock and preferred
stock, and such assets shall be ratably distributed among the holders in
proportion to the full amounts to which whey would otherwise be respectively
entitled.
Except as otherwise required by law, each preferred stock stockholder is
entitled to the number of votes equal to the number of shares of common stock
into which such shares of preferred stock could be converted at the record date.
F-16
<PAGE>
8. Stockholders' Equity (Deficit) (continued)
Stock Option Plan
In November 1999, the Company adopted the 1999 Stock Incentive Plan (the Plan),
which provides for the granting of incentive stock options, non-statutory stock
options, stock appreciation rights, and restricted stock to employees and
directors. Under the 1999 Plan, the Board of Directors determines the term of
each award and the award price. In the case of incentive stock options and non-
statutory stock options, the exercise price may be established at an amount not
less than the fair market value at the date of grant. Options generally vest as
follows: 33.33% of the shares one year after the options' grant date, 33.33% of
the shares two years after the options' grant date, and 33.33% of the shares
three years after the options' grant date. The options expire ten years from the
date of grant.
At February 26, 2000, 4,800,000 shares were reserved for issuance upon the
exercise of stock options. A summary of activity under the Stock Option Plan is
as follows:
Shares Issued Weighted
Available And Average
For Grant Outstanding Exercise Price
----------- ------------ ---------------
Shares authorized 4,800,000
Options granted (2,845,000) 2,845,000 $0.028
----------- ------------ ---------------
Balance at February 26, 2000 1,955,000 2,845,000 $0.028
=========== ============ ===============
As of February 26, 2000, 87,500 options were vested and exercisable into common
stock at a weighted average exercise price of $0.028. The weighted-average
remaining contractual life of options outstanding at February 26, 2000 was 9.75
years.
As permitted under SFAS 123, the Company has elected to follow APB 25 in
accounting for stock-based awards to employees. Under APB 25, the Company
generally does not recognize compensation expense with respect to such awards.
Pro forma information regarding net income (loss) is required by SFAS 123 for
awards granted as if the Company had accounted for its stock-based awards to
employees under the fair value method SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a minimum value option-
pricing model. The weighted- average fair value of the Company's stock-based
awards granted to employees in fiscal 2000 was $0.01 using the following
assumptions for the period from April 13, 1999 (inception) to February 26, 2000:
a risk free rate of interest of 6%, a dividend yield of 0% and an expected life
of 4 years.
F-17
<PAGE>
8. Stockholders' Equity (Deficit) (continued)
The option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require input of highly subjective
assumptions, including the expected option life. Because the Company's employee
stock options have characteristics significantly different from those traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The difference
between the reported loss and the pro forma loss for the period from April 13,
1999 (inception) to February 26, 2000 was not material. The effects of applying
SFAS 123 pro forma disclosures are not likely to be representative of the
effects on pro forma disclosures of future years.
9. Related Party Transactions
As of February 26, 2000, the Company had a note payable of $9,427,347 to its
parent company and majority stockholder, DrugEmporium, Inc. (See Note 6)
Interest expense associated with the note payable was $213,726 for the period
April 13, 1999 to February 26, 2000.
The Company purchases inventory from Drug Emporium, Inc. The inventory is
purchased at cost plus a small percentage mark-up to cover administrative and
processing costs. Total inventory purchases from its parent for the period
April 13, 1999 to February 26, 2000 were approximately $424,000.
10. Subsequent Events
On May 15, 2000, the Company issued 1,843,000 options to purchase common stock
under the 1999 Stock Incentive Plan at $0.01, which was the deemed fair value of
common stock as determined by the Board of Directors.
F-18
<PAGE>
10. Subsequent Events (Continued)
On September 14, 2000, Drug Emporium, Inc. finalized the sale of the Company to
HealthCentral.com. The purchase price included 480,000 shares of preferred
HealthCentral.com stock convertible into up to 2,400,000 shares of
HealthCentral.com common stock, which was valued at approximately $3.00 per
share at the time of the transaction and the assumption by HealthCentral.com of
approximately $2,000,000 in current liabilities and $6,000,000 in future lease
obligations of the Company. In connection with this transaction, the statement
of operations for the six months ended August 26, 2000 includes a $6,014,795
loss on sale of net assets. The loss on sale of net assets is included in the
Company's balance sheet at August 26, 2000 as follows: Impairment of property
and equipment, $3,255,000; impairment of prepaid expenses and other current
assets, $495,000; and accrued exit costs, $2,264,795. Accrued exit costs include
non-assigned future operating lease commitments, severance and other exit costs.
