UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 000-29282
MEDICONSULT.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1341886
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1330 Avenue of the Americas
New York, NY 10019
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (212) 841-7300
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12 (G) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
Check if the disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
Revenues of the issuer for the year ended December 31, 1999 were $6,362,226.
As of December 31, 1999, 49,633,275 shares of the issuer's common stock, $.001
par value, were outstanding, and the aggregate market value of the shares of
common stock held by non-affiliates was approximately $215 million using
beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 to exclude voting stock owned by all directors
and officers of the registrant, some of whom may not be held to be affiliates
upon judicial determination.
MEDICONSULT.COM, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I.
Item 1. Description of Business.............................................................. 1
Item 2. Description of Property.............................................................. 12
Item 3. Legal Proceedings.................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.................................. 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............................. 14
Item 6. Selected Financial Data.............................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data.......................................... 37
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 37
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(A) of the Exchange Act............................................................ 38
Item 11. Executive Compensation............................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 44
Item 13. Certain Relationships and Related Transactions....................................... 45
PART IV
Item 14. EXHIBITS, financial Statement Schedules and Reports on Form 8-K ..................... 45
Signatures ............................................................................................. 48
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Unless otherwise noted, references to "we," "our," and "us" refer to Mediconsult
and its subsidiaries.
Mediconsult.com, Inc. ("Mediconsult" or the "Company") solves medical problems
using the Internet to educate and connect doctors and patients. Our web sites
and Internet services educate physicians, empower chronic patients and enable
more effective doctor-patient relationships. We provide relevant communities,
reliable tools and quality medical information that save doctors time and
improve health outcomes for their patients.
Our focus is on the chronic medical conditions that are responsible for the
majority of healthcare spending. By fostering communities centered on prevalent
medical conditions and health issues, we believe we create significant
opportunities for pharmaceutical and other healthcare companies to effectively
reach physician and patient audiences using Internet-based marketing and
sponsorship programs.
On December 16, 1999, we completed the acquisition of Physicians' Online, Inc.
("Physicians' Online"), a physicians-only Internet service that provides doctors
with clinically oriented services, tools, and information. It is a secure,
physicians-only environment featuring access to clinical discussion groups,
medical databases, daily medical news, continuing medical education credits,
clinical symposia, e-mail accounts, Internet access, secure prescription
transactions, market research and recruiting services, among other services.
Membership is free so long as the member does not use Physicians' Online as its
Internet Service Provider. Physicians' Online's services historically were
principally supported by pharmaceutical and direct-to-physician advertising
sponsors as well as subscription fees from its members using it as an Internet
Service Provider and MDDirect, a physician recruitment business.
Our address is 1330 Avenue of the Americas, 17th Floor, New York, NY 10019.
The Company's telephone number is (212) 841-7300 and our principal Web site is
www.mediconsult.com. Information contained on its Web sites is not, and should
not be deemed to be, a part of this report.
INDUSTRY BACKGROUND
As consumers have become more proactive in their personal healthcare
decisions, they have increasingly searched for information about medical
conditions, treatment alternatives and medical outcomes. The Internet enables
consumers to access large quantities of this information quickly and easily.
With this growth in healthcare information available online, and the ubiquity of
the Internet, physicians and other healthcare professionals have begun to accept
the Internet as a tool enabling them to more effectively and efficiently provide
healthcare to their patients.
THE RAPID GROWTH OF THE INTERNET. The growth of the Internet as a new means
of communicating, accessing information and engaging in commerce has been rapid
and is expected to accelerate. Jupiter Communications estimates that the number
of Internet users worldwide will grow from approximately 85 million at the end
of 1997 to approximately 250 million by the end of 2002. This growth is being
driven by a number of factors, including a growing base of personal computers in
the home and workplace, improvements in network infrastructure, more convenient,
faster and inexpensive Internet access, technological advances in PCs and
modems, increased quantity and quality of content available on the Internet and
the overall increased public awareness of the Internet. Due to its large
audience, the Internet represents a significant channel for advertisers.
THE INTERACTIVE NATURE OF THE INTERNET. The Internet provides an effective
method for consumers to access large quantities of reliable and independent
information on medical conditions, treatment alternatives and medical
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outcomes. We believe that access to this information, together with support
groups and interaction with medical experts on-line, leads to a greater
understanding of health issues and improved patient compliance with
pharmaceutical protocols. The Internet also provides an attractive vehicle for
pharmaceutical and other healthcare companies to increase consumers' awareness
of diagnosed and undiagnosed medical conditions and treatment options. The
Internet allows pharmaceutical companies to easily provide information targeted
to visitors' needs, which may lead to improved patient compliance with
prescribed drug therapies. Consumer Health Information Corporation estimated
that 10% of prescriptions are never filled, 33% are not properly refilled and
50% are not taken as prescribed, resulting in poorer health outcomes for
patients and increased expenditures to the overall healthcare system.
DIRECT-TO-CONSUMER ADVERTISING ON THE INTERNET. The Internet's interactive
nature, coupled with the demographics of the Internet healthcare user, makes the
Internet an attractive vehicle for direct-to-consumer ("DTC") advertising of
prescription pharmaceuticals. The Company believes that the Internet will
capture an increasing portion of this market as pharmaceutical companies
recognize the value of this medium for their products.
THE SOLUTION
Through our Web sites, we address physicians and consumers' needs for
healthcare information and provide a targeted marketing and advertising platform
for pharmaceutical and other healthcare companies. Key elements of this solution
include:
HIGH QUALITY TRUSTED CONTENT; USER-FRIENDLY ENVIRONMENT. We provide our
visitors with high quality content on specific medical conditions and health
issues and an easy-to-navigate environment. Our staff searches for and reviews
extensive amounts of health information and select relevant material from a wide
variety of sources, including medical journals, healthcare association
literature and general periodicals. For each medical topic covered on our Web
sites, we aggregate an average of 30 articles covering current news, symptoms
and treatment alternatives that are understandable to the average consumer. Our
primary Web site at www.mediconsult.com is constructed to enable a person
interested in any one of the 60 medical topics covered on our Web sites to
access a broad range of information, including relevant information on other
portions of our Web sites. For example, a visitor to the diabetes page will be
referred to relevant information for diabetics on the nutrition section. We
frequently solicit visitor feedback through surveys and polls and uses this
information to refine further its content and expand our complementary
offerings.
STRONG SENSE OF ON-LINE COMMUNITY. The Company has developed a strong sense
of on-line community by organizing its Web sites into conditions of concern to
healthcare consumers and providing complementary services. The Company's Web
sites provide visitors with the ability to:
- share and search for information in consultation with healthcare
professionals on particular conditions;
- communicate (through chat groups, bulletin boards, and participation in
polls and surveys) with other visitors with similar health conditions,
interests or experiences;
- participate in moderated on-line support groups;
- participate in live, on-line events hosted by prominent physicians; and
- receive quick responses from our visitor support staff.
LARGE, HIGHLY TARGETED AUDIENCE. Our Web sites are designed to attract a
highly desirable target audience for pharmaceutical manufacturers and other
healthcare companies. We have developed a sophisticated, integrated database of
demographic information about patients' needs, habits, preferences and
intentions. We are able to identify our visitor traffic patterns by condition or
health issue, which provides relevant information for clients seeking to target
an audience for a particular pharmaceutical product or condition.
BROAD, SOPHISTICATED INTERNET HEALTHCARE MARKETING AND ADVERTISING PROGRAMS.
Mediconsult designs, develops, and implements broad, sophisticated Internet
compliance, launch, marketing and direct-to-consumer advertising programs for
pharmaceutical and other healthcare companies and provides ongoing support
services as part of these programs. We utilize our extensive knowledge of the
Internet healthcare user and our high quality, focused content to effectively
design and develop programs focused on a particular product or health issue.
These programs
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incorporate one or more of a broad spectrum of Internet-based tools and products
ranging from condition diagnosis tools, to targeted site sponsorships, to
customized Web sites containing relevant content from our Web sites. In
addition, we create calls to action, through visitor polls, surveys and coupons,
to allow clients to gain more information about the visitor. Mediconsult designs
its on-line marketing and advertising programs to complement our clients'
traditional off-line marketing, compliance and media campaigns.
COMPANY STRATEGY
Effective upon our announcement of the agreement to acquire Physicians' Online,
we officially changed our strategy and announced that we would no longer be
selling banner advertisements on our patient-focused websites. We are now
primarily focused on physicians as the driving force of most healthcare
spending, Mediconsult operates the first and most active online network of
physicians -- Physicians' Online. POL has been operating since 1992. The POL
network offers a number of services and tools for physicians that focus on the
physician's on-line clinical needs, including:
- journal articles;
- medical associations;
- medical news;
- practice management tools;
- continuing medical education;
- discussion forums;
- e-mail;
- Internet access;
- recruitment services;
- build-a-website;
- phone-answering/paging service;
- Rx sample ordering; and
- e-commerce (books and supplies).
The POL network is accessible only by members that have been authenticated as
practicing U.S.-based physicians prior to their entering the site. The
authentication process requires the physician to provide personal information
(ME number) that is then matched to the American Medical Association database,
or to provide other appropriate documentation (medical license, for example) via
fax. Once the physician has been authenticated, we provide him or her with a
username and password to use each time they visit the network.
POL operates as an Internet Service Provider (ISP) as an additional service to
its members. Approximately half of POL's active members access the service
through the POL ISP. The POL ISP is one of the largest virtual private networks
in the U.S. Regardless of whether a physician uses the POL ISP, all members are
provided a POL e-mail account.
The most popular features of the POL site are the clinical discussion forums,
medical literature searches and e-mail. There are more than 35,000 active
discussion `threads' on POL. Members can post clinical information about a
difficult case and receive advice from their colleagues.
With the merger with POL, we now have a combination of the largest
authenticated, physicians-only audience, combined with one of the largest
patient audiences. These two key strategic assets now allow us to focus more
intently on the opportunities in areas such as electronic medical education, as
evidenced by our recently announced agreement with Bristol-Myers Squibb, and
physician programs such as the Mydoctor.com initiative which allows a POL-member
physician create his or her own custom Web site in only minutes.
In the patient healthcare arena, our primary focus is the design, development
and implementation of interactive solutions that educate physicians, empower
patients and enable a more effective physician/patient relationship. We create
and maintain communities of doctors and patients and specialize in enabling
communication between members of these two distinct communities.
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ENHANCE THE VISITOR EXPERIENCE AND SENSE OF ON-LINE COMMUNITY. We are
committed to continually improving the utility and perceived value of our Web
sites. Mediconsult seeks to:
- broaden and deepen the content of our Web sites;
- improve the navigability of our Web site environment;
- expand and enhance our suite of complementary services;
- further segment medical topics into more specific ones;
- enhance the depth of content relating to the clinical conditions that most
frequently affect our visitors; and
- tailor our Web sites to meet the needs and preferences of the visitor.
INCREASE TARGETED TRAFFIC THROUGH STRATEGIC ACQUISITIONS AND RELATIONSHIPS,
AND CONTENT LICENSING. We seek to bolster traffic and revenue through strategic
acquisitions and relationships. We have recently completed strategic
initiatives to purchase, manage or sponsor several significant Web sites to
improve the depth and breadth of our medical content and to increase visitor
traffic. These include:
- Pharminfo.com, a leading Web site providing information on pharmaceutical
products and clinical trials for pharmacists, physicians and consumers;
- Cyberdiet.com, a Web site providing tailored nutritional information and
programs;
- INCIID.org, a Web site providing information on infertility;
- Heartinfo.org, the leading site for patients and professionals seeking
information on heart disease and hypertension;
- Mood Sciences, a developer of a Web-based software tool for the screening
and monitoring of 12 mood related disorders; and
- Storknet.org, a leading website for pregnancy and parenting issues.
We believe that there will continue to be significant opportunities to manage
or acquire Web sites or content that will complement our existing offerings. We
also expect to increase our visitor traffic and related revenue opportunities by
licensing content to other Web sites.
BROADEN RELATIONSHIPS WITH PHARMACEUTICAL COMPANIES. We seek to broaden
relationships with pharmaceutical companies in several ways. We attempt to
expand relationships with existing clients to broaden the number of programs,
both in terms of number of products and types of client services, provided to
them. For example, our work with Novartis Consumer Health Canada, in designing
and developing a Web site for the Habitrol smoking cessation product led to a
relationship with Novartis Pharma, the pharmaceutical division of Novartis AG.
We expanded this relationship to include a French language version of the
Habitrol Web site. We have numerous other projects and proposals with Novartis
Pharma currently in process. We also continue to actively pursue a number of
additional major pharmaceutical companies and other healthcare clients with
proposals tailored to their specific products and marketing strategies.
