UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
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.)
6005 Shellmound Street, Suite 250
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 May 11, 2001, there were 50,661,038 shares of the registrant's Common
Stock outstanding.
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition 11
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 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
HealthCentral.com
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2001 2000
------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 3,365 $ 14,208
Restricted cash........................................................................ 595 -
Accounts receivable, net of allowance for doubtful accounts of
$93 and $84, respectively............................................................ 4,531 3,059
Inventory.............................................................................. 8,256 9,006
Prepaid expenses and other current assets.............................................. 2,151 2,065
------------- -------------
Total current assets.............................................................. 18,898 28,338
Property and equipment, net............................................................. 9,930 11,686
Other assets............................................................................ 422 440
Intangible assets, net.................................................................. 4,447 4,922
------------- -------------
Total assets...................................................................... $ 33,697 $ 45,386
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 10,769 $ 12,258
Accrued expenses....................................................................... 1,954 3,701
Deferred revenue and other current liabilities......................................... 1,482 1,280
Current portion of obligations under capital leases.................................... 2,619 3,258
------------- -------------
Total current liabilities......................................................... 16,824 20,497
Deferred rent........................................................................... 146 195
Obligations under capital leases........................................................ 1,106 1,289
------------- -------------
Total liabilities................................................................. 18,076 21,981
------------- -------------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity:
Convertible preferred stock............................................................ 7,275 7,275
Common stock........................................................................... 50 50
Additional paid-in capital............................................................. 210,458 210,831
Notes receivable from stockholders..................................................... (65) (65)
Deferred stock compensation............................................................ (962) (1,487)
Accumulated deficit.................................................................... (201,135) (193,199)
------------- -------------
Total stockholders' equity....................................................... 15,621 23,405
------------- -------------
Total liabilities and stockholders' equity....................................... $ 33,697 $ 45,386
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
HealthCentral.com
Condensed Consolidated Statement of Operations
(unaudited, in thousands except for per share amounts)
Three months ended March 31,
2001 2000
---------------- -----------------
Revenues:
E-commerce and other product sales................................... $ 12,221 $ 9,905
Advertising, content and other....................................... 605 632
---------------- -----------------
Total revenues...................................... 12,826 10,537
---------------- -----------------
Operating and other expenses:
Cost of e-commerce and other product sales........................... 8,038 7,738
Content and product development...................................... 1,198 2,807
Sales and marketing.................................................. 7,175 24,203
General and administrative........................................... 2,063 2,641
Amortization of intangible assets.................................... 329 3,544
Stock compensation................................................... 126 587
Asset impairment charge ............................................. 880 -
Restructuring charge................................................. 826 -
Acquisition and contract termination costs........................... - 35
---------------- -----------------
Total operating and other expenses.................. 20,635 41,555
---------------- -----------------
Loss from operations.................................................... (7,809) (31,018)
Interest income (expense), net.......................................... (127) 997
---------------- -----------------
Net loss................................................................ $ (7,936) $ (30,021)
================ =================
Basic and diluted net loss per share.................................... $ (0.16) $ (1.10)
Shares used in computing basic and diluted net loss per share........... 50,336 27,378
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
HealthCentral.com
Condensed Consolidated Statement of Cash Flows
(unaudited, in thousands)
Three months ended March 31,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss............................................................ $ (7,936) $ (30,021)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock compensation expense...................................... 126 587
Depreciation and amortization expense........................... 1,182 4,084
Amortization of prepaid contracts............................... 20 233
Asset impairment charge......................................... 880 -
Changes in assets and liabilities:
Accounts receivable........................................... (1,472) 378
Inventory..................................................... 750 1,394
Prepaid expenses and other assets............................. (85) (710)
Accounts payable.............................................. (1,489) (2)
Accrued expenses.............................................. (1,726) 2,643
Deferred revenue and other liabilities........................ 300 52
------------- --------------
Net cash used in operating activities..................... (9,450) (21,362)
------------- --------------
Cash flows from investing activities:
Purchase of property and equipment................................ (33) (2,153)
Proceeds from sale of property and equipment...................... 55 -
Restricted cash................................................... (595) -
Cash paid in connection with acquisitions, net of
cash received................................................... - (1,312)
Payments to related party......................................... - (758)
------------- --------------
Net cash used in investing activities..................... (573) (4,223)
------------- --------------
Cash flows from financing activities:
Payments on capital leases........................................ (822) (94)
Proceeds from the issuance of common stock........................ 2 33
------------- --------------
Net cash used in financing activities..................... (820) (61)
------------- --------------
Net decrease in cash and cash equivalents........................... (10,843) (25,646)
Cash and cash equivalents at beginning of period.................... 14,208 83,690
------------- --------------
Cash and cash equivalents at end of period.......................... $ 3,365 $ 58,044
------------- --------------
Supplemental disclosures of non-cash investing and
financing activities:
Deferred stock compensation....................................... $ (395) $ (614)
Stock warrants and options issued in connection with
agreements...................................................... 21 13
Assets acquired under capital leases.............................. - 23
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
HEALTHCENTRAL.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
HealthCentral.com (the "Company") is a leading provider of online
healthcare-related e-commerce and content to consumers through its network of
websites, which include WebRx.com, ComfortLiving.com, Vitamins.com,
HealthCentral.com and RxList.com, and through its Vitamins.com mail order and
retail operations. In addition, the Company designs, hosts and maintains
healthcare institutions' websites for healthcare content and e-commerce.
HealthCentral.com offers more than 25,000 SKU's of health, beauty,
nutraceuticals, home and personal care products, prescription drugs and vision
products. The Company also offers user-friendly interactive tools, customized
health information pages, personalized health risk assessments and topical
newsletters.
The Company derives revenue from e-commerce, mail order and other product
sales, which consists of prescription and non-prescription drugs,
over-the-counter health and beauty aid products, nutraceuticals, vitamins,
minerals, supplements, back care products, baby care products, maternity care
products, allergy care products and other specialty health and wellness
products. The Company also derives revenue from the sale of the Dr. Dean Edell
Eyewear brand eyeglasses to its distributor, advertising and vendor sponsorship
agreements, as well as from annual license fees for applications, content,
hosting and maintenance services for healthcare institutions' websites.
Note 2 Need For Additional Financing and Nasdaq Listing
The Company has sustained net operating losses and negative cash flows from
operations since its inception. Further, the Company has experienced substantial
increases in expenditures consistent with its growth in operations and
personnel, both internally and through multiple acquisitions. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The Company has
previously financed operations through the issuance of preferred stock, the
issuance of notes payable, an initial public offering completed in December 1999
for $74.7 million in cash, through capital leases, and the proceeds of the long-
term debt financing entered into in May 2001 (see Note 8). The Company's current
cash and cash equivalents are expected to be sufficient to satisfy its liquidity
requirements through approximately 2001, provided that the Company achieves its
targeted revenues, efficiencies and cost reductions, restructures certain
partnerships and other relationships and completes certain asset sales and
collects certain accounts receivables in a timely manner. However, there can be
no assurance that the Company will not need additional funds from the issuance
of additional equity or debt securities, funds from credit facilities and/or
from the sale of certain assets, none of which may be achieved.