F-19
<PAGE>
HealthCentral.com
Unaudited Pro Forma Combined Condensed Financial Statements
The following unaudited pro forma combined condensed financial statements for
HealthCentral.com have been prepared to give effect to the acquisition of Drug
Emporium.com using the purchase method of accounting for all periods presented.
The unaudited pro forma combined condensed statement of operations for the year
ended December 31, 1999 has also been prepared to give effect to the merger with
Vitamins.com which was accounted for under the pooling-of-interest method of
accounting. The historical financial information has been derived from, and is
qualified by reference to, the consolidated financial statements of
HealthCentral.com included in its Form 10-K for the year ended December 31, 1999
and its Form 10-Q for the six months ended June 30, 2000 filed with the
Securities and Exchange Commission ("SEC"), the financial statements of Drug
Emporium.com included elsewhere as an exhibit to this filing and the
consolidated financial statements of Vitamins.com included in
HealthCentral.com's Form 8-K dated July 25, 2000 as amended on August 30, 2000.
The unaudited pro forma combined condensed financial statements should be read
in conjunction with those financial statements and the notes thereto.
The unaudited pro forma combined condensed statement of operations for the year
ended December 31, 1999 set forth herein gives effect to the acquisitions of
Drug Emporium.com and Vitamins.com as if they occurred on January 1, 1999. The
unaudited pro forma combined condensed statement of operations for the six
months ended June 30, 2000 set forth herein gives effect to the acquisition of
Drug Emporium.com as if it occurred on January 1, 2000. The Vitamins.com merger,
which was consummated on June 16, 2000, is reflected in HealthCentral.com's June
30, 2000 historical statement of operations for the entire period and is
therefore not presented in a separate historical column in the unaudited pro
forma combined statement of operations.
The unaudited pro forma combined condensed balance sheet as of June 30, 2000,
set forth herein gives effect to the acquisition of Drug Emporium.com assuming
it occurred on that date. The historical Drug Emporium.com balance sheet is
presented as of August 26, 2000, which is the latest quarter-end balance sheet
date available. The Vitamins.com merger is fully reflected in
HealthCentral.com's June 30, 2000 historical balance sheet and is therefore not
presented in a separate historical column in the unaudited pro forma condensed
balance sheet.
Unaudited pro forma combined condensed financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
acquisitions occurred at the beginning of the periods presented, nor is it
necessarily indicative of future financial position or results of operations.
These unaudited pro forma combined condensed financial statements are based upon
the respective historical consolidated financial statements of
HealthCentral.com, Drug Emporium.com and Vitamins.com and notes thereto. These
unaudited pro forma combined condensed financial statements do not incorporate,
nor do they assume, any benefits from cost savings or synergies of operations of
the combined company.