BUILD STRONG BRAND AWARENESS. We believe that establishing brand awareness is
critical to attracting and retaining visitors and advertisers. The Company seeks
to build its brand by creating a superior visitor experience and creating broad
awareness of its name as the trusted on-line source for medical information. We
intend to achieve this goal by expanding our marketing and educational efforts
through both off-line and on-line marketing initiatives, including collaborative
events with patient associations such as the National Stroke Association and the
Arthritis Foundation, speeches and media coverage.
THE MEDICONSULT.COM FAMILY OF WEB SITES
Our family of Web sites serves as a gateway for access to a comprehensive
source of health-related information focused on the clinical and educational
needs of patients, as well as practicing physicians and other healthcare
professionals. Since inception of Mediconsult in 1996, we have focused on
developing our reputation as the leading independent provider of
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health information to consumers on the Web. Mediconsult.com, includes easy to
understand information on more than 60 chronic medical conditions and health
issues. We believe that in the United States these medical conditions affect
more than 90 million people and represent a significant portion of healthcare
spending. The major medical conditions and health issues covered by the
Company's Web sites include:
- --------------------------------------------------------------------------------------------------------------
Acid Reflux Emphysema Osteoporosis
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AIDS/HIV Epilepsy Palliative Care
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Alzheimer's Disease Erectile Dysfunction Parkinson's Disease
- --------------------------------------------------------------------------------------------------------------
Anxiety Fitness Peptic Ulcers
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Arthritis General Pregnancy Complications
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Asthma GERD (Heartburn/Acid Reflux) Prostate Cancer
- --------------------------------------------------------------------------------------------------------------
Attention Deficit Disorder Headache Senior Health
- --------------------------------------------------------------------------------------------------------------
Benign Prostatic Hypertrophy Heart Disease Sexually Transmitted Diseases
- --------------------------------------------------------------------------------------------------------------
Bladder Cancer Heartburn Herpes Skin Cancer
- --------------------------------------------------------------------------------------------------------------
Brain Tumor Hypertension Skin Disorder
- --------------------------------------------------------------------------------------------------------------
Breast Cancer Ileostomy Smoking Cessation
- --------------------------------------------------------------------------------------------------------------
Bronchitis Incontinence Spinal Cord Injury
- --------------------------------------------------------------------------------------------------------------
Cancer Support Group Inflammatory Bowel Disease Stoma/Ileostomy/Colostomy
- --------------------------------------------------------------------------------------------------------------
Cervical Cancer Infertility Kidney Cancer Stress
- --------------------------------------------------------------------------------------------------------------
Children's Health Interstitial Cystitis Strokes
- --------------------------------------------------------------------------------------------------------------
Chronic Fatigue Syndrome Leukemia Testicular Cancer
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Chronic Pain Liver Disease Travel Vaccinations
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Chronic Renal Failure Lung Cancer Urinary Stones
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Cirrhosis Lymphoma Vasectomy
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Colorectal Cancer Melatonin Vitamins
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Colostomy Menopause Women's Health
- --------------------------------------------------------------------------------------------------------------
Contraception Men's Health
- --------------------------------------------------------------------------------------------------------------
Depression Migraines
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Diabetes Multiple Sclerosis
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Eating Disorders Nutrition
- --------------------------------------------------------------------------------------------------------------
The other sites included among our family of sites are:
- heartinfo.org - Heart health for patients and physicians;
- pharminfo.com - Current and in-depth drug information;
- cyberdiet.com - Fitness and nutrition resource and community; and
- inciid.org - Infertility information and support.
5
Within this group of medical conditions, Mediconsult provides specific tools,
resources, experts and information databases to assist visitors in dealing with
a variety of inquiries including those relating to a recent diagnosis, general
background information, and highly technical drug profiles. These resources
include:
- comprehensive and easy to understand independent medical information from a
variety of independent sources, including medical journals, healthcare
association literature and general periodicals;
- a community of visitors with an interest or experience in the topic;
- on-line moderated support groups; and
- a selection of recommended books and other healthcare products for purchase
on-line.
The www.mediconsult.com Web site has received awards from more than 30
independent organizations under the general categories of content, navigation
and overall design. Among the more recent awards and citations are those from
ENCYCLOPEDIA BRITANNICA (one of 76 "Best of Web" sites out of 125,000
reviewed), THE LANCET ("An exceptionally well-designed, easy to navigate site
brimming with health news and patient-oriented information"), and POPULAR
SCIENCE (one of the "50 Best of the Web" for 1999). In January 1999, the
Company's MEDICONSULT.COM Web site was one of 110 Web sites nominated for a
"Webby" by the International Academy of Digital Arts and Science. We believe
that these awards from independent companies and agencies help to build
awareness of, and visitor traffic to, our Web sites and provide independent
validation of the perceived thoroughness and quality of our Web sites and their
content. More recently, we were named an Impact Award 2000 recipient by INTERNET
WORLD, a Valuable Reference by CITELINE, a HEALTH EXPLORER Best Site, an ABC'S
OF PARENTING 4-Star site and a HEALTH A-Z 5-Star site.
We also provide visitors with the ability to purchase the following products
on-line through our various sites:
- MEDI-STORE. We operate an on-line store on www.mediconsult.com. Through this
store, visitors can purchase selected medical products, vitamins and
supplements categorized by medical condition.
- MEDI-BOOKS. Through an agreement with Amazon.com, we offer visitors the
opportunity to purchase healthcare-related books that have been reviewed by
our medical professionals. This offers the visitor a pre-screened and
targeted list of recommended books that are relevant to their area of
interest.
We believe that visitor support services are important in order to attract and
retain visitors to our Web sites. We provide visitor support primarily through
e-mail-based correspondence. Help and feedback buttons are prominently displayed
throughout the Mediconsult family of Web sites, and visitor support staff
responds to most e-mail queries within 24 hours. In addition, through support
group activities, healthcare professionals provide free e-mail support for a
broad range of issues.
Mediconsult has strict policies and practices to ensure privacy and
confidentiality of personal information posted on the Mediconsult family of Web
sites. We adhere to the Health on the Network (HON) code of conduct
(www.hon.org) and the Trusted Standards in Electronic Transactions, known as
Truste, privacy and disclosure requirements. The Truste program is intended to
maximize disclosure to consumers with regard to the collection of personally
identifiable information on Web sites in order to promote the Internet as a safe
and secure place to conduct business, education, communication and entertainment
activities. In accordance with our commitment to Truste, we do not display or
make publicly available any personally identifiable information without the
prior written consent of the individual identified, and we limit the usage of
personally identifiable information gathered on our sites.
PRODUCTS AND SERVICES
PHYSICIAN-ORIENTED PRODUCTS AND SERVICES
We design and develop physician-oriented programs. These include programs such
as electronic medical education, the medical education planner, the Mydoctor.com
suite of products and ISP services to physicians. Through POL we also offer
secure physician-only communities that allow medical professionals to openly
discuss clinical issues and outcomes, and other services designed to facilitate
the physician/patient relationship.
MARKETING AND ADVERTISING PROGRAMS.
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We design, develop and implement sophisticated on-line marketing and
advertising programs for pharmaceutical and other healthcare companies. These
programs are intended to educate patients on particular medical conditions,
increase their awareness of treatment options, describe the benefits of various
treatments and generally increase compliance with treatment protocols. The
Company's programs include:
- condition-specific site sponsorships, visitor polls and surveys, and live
events, to build brand awareness;
- condition-specific content, to educate the targeted visitor group;
- calls to action and other visitor interactions, such as requests for product
samples;
- design and development of customized Web sites focused on a particular
product, treatment or medical condition;
- development of product positioning strategies and initiation of on-line
program launches; and
Web site management and support and visitor services.
CONTENT LICENSING AND WEB SITE SUPPORT.
We also seek to increase visitor traffic and generate additional revenue by
licensing content to, and providing Web site support for, Web sites established
by healthcare organizations, including health maintenance organizations, and
other payers, and pharmaceutical companies. Under these arrangements, we design,
develop and maintain individual Web sites for clients incorporating content from
the Mediconsult family of Web sites. In addition, with certain clients we
maintain the right to place advertisements on client sites, sharing revenue on a
predetermined basis. Listed below is a sample of some of the Company's content
licensing and Web site support clients.
IBM. In January 1998, the Company entered into a content licensing
agreement with IBM. Under this agreement, the healthcare division of IBM
markets MEDICONSULT.COM'S medical content to IBM's clients.
GEOACCESS. In December 1998, the Company entered into a content licensing
agreement with GeoAccess, a healthcare information services company that
provides enterprise-wide software for managed care companies, authorizing
GeoAccess to market the Company's content to its managed care clients.
OTHER. The Company is licensing its content and providing consulting
services to pharmaceutical companies and is seeking to expand its client
base to include other service providers, such as hospital groups, managed
care companies and retail pharmacies.
JOINT VENTURES, STRATEGIC ACQUISITIONS AND RELATIONSHIPS
JOINT VENTURES.
In February 1999, we entered into a memorandum of agreement to form a 50/50
joint venture with CommonHealth LLP ("CommonHealth"). The venture was intended
to focus on providing pharmaceutical and other healthcare companies with
innovative approaches to marketing their products in comprehensive marketing and
advertising campaigns containing both significant Internet components and
traditional media such as, print, television and direct marketing. Based upon
changed strategic focus, the documentation to finalize the venture was not
completed, and during 1999, CommonHealth and Mediconsult agreed to terminate the
relationship.
STRATEGIC ACQUISITIONS.
Mediconsult has grown in part through strategic acquisitions and agreements.
We plan to continue this strategy in order to increase visitor traffic, increase
revenue, gain access to human resources, and increase the breadth and depth of
the medical content provided on our Web sites. During 1999, we acquired or
entered into Web site management or sponsorship agreements as follows:
INCIID.ORG, a Web site providing information on infertility. In February
1999, we entered into an exclusive sponsorship agreement with the
InterNational Counsel of Infertility Information Dissemination, a not-for-
profit organization, relating to INCIID.ORG and granting us the sole right
to place advertisements on the Web site, to link traffic, and manage the
content on the Web site.
CYBERDIET.COM, a Web site providing tailored nutritional information and
programs. On May 11, 1999, we completed the acquisition of CyberDiet, Inc.,
the owner of Cyberdiet.com which provides tailored
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nutritional information and programs, in exchange for 400,000 shares of our
common stock issued to the former shareholders of CyberDiet, Inc. The total
purchase price, including acquisition costs and assumption of net
liabilities, was $2.8 million. The fair value of shares provided as
consideration was determined by the market price of the shares at the
announcement date (February 25, 1999). The excess of the purchase price
over net assets acquired was recorded as goodwill and is being amortized on
a straight-line basis over five years.
CYBER-TECH, INC, a company that has developed and provides high quality
content and tools focused on heart disease and related areas that have
attracted a large and growing number of visitors to the www.heartinfo.com
Web site ("Cyber-Tech"). On June 14, 1999, we acquired all of the capital
stock of Cyber-Tech, Inc. ("Cyber-Tech"). The consideration paid to Cyber-
Tech shareholders consisted of $3,765,000 in cash and 267,732 shares of our
common stock. Mediconsult and the shareholders of Cyber-Tech also entered
into an Escrow Agreement with respect to certain of the shares of
Mediconsult common stock issued to the former Cyber-Tech shareholders. The
total transaction value, including acquisition costs, was $7.6 million. The
fair value of shares provided as consideration was determined by the market
price of the shares at the transaction date. The excess of the purchase
price over net assets acquired was allocated to goodwill and other
intangible assets. Goodwill and other intangible assets are being amortized
on a straight-line basis over an estimated useful life of three to five
years.
MOOD SCIENCES, INC., a company that specializes in mental health disease
management innovations, ("Mood Sciences"). Mood Sciences was acquired on
October 27, 1999, in exchange for 215,000 shares of Mediconsult common
stock. The total purchase price, including acquisition costs of $0.2
million and assumption of net liabilities of $0.2 million, was $1.9
million. The fair value of shares provided as consideration was determined
by the market price of the shares at the transaction date. The excess of
the purchase price over net assets acquired was recorded as goodwill and is
being amortized on a straight-line basis over five years.
PHYSICIANS' ONLINE INC., a company with more authenticated doctor-users
than any other medical Web site, ("Physicians' Online"). On December 16,
1999, we acquired the shares of Physicians' Online, Inc. ("POL"), a
provider of an exclusive network for physicians in addition to on-line
medical information and communications. POL operates a secure, physicians-
only environment featuring access to medical databases, daily medical news,
continuing medical education credits, clinical symposia, e-mail accounts,
Internet access, and other services. As consideration for the acquisition,
we issued approximately 18.5 million shares of Mediconsult common stock.