On April 5, 2001, the Company received a notice from Nasdaq that its stock
would be delisted from the Nasdaq National Market because the stock failed to
maintain a minimum closing bid price of $1.00 for the requisite 10 day period
during the 90 calendar day grace period. The Company appealed that determination
and has been granted a hearing before a Listing Qualifications Panel. A hearing
date has been scheduled for May 31, 2001 and the delisting of the Company's
stock has been stayed pending the Panel's decision. At the hearing, the Company
plans to demonstrate its long-term ability to comply with each of the Nasdaq
National Market maintenance requirements and discuss the Company's plans to
effect a 1-for-50 reverse stock split at its 2001 Annual Meeting to be held in
June 2001. Should these efforts be unsuccessful, the Company's common stock
would probably be delisted from the Nasdaq stock market.
Note 3 Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the
7
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, 2000. Operating results for the three
months ended March 31, 2001 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2001. 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 pharmaceutical
products, over-the-counter health and beauty aid products, vitamins, minerals,
supplements, baby and maternity products, allergy care and back care products,
net of discounts, when products are shipped to customers or sold through its
retail stores. Net sales include outbound shipping and handling fees charged to
customers. Revenue also includes the wholesale revenue from the sale of "Dr.
Dean Edell Eyewear" brand eyeglasses to the Company's 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 for e-commerce sales and at the point of sale for retail stores.
The Company is responsible for all refunds relating to all sales where a
customer is not satisfied with the products received. The Company records an
estimated allowance for such returns in the period of sale and also retains the
credit risk for all sales.
Advertising revenues are recognized in the period the advertising
impressions are delivered to customers. The Company uses an outside vendor to
solicit customers to use the Company's advertising services, to serve the ads to
the Company's website and to bill and collect for these services. This outside
vendor provides monthly reports indicating the impressions delivered, the
amounts billed for advertising services and the related administrative fee. The
Company recognizes advertising revenues, as reported by the outside vendor, net
of this administrative fee, as the Company bears no collection risk for the
gross amount of the advertising fees. The advertising contracts do not guarantee
a minimum number of impressions to be delivered. The Company also enters into
vendor sponsorship agreements and provides 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 consist
of license fees for website development applications, consulting fees from
custom website development and hosting, and maintenance fees related to the
websites' maintenance. The Company recognizes 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, the Company accounts 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.
Concentration
At March 31, 2001 and December 31, 2000, the Company had approximately 83%
and 70%, respectively, in accounts receivable balances with one customer.
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.
Note 4 Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share and SEC
Staff Accounting Bulletin 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 the effect is
antidilutive. Potential common stock consists of convertible preferred stock and
incremental common shares issuable upon the exercise of stock options and
warrants.
8
The following table sets forth potential shares of common stock that are
not included in the computation of diluted net loss per share because to do so
would be antidilutive for the periods indicated:
March 31,
---------
(in thousands)
--------------
2001 2000
------ ------
Convertible preferred stock............. 480 --
Convertible preferred stock warrants.... 12 12
Common stock warrants................... -- 74
Common stock options.................... 3,823 3,389
Common stock subject to repurchase...... -- 221
------ ------
4,315 3,696
====== ======
The restricted shares subject to repurchase are excluded from the
calculation of basic and diluted net loss per share until the restrictions
lapse.
Note 5 Segment Information
Based on the criteria established by SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, the Company operates in three
principal business segments. The 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 mail order catalog sales of
health-related products, including Dr. Dean Edell Eyewear. Retail store sales
include sales of health-related products through our brick-and-mortar stores.
Advertising, content and other revenues primarily include amounts derived from
delivering advertising impressions to companies, revenues from vendor
sponsorship agreements and from providing website development and related
services to healthcare providers and other commercial organizations. The Company
does not report any information regarding costs by business segment as
management does not produce such information to measure the performance of the
Company's segments.
Revenues by business segment are as follows:
Three Months Ended March 31,
----------------------------
(in thousands)
--------------
2001 2000
------- -------
Segment:
E-commerce and other product sales ....... $10,747 $ 7,876
Retail store sales ....................... 1,474 2,029
Advertising, content and other ........... 605 632
------- -------
Total revenue .......... $12,826 $10,537
======= =======
Note 6 Restructuring
Based on the criteria required by Emerging Issues Task Force ("EITF") 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring) and
Staff Accounting Bulletin ("SAB") 100, Restructuring and Impairment Charges, the
Company incurred restructuring charges in the first quarter 2001.
In January 2001, the Company implemented a reduction in workforce of
approximately 60 employees, consisting of 29 warehouse employees, 9 production
and engineering employees, 15 sales and marketing employees and 7 finance and
administrative employees. In connection with this action, the Company recorded a
restructuring charge in the first quarter 2001 of $634,000 comprised of $594,000
in employee severance and benefits and $40,000 in legal fees.
In February 2001, the Company closed four of its unprofitable retail
Vitamins.com stores. In connection with this action, the Company recorded a
restructuring charge of $192,000 in the first quarter 2001, consisting of
$132,000 in lease termination payments, $21,000 in employee severance and
benefits for 18 employees and $39,000 in other miscellaneous charges. The
Company
9
also recorded an asset impairment charge of $682,000 associated with the write-
off of fixed assets which consisted of customized store furniture and fixtures
that have little or no resale value. During the process of closing the four
stores, inventory was damaged while being moved to other locations. The Company
is still reviewing the damaged inventory and expects to take a charge, which is
not estimable at this time, in the second quarter of 2001.
The Company has accrued a total of $445,000 at March 31, 2001 related to
the restructuring, which is included in accrued liabilities.
Note 7 Commitments and Contingencies
In December 1999, the Company entered into an eleven month agreement with
Microsoft Corporation ("Microsoft") whereby the Company would be the premier
provider of health and fitness newsletters to Microsoft News Hotmail
subscribers. The agreement provided that the Company pay Microsoft a minimum
fee of $1,833,000 based on $.01 per copy distributed to each subscriber, but not
to exceed $2,433,000 over the term of the contract. In addition, the agreement
provided that the Company purchase an aggregate of $640,000 in advertising from
Microsoft during the term of the agreement. These expenses were accrued ratably
over the term of the agreement. As of March 31, 2001, the Company had paid
approximately $1.9 million under this agreement. In addition, Vitamins.com
entered into an agreement with Microsoft in November 1999 for advertising
services and terminated this contract in June 2000, claiming breach of contract.
The Company and Microsoft are in dispute over the breach of contract claim. On
May 4, 2001, the Company tendered an offer to settle all outstanding contract
claims between the parties to date. The Company has not received any response to
the settlement offer. However, if Microsoft were to prevail on its claim with
regard to the Vitamins.com agreement, the Company could face potentially
substantial payment obligations.