F-20
<PAGE>
HealthCentral.com
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000 August 26, 2000
------------------ --------------------- ---------------- ---------------
HealthCentral.com Drug Emporium.com Adjustments Pro Forma
------------------ --------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,738,312 $ 85,810 $ (85,810) (A) $ 41,738,312
Accounts receivable, net 2,097,663 79,584 (79,584) (A) 2,097,663
Other receivables 69,988 - - 69,988
Inventory 5,899,671 2,719,453 (461,853) (A) 8,157,271
Prepaid expenses and other
current assets 2,350,617 508,528 (496,033) (A) 2,363,112
------------------ -------------------- -------------- --------------
Total current assets 52,156,251 3,393,375 (1,123,280) 54,426,346
Property and equipment, net 8,593,588 9,374,364 (3,374,364) (A) 14,593,588
Intangible assets, net 41,772,019 - 5,857,647 (B) 47,629,666
Other assets 983,667 91,514 (91,514) (A) 983,667
------------------ -------------------- -------------- --------------
Total assets $ 103,505,525 $ 12,859,253 $ 1,268,489 $ 117,633,267
================== ==================== ============== ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 13,630,418 $ 2,836,167 $ (1,299,750) (A) $ 15,166,835
Accrued expenses 6,791,941 4,180,584 (3,558,268) (A)(F) 7,414,257
Deferred revenue 689,900 - - 689,900
Accrued exit costs - 2,264,795 (2,264,795) (A) -
Current portion of notes payable - 1,596,944 (1,596,944) (A) -
Current portion of obligations
under capital leases 329,748 2,833,125 (280,955) (A) 2,881,918
------------------ -------------------- -------------- --------------
Total current liabilities 21,442,007 13,711,615 (9,000,712) 26,152,910
Deferred rent, net of current portion 222,233 - - 222,233
Notes payable, long-term portion - 203,859 (203,859) (A) -
Note payable - Drug Emporium, Inc. - 25,710,724 (25,710,724) (A) -
Obligations under capital leases,
net of current portion 483,430 1,280,449 861,510 (A) 2,625,389
------------------ -------------------- -------------- --------------
Total liabilities 22,147,670 40,906,647 (34,053,785) 29,000,532
Stockholders' equity (deficit):
Preferred stock - 21,000 7,253,880 (G)(H) 7,274,880
Common stock 44,943 1,875 (1,875) (H) 44,943
Additional paid-in capital 204,906,945 7,529,625 (7,529,625) (H) 204,906,945
Note receivable from stockholder (465,457) (52,500) 52,500 (H) (465,457)
Deferred stock compensation (2,980,863) - - (2,980,863)
Accumulated deficit (120,147,713) (35,547,394) 35,547,394 (H) (120,147,713)
------------------ -------------------- -------------- --------------
Total stockholders'
equity (deficit) 81,357,855 (28,047,394) 35,322,274 88,632,735
------------------ -------------------- -------------- --------------
Total liabilities and stockholders'
equity (deficit) $ 103,505,525 $ 12,859,253 $ 1,268,489 $ 117,633,267
================== ==================== ============== ==============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined condensed financial statements.
F-21
<PAGE>
HealthCentral.com
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months Ended Six months Ended
June 30, 2000 August 26, 2000
----------------------- ---------------------
HealthCentral.com Drug Emporium.com Adjustments Pro Forma
----------------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
eCommerce and other product sales $ 19,992,452 $ 2,343,015 - $ 22,335,467
Advertising, content and other 1,389,486 - - 1,389,486
---------------------- -------------------- ---------------- ---------------
Total revenues 21,381,938 2,343,015 - 23,724,953
---------------------- -------------------- ---------------- ---------------
Operating and other expenses:
Cost of eCommerce and product sales 18,065,703 - (379,093) (C)(D) 17,686,610
Cost of sales - 2,537,722 (2,537,722) (C) -
Content and product development 6,076,852 - - 6,076,852
Selling, general and administrative - 13,501,004 (13,501,004) (C) -
Sales and marketing 36,542,334 - 16,417,819 (C)(D) 52,960,153
General and administrative 5,233,174 - - 5,233,174
Amortization of intangible assets 7,099,247 - 832,206 (E) 7,931,453
Stock compensation 1,117,827 - - 1,117,827
Acquisition costs 2,462,346 - - 2,462,346
---------------------- -------------------- ---------------- ---------------
Total operating and other
expenses 76,597,483 16,038,726 832,206 93,468,415
---------------------- -------------------- ---------------- ---------------
Loss from operations (55,215,545) (13,695,711) (832,206) (69,743,462)
Other expense, net (19,923) - - (19,923)
Loss on sale of net assets - (6,014,795) 6,014,795 (A) -
Interest income, net 1,790,915 (1,269,463) - 521,452
---------------------- -------------------- ---------------- ---------------
Net loss $ (53,444,553) $ (20,979,969) $ 5,182,589 $ (69,241,933)
====================== ==================== ================ ===============
Basic and diluted net loss per share $ (1.85) $ (2.40)
====================== ===============
Shares used in computing basic and
diluted net loss per share 28,881,986 28,881,986
====================== ===============
</TABLE>