The total value of consideration was $183.1 million, including the
assumption of debt and acquisition costs. Identifiable intangible assets
resulting from the transaction are amortized over periods ranging from
three to five years.
STRATEGIC RELATIONSHIPS.
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We have entered into strategic alliances with a number of patient and
professional associations, including the Arthritis Foundation, Leukemia Society
of America, the National Stroke Association and the National Mental Health
Association. These alliances allow us to:
- gain access to condition-specific medical information;
- gain access to condition-specific visitor traffic;
- increase visibility of the Company on the Internet; and
- increase resources available to the Company regarding particular medical
conditions.
SALES AND MARKETING
Until September of 1999, our sales and marketing was managed entirely by
Mediconsult employees. In September, 1999 we entered into a relationship with
Pharma Marketing, LLC under which responsibility for sales and marketing of
certain aspects of our business to pharmaceutical companies is managed by this
newly formed company. Marketing and program design continue to be managed by our
own employees.
Pharma Marketing, LLC, is a newly formed marketing company which will conduct
sales and marketing activities on behalf of the Company ("Pharma Marketing"). On
September 7, 1999 we entered into a membership investment agreement for the
purchase 35% of the aggregate membership interests of Pharma Marketing for
$1,250,000 and 200,000 shares of Mediconsult common stock. The remaining 65% of
Pharma Marketing is owned by a certain individual ("Individual"). Under the
terms of an operating agreement with and among Mediconsult, Pharma Marketing and
the Individual, the $1,250,000 contributed by Mediconsult and 100,000 of the
200,000 shares that we issued to Pharma Marketing, were distributed to the
Individual in September 1999.
We generally seek to hire individuals with significant experience in program
design, marketing and from the Internet and healthcare industries.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Our operating infrastructure has been designed and implemented to support the
reliable and swift delivery of hundreds of thousands of page views a day. The
design of our Web sites allows for growth into millions of page views per day.
Web pages are generated and delivered, in response to visitors' requests by any
one of multiple Web servers. Key attributes of this infrastructure include
scalability, performance and service availability.
Mediconsult has deployed a standard production and development server
environment utilizing standard software solutions running on generally available
server hardware platforms. We are currently transitioning our systems hosted at
various offsite facilities to an in-house software environment to be located in
the United States in its Tarrytown, NY facilities, which the Company will manage
from Toronto, Canada and Tarrytown. Our Web-based software systems use standard,
off-the-shelf software components. Our strategy is to license and integrate
"best-of-breed" commercially available technology from industry leaders such as
IBM, Sun Microsystems and Microsoft whenever possible. We believe this
architecture will allow us to increase rapidly the scale of our systems in a
cost-effective manner.
Our production data is copied to backup tapes each night and stored at a third
party, off-site storage facility. We do not have a comprehensive disaster
recovery plan, but we are in the process of developing such a plan to respond to
system failures. We have engaged International Computer Security Associates to
conduct a security audit of our systems. Strict password management and
physical security measures are followed.
COMPETITION
There are many companies that provide Internet and non-Internet based
education, content, marketing and advertising services to the healthcare
industry. All of these companies compete with Mediconsult for clients, and
Internet healthcare companies also compete with us for visitor traffic. We
expect competition to continue to increase as there are no substantial barriers
to entry in our markets. Increased competition could result in reductions in the
fees we receive for our services, lower margins, loss of clients, reduced
visitor traffic to its Web sites, or loss of market share. Any of these
occurrences could materially and adversely affect our business, financial
condition and results of operations. Competition is also likely to increase
significantly, not only as new entities enter the market, but also as current
competitors expand their services. Our principal competitors include:
- advertising agencies and consulting firms, such as Young & Rubicam and
Agency.com, that develop marketing and advertising programs for
pharmaceutical and other healthcare companies;
9
- Web sites that deliver consumer and professional healthcare information,
either as their sole focus or as part of a more broadly-based site, such as
Health Oasis, InteliHealth, iVillage, OnHealth, Thrive Online,
Healtheon/WebMD, CareInsite, and Medscape;
- Other, larger companies that either have entered the Internet healthcare
markets or have announced an intention to do so, such as IMS Health,
McKesson HBOC, Quintiles Transnational, and National Data;
- general purpose consumer online service providers, such as America Online
and Microsoft Network;
- Web site development firms, such as USWeb/CKS; and
- publishers and distributors of television, radio and print, such as FOX,
CBS, Disney, NBC and Time Warner.
Our ability to compete depends on a number of factors, many of which are
outside of our control. These factors include quality of content, ease of use,
timing and market acceptance of new and enhanced services, and level of sales
and marketing efforts.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, existing
relationships with pharmaceutical and other healthcare companies and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than us to the development and
promotion of their services. These competitors may also engage in more extensive
development efforts, undertake more far-reaching marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to existing and
potential employees, advertisers and alliance partners. Our competitors may
develop services that are equal or superior to those provided by Mediconsult or
that achieve greater market acceptance and brand recognition than we achieve. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address the needs of advertisers. It is possible that new
competitors may emerge and rapidly acquire significant market share. We may not
be able to compete successfully or competitive pressures may have a material
adverse effect on our business, results of operations and financial condition.
If clients perceive the Internet generally or our Web sites to be a relatively
limited or ineffective medium, clients may be reluctant to devote a significant
portion of their budgets to Internet advertising or to advertise on our Web
sites.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND DOMAIN NAMES
We protect our intellectual property through a combination of trademark and
copyright law, trade secret protection and confidentiality with employees,
customers, independent contractors and strategic partners. We pursue the
registration of its domain names, trademarks and service marks in the United
States, and has obtained trademark registration in the United States of the
"MEDICONSULT.COM" mark and assert various other trademarks and servicemarks.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our services and products are made
available on-line. We obtain a majority of our content from the public domain.
In addition, we create some of our own content and obtain rights to use the
balance of our content from third parties. It is possible that we could become
subject to infringement actions based upon the content obtained from these third
parties. In addition, others may use this content and we may be subject to
claims from licensors. We currently have no patents; however, we have one patent
pending which was acquired in the Mood Sciences transaction. We do not
anticipate that patents will become significant part of our intellectual
property in the future. We seek to enter into confidentiality agreements with
our employees and independent consultants and have instituted procedures to
control access to and distribution of our technology, documentation and other
proprietary information and the proprietary information of others. The steps we
take to protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trademarks, service marks and similar
proprietary rights. In addition, other parties may assert claims of infringement
of intellectual property or other proprietary rights against the Company. The
legal status of intellectual property on the Internet is currently subject to
various uncertainties.
HUMAN RESOURCES
As of December 31, 1999, we employed 284 full-time employees, of whom 32 were
in marketing, sales and program design, 117 were in product and content
development, 33 were in administration and corporate services, and 102 were in
operations and support. In addition, there were 10 part-time employees. As we
continue to grow and introduce more products, we expect to hire more personnel.
Competition for personnel is intense and we may not be able to retain our senior
10
management or other key personnel in the future. None of our current employees
is represented by a labor union or is the subject of a collective bargaining
agreement. We believe that our relations with employees are good.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
GENERAL. There is an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, visitor privacy, taxation and quality of
products and services. Moreover, the applicability to the Internet of existing
laws governing issues such as intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment and personal
privacy is uncertain and developing. Any new legislation or regulation, or the
application or interpretation of existing laws may have an adverse effect on our
business. In addition to Internet regulation, our Web sites may be subject to
numerous state and federal laws that govern the delivery of healthcare services
and goods in the United States. These laws range from laws prohibiting the
offer, payment or receipt of remuneration to induce referrals to entities
providing healthcare services and goods to licensure requirements as well as
special protection for healthcare data. These laws are complicated and are under
constant revision and interpretation. These laws and their active enforcement,
particularly in the area of healthcare fraud, affects the way all healthcare
providers structure their business relationships and deliver healthcare services
and goods. New developments in this area could affect the structure and
operation of our business. In the event some state or federal regulatory agency
determined that our relationship with one or more of our clients that deliver
healthcare services or goods violate any such laws, then we could be subjected
to fines and other costs and could be required to revise or terminate that
portion of its business.
LIABILITY FOR INFORMATION RETRIEVED FROM THE COMPANY'S WEB SITES AND FROM THE
INTERNET. Content may be accessed on our Web sites and this content may be
downloaded by visitors and subsequently transmitted to others over the Internet.
This could result in claims against Mediconsult based on a variety of theories,
including defamation, practicing medicine without a license, malpractice,
obscenity, negligence, copyright or trademark infringement or other theories
based on the nature, publication and distribution of this content. Some of these
types of claims have been brought, sometimes successfully, against providers of
Internet services in the past. We could also be exposed to liability with
respect to third-party content that may be posted by visitors in chat rooms or
bulletin boards offered on our Web sites. It is also possible that if any
information contains errors or false or misleading information, third parties
could make claims against us for losses incurred in reliance on such
information. In addition, we may be subject to claims alleging that, by directly
or indirectly providing links to other Web sites, we are liable for copyright or
trademark infringement or the wrongful actions of third parties through their
respective Web sites. The Communications Decency Act of 1996 provides that,
under certain circumstances, a provider of Internet services shall not be
treated as a publisher or speaker of any information provided by a third-party
content provider. This safe harbor has been interpreted to exempt certain
activities of providers of Internet services. Our activities may prevent us from
being able to take advantage of this safe harbor provision. While we attempt to
reduce our exposure to such potential liability through, among other things,
visitor policies and disclaimers, the enforceability and effectiveness of such
measures are uncertain. Any claims brought against us in this respect may have a
material and adverse effect on our business.
ON-LINE CONTENT REGULATIONS. While we do not believe the content on our Web
sites is obscene or indecent, our Web sites contain healthcare content which is
explicit in nature and is intended for a mature audience. Several federal and
state statutes prohibit the transmission of certain types of indecent, obscene
or offensive content over the Internet to certain persons. The enforcement of
these statutes and initiatives, and any future enforcement activities, statutes
and initiatives, may result in limitations on the type of content and
advertisements available on our Web sites. Legislation regulating online content
could dampen the growth in use of the Internet generally and decrease the
acceptance of the Internet as an advertising and e-commerce medium, which could
have a material adverse effect on our business, results of operations and
financial condition. We adhere to the Health on the Network code of conduct
which establishes guidelines for health information on the Internet.
PRIVACY CONCERNS. The Federal Trade Commission ("FTC") is considering
adopting regulations regarding the collection and use of personal identifying
information obtained from individuals when accessing Web sites, with particular
emphasis on access by minors. Such regulations may include requirements that
companies establish certain procedures to, among other things: (1) give adequate
notice to consumers regarding information collection and disclosure practices,
(2)
11
provide consumers with the ability to have personal identifiable information
deleted from a company's database, (3) provide consumers with access to their
personal information and with the ability to rectify inaccurate information, (4)
clearly identify affiliations or a lack thereof with third parties that may
collect information or sponsor activities on a company's Web site and (5) obtain
express parental consent prior to collecting and using personal identifying
information obtained from children under 13 years of age. Such regulation may
also include enforcement and redress provisions. While we have implemented or
intend to implement programs designed to enhance the protection of the privacy
of our visitors, including children, there can be no assurance that such
programs will conform with any regulations adopted by the FTC. The FTC's
regulatory and enforcement efforts may adversely affect the ability to collect
demographic and personal information from visitors, which could have an adverse
effect on our ability to provide highly targeted opportunities for clients,
advertisers and e-commerce marketers.
It is also possible that "cookies" (information keyed to a specific server,
file pathway or directory location that is stored on a visitor's hard drive,
possibly without the visitor's knowledge) used to track demographic information
and to target advertising may become subject to laws limiting or prohibiting
their use. A number of Internet commentators, advocates and governmental bodies
in the United States and other countries have urged the passage of laws limiting
or abolishing the use of cookies. Limitations on or elimination of our use of
cookies could limit the effectiveness of our targeting of advertisements, which
could have a material adverse effect on our business, results of operations and
financial condition.