On January 29, 2001, XOR, Inc. filed an action in Adams County, Colorado
District Court against HealthCentral.com. The complaint alleges breach of
contract, unjust enrichment and promissory estoppel. The complaint alleges
monetary damages of approximately $1.3 million. The Company has responded with
an answer and counter claim for breach of contract and plans to vigorously
defend against this claim. The Company's financial statements reflect the
software capitalization of $0.5 million related to XOR. The Company has not
accrued any amount related to the resolution of this matter.
On February 23, 2001, Albert Greene resigned as Chief Executive Officer of
the Company. The Employment Agreement between Albert Greene and the Company, as
amended, provides that the Company make monthly severance payments of
approximately $25,000 to Mr. Greene, which under certain circumstances may
continue for up to twelve months after his termination, in which case the total
severance would be approximately $300,000. The Company is currently in
negotiations with Mr. Greene regarding his severance package.
On March 15, 2001, the Company amended its equipment lease agreement with
LeaseNet, Inc., extending the payment terms from 36 months to 46 months, ending
in May 2003, resulting in additional payments of $767,000. In exchange for the
extended term, the Company assigned $180,000 in Certificates of Deposit to
LeaseNet of which $20,000 will be released back to the Company each month upon
LeaseNet's receipt of their monthly lease payment.
On March 29, 2001, an employee was formally notified that his promissory
note, due March 5, 2000 for $59,398 plus accrued interest and penalties, was
past due and payable immediately. The employee has not responded to this
notification, and the Company is actively pursuing collection. The ultimate
collectibility of this promissory note is uncertain, however, no reserve has
been provided at March 31, 2001.
Note 8 Subsequent Events
On April 23, 2001, the Company consolidated its Comfort Living warehouse
and customer service operations into its existing Kentucky fulfillment center,
the Virginia customer service center and the Company's headquarters in
California. The Company expects to record a total charge associated with this
consolidation of approximately $491,000 in the second quarter of 2001, which is
expected to consist of approximately $115,000 in restructuring
10
charges, $176,000 in asset impairment charges and an estimated $200,000 in
inventory write-off charges. The restructuring charge is expected to be $78,000
in lease termination payments, $34,000 in employee severance and benefits for 16
warehouse and administrative employees and $3,000 in other miscellaneous
charges.
In May 2001, the Company began consolidating its L&H Catalog division into
the Company's existing operations. The Company expects to record a
restructuring charge of approximately $473,000 in the second quarter 2001
related to severance benefits and legal fees related to the consolidation and
termination of 20 warehouse and administrative employees. The Company expects to
complete this consolidation by the end of second quarter 2001.
In May 2001, the Company received $2.7 million in cash in the first closing
of a debt financing with multiple persons and entities. Under the terms of the
agreements, the principal borrowed is due on December 31, 2003 and interest is
fixed at 8.5% to be paid monthly in arrears. The debt is secured by the
Company's inventory and receivables under a UCC-1 filing. Additionally, each
lender received a warrant to purchase five shares of the Company's common stock
for each dollar loaned to the Company. The warrants are immediately exercisable
for a period of five years and carry an exercise price equal to the fair market
value of the Company's common stock on the date of the closing. Under the terms
of the debt agreements, the Company could raise an additional $1.3 million in
additional closings. Of the total funds, $400,000 of the funds came from C. Fred
Toney, the Company's Chief Executive Officer and James Hornthal, a director of
the Company.
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 "Risk 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 related
e-commerce and content to consumers through our network of websites, which
includes WebRx.com, Vitamins.com, HealthCentral.com, RxList.com,
DrugEmporium.com and ComfortLiving.com, and through our Vitamins.com mail order
and retail operations. In addition, we design, host and maintain healthcare
institutions' websites for healthcare content and e-commerce. We offer more than
25,000 SKU's of health, beauty, nutraceuticals, home and personal care products.
We also offer user-friendly interactive tools, customized health information
pages, personalized health risk assessments and topical newsletters.
Revenues for e-commerce and other product sales are recognized for
pharmaceutical products, over-the-counter health and beauty aid products, and
other health-related products, net of discounts, when products are shipped to
customers or sold through our retail stores. Net sales include outbound shipping
and handling fees charged to customers. Revenue also includes the wholesale
revenue
11
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 for e-commerce sales and at the point of sale for retail
stores. We are responsible for all refunds relating to all sales where a
customer is not satisfied with the products received. We record an estimated
allowance for such returns in the period of sale and 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 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. The 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 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.
We incurred net losses of approximately $7.9 million for the quarter ended
March 31, 2001 compared to $30.0 million for the quarter ended March 31, 2000.
We are currently targeting to breakeven on our bottom line (excluding non-cash
items and other charges) at some point prior to year end, based on our monthly
run rate, provided that we achieve our targeted revenues, efficiencies and cost
reductions, restructure certain partnerships and other relationships and
complete certain asset sales and collect certain accounts receivables in a
timely manner.
Strategies Implemented in the First and Second Quarter 2001
We recently began the implementation of significant cost reduction programs
designed to substantially reduce our operating expenses. Specifically, the
initiatives included:
- a reduction in workforce of approximately 60 employees in January 2001
consisting of 29 warehouse employees, 9 production and engineering
employees, 15 sales and marketing employees and 7 finance and
administration employees. We recorded a restructuring charge of
approximately $634,000 comprised of $594,000 in employee severance and
benefits and $40,000 in legal fees;
- closure of four unprofitable retail Vitamins.com stores that occurred
in February 2001. We recorded an asset impairment and restructuring
charge in the first quarter 2001 of approximately $874,000 primarily
associated with employee severance for 18 employees, store lease
terminations and the write-off of customized fixed assets that have
little or no resale value. During the process of closing the four
stores, inventory was damaged while being moved to other locations. We
are still reviewing the damaged inventory and expect to take a charge,
which is not estimable at this time, in the second quarter of 2001. We
expect to close or sell the remaining six retail stores during the
second quarter of 2001 and expect to take a restructuring charge in
the second quarter of 2001 when this occurs;
- consolidation of the Comfort Living warehouse and customer service
operations into the Kentucky fulfillment center, Virginia customer
service center and our headquarters in California on April 23, 2001.
We expect to record a charge associated with this consolidation of
approximately $491,000 in the second quarter 2001 which is expected to
consist of approximately $115,000 in restructuring charges, $176,000
in asset impairment charges and an estimated $200,000 in inventory
write-off charges. The restructuring charge is expected to be
comprised of $78,000 in lease termination payments, $34,000 in
employee severance and benefits for 16 warehouse and administrative
employees, and $3,000 in miscellaneous charges; and
- consolidation of the L&H Catalog division into the existing
operations, which began in May 2001. We plan to record a
restructuring charge of approximately $473,000 in the second
quarter 2001 primarily for severance, benefits and related legal
fees in connection with the consolidation and termination of 20
warehouse and administrative employees. This consolidation is
expected to be completed by the end of the second quarter of 2001.