The accompanying notes are an integral part of these unaudited
pro forma combined condensed financial statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
HealthCentral.com
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Year Ended Period From April 13,
December 31, 1999 1999 (Inception) to
---------------------------------- February 26, 2000
HealthCentral.com Vitamins.com Drug Emporium.com Adjustments Pro Forma
----------------- ------------- --------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ - $ 16,940,977 $ - $ (16,940,977)(C) $ -
Advertising and eCommerce 901,331 - - (901,331)(C) -
Content, subscription and
license 287,422 - - (287,422)(C) -
eCommerce and other product
sales - - 1,052,705 17,041,760 (C) 18,094,465
Advertising, content and
other - - - 1,188,753 (C) 1,188,753
----------------- ------------- --------------------- -------------- ---------------
Total revenues 1,188,753 16,940,977 1,052,705 100,783 19,283,218
----------------- ------------- --------------------- -------------- ---------------
Operating and other expenses:
Cost of product sales - 11,797,099 - (11,797,099)(C) -
Cost of sales - - 1,239,817 (1,239,817)(C) -
Cost of eCommerce and other
product sales - - - 13,033,094 (C)(D) 13,033,094
Product, content and product
development 4,398,580 - - (4,398,580)(C) -
Content and product
development - - - 4,398,580 (C) 4,398,580
Selling, general and
administrative - - 14,035,124 (14,035,124)(C) -
Sales and marketing 9,159,290 7,749,174 - 25,798,630 (C)(D) 42,707,094
General and administrative 2,045,795 13,438,817 - (10,801,189)(C) 4,683,423
Website development expense - 857,712 - (857,712)(C) -
Amortization of intangible
assets 3,333,961 323,261 - 1,664,412 (E) 5,321,634
Stock compensation 4,939,694 1,306,128 - - 6,245,822
Acquired in-process
research and development 804,525 - - - 804,525
----------------- ------------- --------------------- -------------- ---------------
Total operating and
other expenses 24,681,845 35,472,191 15,274,941 1,765,195 77,194,172
----------------- ------------- --------------------- -------------- ---------------
Loss from operations (23,493,092) (18,531,214) (14,222,236) (1,664,412) (57,910,954)
Other expenses - (32,568) - - (32,568)
Interest expense - - (345,189) 345,189 (C) -
Interest income, net 493,706 284,161 - (345,189)(C) 432,678
----------------- ------------- --------------------- -------------- ---------------
Net loss (22,999,386) (18,279,621) (14,567,425) (1,664,412) (57,510,844)
Preferred stock dividend 11,388,000 10,887,542 - - 22,275,542
----------------- ------------- --------------------- -------------- ---------------
Net loss attributable to
common stockholders $ (34,387,386) $ (29,167,163) $ (14,567,425) $ (1,664,412) $ (79,786,386)
================= ============= ===================== ============== ===============
Basic and diluted net loss per
share attributable to common
stockholders $ (4.96) $ (7.12)
================= ===============
Shares used in computing
basic and diluted net loss
per share attributable to
common stockholders 6,926,485 11,204,707
================= ===============
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined condensed financial statements
F-23
<PAGE>
HEALTHCENTRAL.COM
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
On September 14, 2000, HealthCentral.com consummated an asset purchase agreement
with Drug Emporium, Inc. and its wholly owned online drugstore subsidiary, Drug
Emporium.com. Drug Emporium.com, Inc. is an Internet-based retailer of health,
wellness, nutrition, beauty, personal care and pharmacy products. Under the
terms of the asset purchase agreement, HealthCentral.com acquired a majority of
the assets and assumed some liabilities, primarily trade payables and
hardware/software leases, of Drug Emporium.com in exchange for the issuance of
shares of HealthCentral.com non-voting preferred stock, which does not carry a
liquidation preference and which is convertible into 2,400,000 shares of common
stock. Drug Emporium, Inc. also has an opportunity to receive additional shares
of HealthCentral.com convertible preferred stock, which do not carry a
liquidation preference, if certain revenue targets are met. In connection with
this acquisition, HealthCentral.com also entered into a 10-year services
agreement with Drug Emporium, Inc., under which HealthCentral.com will receive
in-store promotional and advertising support and access to Drug Emporium Inc.'s
electronic purchasing system and in-store order pickup capabilities at certain
Drug Emporium, Inc. retail stores. In consideration of DrugEmporium, Inc.'s
services, HealthCentral.com will pay Drug Emporium, 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
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
==========
The total purchase price of $7.8 million consisted of 480,000 shares of
HealthCentral.com preferred stock, convertible into 2.4 million shares of common
stock, valued at $7,274,880 based upon the fair market value of
HealthCentral.com common stock of $3.03 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.