The European Union ("EU") has adopted a directive that imposes restrictions on
the collection and use of personal data. Under the Directive, EU citizens are
guaranteed certain rights, including the right of access to their data, the
right to know where the data originated, the right to have inaccurate data
rectified, the right to recourse in the event of unlawful processing and the
right to withhold permission to use their data for direct marketing. The
directive could, among other things, affect U.S. companies that collect
information over the Internet from individuals in EU member countries, and may
impose restrictions that are more stringent than current Internet privacy
standard in the United States. In particular, companies with offices located in
EU countries will not be allowed to send personal information to countries that
do not maintain adequate standards of privacy. The directive does not, however,
define what standards of privacy are adequate. As a result, there can be no
assurance that the directive will not adversely affect the activities of
entities, such as Mediconsult, which engage in data collection from visitors in
EU member countries.
DOMAIN NAMES. Domain names are Internet "addresses." The current system for
registering, allocating and managing domain names has been the subject of
litigation, including trademark litigation, and of proposed regulatory reform.
We have registered as its URL, the domain name "mediconsult.com." Although we
have registered "MEDICONSULT.COM" as a trademark, third parties may bring claims
for infringement against us for the use of this trademark. There can be no
assurance that our domain names will not lose their value, or that we will not
have to obtain entirely new domain names in addition to or in lieu of our
current domain names if reform efforts result in a restructuring of the current
system.
JURISDICTIONS. Due to the global nature of the Internet, it is possible that,
although transmissions by Mediconsult over the Internet originate primarily in
the United States, the governments of other states and foreign countries might
attempt to regulate such transmissions or prosecute Mediconsult for violations
of their laws. These laws may be modified, or new laws enacted, in the future.
Any of the foregoing developments could have a material adverse effect on our
business, results of operations and financial condition. In addition, as our
service is available over the Internet in multiple states and foreign countries,
these jurisdictions may claim that we are required to qualify to do business as
a foreign corporation in each state or foreign country. We have not qualified to
do business as a foreign corporation in any jurisdiction. This failure to
qualify as a foreign corporation in a jurisdiction where it is required to do so
could subject us to taxes and penalties and could result in our inability to
enforce contracts in such jurisdictions. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could have a material
adverse effect on our business, financial condition and results of operations.
ITEM 2. DESCRIPTION OF PROPERTY.
We maintain executive offices in Hamilton, Bermuda, as well as corporate
headquarters in New York, New York. The New York lease agreement for
approximately 9,200 square feet of corporate headquarters space expires in 2003,
but is subject to early termination at any time upon ninety days written notice.
We operate out of offices in nine separate locations
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throughout the United States and Canada. We also have employees geographically
dispersed who work out of home offices, independent or client offices.
We own or lease a variety of computers and other computer equipment for our
operational needs. This year we significantly upgraded and expanded our
computers and related equipment in order to increase efficiency, enhance
reliability, and provide the necessary base for business expansion.
We believe that our facilities and equipment are suitable and adequate for our
business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS.
Our wholly owned subsidiary, POL is a defendant in a lawsuit in which a former
officer and director of POL alleges, among other things, that POL violated
securities laws in selling stock to the former officer and that POL breached its
employment agreement with the former officer. This action is currently in the
United States District Court in New York. POL has made a motion in the United
States District Court action seeking dismissal of the action. By Order dated
August 14, 1997, United States District Court Judge for the Southern District of
New York (a) dismissed the first two counts of the former officer's Amended
Complaint alleging violation of certain provisions of the Securities Act of 1933
with prejudice, and (b) dismissed the third, fourth and sixth counts of the
former officer's Amended Complaint alleging securities fraud, common law fraud
and negligent misrepresentation; with leave to replead. By letter dated November
4, 1997, the former officer notified the Court of the former officer's decision
not to replead the former officer's third, fourth and sixth counts at this time.
We are also party to a number of other claims and lawsuits incidental to our
business.
Management, based on the advice of counsel, believes that the ultimate outcome
of these matters, individually or in the aggregate, will not have a material
adverse effect on our results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A majority of our stockholders approved the following actions by written
consent on November 19, 1999:
1. the merger transaction with Physicians' Online, Inc. pursuant to the terms
of the merger agreement, as amended, including the necessary issuance of up
to 20,500,000 shares of Mediconsult common stock;
2. an amendment to the Mediconsult certificate of incorporation to increase the
authorized common stock of Mediconsult from 50,000,000 shares to 100,000,000
shares;
3. an amendment to the Mediconsult 1996 Stock Option Plan to authorize an
additional 3,500,000 shares of Mediconsult common stock for issuance
thereunder and to provide for an independent compensation committee to
administer certain option grants;
4. the assumption and adoption of the Physicians' Online, Inc. stock option
plan, with certain amendments providing for the issuance of Mediconsult
common stock, in accordance with the conversion ratio, upon exercise of the
outstanding Physicians' Online, Inc. options; and
5. the ratification of an amendment to the Mediconsult bylaws increasing the
size of the company's board to 10 to facilitate the placement of four
Physicians' Online nominees on the Mediconsult Board as required by the
merger agreement.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. Until April 5, 1999, the Company's common stock traded
on the over-the-counter market, under the symbol "MCNS". On April 6, 1999,
the Company's stock was quoted on the NASDAQ National Market. The following
table sets forth the high and low sale prices for our common stock for the
periods indicated as reported by the OTC Bulletin Board or NASDAQ, as
applicable. These prices are believed to be inter-dealer quotations and do
not include retail mark-ups, mark-downs, or other fees or commissions, and
may not necessarily represent actual transactions.
-------------------------------------------------------
QUARTER ENDED HIGH SALE LOW SALE
-------------------------------------------------------
December 31, 1997 $ 1.6875 $1.046875
-------------------------------------------------------
March 31, 1998 $2.09375 $ 1.00
-------------------------------------------------------
June 30, 1998 $1.90625 $ 1.25
-------------------------------------------------------
September 30, 1998 $ 1.6875 $ 0.635
-------------------------------------------------------
December 31, 1998 $ 9.5625 $ 0.49
-------------------------------------------------------
March 31, 1999 $ 22.625 $ 6.1875
-------------------------------------------------------
June 30, 1999 $19.6875 $ 9.6875
-------------------------------------------------------
September 30, 1999 $ 13.75 $ 6.25
-------------------------------------------------------
December 31, 1999 $ 9.938 $ 5.25
-------------------------------------------------------
(b) HOLDERS. As of December 31, 1999, the Company had approximately 300
shareholders of record. This does not include shareholders who hold stock
in accounts at broker/dealers.
(c) DIVIDENDS. The Company has not declared or paid any cash dividends on its
capital stock since inception and does not expect to pay any cash dividends
for the foreseeable future. The Company currently intends to retain future
earnings, if any, to finance the expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES. On February 26, 1999, we sold in a
private placement an aggregate of 506,329 shares of our newly designated senior
preferred stock and warrants exercisable for five years to purchase 224,000
shares of senior preferred stock to Nazem & Company IV, L.P., Transatlantic
Venture Fund C.V. (a joint venture of Nazem & Company and Banque Nationale de
Paris) and other individual investors, for an aggregate of $3.2 million. On May
11, 1999, we completed the acquisition of CyberDiet in exchange for 400,000
shares of Mediconsult common shares issued to the former stockholders of
CyberDiet. Effective June 1, 1999, we completed the acquisition of Cyber-Tech,
Inc. in exchange for cash and 267,732 shares of our common stock. On September
7, 1999, we acquired a 35% interest in Pharma Marketing, LLC in exchange for
cash of $3.3 million of which $1.65 million was reinvested in Mediconsult in
exchange for the issuance of 200,000 of our common shares. Effective October
27, 1999 we acquired Mood Sciences, Inc. in exchange for 215,000 shares of our
common stock.
ITEM 6. SELECTED FINANCIAL DATA
14
The selected consolidated financial data should be read in conjunction with
the consolidated financial statements and the notes thereto presented under
Item 8.
Year Ended December 31,
---------------------------------------------------------------------------------------
Income Statement Data: 1999 1998 1997 1996
(Partial Year)
----------------- ----------------- ----------------- ------------------
Revenues 6,362,226 1,030,934 256,374 --
----------------- ----------------- ----------------- ------------------
Operating expenses
Product and content development 7,574,171 1,316,188 765,864 --
Marketing, sales and client service 11,934,645 1,811,710 1,130,340 435,637
General and administrative 7,055,865 1,012,719 792,213 403,794
Depreciation and amortization 3,758,210 170,439 132,768 --
Fair value of options granted to
employees 2,031,251 275,145 40,235 --
Fair value of options and warrants
granted to consultants and third
parties 1,834,175 1,354,000 -- --
----------------- ----------------- ----------------- ------------------
Total operating expenses 34,188,317 5,940,201 2,861,420 839,431
----------------- ----------------- ----------------- ------------------
Loss from operations (27,826,091) (4,909,267) (2,605,046) (839,431)
Interest income (expense), net 1,542,185 -- (20,000) (22,667)
----------------- ----------------- ----------------- ------------------
Net loss (26,283,906) (4,909,267) (2,625,046) (862,098)
----------------- ----------------- ----------------- ------------------
Dividends on preferred stock (945,505) -- -- --
----------------- ----------------- ----------------- ------------------
Net loss attributable to common
stockholders (27,229,411) (4,909,267) (2,625,046) (862,098)
----------------- ----------------- ----------------- ------------------
Per common share data:
Basic and diluted net loss per share $(1.02) $(0.27) $(0.16) $(0.08)
Weighted average shares - basic 26,711,890 17,910,898 16,729,900 11,137,662
Balance Sheet Data:
(unaudited)
Cash 22,320,814 135,053 400,949 393,130
Working Capital 11,171,076 (593,159) 372,522 (58,811)
Total Assets 222,780,950 1,142,383 751,763 760,028
Stockholders' Equity 206,578,329 278,381 565,526 146,487
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Unless otherwise noted, references to "we," "our," and "us" refer to
Mediconsult and its subsidiaries.
OVERVIEW
Mediconsult is a leading provider of physician and patient-oriented healthcare
information and services on the World Wide Web. Our Web sites provide a trusted
source of comprehensive and easy to understand medical information and are
designed to empower professionals and consumers through increased education
related to medical conditions and treatment alternatives. The Web sites also
provide a destination on the Internet where visitors, both professionals and
patients, can interact with others in a community environment. We facilitate
this environment through a well-organized, easy to navigate format and an array
of complementary services, including
15
moderated on-line support groups and discussion forums. By fostering communities
centered around over 60 prevalent chronic medical conditions and health issues,
we believe that Mediconsult creates significant opportunities for pharmaceutical
and other healthcare companies to reach highly targeted physician and consumer
audiences using Internet-based marketing and advertising programs.
BACKGROUND
For the period from the inception of our operations in April 1996 through
January 1997, our operating activities related primarily to the initial
development of the mediconsult.com Web site and operating infrastructure, and
also the recruitment of employees. Since the launch of mediconsult.com in 1996,
we have focused on developing and organizing content in an easy to navigate
format, and improving the functionality of mediconsult.com. We have added new
sites through subsequent acquisitions including cyberdiet.com and heartinfo.com,
and new Internet-based healthcare tools through the acquisition of Mood
Sciences. We continue to refine our strategy of creating targeted on-line
marketing and advertising programs for large pharmaceutical and other healthcare
organizations. We continue to develop and implement these types of programs for
our clients. We structure programs to provide clients with a measurable return
on their investment by tracking the level of interest and interactive responses
of visitors. Our programs utilize a broad range of on-line strategies and
resources to deliver a message consistent with the advertisers' global marketing
strategy.
In the third quarter we expanded our focus on long-term strategic
relationships with major pharmaceutical manufacturers to include other Internet-
based initiatives in addition to marketing programs. The initial relationship in
this new strategic direction was entered into with Bristol-Myers Squibb Company
in which we are working with Bristol-Myers to develop innovative new approaches
to electronic medical education.
In the fourth quarter we expanded our focus to include a secure physicians-
only service through the acquisition of Physicians' Online, Inc. Physicians'
Online is an Internet online service that provides medical information,
communications, and a transactions network for physicians. It is a secure,
physicians-only environment featuring access to medical databases, daily medical
news, continuing medical education credits, clinical symposia, e-mail accounts,
Internet, discussions with colleagues, secure prescription transactions, market
research and recruiting services, among other services. Membership is free.
REVENUE SOURCES
Our main source of revenue has historically been through client services
related to the development and support of on-line marketing and advertising
programs for pharmaceutical and other healthcare companies. These services
continue to be a source of revenue and typically include the design, development
and management of customized Web sites relating to a particular pharmaceutical
or other health-related products. Client services also include marketing
research, focus group testing and on-line testing of visitors' preferences.