12
We also began capital raising activities, consists of:
- raising up to $4.0 million in a debt financing from multiple persons
and entities. On May 10, 2001, we borrowed $2.7 million in a first
closing and anticipate closing on an additional $200,000 during May of
2001. Under the terms of the agreements, the principal borrowed is due
on December 31, 2003 and interest is fixed at 8.5% per annum to be
paid monthly in arrears. The debt is secured by our inventory and
receivables under a UCC-1 filing. Additionally, each lender received a
warrant to purchase five shares of our common stock for each dollar
loaned to us. The warrants are immediately exercisable for a period of
five years and carry an exercise price equal to the fair market value
on the date of the issuance based on the average closing stock price
for the 20 days prior to issuance. Under the terms of the debt
agreements, we may borrow up to $4.0 million total (including the
amount already funded). Of the total, $400,000 of the funds came from
C. Fred Toney, our Chief Executive Officer and director and James
Hornthal, a director.
We believe our cost reduction and revenue generating initiatives, combined with
our capital raising activities, will enable us to operate more efficiently and
effectively in the future.
Results of Operations
Three Months Ended March 31, 2001 and 2000
Revenues
E-commerce and other product sales. E-commerce and other product sales
consist of health-related on-line product sales, mail order catalog sales,
wholesale sales of Dr. Dean Edell brand eyewear and retail store sales. E-
commerce and other product sales were $12.2 million for the quarter ended March
31, 2001 compared to $9.9 million for the quarter ended March 31, 2000,
representing an increase of 23.2% over the same period for the previous year.
Mail order and e-commerce sales. Revenues from mail order and e-commerce
sales were $10.7 million for the quarter ended March 31, 2001 and $7.9 million
for the quarter ended March 31, 2000, representing an increase of 36.5%. The
increase was primarily attributable to growth in our mail order and e-commerce
sales, an increased customer base, repeat purchases from existing customers
and new product offerings. The increase is also attributable to the addition
of Comfort Living customers. We also reduced the use of product discounts as a
marketing tool. Revenues are targeted to increase through 2001, with the
exception of the Dr. Dean Edell eyewear, as we aim for continued growth in our
e-commerce and mail order customer base and our affiliate relations and as we
focus our marketing efforts on our existing customer base and new low cost
customer acquisition programs. However, future sales will continue to depend
upon a number of factors, including our ability to increase sales with a greatly
reduced marketing budget, the frequency of customer purchases, the quantity and
mix of products sold and the price we charge for our products. We currently
expect revenues for the sale of prescription drugs and Dr. Dean Edell Eyewear
will decrease as we currently plan to outsource our pharmacy fulfillment and
restructure our Cable Car agreement.
Retail store sales. Retail store sales, consisting of brick-and-mortar
sales of healthcare related over-the-counter products, were $1.5 million for the
three months ended March 31, 2001 compared to $2.0 million for the three months
ended March 31, 2000. The 27.4% decrease is primarily due to the closure of four
unprofitable Vitamins.com stores in February 2001. We are currently targeting
the remaining six retail stores will be sold or closed during the second
quarter of 2001.
Advertising, content and other revenues. Advertising, content and other
revenues consist of advertising and sponsorship revenues, content, subscription
and license revenues and were $605,000 and $632,000 for the three months ended
March 31, 2001 and 2000, respectively. In first quarter 2001, advertising,
content and other revenues decreased 4.2% from the comparable period in 2000
primarily due to decreased advertising sponsorship revenue. We are targeting our
vendor sponsorship revenues to increase in the future as we focus on providing
vendors with opportunities in which to communicate their marketing messages to
customers on our e-commerce and content websites. Content, subscription and
license revenues are not expected to grow as we have de-emphasized this business
and these revenues are targeted to remain flat for the remainder of 2001.
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Cost of Revenues
Cost of e-commerce and other product sales. Cost of e-commerce and other
product sales consists primarily of the cost of products sold to customers,
certain promotion costs and inbound shipping charges. These costs were $8.0
million in the first quarter of 2001 as compared to $7.7 million in the first
quarter of 2000. The 3.9% increase from the first quarter of 2000 to the first
quarter of 2001 was attributable to an increase in sales, an increase in unit
costs of certain products and increases in inbound shipping. We expect that
our cost of e-commerce and other product sales will continue to fluctuate in
the future with changes in e-commerce and other products sales and price
discounting and other promotion costs.
Operating Expenses
Content and product development. Content and product development expenses
consist primarily of payroll and related expenses for website development,
editorial, engineering 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 developments expenses were $1.2 million and $2.8 million in March 31,
2001 and 2000, respectively. The decrease of 57.3% from the first quarter of
2000 to the first quarter of 2001 was primarily attributable to a $1.3 million
decrease in our editorial and engineering staffing expenses resulting from the
completion of development projects in 2000 and the downsizing of staff. We
expect content and product development costs to continue to decrease through
the second quarter of 2001, then stabilize.
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 partners prior
to August 2000 and the internal cost of operating and staffing the distribution
center thereafter. Sales and marketing expenses were $7.2 million for the first
quarter of 2001 compared to $24.2 million for the first quarter of 2000. The
70.4% decrease from 2000 to 2001 was primarily attributable to a decrease of
$15.6 million in advertising expense and $1.6 million in staffing and
personnel expense offset by an increase of $284,000 in fulfillment and
shipping charges. We expect sales and marketing expense to continue to
decrease as we shift our efforts towards more cost effective promotional and
marketing campaigns such as segmented e-mail programs and vendor and other
partnership agreements.
General and administrative. General and administrative expenses consist
primarily 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 $2.1 million in the first quarter of 2001 and $2.6
million in the first quarter of 2000. The 21.9% decrease is attributable to a
reduction in personnel and professional related costs of $955,000 and $131,000,
respectively, partially offset by an increase of $481,000 in overhead. General
and administrative expenses are expected to remain stable 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 intangible assets
was $329,000 and $3.5 million for the quarters ended March 31, 2001 and 2000,
respectively, which represented a decrease of 90.7%. This decrease is the result
of the write-off of impaired intangibles of $39.1 million during the fourth
quarter of 2000. Amortization of intangible assets are expected to remain stable
for 2001 as we do not anticipate additional acquisitions at this time.
Stock compensation. Deferred stock compensation is amortized over the
respective vesting periods of the outstanding options, which is generally three
to four years. Stock compensation expense was $126,000 and $587,000 for the
first quarters ended March 31, 2001 and 2000, respectively. The 78.5% decrease
was attributable to a decrease in the number of employees and a decrease in the
market valuation of our common stock.
14
Asset impairment charge. Asset impairment charges were $880,000 for the
quarter ended March 31, 2001 and were primarily related to a write-off of the
fixed assets from the closure of four Vitamin.com retail stores in February
2001. There were no asset impairment charges in the first quarter of 2000.
Restructuring charge. A restructuring charge for the quarter ended March
31, 2001 was $826,000 of which $634,000 was attributable to a reduction in force
and $192,000 was attributable to the closure of four retail stores and consisted
of $132,000 in lease termination payments, $21,000 in employee severance and
benefits for 18 employees and $39,000 in other miscellaneous charges. There were
no restructuring charges in the first quarter of 2000.