F-24
<PAGE>
NOTE 2 - PROFORMA ADJUSTMENTS
Pro forma adjustments for the unaudited pro forma condensed combining financial
information are as follows:
(A) Represents adjustments to reflect assets and liabilities not acquired
or assumed by HealthCentral.com.
(B) Represents $5,857,647 of acquired intangible assets, summarized as
follows:
Goodwill......................... $ 887,647
Contracts........................ 1,700,000
Customer list.................... 1,100,000
Tradename........................ 870,000
Acquired workforce............... 1,300,000
----------
Total............................ $5,857,647
==========
(C) Reclassification of certain revenue and expense amounts consistent
with the financial reporting policies of HealthCentral.com.
(D) To reclass fulfillment costs consistent with the financial reporting
policies which are reflected in the September 30, 2000
HealthCentral.com Form 10-Q as filed with the Securities and Exchange
Commission on November 14, 2000. For the year ended December 31, 1999,
fulfillment costs were $1,584,075 and for the period ending June 30,
2000, fulfillment costs were $2,916,815.
(E) Represents amortization of intangible assets over three to four years.
(F) Represents accrued transaction costs associated with the asset
acquisition.
(G) Represents the preferred stock issued in connection with the asset
acquisition.
(H) Represents the elimination of equity accounts of Drug Emporium.com.
NOTE 3 - PRO FORMA NET LOSS PER SHARE:
The net loss attributable to common stockholders and shares used in
computing the net loss per share attributable to common stockholders for the
year ended December 31, 1999 and the net loss per share and common stock shares
used in computing net loss per share for the six months ended June 30, 2000 are
based upon the historical weighted average common shares outstanding. Common
stock issuable upon the exercise of stock options, warrants and the conversion
of preferred stock have been excluded from the computation of net loss per share
attributable to common stockholders as their effect would be anti-dilutive.
The following table reconciles the number of shares used in the pro forma
loss per share computations to the numbers set forth in the HealthCentral.com
and Drug Emporium.com historical consolidated statements of operations:
F-25
<PAGE>
HEALTHCENTRAL.COM
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1999 June 30, 2000
----------------- ----------------
<S> <C> <C>
Shares used in computing basic and diluted
net loss per share attributable to common stockholders:
Historical--Vitamins.com common stock 11,054,837
Exchange ratio 0.387
-----------------
4,278,222
Shares issued for Drug Emporium.com acquisition - -
Historical--HealthCentral.com 6,926,485 28,881,986
----------------- ----------------
Shares used in computing pro forma basic and
diluted net loss per share attributable to
common stockholders 11,204,707 28,881,986
================= =================
</TABLE>
Basic and diluted weighted average shares outstanding were calculated based upon
the historical basic and diluted weighted average shares outstanding of
HealthCentral.com for each period. The weighted average number of shares
outstanding as of December 31, 1999 was adjusted to reflect the common stock
issued in connection with the Vitamins.com merger on June 16, 2000. The exchange
ratio was calculated by dividing 22,704,075, the number of shares of
HealthCentral.com common stock outstanding immediately prior to the merger, less
one share, by 58,664,288, the total number of shares of capital stock of
Vitamins.com outstanding immediately prior to the merger. The weighted average
number of shares outstanding as of June 30, 2000 fully reflects the common stock
issued for the Vitamins.com merger.
Since HealthCentral.com issued pref erred stock for the purchase of Drug
Emporium.com and the inclusion of these shares would be anti-dilutive, the basic
and diluted net loss per share computations exclude these shares.
F-26