Revenue from client services is recognized on the basis of contractual
commitments over the period of each engagement using the percentage-of-
completion method, based on labor hours and costs incurred as the measure of
progress towards completion. Revenue from support services, principally the
management of Web sites that we develop for our clients, is recognized ratably
over the period services are provided, generally on a monthly basis. Payments
received from clients prior to the performance of client services are recorded
as unearned revenue.
We also provide advertising services involving the sale of advertising space
on certain Web sites we own, manage or sponsor. These services can be provided
separately or as part of a more comprehensive suite of client services.
Advertising services include banner advertisements, polls, surveys, registration
programs, coupons and other interactive forms of advertising. Revenue from
advertising sales is recognized ratably over the period in which the
advertisement is displayed, if no significant obligations remain. In certain
cases, advertising revenue from the sale of advertising space is related to the
delivery of impressions or
16
click-throughs from pages viewed by visitors to our Web sites. In these cases,
we may guarantee a minimum number of impressions or click-throughs by visitors
over a specific period of time. To the extent that revenue is related to the
number of impressions or click-throughs, we defer recognition of this revenue
until the required impressions or click-throughs are achieved. Payments received
from advertisers prior to displaying their advertisements are recorded as
deferred revenue. Mediconsult does not recognize revenue from barter
transactions with respect to its advertising services. We recently announced
that effective October 1, 1999 we will no longer sell banner advertising on our
consumer Web sites. As a result, this source of revenue may decline in future
periods even though we will continue to sell such advertising on our
professional sites such as Physicians' Online.
As noted above, in the third quarter we expanded our focus on long term
strategic relationships with major pharmaceutical manufacturers to include other
Internet-based initiatives in addition to marketing programs. The initial
relationship in this new strategic direction was entered into with Bristol-Myers
Squibb Company in which we are working with Bristol-Myers to develop innovative
new approaches to electronic medical education. We are currently in the
proposal stages for similar relationships with additional major pharmaceutical
companies.
We also derive revenue from licensing our mediconsult.com content and
providing Web site support to healthcare and other organizations. These client
organizations make our content available to visitors to their Web sites or to
Web sites of their clients. Revenue from content licensing is recognized over
the period of the license. In certain cases, we design and develop these Web
sites. The portion of licensing revenue related to up-front customized design
work is recognized over the period that the work is performed. In certain cases,
we realize additional revenue from management of the Web site or its content.
Revenue from management services is recognized ratably over the period the
services are performed, generally on a monthly basis. We may also retain the
right to place advertising on a Web site that hosts our content.
Although we have certain electronic commerce alliances with merchants of
healthcare-oriented books and products, revenue from these revenue-sharing
arrangements has not been material. Revenue from our share of the proceeds from
electronic commerce partners' sales is recognized by us upon notification from
our commerce partners of sales attributable to our Web sites.
MARKETING AND SALES INITIATIVES
In late 1997, we initiated our first significant marketing and advertising
program. The Company was engaged by Novartis Consumer Health Canada to develop a
comprehensive on-line smoking cessation program for its Habitrol brand, focused
on Canadian consumers. We developed the Web site for this program during early
1998, for which we received payment as services were performed. We receive
revenue for maintaining and upgrading this program (beginning with its launch in
June 1998), and receive monthly advertising revenue for referring visitor
traffic to the Habitrol Web site. We recently expanded the Habitrol program to
provide French and professional healthcare versions of the Web site.
We have also generated revenue from developing programs for a number of
branded pharmaceutical products for Novartis Pharma, the worldwide
pharmaceutical division of Novartis. We are developing the Web sites for these
programs and receiving payment as services are performed. We are developing a
custom version of an electronic medical education product for Bristol-Myers
Squibb. In 1998, revenue from Novartis and Bristol-Myers Squibb represented $0.7
million or 65% of the Company's total revenue. In the twelve months ended
December 31, 1999, revenue from Novartis and Bristol-Myers Squibb represented
$5.0 million or 76% of the Company's total revenue. We have also completed
assessment programs for Glaxo Wellcome and Astra Merck. The loss of Novartis or
Bristol-Myers Squibb as a customer or any changes to the existing relationships
that are less favorable to us, or any significant reduction in traffic on or
through the Web sites that we manage, will materially and adversely affect our
business, financial condition and results of operations.
To date, our revenue has been generated primarily by our own internal sales
organization, Pharma Marketing, LLC and, to a lesser extent, by third party
advertising representatives. As of December 31, 1999, we had an internal
marketing, sales, program design and product development organization of 149
professionals, compared
17
to 28 at June 30, 1999. We believe that we need to increase further the size of
our internal marketing and sales organization in order for us to execute
successfully our growth strategy and, accordingly, we intend to hire additional
marketing and sales professionals in 2000.
VISITOR TRAFFIC
To improve the depth and breadth of our medical content and to increase visitor
traffic, in 1998 and 1999 we completed strategic initiatives to purchase, manage
or sponsor the following Web sites and companies:
. PharmInfo.com, a leading Web site providing information on pharmaceutical
products and clinical trials for pharmacists, physicians and consumers.
. INCIID.org, a Web site providing information on infertility.
. Cyberdiet.com, a Web site providing tailored nutritional information and
programs.
. Heartinfo.org, a leading Web site that provides high quality content and
tools focused on heart disease and related areas that have attracted a large
and growing number of visitors to the www.heartinfo.com Web site.
. Mood Sciences, Inc., a company that specializes in mental health disease
management innovations.
. POL.net, the flagship site of Physicians' Online Inc., a company with more
authenticated doctor-users than any other medical Web site, ("Physicians'
Online").
We believe that Mediconsult's Web sites together represent the most highly
trafficked physicians-only Web site and one of the most highly trafficked
consumer healthcare information sites on the Internet. During the fourth quarter
of 1999, our Web sites attracted 10.5 million visitors who viewed 58.5 million
pages. On average, viewers spent approximately 22 minutes per session on our Web
sites.
CORPORATE
Mediconsult was originally incorporated under the laws of the State of
Colorado in October 1989. In April 1996, we purchased Mediconsult.com Limited, a
Bermuda corporation ("MCL"), through a merger in which MCL became a wholly-owned
subsidiary. In December 1996, Mediconsult consummated a reincorporation merger
pursuant to which it became a Delaware corporation. Mediconsult conducts
business primarily through MCL, its Bermudan subsidiary. In addition to MCL,
Mediconsult has established subsidiaries in the United States, Canada and the
United Kingdom. Mediconsult's operations are conducted by MCL, which has
obtained an exemption from all Bermudan income taxes until the year 2016. MCL
has, however, entered into service agreements with other subsidiaries of
Mediconsult for their employees to provide services to MCL. These subsidiaries
will be subject to income taxes in their jurisdictions. MCL may be deemed to be
doing business in the United States and thereby become subject to US taxation.
STOCK OPTIONS AND WARRANTS
We expense stock options granted to employees over their vesting period, based
on their fair value at the date of grant, under Statement of Financial
Accounting Standards No. 123 "Accounting For Stock-Based Compensation." The fair
value of options and warrants granted to non-employees for services provided are
expensed over the period the services are performed in accordance with EITF 96-
18, "Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
18
Pursuant to an agreement with Arnhold and S. Bleichroeder, Inc. to provide us
with investment advisory services, we have warrants to this firm to purchase an
aggregate of 400,000 shares of common stock with an exercise price of $1.22 per
share, which was the closing price of our common stock on the contract date. Of
this amount, we delivered warrants for 200,000 shares of Common Stock upon the
filing of a prospectus for secondary public offering in February 1999, and have
been exercised. We delivered warrants for 100,000 shares of common stock on
March 15, 2000, and we are obligated to deliver the remaining 100,000 warrants
on September 15, 2000, subject to certain conditions.
As more fully described below in "Results of Operations," we have recorded
compensation expense in connection with the vesting of stock options and
warrants during the years ended December 31, 1999 and 1998, as well as deferred
compensation expense for the value of options and warrants granted that were not
vested as of such dates.
RESULTS OF OPERATIONS
REVENUE. Revenue consists of fees received for the design, development and
implementation of online marketing and advertising programs, including Web site
development and implementation, advertising services, licensing our content and
Web site support. Revenue was $0.3 million for the year ended December 31, 1997,
$1.0 million for the year ended December 31, 1998 (an increase of 233% over the
prior year) and $6.4 million for the year ended December 31, 1999 (an increase
of 540% over the prior year). The period-to-period growth in revenue was
primarily attributable to acquisitions, an increase in the number of clients,
the number of marketing and advertising programs developed and implemented for
those clients and our newly introduced initiatives focused on the delivery of
electronic medical education over the Internet.
PRODUCT AND CONTENT DEVELOPMENT. Product and content development costs
include expenses incurred by us to develop, enhance, manage, monitor and operate
its Web sites and to develop new products such as electronic medical education
and related products. Prior to 1997, these costs consisted primarily of third
party software development expenses, which were deferred and amortized over the
years ended December 31, 1997 and 1998. From 1997 onwards, these costs have
consisted primarily of salaries and fees paid to employees and consultants to
develop and maintain the software and information contained on our Web sites.
For the year ended December 31, 1997, these costs were $0.8 million, for the
year ended December 31, 1998, these costs were $1.3 million (an increase of 63%
over the prior year) and for the year ended December 31, 1999 these costs were
$7.6 million (an increase of 485% over the prior year). For 1997 and 1998, these
costs related primarily to the development of healthcare content. In 1999 these
activities were supplemented by both internal and third party expenses incurred
for the development of new products, such as electronic medical education as
well as costs incurred relating to acquisitions.
MARKETING, SALES AND CLIENT SERVICES. Marketing, sales and client services
costs include expenses incurred by the Company to obtain and maintain client
relationships. These costs included salaries and fees paid to employees and
consultants, and programming costs. In 1997, marketing, sales and client
services costs were $1.1 million and for the year ended December 31, 1998,
marketing, sales and client services costs were $1.8 million (an increase of 64%
over the prior year). For the year ended December 31, 1999, these costs were
$11.9 million (an increase of 561% over the prior year), consisting primarily of
costs associated with the development and implementation of specific client
marketing programs and of new prototype marketing and advertising programs. A
substantial portion of the increase was attributable to acquisitions and a
marketing agreement entered into with Pharma Marketing, LLC which resulted in
sales and marketing efforts being significantly increased.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance, accounting and legal expenses, and
19
fees for other professional services. For the year ended December 31, 1997,
general and administrative expenses were $0.8 million. These expenses were $1.0
million for the year ended December 31, 1998 (an increase of 25% over the prior
year), and $7.1 million for the year ended December 31, 1999 (an increase of
610% over the prior year). The increase in general and administrative expenses
was attributable to increased salaries and related expenses associated with
acquired companies and hiring additional personnel to support the growth of our
operations. In addition, we opened offices in New York and Toronto in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense includes
depreciation of tangible assets and software, using the straight line method,
over the estimated useful lives of the assets. Amortization expense includes
intangible assets such as goodwill. For the year ended December 31, 1997,
depreciation and amortization expense was $0.1 million. These expenses were $0.2
million for the year ended December 31, 1998 (an increase of 100% over the prior
year), and $3.8 million for the year ended December 31, 1999 (an increase of
1800% over the prior year). The increases are primarily due to the growth of the
Company, and the acquisitions completed in 1999, principally the amortization of
intangibles from the Physician's Online transaction.
FAIR VALUE OF OPTIONS GRANTED TO EMPLOYEES. We recorded compensation expense
in connection with the vesting of employee stock options of $40,235 during the
year ended December 31, 1997, $0.3 million during the year ended December 31,
1998 (an increase of 646% over the prior year) and $2.0 million during the year
ended December 31, 1999 (an increase of 567% over the prior year). The increase
is attributable to an increase in the number of employees and the number of
options being granted to employees and an increase in the value of each stock
option granted.
FAIR VALUE OF OPTIONS GRANTED TO CONSULTANTS AND WARRANTS GRANTED TO THIRD
PARTIES. The fair value of options and warrants granted to non-employees for
services provided are expensed over the period the services are performed in
accordance with EITF 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." We recorded compensation expense in connection with stock options and
warrants granted to consultants and third parties of $nil during the year ended
December 31, 1997, $1.4 million in the year ended December 31, 1998, and $1.8
million during the year ended December 31, 1999 (an increase of 29% over the
prior year).