Interest income (expense), net. Interest income (expense), net consists of
interest on capital lease obligations partially offset by earnings on our cash
and cash equivalents. Interest income (expense), net was $(127,000) in the first
quarter of 2001 and $997,000 in the first quarter of 2000. The decrease is
attributable to lower interest bearing asset balances as cash was utilized for
operating and other expenses.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through our initial
public offering, the sale of preferred stock, the issuance of notes payable and
capital leases, and the proceeds of the May 2001 debt financing. As of March 31,
2001, we had $3.4 million in cash and cash equivalents and $595,000 in
restricted cash. Net cash used in financing activities for the quarters ended
March 31, 2001 and 2000, was $820,000 and $61,000, respectively. The cash used
in financing activities in the first quarter of 2001 was attributable to
$822,000 in cash payments on capital leases. In the first quarter of 2000, cash
used in financing activities was mainly attributable to $94,000 in capital lease
payments offset by $33,000 in proceeds from the issuance of our common stock.
Net cash used in operating activities was $9.5 million for the quarter
ended March 31, 2001 and $21.4 million for the first quarter of 2000. Net cash
used in operating activities in the quarter ended March 31, 2001 was comprised
primarily of a $7.9 million net operating loss and decreases of $1.7 in accrued
expenses, $1.5 million in accounts payable and increases of $1.5 million in
accounts receivable and $85,000 in prepaid expenses and other assets. This use
of cash was partially offset by $1.2 million in depreciation and amortization
expense, $880,000 in asset impairment charges, $126,000 in stock compensation
expense and a decrease of $750,000 in inventory and an increase of $300,000 in
deferred revenue and other liabilities.
Net cash used in investing activities was $573,000 for the quarter ended
March 31, 2001 and $4.2 million for the quarter ended March 31, 2000. In the
first quarter of 2001, cash used in investing activities consisted of $595,000
in restricted cash, partially offset by $55,000 in proceeds from the sale of
property and equipment. Cash used in investing activities in the first quarter
of 2000 was comprised of $2.2 million for the purchase of property and
equipment, $1.3 million in net cash paid in connection with acquisitions and
$758,000 in payments to related parties.
Our capital requirements depend on numerous factors, including our ability
to integrate our acquired technology from acquisitions and improve our
transaction processing fulfillment systems and our website infrastructure
without substantial 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, we have reduced our workforce, consolidated
facilities, eliminated duplicate positions, closed unprofitable retail stores
and reformatted our business model to focus on e-commerce and mail order sales.
We will continue to look at gaining efficiencies and intend to eliminate
additional positions.
We have experienced substantial increases in expenditures since inception,
consistent with growth in operations and personnel, both internally and through
multiple acquisitions. While we are targeting to reduce our cost structure, we
currently expect to continue to use cash to fund operating losses, to integrate
acquisitions, to acquire and retain customers and to restructure agreements. We
currently are targeting that our available cash, cash equivalents and cash flows
to be generated from operations will be sufficient to meet our targeted cash
needs through approximately 2001, provided that we achieve our targeted
revenues, efficiencies and cost reductions, restructure certain partnerships and
other relationships and on a timely basis, complete certain asset sales and
collect certain accounts receivable. If we are unable to complete any of these
actions as scheduled or on the terms currently contemplated, we may have to
significantly reduce our operations and our business may be jeopardized.
15
Any projections of future cash needs and cash flows are subject to
substantial uncertainty. We may need additional cash sooner than currently
anticipated. The sale of additional equity or debt securities that include
warrants could result in additional dilution to our stockholders. Any debt
securities issued could have rights senior to holders of common stock and could
contain covenants that would restrict our operations. Additional financing may
not be available in amounts or on terms acceptable to us, or at all. We have
received a report from our independent accountants for the year ended December
31, 2000 containing an explanatory paragraph that describes the uncertainty as
to our ability to continue as a going concern due to our historical net
operating losses and negative cash flows.
Risk Factors That May Affect Future Results and Market Price of Stock.
You should carefully consider the following risk factors. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY.
We launched our HealthCentral.com website in November 1998, our
Vitamins.com website in March 1999, and our WebRx.com website in November 2000.
We merged with Vitamins.com in June 2000, and we acquired the assets and
certain liabilities of DrugEmporium.com in September 2000 and Comfort Living in
December 2000. Accordingly, 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:
. implement a successful e-commerce strategy through our websites;
. attract and retain a large audience of users to our HealthCentral.com
network, including WebRx.com;
. compete effectively against other established Internet health
companies, such as drugstore.com and CVS.com;
. develop and upgrade our technology;
. retain and motivate qualified personnel;
. manage inventory levels and fulfillment operations effectively;
. gain advertising and sponsorship revenue from vendors of health-
related products and services; and
. create and maintain successful strategic alliances with provider
groups, content providers and other third parties.
WE HAD AN ACCUMULATED DEFICIT OF APPROXIMATELY $201.1 MILLION AT MARCH 31, 2001,
AND WE MAY NOT ACHIEVE OUR TARGETED EXPENSE REDUCTIONS OR ACHIEVE PROFITABILITY.
Since our inception, we have had limited revenues and have incurred
substantial net losses in each year. While we are unable to predict accurately
our future operating expenses, we may not be able to achieve our targeted
expense reductions as we:
. restructure and/or terminate various contractual obligations;
16
. offer product promotions;
. integrate geographically dispersed operations as a result of
acquisitions;
. make payments to both our existing and future business partners to
gain advertising revenue; and
. develop and expand our systems infrastructure and support functions.
If we do not achieve our targeted expense reductions as planned, our
business may be jeopardized. Even if we were to achieve profitability, we might
not be able to sustain or increase profitability on a quarterly or annual basis.
THE INTERNET HAS NOT PROVEN TO BE AN EFFECTIVE OR PROFITABLE MARKETING MEDIA FOR
ADVERTISERS AND OUR INSTITUTIONAL BUSINESS HAS NOT DEVELOPED AS INITIALLY
ANTICIPATED, AND THUS OUR BUSINESS DEPENDS ON THE SUCCESS OF OUR E-COMMERCE AND
CATALOG BUSINESS.
At the time of our public offering, we expected to build revenues from
three channels: Internet advertising, private label institutional website
services, and healthcare e-commerce. To date, the Internet has not proven to be
as effective an advertising medium as traditional media, and thus advertising
revenues contribute much less to our revenue mix than originally expected. In
addition, the institutional healthcare market has been slow to adopt the
Internet as a meaningful tool to improve patient service and revenues. Thus, we
have focused our business operations on the sale of healthcare products online
and the sale of vitamins through our mail order business, and if we do not
meet our target performance goals in any of these business lines, our business
may fail.
WE NEED TO GENERATE SUBSTANTIAL REVENUES AND PROFIT FROM OUR E-COMMERCE BUSINESS
FOR HEALTHCARE PRODUCTS, BUT THIS MARKET IS UNPROVEN AND WE HAVE LIMITED
EXPERIENCE IN IT.
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, many of which 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, which has
resulted in price discounting, the erosion of gross margins and business
failures by many of our better known competitors. This market is significantly
less developed than the online market for books, music, software, toys and a
number of other consumer products. Even if Internet usage and electronic
commerce continue to increase, the rate of growth and profit margins, if any, of
the online drugstore and health products market could be significantly less than
those in online markets for other products.