Compensation expense represents the amortization of deferred compensation that
is measured based on the fair value of the options and warrants granted to
employees, consultants and third parties. These amounts are amortized over the
vesting period of the applicable options. We have recorded deferred compensation
for the value of the options granted that have not yet vested of $0.9 million as
of December 31, 1998 and $16.1 million as of December 31, 1999.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited quarterly consolidated
statement of operations data for each of the eight quarters ended December 31,
1999. In our opinion, this data has been prepared substantially on same basis as
the audited financial statements appearing elsewhere in this report and includes
all necessary adjustments, consisting only of normal recurring adjustments
necessary for fair presentation of this data. The quarterly data should be read
in conjunction with the financial statements and the notes to these statements
appearing elsewhere in this report. The results of operations for any quarter
are not necessarily indicative of the results of operations for any future
period.
We have limited operating history upon which to evaluate our business and
predict revenue and planned operating expenses. Our quarterly operating results
may vary significantly in the foreseeable future due to a variety of factors,
many of which are outside our control. The timing of our marketing program and
electronic medical education product sales are two of the most significant
factors affecting quarterly results. The time between the date of initial
contact with a potential client and the execution of a contract with the client
typically ranges from six weeks for smaller agreements nine months for larger
agreements. These contracts are also subject to delays over which we have little
or no control, including customers budgetary constraints, their internal
acceptance reviews whether or when regulatory approval of their products is
given by the Food and Drug Administration ("FDA") or other regulatory authority,
the possibility of cancellation or delay of projects by clients and any post-
approval actions taken by the FDA or other regulatory authority, including
product recalls. During the selling process, we may expend substantial funds and
management resources and yet not obtain adequate revenue. Once a contract is
executed, a significant portion of our revenue may be derived from custom
development efforts and implementation projects, rather than from recurring
fees. As a result, we cannot predict
20
with certainty when we will perform the work necessary to receive payment for
these projects. In addition, traffic levels on Web sites have typically
fluctuated during the summer, and during year-end and holiday periods, and we
could experience a decrease in visitor traffic to our Web sites during these
periods.
QUARTER ENDED
(UNAUDITED)
Mar. 31, Jun. 30, Sept. 30, Dec.31,
1998 1998 1998 1998
(in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $ 206 $ 215 $ 238 $ 372
------ ------ ------ -------
Operating Expenses:
Product and content development 250 260 401 405
Marketing, sales and client services 189 492 234 896
General and administrative 171 137 183 435
Depreciation and amortization 39 126 45 46
Fair value of options granted to employees 39 30 26 180
Fair value of warrants granted to third -- -- -- 1,354
parties ------ ------ ------ -------
Total operating expenses 688 1,045 889 3,317
------ ------ ------ -------
Loss from operations (482) (830) (651) (2,945)
Interest income -- -- -- --
------ ------ ------ -------
Net loss $ (482) $ (830) $ (651) $(2,945)
------ ------ ------ -------
Net loss per share $(0.03) $(0.05) $(0.04) $ (0.16)
In 1999, due to various factors, the quarters ended March 31, June 30, and
September 30, 1999, were revised after the initial filings were made. The
following tables provide the Quarterly Results of Operations Data for each
quarter of 1999, as originally filed and as revised, including the effect of
the revisions.
QUARTER ENDED
(UNAUDITED)
Mar. 31, Mar. 31,
1999 1999
(as reported) (revised)
(in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $ 700 $ 487
Operating Expenses:
Product and content development 752 905
Marketing, sales and client services 738 738
21
General and administrative 825 656
Depreciation and amortization 119 119
Fair value of options granted to employees 191 152
Fair value of warrants granted to third parties -- --
------- -------
Total operating expenses 2,625 2,570
------- -------
Loss from operations (1,924) (2,083)
Interest income -- --
------- -------
Net loss (1,924) (2,083)
Dividends on preferred stock -- 945
------- -------
Net loss attributable to common stockholders $(1,924) $(3,028)
Net loss per share $(0.10) $(0.16)
The effect of the revisions in the quarter ended March 31, 1999 was as
follows:
Effect on Net
Loss
(in thousands)
-------------------
Reduction of Revenue $ (214)
Reflect dividends on preferred stock (1) (946)
Fair value of options granted to employees $ 40
Other net decrease in operating expenses $ 16
-------------------
Total effect $(1,104)
-------------------
(1) Amount is reflected as an increase to net loss attributable to common
shareholders.
QUARTER ENDED
(UNAUDITED)
Jun. 30, Jun. 30,
1999 1999
(as reported) (revised)
(in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,203 $ 812
Operating Expenses:
Product and content development 1,368 1,368
Marketing, sales and client services 837 837
22
General and administrative 649 830
Depreciation and amortization 388 388
Fair value of options granted to employees 384 391
Fair value of warrants granted to third 2,269 1,498
parties ------- -------
Total operating expenses 5,896 5,312
------- -------
Loss from operations (4,693) (4,500)
Interest income 576 576
------- -------
Net loss (4,117) (3,924)
Dividends on preferred stock -- --
-----------------------------------
Net loss attributable to common stockholders $(4,117) $(3,924)
Net loss per share $(0.15) $(0.14)
The effect of the revisions in the quarter ended June 30, 1999 was as
follows:
Effect on Net
Loss
-------------------
Quarter Ended
06/30/99
(in thousands)
-------------------
Reduction of Revenue $(391)
Fair value of options granted to employees (7)
Fair value of warrants granted to consultants 771
Other net decrease in operating expenses (180)
-------------------
Total effect $ 193
-------------------
QUARTER ENDED
(UNAUDITED)
Sep. 30, Sep. 30,
1999 1999
(as reported) (revised)
(in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,984 $ 2,416
------- -------
Operating Expenses:
23
Product and content development 2,369 2,369
Marketing, sales and client services 2,764 6,087
General and administrative 1,225 1,847
Depreciation and amortization 885 885
Fair value of options granted to employees 1,120 517
Fair value of warrants granted to third -- 210
parties ------- -------
Total operating expenses 8,364 11,915
------- -------
Loss from operations (6,379) (9,499)
Interest income 592 592
------- -------
Net loss (5,787) (8,907)
Dividends on preferred stock -- --
------------------------------
Net loss attributable to common stockholders $(5,787) $(8,907)
Net loss per share $(0.20) $(0.31)
------- -------
The effect of the revisions in the quarter ended September 30, 1999 was as
follows:
Effect on Net
Loss
-------------------
Quarter Ended
09/30/99
(in thousands)
-------------------
Increase in (reduction of) revenue $ 432
Fair value of options granted to employees 603
Fair value of warrants granted to consultants (210)
Expense amounts related to Pharma Marketing LLC (3,323)
Other net decrease in operating expenses (622)
-------------------
Total effect $(3,120)
-------------------
QUARTER ENDED
(UNAUDITED)
Dec. 31,
1999
(in thousands)
STATEMENT OF OPERATIONS DATA:
24
Revenues $ 2,647
--------
Product and content development 2,933
Marketing, sales and client services 4,273
General and administrative 3,723
Depreciation and amortization 2,366
Fair value of options granted to employees 970
Fair value of warrants granted to third 126
parties --------
Total operating expenses 14,391
--------
Loss from operations (11,744)
Interest income 374
--------
Net loss (11,370)
Dividends on preferred stock --
------------------------
Net loss attributable to common stockholders $(11,370)
Net loss per share $(0.35)
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed operations primarily through the public and
private placement of equity securities and advances from our principal
stockholder. Our most significant financing transaction was a public offering
completed in April 1999 which raised net proceeds to Mediconsult of $57 million.
As of December 31, 1999, we had $22.3 million in cash and cash equivalents
compared to $0.1 million at December 31, 1998.
We have incurred substantial costs to design, develop and implement Internet-
based marketing and advertising programs for clients, to build brand awareness
and to grow our business. As a result, we have incurred operating losses and
negative cash flows from operations in each quarter since commencing operations.
As of December 31, 1999, we had an accumulated deficit of $34.7 million. These
losses have been primarily funded through the public offering referred to above
and by advances aggregating $5.1 million by a stockholder, an entity controlled
by Robert A. Jennings, our Chairman and Chief Executive Officer. Approximately
$0.5 million of these advances were repaid and $4.3 million converted to equity
in 1999. The balance constitutes an interest free advance of $0.3 million.
To date, we have experienced negative cash flows from operating activities.
For the period ended December 31, 1997, net cash used in operating activities
was $2.5 million. For the year ended December 31, 1998, net cash used in
operating activities was $2.7 million. For the year ended December 31, 1999, net
cash used in operating activities was $14.4 million. Net cash used in operating
activities for these periods was primarily attributable to net losses during
these periods offset by certain non-cash expenses. For the year ended December
31, 1999, the increase in net cash used in operating activities was attributable
to a net operating loss of $26.3 million, offset by certain non-cash items of
$11.9 million in the aggregate. This amount was comprised of deferred
compensation expense of $3.9 million related to stock options and warrants
granted to employees and consultants, depreciation of $0.6 million, amortization
of intangibles of $3.1 million, amortization of deferred compensation related to
shares issued for
25
services and membership in Pharma Marketing LLC of $1.5 million and net changes
in operating working capital of $2.8 million.
For the period ended December 31, 1997, net cash used in investing activities
was $0.1 million. For the year ended December 31, 1998, net cash used in
investing activities was $30,225. For the year ended December 31, 1999, net cash
used in investing activities was $23.7 million. Cash used in investing
activities during 1997 and 1998 related to capital expenditures, primarily the
acquisition of equipment. In 1999, the balance was comprised of $2.4 million of
capital expenditures and $21.3 million on acquisition of subsidiaries, net of
cash acquired of $.2 million.
For the period ended December 31, 1997, net cash provided by financing
activities was $2.6 million. For the year ended December 31, 1998, net cash
provided by financing activities was $2.4 million. For the year ended December
31, 1999, net cash provided by financing activities was $60.3 million. Net cash
proceeds from financing activities in 1997 and 1998 were primarily attributable
to net proceeds received from unsecured advances from a stockholder in the
aggregate amount of $2.6 million in 1997 and $2.2 million in 1998. By December
31, 1999, $4.3 million of the cash advances from a stockholder made prior to
that date had been converted into junior preferred stock. Net cash provided by
financing activities in 1999 comprised $57 million from the issuance of common
stock and $3.2 million from the issuance of senior preferred stock that was
subsequently converted to common stock. We also had net repayments of $0.2
million to a stockholder in 1999 and realized $0.3 million from the exercise of
stock options.
As of December 31, 1999, we had no principal capital commitments outstanding.
During 2000 we expect to repay $5.0 million of notes payable. In addition, at
December 31, 1999 we had lease obligations totaling $1,266,000, as more
specifically set forth below:
Year Lease
Obligations
2000 $ 434,000
2001 227,000
2002 227,000
2003 218,000
2004 160,000
------------------
Total lease obligations $1,266,000
Subsequent to December 31, 1999, we have entered into additional lease
agreements which will increase our lease obligations in 2000, 2001, 2002, 2003,
and 2004, by $801,567, $915,156, $915,156, $228,789, and $nil, respectively.
In connection with our sponsorship and management of INCIID.ORG, we have
committed to pay INCIID $0.5 million per year beginning in 1999 for three years
in equal quarterly installments, in cash or common stock as we determine with
respect to each quarter.
Our ability to generate significant revenue is uncertain. We incurred net
losses of approximately $2.6 million for the year ended December 31, 1997, $4.9
million for the year ended December 31, 1998 and $26.3 million for the year
ended December 31, 1999. We expect losses from operations and negative cash flow
to continue for the foreseeable future and at least through the year 2000 as a
result of our expansion plans and expectations that operating expenses will
increase in the next several years. The rate at which these losses will be
incurred may increase from current levels. Although we have experienced revenue
growth in recent periods, our revenue may not remain at current levels or
increase in the future. If our revenue does not increase and if spending levels
are not adjusted accordingly, we may not generate sufficient revenue to achieve
profitability, which would have a
26
material adverse effect on our business, financial condition and results of
operations. Even if we achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future.
Our working capital requirements depend on numerous factors. We have
experienced a substantial increase in expenditures since inception consistent
with growth in our operations and staffing, and anticipate that this will
continue for the foreseeable future. We anticipate incurring additional expenses
to increase our marketing and sales efforts, for new product and content
development and for technology and infrastructure development. Additionally, we
will continue to evaluate possible investments in businesses, products and
technologies, the expansion of our marketing and sales programs and more
aggressive brand promotions. If we experience a shortfall in revenue in relation
to expenses, or if our expenses precede increased revenue, our business,
financial condition and results of operation and could be materially and
adversely affected.
We currently anticipate that available cash resources, including revenue
generated from clients, will be sufficient to meet anticipated needs for working
capital and capital expenditures through at least the year 2000. We may need to
raise additional funds, however, in order to fund more rapid expansion, to
develop new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary products, businesses or technologies.