WE ACQUIRED OUR OWN FULFILLMENT CAPABILITIES FOR E-COMMERCE PRODUCT ORDERS
(EXCEPT FOR CONTACT LENSES) AND WE HAVE LIMITED EXPERIENCE IN PROVIDING THESE
SERVICES.
As a result of our acquisition of assets of DrugEmporium.com and the
acquisition of assets of Comfort Living, we have begun managing fulfillment of
our e-commerce product orders internally. Previously, we 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 cost-effective and timely basis could result in customer
dissatisfaction and could significantly harm our e-commerce business. We are in
the process of rationalizing various fulfillment functions, which may lead to
disruptions in inventory management and other fulfillment problems. We are also
in the process of reviewing our pharmacy operations and, as a result, we
currently plan to outsource this function in the future.
We 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.
17
Failure to deliver products to our customers in a timely manner could adversely
affect our reputation, brand and business.
BECAUSE WE HAVE VERY LIMITED CASH, WE WILL NEED TO RAISE ADDITIONAL CAPITAL SOON
AND MAY NOT BE ABLE TO RAISE IT ON ACCEPTABLE TERMS, OR AT ALL.
As of March 31, 2001, we had cash and cash equivalents of approximately
$3.4 million, and we have obtained additional debt funding since March 31, 2001
of approximately $2.7 million. While we are targeting to reduce our cost
structure, we currently expect to continue to use cash to fund operating losses,
to integrate acquisitions, to acquire and retain customers and to restructure
agreements. We currently are targeting that our available cash, cash equivalents
and cash flows to be generated from operations will be sufficient to meet our
targeted cash needs through approximately 2001, provided that we achieve our
targeted revenues, efficiencies and cost reductions, restructure certain
partnerships and other relationships and complete certain asset sales and
collect certain accounts receivables in a timely manner. If we are unable to
complete any of these actions as scheduled or on the terms currently
contemplated, we may have to significantly reduce our operations and our
business may be jeopardized.
Any projections of future cash needs and cash flows are subject to
substantial uncertainty. We may need additional cash sooner than currently
anticipated. We issued warrants to purchase 12.5 million shares of our common
stock in connection with the first closing of $2.7 million of our May 2001 debt
financing. The sale of additional equity or debt securities that include
warrants could result in dilution to our stockholders. Any additional 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 have
received a report from our independent accountants for the year ended December
31, 2000 containing an explanatory paragraph that describes the uncertainty as
to our ability to continue as a going concern due to our historical net
operating losses and negative cash flows.
OUR STOCK PRICE, LIKE THAT OF MANY COMPANIES IN THE INTERNET INDUSTRY, HAS BEEN
AND MAY CONTINUE TO BE EXTREMELY VOLATILE, AND WE MAY BE DELISTED FROM THE
NASDAQ NATIONAL MARKET SYSTEM.
The market price of our common stock has declined significantly in recent
months, and we expect that it will continue to be subject to significant
fluctuations as a result of variations in our quarterly operating results and
the overall decline in the Nasdaq stock market. These fluctuations have been,
and may continue to be, exaggerated because an active trading market has not
developed for our stock. Thus, investors may have difficulty selling shares of
our stock at a desirable price, or at all. Our stock is currently trading below
the $1 per share requirement for continued listing on the Nasdaq National
Market, and on April 5, 2001 we received a notice from Nasdaq that our stock
would be delisted from the Nasdaq National Market because the stock failed to
maintain a minimum bid price of $1.00 for the requisite 10 day period during the
90 calendar day grace period. We appealed that determination and have been
granted a hearing before a Listing Qualifications Panel. In addition, if our
stock price is not at or above approximately $0.12 per share by the date of
our Nasdaq hearing, we will not qualify for the Nasdaq National Market System
listing as a result of our failure to comply with the $5 million public float
requirement, as well. A hearing date has been scheduled for Thursday, May 31,
2001 and the delisting of our stock has been stayed pending the Panel's
decision. At the hearing, the Company plans to demonstrate its long-term
ability to comply with each of the Nasdaq maintenance requirements and discuss
the Company's plans to effect a 1-for-50 reverse stock split at its 2001
Annual Meeting to be held in June 2001. The reverse stock split requires the
approval of stockholders holding a majority of our outstanding common stock
(currently approximately 50.7 million shares), so it may prove difficult to get
stockholder approval of this action. If at the time of our hearing our stock is
not at or above approximately $0.12 per share, we will request a transfer to the
Nasdaq SmallCap Market, assuming the stockholders approve our reserve stock
split. If our efforts in this regard are unsuccessful, our stock will be
delisted from the Nasdaq Stock Market. If a delisting from the Nasdaq Stock
Market were to occur, our stock would trade on the OTC Bulletin Board or in the
"pink sheets." Such alternatives are generally considered to be less efficient
markets and are not as broad as the Nasdaq National market or the Nasdaq
SmallCap Market.
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;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
. reductions in operating scope.
18
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.
OUR CASH PROJECTIONS DEPEND ON OUR SUCCESSFULLY RESTRUCTURING OUR DEAN EDELL
EYEWEAR RELATIONSHIP.
We currently sell our Dr. Dean Edell brand of eyewear to a single
distributor under an exclusive arrangement. Accounts receivable due from this
distributor represented almost 83% of our total accounts receivable as of
March 31, 2001. In addition, we have incurred substantial inventory carrying
costs related to the Dr. Dean Edell brand of eyewear. We are currently working
to restructure this relationship into a royalty stream arrangement, and then
we plan to sell our right to receive this royalty to a third party. The
restructuring of this relationship, subsequent sale of the royalty stream and
our collection of certain accounts receivable presently owed to us by our
current distributor are all key components of our funding strategy, and, if we
do not succeed in completing these actions as scheduled and on the terms
currently contemplated, our business and our liquidity may be jeopardized.
WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF THE ACQUISITION OF VITAMINS.COM, OR
THE ACQUISITION OF THE ASSETS OF DRUGEMPORIUM.COM AND COMFORT LIVING, AND THEIR
INTEGRATION MAY RESULT IN 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 or ComfortLiving.com assets and operations or accomplish the
execution of our e-commerce business plan. The integration of these recent
acquisitions into our business has strained, and may continue to strain, our
existing technology and operations systems as we continue to assimilate
Vitamins.com, DrugEmporium.com and Comfort Living into our existing operations.
In addition, the personnel that we have hired pursuant to these acquisitions 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 acquisitions of the assets of
DrugEmporium.com and Comfort Living, 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 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 these acquisitions as rapidly as, or to the
extent, anticipated by financial or industry analysts, the market price of our
common stock may decline.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK PRICE.
We have filed S-3 Registration Statements covering the resale of
approximately 31.8 million shares of our common stock by selling stockholders.
In addition to the shares being registered on the Forms S-3, approximately 16.3
million shares are saleable in the public market without restriction under the
Securities Act or are saleable under Rule 144 of the Securities Act, subject to
volume, manner of sale, notice and current reporting information requirements.
In addition, as of April 30, 2001, approximately 3.6 million shares of our
common stock were subject to options outstanding, and approximately 1.8 million
of these options were repriced in December 2000 and carry an exercise price of
$0.4062 per share. Because our stock price is currently low and the trading
volume is thin, the sale of a substantial number of shares could depress the
price of our stock dramatically and could jeopardize our ability to maintain our
Nasdaq listing. Any substantial sales could also make it more difficult for us
to sell equity-related securities in the future at an appropriate price, or at
all.
CONSUMER PROTECTION PRIVACY CONCERNS MAY RESULT IN A DECREASE IN TRAFFIC OR A
DECREASE IN REVENUES.
19
Our network of websites captures information regarding our users in order
to personalize our websites for them and to assist sponsors and advertisers in
targeting their products and 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 of, use of 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 sponsorship
and 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 e-health company could become either a target of, or a witness in, a
federal or state agency or private party claim regarding privacy issues, any of
which could be expensive and time-consuming, could divert the attention of
senior management from our core business and could harm our business.
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 customers, users,
advertisers, content and product providers, institutional clients 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 and CVS.com
. other online dietary supplement stores, such as 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 entered into an alliance with CVS.com and drugstore.com has
formed an alliance with RiteAid. 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.
20
In the market for enterprise web services, we compete mainly with payors'
and providers' internal systems development teams, with local web development
companies, and with other consumer-oriented websites that are selling
applications to institutions, such as drkoop.com and WebMD. We also compete with
drugstore.com and CVS.com 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 and other healthcare 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.
We are currently in dispute with Microsoft with regard to our claims of
breach of contract by Microsoft and their payment claims against us. We have
tendered an offer to settle all outstanding contract claims, but have not
received a response from Microsoft. If Microsoft were to prevail on its claim,
we could face potentially substantial payment obligations.
We are in the process of renegotiating and/or terminating certain major
contractual relationships such as employment agreements, lease agreements,
licensing agreements and advertising agreements, and may renegotiate certain
additional contractual relationships, any of which could disrupt our business
and/or cause us to incur additional costs or make additional payments.
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
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on our being a trusted source of independent health-related information. Any
consumer perception that our editorial content is influenced by our commercial
relationships could harm our reputation and business.
WE HAVE EXPERIENCED AND MAY EXPERIENCE SYSTEMS INTERRUPTIONS AND CAPACITY
CONSTRAINTS ON OUR HEALTHCENTRAL.COM NETWORK, WHICH COULD RESULT IN ADVERSE
PUBLICITY, REVENUE LOSSES AND EROSION OF CUSTOMER TRUST.
In the past, we have experienced system interruptions in the performance of
our websites. 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 competitors' services and reduce our revenues. Additionally, if we fail
to meet the website performance standards in our contracts with our
institutional clients, they may terminate their agreements, require refunds or
fail to renew contracts with us, any of which could decrease our institutional
revenues.
We are also vulnerable to breaches in our security and to natural
disasters. We may not be able to correct any problem in a timely manner. Because
we outsource the server hosting function to third parties, 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.
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 expended, and may be required to expend, significant sums to
protect against security breaches or to alleviate problems caused by breaches.
In addition, a breach of privacy of patient health records could constitute a
violation of federal law.
WE DEPEND ON OUR RELATIONSHIP WITH DOUBLECLICK TO GENERATE ADVERTISING REVENUES,
AND DOUBLECLICK CAN TERMINATE THIS RELATIONSHIP ON SHORT NOTICE.
A portion of our revenues consists of the sale of advertising, all of which
is currently derived through our relationship with DoubleClick, an online
advertising sales agency. DoubleClick is our exclusive representative for
advertising sold on our HealthCentral.com website; however, DoubleClick can
enter into advertising sales contracts with our competitors, and either party
can terminate the contract on 90 days notice. We have no control over
DoubleClick's sales efforts, and if it fails to sell advertising in accordance
with our expectations, our revenues would likewise be lower.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND OUR
STOCK PRICE MAY CONTINUE TO DECLINE IF WE DO NOT MEET REVENUE GOALS OR QUARTERLY
EXPECTATIONS OF INVESTORS AND ANALYSTS.
In part because of our limited operating history, it is difficult to
forecast accurately our future revenues or results of operations. We have
recently made certain organizational changes to focus operations on e-commerce
and our catalog business and to conserve cash. We have reduced our marketing
budget substantially and thus it may be difficult for us to achieve our revenue
targets. A variety of factors may cause our annual and quarterly operating
results to fluctuate significantly including:
. reductions in spending on marketing and other promotional activities;
. customer visits and purchases on the WebRx.com, Vitamins.com,
DrugEmporium.com, ComfortLiving.com, HealthCentral.com and RxList.com
websites and associated costs;
. demand for our products and mix of products sold;
. shifts in the nature and amount of publicity about us or our competitors;
22
. 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;
. management of our inventory levels and fulfillment operations;
. interruptions in product supply, supplier channels or relationships;
. fluctuations in the wholesale prices of the products we sell, as well as
shipping costs or delivery times;
. seasonal patterns of spending by customers, advertisers and sponsors and
trends in advertising rates;
. 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 OUR OPERATIONS COULD INCREASE OUR OPERATING COSTS.
We have experienced 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, we will need to improve our
efficiency, which we may not be able to accomplish. Any failure to successfully
manage our operations and increase our efficiency could distract management
attention and result in our failure to execute on our business plan. As a result
of our acquisitions, we are in the process of assimilating the operations of
Vitamins.com, DrugEmporium.com and Comfort Living into our operations. In order
to manage this growth effectively, we will need to implement and integrate
transaction-processing, operational, reporting, and financial systems,
rationalize and train our employee base, and maintain close coordination among
our technical, finance, marketing, and merchandising staffs. Our integration and
operational efforts are complicated by the fact that Vitamins.com operates in
the Washington D.C. and New York areas, DrugEmporium.com operations are based in
Kentucky and the Comfort Living operations are based in 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 resources
to website development, strategic relationships, technology infrastructure and
operational infrastructure.
IN ORDER TO EXECUTE OUR BUSINESS PLAN WE MUST 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 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 retaining highly skilled employees with appropriate
qualifications. Recent layoffs within our company may make it harder to retain
key employees. Additionally, the loss of any of our key executive officers could
have a significant negative impact on our operations.
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WE MAY BE EXPOSED TO LIABILITIES THAT ARE NOT COVERED BY THE INDEMNIFICATION
AVAILABLE UNDER THE DRUGEMPORIUM.COM ASSET PURCHASE AGREEMENT OR THE MORE.COM
AND COMFORT LIVING ASSET PURCHASE AGREEMENT, WHICH MAY HARM OUR RESULTS OF
OPERATION AND FINANCIAL CONDITION.