There can be no assurance that any required additional financing will be
available on terms favorable to us, or at all. If additional funds are raised by
the issuance of equity securities stockholders will experience dilution of their
ownership interest and these securities may have rights senior to those of the
holders of the common stock. If additional funds are raised by the issuance of
debt, it may subject us to certain limitations on our operations, including
limitations on the payment of dividends. If adequate funds are not available or
not available on acceptable terms, we may be unable to fund our expansion,
successfully promote our brand name, take advantage of acquisition
opportunities, develop or enhance services or respond to competitive pressures,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
Although a significant portion of our revenue is derived from activities
conducted outside the United States, fees paid to us have been and are expected
to continue to be paid in U.S. dollars. However, a substantial portion of our
payroll is paid, and it is expected that rent under leases of office facilities
outside the United States will be paid, in currencies other than U.S. dollars.
Because our financial results are reported in U.S. dollars, they are affected by
changes in the value of the various foreign currencies in which we make payments
in relation to the U.S. dollar. We do not cover known or anticipated operating
exposures through foreign currency exchange option or forward contracts. The
primary currency for which we have foreign currency exchange rate exposure is
the Canadian dollar. Our financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities and
advances from shareholder are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Management believes that the future adoption of recently issued accounting
standards will not have a material impact on the Company's financial statements,
except that the Company is currently evaluating the future impact that Staff
Accounting Bulletin 101, Revenue Recognition", issued in December 1999 by the
Securities and Exchange Commission, will have on its financial statements.
YEAR 2000
Some computers, software and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. We have not
encountered any significant Year 2000 problems to date and do not expect that
any will arise.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
27
This Form 10-K contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Our actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include, among other factors noted
herein, the following:
We Have Only Been In Business For A Short Period Of Time, So The Basis For
Evaluation Is Limited.
We began operations in April 1996 when we launched a limited, initial Web
site. We launched a more extensive Web site in September 1996. As a result,
there is a limited history of operations for evaluating our business. The risks
and difficulties frequently encountered by early stage companies in new and
rapidly evolving markets, including the Internet market and the direct-to-
consumer advertising market must be considered. Some of these risks and
uncertainties relate to our ability to:
- design, develop and implement effective electronic medical education and
marketing and advertising programs for existing clients and new clients;
- gain acceptance of new products and services, including electronic medical
education, by our existing clients and prospective new clients;
- maintain and expand our relationship with Bristol-Myers Squibb and Novartis;
- attract additional pharmaceutical and other healthcare advertisers in order
to generate significant revenue;
- build our organizational and technical infrastructures to manage growth
effectively;
- maintain our current strategic relationships and develop new ones;
- respond effectively to actions taken by competitors;
- attract a larger audience to our Web sites;
- increase awareness of our brand and continue to develop visitor loyalty;
- integrate acquired and managed businesses, technologies and services; and
- attract, retain and motivate qualified personnel.
If we are unsuccessful in addressing these risks and uncertainties, our
business, financial condition and results of operations will be materially and
adversely affected.
We Have Lost Money in Every Quarter and Year, And We Expect these Losses to
Continue in The Future.
Since we began operations in 1996, we have lost money in every quarter and
year. As of December 31, 1999, we had an accumulated deficit of approximately
$34.7 million. We intend to increase the amount of our expenses in the future in
order to expand our operations and our employee base. We do not expect that we
will generate sufficient revenue to cover these expenses through at least the
year 2000. If our revenue does not increase and we cannot adjust our level of
spending adequately, we may not generate sufficient revenue to become
profitable. Even if we do become profitable, we may not be able to sustain or
increase profitability on a quarterly or annual basis in the future. Our ability
to generate revenue depends primarily upon our ability to attract visitors to
our Web sites and to successfully gain acceptance of our new physician-oriented
products such as electronic medical education and Mydoctor.com.
We Are Dependent On Novartis and Bristol-Myers Squibb For a Significant Portion
of Our Revenue.
Approximately 65% of our revenue for the year ended December 31, 1998 and 78%
of our revenue for the year ended December 31, 1999 resulted from engagements by
various independent divisions of Novartis AG and Bristol-Myers Squibb. We expect
that these and other divisions of these companies will account for a substantial
portion of our revenue for the foreseeable future. Our existing agreement with
Bristol-Myers Squibb includes a
28
minimum commitment of $5 million, and contains expansion and renewal provisions
that we believe have the potential to increase the total revenue from the
relationship to $50 million over the term of the agreement, including renewals
through December 31, 2004.
Novartis and Bristol-Myers Squibb may also choose to change or limit our
products that they utilize, including electronic medical education, or the
products that they advertise on the Internet or on our Web sites. If they do,
this change could materially and adversely impact our revenue. In addition, our
relationship with Novartis or Bristol-Myers Squibb could be negatively affected
by any business or financial developments that impact those companies, such as a
delay or failure to obtain or maintain FDA approval of pharmaceutical products,
a general downturn in its business or a reduction in their direct-to-consumer
advertising budgets.
We May Have Difficulty Managing our Expanding Operations.
We are currently engaged in a significant expansion of our operations. We are
transitioning our systems hosted at various offsite facilities to an in-house
software environment to be located in the United States in our Tarrytown, NY
facilities, which we will manage from Toronto, Canada and Tarrytown. We have
acquired or agreed to fund a number of web sites and operations that must be
integrated into our operations including:
- pharminfo.com, a Web site providing information on pharmaceutical products
and clinical trials for pharmacists, physicians and consumers,
- Cyberdiet, Inc. which operates cyberdiet.com, a Web site providing tailored
nutritional information and programs,
- Cyber-Tech, Inc., which operates Heartinfo.org,
- inciid.org, a Web site providing information on infertility,
- Mood Sciences, which operates moodsciences.com, a mental health, oriented
web site that utilizes a proprietary tool to diagnose and track states of
depression online, and
- Physicians' Online, Inc., a company with more authenticated doctor-users
than any other medical web site.
As part of our expansion, we will have to implement additional operational and
financial systems, procedures and controls to maintain appropriate coordination
among our technical, accounting, finance, marketing, sales and editorial staffs.
If these systems and controls are not adequate, we will have significant
difficulty managing the various business functions of our operations from
multiple locations. We will also need to recruit, train and retain a significant
number of employees, particularly employees with technical, marketing, sales and
healthcare backgrounds. Individuals with these backgrounds are in high demand
and we are not certain that we will be able to attract the staff we need. In
addition, many of our senior management personnel have recently joined
Mediconsult and have not yet become integrated into and experienced with our
operations, policies, personnel and clients. In connection with the transition
of our technical operations, difficulties may arise that could cause disruptions
in the operation of our Web sites. Any of the risks described above could have a
material and adverse effect on our business, financial condition and results of
operations.
Because Our Business Model Is Unproven, We May Not Be Successful.
There are various ways to sell advertising on the Internet, the most common
means being through simple advertisements on Web sites, known as banner
advertisements. Our business depends upon the sale of in depth Internet-based
marketing programs to, and developing sponsorship relationships with,
pharmaceutical and other healthcare companies. Sales of these programs usually
depend upon a prospective client first deciding to engage in direct-to-consumer
advertising, then deciding to adopt an Internet-based marketing or advertising
strategy and finally implementing that strategy by developing a marketing
program for a particular drug or other healthcare product. This typically
involves a significant commitment of time and money from the client and, we
believe,
29
requires us to establish a closer relationship with the client than in
the case of banner advertisements. Based on our experience, it typically takes
six weeks to nine months to finalize an agreement with a potential customer. In
addition, our business depends upon our ability to design, develop and implement
a customized marketing and advertising program calculated to achieve the
specific client's marketing objectives. Our business, financial condition and
results of operations will be materially and adversely affected if the business
model we have adopted is not attractive to our prospective clients and if we are
unable to adapt to other business models for generating Internet
advertiser/sponsorship revenue.
We currently intend to develop relationships for our Web sites and Internet-
based services, such as electronic medical education, solely with pharmaceutical
and other healthcare companies. Accordingly, our target customer base is
limited. Most of our current or potential clients have little or no experience
using the Internet for medical education, marketing and advertising and have
allocated only a limited portion of their budgets to the Internet. The adoption
of Internet marketing and advertising by entities that have historically relied
upon traditional media for marketing and advertising requires the acceptance of
a new way of conducting business, exchanging information and advertising
products and services. These customers may find Internet advertising to be less
effective than traditional advertising media for promoting their products and
services. In addition, direct-to-consumer pharmaceutical advertising is a
relatively new concept and, as a result, we cannot assure you that it will
increase, or if so, to what extent it will increase, generally or through the
Internet.
We Will Not Be Successful if the Use of the Internet for Advertising Does Not
Continue to Increase.
A significant percentage of our revenue will be derived from Internet
marketing and sponsorship relationships for the foreseeable future. Since the
Internet advertising market is new and rapidly evolving, we cannot yet gauge its
acceptance as an effective media by advertisers. Our business, financial
condition and results of operations will be materially and adversely affected if
the Internet advertising market develops more slowly than we expect. Moreover,
"filter" software programs that limit or prevent advertising from being
delivered to an Internet visitor's computer are available. Widespread adoption
of this software could adversely affect the commercial viability of Internet
advertising and as a result would materially and adversely affect our business,
financial condition and results of operations.
Advertisers may choose not to sponsor our Web sites or may pay less for
advertising on our Web sites if they do not perceive the visitor measurements of
our Web sites to be reliable. No standards have been widely accepted to measure
the effectiveness of Internet advertising or to measure the demographics of our
visitor base. Third parties currently provide these measurement services for us.
If they are unable to provide these services in the future, we would be required
to perform them ourselves or obtain them from another provider. This could cause
us to incur additional costs or cause interruptions in our business while we
replace these services. In addition, we are implementing additional systems
designed to record demographic data of visitors. If we do not implement these
systems successfully, we may not be able to accurately evaluate the demographic
characteristics of the visitors.
We Depend on the Continued Growth of the Internet for our Services.
The Internet is relatively new and is rapidly evolving. Our business,
financial condition and results of operations will be materially and adversely
affected if Internet usage does not continue to grow. Internet usage may be
inhibited for a number of reasons:
- demands placed on the Internet infrastructure and the potential decline in
performance and reliability as usage grows;
- security and authentication concerns with respect to the transmission over
the Internet of confidential information, like credit card numbers and
medical information, and attempts by unauthorized computer visitors, known
as hackers, to penetrate online security systems; and
30
- privacy concerns, including those related to the placement by Web sites of
certain information to gather visitor information, known as cookies, on a
visitor's hard drive without the visitor's knowledge or consent.
We must adapt as the Internet continues to evolve. To be successful, we must
adapt to the changing technologies in our rapidly evolving market by continually
enhancing our Web sites and introducing new services to address our customers'
changing demands. This will entail a continuous level of development and capital
spending and we could incur substantial additional costs if we need to modify
our services or infrastructure. Our business, financial condition and results of
operations will be materially and adversely affected if we incur significant
costs to adapt, or cannot adapt, to these changes.
You Should Not Rely on our Quarterly Operating Results as an Indication of How
we will Do in the Future.
Our quarterly operating results may vary significantly in the foreseeable
future due to a number of factors that could affect our revenue, expenses or
prospects during any particular quarter. These factors include:
- demand for direct-to-consumer healthcare advertising and medical education
on the Internet in general and on our Web sites in particular;
- visitor traffic levels on our Web sites;
- our ability to retain our significant clients, particularly Novartis and
Bristol-Myers Squibb;
- our ability to attract and retain other sponsors that are seeking in-depth
Internet-based marketing and advertising programs;
- changes in rates paid for Internet advertising resulting from competition or
other factors;
- technical difficulties or system downtime affecting the Internet or the
operation of our Web sites;
- the amount and timing of our costs related to our marketing and sales
efforts;
- costs we may incur as we expand our operations;
- seasonality in sponsorship agreements and Internet usage;
- our ability to price our marketing and sponsorship programs profitably;
- costs related to the acquisition and integration of other businesses,
technologies and services; and
- economic conditions specific to the healthcare and pharmaceutical industries
and to the Internet.
The timing of our ability to develop client relationships is one of the most
significant factors affecting quarterly results. The time between the date of
initial contact with a potential client and the execution of a contract
typically ranges from six weeks for smaller agreements to nine months for larger
agreements. These contracts are also subject to delays over which we have little
or no control, including customers' budgetary constraints, their internal
acceptance reviews, whether or when regulatory approval of their products is
given by the FDA or other regulatory authority, the possibility of cancellation
or delay of projects by advertisers and any post-approval actions taken by the
FDA or other regulatory authority, including product recalls. During the selling
process, we may expend substantial funds and management resources and yet not
obtain adequate sponsorship revenue. Once a contract is executed, a significant
portion of our revenue is derived from customized Web site development and
implementation projects, rather than from recurring fees. As a result, we cannot
predict with certainty when we will perform the work necessary to receive
payment for these projects.