Upon consummation of our asset purchase agreements, we assumed certain
liabilities of DrugEmporium.com and more.com/Comfort Living. As a result, we may
be exposed to liabilities that are not covered by the indemnification available
under the asset purchase agreements. 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 DrugEmporium or more.com. The
DrugEmporium.com and more.com agreements provide that 10% of the
HealthCentral.com stock issued in each purchase will be placed in an escrow
account for indemnification and held for a 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 liabilities for which
indemnification is available exceed the escrow amount, 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 six companies,
Enterprise Web Services, HealthCentralRx.com, RxList.com, Vitamins.com,
DrugEmporium.com and more.com/Comfort Living, and we have acquired the license
to use the Dr. Dean Edell Eyewear brand. We are not currently planning any
additional acquisitions; however 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, including but not limited to:
. expenses related to funding the operation, development and/or
integration of complementary businesses;
. expenses associated with the transactions;
. additional expenses associated with amortization of acquired intangible
assets;
. the difficulty of maintaining uniform standards, controls, procedures
and policies;
. the impairment of relationships with employees and customers as a result
of any integration of new 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, or the acquisition of the assets of DrugEmporium.com and Comfort
Living, and their integration may result in a disruption to our business or the
distraction of our management and employees."
WE COULD FACE SIGNIFICANT NON-CASH STOCK-BASED CHARGES.
In light of the recent decline in our stock price and in an effort to
retain our employee base, in December 2000 we exchanged stock options held by
employees and certain consultants. In exchange for accepting new vesting
schedules, the exercise price of all eligible employee and certain consultant
options with an exercise price in excess of $0.4062 was reduced to $0.4062, the
closing market price on the Nasdaq on December 11, 2000. As a result of
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this repricing, options to purchase approximately 1.8 million shares will be
subject to variable accounting treatment, which means that any increase in our
stock price will result in non-cash accounting charges, which would increase our
net loss.
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.
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 WebRx.com, RxList.com, Vitamins.com, DrugEmporium.com
and ComfortLiving.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,
however we are in the process of reviewing our pharmacy operations and, as a
result, may make changes in the future. Any pharmacy errors, whether through
WebRx or otherwise, 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 ONLINE AND OFFLINE CHANNELS.
Consumers may sue us if any of our products or services that are sold
through our online or offline channels 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.
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,
25
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 as a trustworthy and dependable provider of healthcare
information and services. Allegations of impropriety, even if unfounded, could
therefore harm our reputation 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, 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, all of which are expensive.
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 and could harm sales of the Dr. Dean
Edell brand of eyewear. 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.
IN ORDER TO ATTRACT AND RETAIN USERS TO OUR HEALTHCENTRAL.COM NETWORK, WE NEED
TO CONTINUE TO PROVIDE 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 informative content. We will need to purchase or license
much of this content from third persons. Competition for content from
26
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.
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
technologies or adapt our network, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards.
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.
EXTENSIVE AND CHANGING GOVERNMENT REGULATION OF THE HEALTHCARE, DIETARY
SUPPLEMENTS AND PHARMACY INDUSTRIES IS EXPENSIVE TO COMPLY WITH AND EXPOSES US
TO THE RISK OF SUBSTANTIAL GOVERNMENT PENALTIES.
Numerous state and federal laws regulate our health business covering areas
such as:
. storage, transmission and disclosure of medical information and
healthcare records;
. the practice of medicine and other healing arts professions;
. the sale of controlled products such as pharmaceuticals and other
healthcare products;
. prohibitions against the offer, payment or receipt of remuneration to
induce referrals to entities providing healthcare services or goods;
. dispensing and delivering prescription or over-the-counter drugs and
other medical products;
. advertising drugs, cosmetics and nutritional supplements; and
. state insurance regulations.
Further, because the Internet health business is novel, federal and state
agencies may apply laws and regulations to us in unanticipated ways, and may
produce new legislation regulating our business, which could
27
increase our costs or reduce or eliminate certain of our activities or our
revenues. See "Business--Government Healthcare Regulation" and "Business--Other
Governmental Regulation"
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. See "Business--Other Governmental Regulation."
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 of federal and state governments,
including proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs, may further impact our revenues from
prescription drug sales. As a result, 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.
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:
. establishment of a classified board in which only a portion of the total
board members will be elected at each annual meeting;
. authorization for the board to issue preferred stock;
. prohibition of cumulative voting in the election of directors;
. 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.
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.
IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRANDS AND
REPUTATION COULD BE DAMAGED, AND WE COULD LOSE CUSTOMERS.
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The regulation of domain names in the United States and in foreign
countries is subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may not acquire or
maintain our existing domain names in all of the countries in which we conduct
business.
The relationship between regulations governing domain names and always
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.
Item 3. Qualitative and Quantitative Disclosure 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 hedges or other derivative financial
instruments as of March 31, 2001.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 28, 2000, Bergen Brunswig Drug Company and its wholly owned
subsidiary, Medi-Mail, filed an action in Orange County, California Superior
Court (Case No. 00CC15552) against HealthCentral.com and more.com. The complaint
alleges inducement of breach of contract and fraudulent conveyance by
HealthCentral.com and breach of contract by more.com arising out of
HealthCentral's acquisition of certain of the assets of more.com. The complaint
alleges monetary damages of approximately $6 million. The Company believes this
claim is without merit and has retained the law firm of Rutan & Tucker, LLP to
vigorously defend against this claim. The parties have commenced settlement
negotiations.
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On January 29, 2001, XOR, Inc. filed an action in Adams County, Colorado
District Court (Case No. 01 CV 108) against HealthCentral.com. The complaint
alleges breach of contract, unjust enrichment and promissory estoppel. The
complaint alleges monetary damages of approximately $ 1.3 million. The Company
has responded with an Answer and Cross Complaint for breach of contract and has
retained the law firm of Moye, Giles, O'Keefe, Vermeire & Gorrell LLP, to
vigorously defend against this claim.
The Company is involved in litigation from time to time that is routine in
nature and incidental to the conduct of its business.
Item 2. Changes in Securities and Use of Proceeds
On December 7, 1999, in connection with our initial public offering, a
Registration Statement on Form S-1 (File No. 333-88019) was declared effective
by the Securities and Exchange Commission, pursuant to which 7,500,000 shares of
our common stock were offered and sold on December 7, 1999 for our account,
generating net proceeds of approximately $74.6 million. We used $71.2 million of
the net offering proceeds through March 31, 2001, of which $56.5 million was
used for funding working capital and operating losses, $6.2 million was used for
capital expenditures and $5.8 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, an officer, in
connection with 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.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits:
None.
(b) Reports on Form 8K:
A current report on Form 8K was filed with the Securities and Exchange
Commission by HealthCentral.com on February 22, 2001 to report the restated
audited consolidated financial statements to reflect HealthCentral.com's
acquisition of Vitamins.com, which was accounted for as a pooling-of-interests.
A current report on Form 8K was filed with the Securities and Exchange
Commission by HealthCentral.com on March 9, 2001 to report the resignation of
Albert L. Greene as Chief Executive Officer.
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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
Date: May 15, 2001 By: /s/ C. Fred Toney
-----------------------------------
C. Fred Toney,
Chief Executive Officer,
Chief Financial Officer and
Director
31