In any given quarter, we may not be able to adjust spending in a timely manner
to compensate for any unexpected shortfall in our revenue. Any significant
shortfall would have an immediate material and adverse effect on our business,
financial condition and results of operations. Since we have a limited operating
history, we
31
cannot yet determine whether seasonal factors will affect our quarterly
operating results. Traffic levels on Web sites have typically fluctuated during
the summer and year-end vacation and holiday periods, and this could result in a
decrease in user traffic on our Web sites during these periods.
Similar seasonal or other patterns may develop in the Internet healthcare
industry. Due to all of the foregoing factors, and the other risks discussed in
this section, you should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of future performance. It is possible
that in some future periods our operating results will be below the expectations
of public market analysts and investors. In this event, the price of our common
stock would likely fall.
There Are Many Competitors in the Healthcare Segment of the Internet Market and
We May Not be Able to Compete Effectively Against Them.
There are many companies that provide Internet and non-Internet based
marketing and advertising services to the healthcare industry. All of these
companies compete with us for advertisers, and Internet healthcare companies
also compete with us. We expect competition to continue to increase as there are
no substantial barriers to entry in our market. Increased competition could
result in reductions in the fees we receive for our marketing and sponsorship
relationships, lower margins, loss of clients, reduced visitor traffic to our
Web sites, or loss of market share. Any of these occurrences could materially
and adversely affect our business, financial condition and results of
operations. Competition is also likely to increase significantly, not only as
new entities enter the market, but also as current competitors expand their
services. Our principal competitors include:
- advertising agencies and consulting firms, such as Young & Rubicam and
Agency.com, that develop marketing and advertising programs for
pharmaceutical and other healthcare companies;
- Web sites that deliver consumer and professional healthcare information,
either as their sole focus or as part of a more broadly-based site, such as
DrKoop, InteliHealth, Healtheon/WebMD, and Medscape;
- Other, larger companies that either have entered the Internet healthcare
markets or have announced an intention to do so, such as IMS Health,
McKesson HBOC, Quintiles Transnational, and National Data;
- general purpose consumer online service providers, such as America Online
and Microsoft Network;
- Web site development firms, such as USWeb/CKS; and
- publishers and distributors of television, radio and print, such as FOX,
CBS, Disney, NBC and Time Warner.
Our ability to compete depends on a number of factors, many of which are
outside of our control. These factors include quality of content, ease of use,
timing and market acceptance of new and enhanced services, and level of sales
and marketing efforts.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, existing
relationships with pharmaceutical and other healthcare companies and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. These competitors may also engage in more
extensive development efforts, undertake more far-reaching marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
existing and potential employees, sponsors and alliance partners. Our
competitors may develop services that are equal or superior to those we provide
or that achieve greater market acceptance and brand recognition than we achieve.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address the needs of sponsors. It is possible that new
competitors may emerge and rapidly acquire significant market share. We may not
be able to compete successfully or competitive pressures may have
32
a material adverse effect on our business, results of operations and financial
condition. If advertisers perceive the Internet generally or our Web sites to be
a relatively limited or ineffective advertising medium, advertisers may be
reluctant to devote a significant portion of their advertising budget to
Internet advertising or to become sponsors of our Web sites.
We Must Continually Enhance and Develop the Content and Features of our Web
Sites to Attract Visitor Traffic and Sponsors.
We produce only a portion of the editorial content available on our Web sites
and rely on third-party firms and organizations for most of our content. Much of
the information on our Web sites is easily available from other sources. Other
Web sites may present the same or similar content in a superior manner to our
Web sites, which would adversely affect our visitor traffic. To remain
competitive, we must continue to enhance and improve our content. In addition,
we must continually improve the responsiveness, functionality and features of
our Web sites and develop other products and services attractive to visitors and
sponsors. Changes to our Web sites may contain undetected programming errors
that require significant design modifications, which may result in a loss of
consumer confidence and user support and a decrease in the value of our brand
name. We plan to develop and introduce new features, functions, content,
products and services that will require the development or licensing of
increasingly complex technologies. We may not succeed in developing or
introducing features, functions, products and services that will attract
visitors and sponsors, which would be likely to materially and adversely affect
our business, financial condition and results of operations.
We May Need to Create a Mediconsult Brand Identity to Be Successful.
In order to build and align our brand awareness, we must succeed in our
marketing efforts, provide high-quality services and increase the number of
visitors to our Web sites. In addition, healthcare consumers and physicians
must, among other things, perceive us as offering relevant, reliable healthcare
information from trustworthy sources. We intend to increase our marketing
expenditures as part of our brand-building efforts. If these efforts are
unsuccessful and we cannot increase our brand identity and increase revenue, our
business, financial condition and results of operations could be materially and
adversely affected.
We Are Subject to the Risks of Integrating and Successfully Funding Our Joint
Ventures and Acquisitions.
We have in the past developed joint ventures with and acquired complementary
businesses, technologies, services or products, including topic-specific Web
sites, and may continue to do so in the future.
We recently acquired CyberDiet, Inc., which operates a Web site providing
tailored nutritional information and programs, Cyber-Tech, Inc., which operates
Heartinfo.org., acquired Mood Sciences, a mental health oriented web site that
utilizes a proprietary tool to diagnose and track states of depression online,
and acquired Physicians' Online, Inc., the largest, secure physicians-only
community on the Internet. We may not receive a positive return on our
investments in these companies and may not realize other benefits anticipated
from them. We may have difficulty assimilating these entities and their
operations with our existing operations, and this could result in a loss of
visitor traffic and revenue.
We may not be able to identify suitable acquisition candidates or joint
venture and alliance partners in the future. Even if we do identify suitable
candidates, we may not be able to enter into transactions with these candidates
on commercially acceptable terms. If we make other acquisitions or enter into
these other arrangements, we could have difficulty in integrating the acquired
products, services or technologies into our operations. These difficulties could
disrupt ongoing business, distract management and employees, increase our
expenses and materially and adversely affect our business, financial condition
and results of operations. We may incur significant amortization charges from
the goodwill resulting from acquisitions. We may also incur indebtedness or
issue equity securities to pay for future acquisitions or management or
sponsorship rights. The
33
issuance of equity securities would be dilutive to our existing stockholders.
The issuance of the Mediconsult stock in connection with the merger will result
in immediate and substantial dilution to existing Mediconsult stockholders.
Aspects of our Web Sites May Subject us to Regulatory Oversight and Other
Concerns
Numerous state and federal laws also govern the delivery of healthcare
services and goods. Healthcare licensing laws and laws prohibiting the offer,
payment or receipt of remuneration to induce referrals to entities providing
healthcare services or goods, many of which are being actively enforced, apply
to Internet healthcare applications as well. In the event some state or federal
regulatory agency determined that our relationship with one or more of our
advertisers that deliver healthcare services or goods violate any such laws,
then we could be subjected to fines and other costs and could be required to
revise or terminate that portion of our business. Our pharmaceutical clients are
also subject to review by the FDA for compliance with regulations governing the
information that can be provided to consumers on a pharmaceutical product. These
regulations, for example, limit recommended uses to the specific uses approved
by the FDA. The FDA also monitors compliance with direct-to-consumer advertising
regulations. If the FDA adopts regulations specifically aimed at pharmaceutical
advertising on the Internet or takes action with respect to a particular
client's advertising program, our existing marketing and advertising programs
for clients and future opportunities could be materially and adversely affected.
Our Key Personnel are Very Important to Our Success.
Our future success depends on the services of our senior management personnel.
We do not have key person life insurance on any of our personnel. Loss of any
one or more of our senior management personnel would have a material adverse
effect on our business, financial condition and results of operations. To be
successful, we will also need to attract and retain individuals with expertise
in the areas of marketing and sales and technology. In addition, the successful
staffing and integration of our in-house programming operations will depend on
our ability to attract and retain qualified employees. Competition for qualified
personnel is intense, and the loss of key personnel, or the inability to
attract, train and retain the additional highly skilled personnel required for
the expansion of our activities, would materially and adversely affect our
business, financial condition and results of operations.
We are Controlled By Management Stockholders Whose Interests May Differ From
Other Stockholders.
Mr. Robert A. Jennings, our Chief Executive Officer, currently owns as an
individual and through affiliated entities controls approximately 26.4% of the
outstanding shares of our common stock. Together with Mr. Jennings, the
management stockholders of Mediconsult own or control approximately 30.8% of
Mediconsult's outstanding common stock. Accordingly, pursuant to Delaware
corporate law, the Mediconsult management stockholders effectively control the
election of all of our directors and, in general, have sufficient voting power
to determine (without the consent of our other stockholders) the outcome of any
corporate transaction or other matter submitted to the stockholders for
approval. These include mergers, consolidations and the sale of all or
substantially all of our assets, and also the power to prevent or cause a change
in control. The interests of the management stockholders may differ from the
interests of other stockholders.
We Are Subject to Risks Associated with International Operations.
Our business is conducted through operations and employees in Bermuda, Canada,
the European Community and the United States. Our international operations and
activities subject us to a number of risks, which include the risk of complying
with multiple complex regulatory requirements, like European Community
regulations affecting Internet operations, and the risks of political and
economic instability, difficulty in managing foreign operations, potentially
adverse taxes, higher expenses and difficulty in collection of accounts
receivable. In addition, we receive most of our revenue in U.S. dollars, but a
substantial portion of our payroll and other
34
expenses are paid in the currency of the country where our employees reside or
operations are located. Because our financial results are reported in U.S.
dollars, they are affected by changes in the value of the various foreign
currencies that we use to make payments in relation to the U.S. dollar. We do
not cover known or anticipated operating exposures through foreign currency
exchange option or forward contracts.
The Internet is Subject to Many Governmental Regulations that May Impact our
Ability to Conduct Business.
There is, and will be, an increasing number of laws and regulations pertaining
to the Internet. These laws or regulations may relate to liability for
information received from or transmitted over the Internet, online content
regulation, user privacy, taxation and quality of products and services. In
addition, the applicability to the Internet of existing laws governing
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment, personal privacy and other issues is
uncertain and developing. Any new law or regulation, or the adverse application
or interpretation of existing laws, may decrease the growth in the use of the
Internet or our Web sites. This could decrease the demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our business, financial condition or results of operations.
We May Be Subject to Claims Based on the Content We Provide on the Internet.
Because visitors to our Web sites may distribute our content to other people,
third parties might sue us for defamation, negligence, product liability,
copyright, or trademark infringement, or other matters. These types of claims
have been brought, sometimes successfully, against other on-line services in the
past. We may also incur liability for the content on other Web sites that are
linked to our Web sites or for content and materials that may be posted by
visitors in chat rooms or bulletin boards. Our e-mail services may also subject
us to potential claims resulting from unsolicited e-mail, lost or misdirected
messages, illegal or fraudulent use of e-mail or interruptions or delays in e-
mail service. We also enter into agreements with commerce partners that entitle
us to receive a share of any revenue from the purchase of goods and services
through direct links from our Web sites to their Web sites. These arrangements
may subject us to additional claims, including product liability or personal
injury related to these products and services, because we provide access to
these products or services, even if we do not provide the products or services
ourselves.
Satisfactory Performance of our Web Sites is Critical to our Business and
Reputation.
The performance of our Web sites is critical to our business and reputation
and to our ability to attract visitors and sponsors to our Web sites. We are
dependent upon the continuous, reliable and secure operation of Internet servers
and related hardware and software. To the extent that service is interrupted or
delayed, we could experience a decrease in traffic and revenue. We do not at
present have any back up "off-site" systems or a formal disaster recovery plan,
nor do we have insurance coverage for business interruption. Substantially all
of our communications hardware and some of our other computer hardware
operations are located in Toronto, Canada. Fire, floods, earthquakes, power
loss, telecommunications failures, break-ins and similar events could damage
these systems. Computer viruses, electronic break-ins or other similar
disruptive problems could also adversely affect our Web sites.
Our Web sites must accommodate a high volume of traffic and deliver
information that is updated frequently. Our Web sites have in the past and may
in the future experience slower response times or decreased traffic for a
variety of reasons. In addition, our visitors depend on Internet Service
Providers, online service providers and other Web site operators for access to
our Web sites. Many of them have experienced significant outages in the past and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems in the future.
35
The on-going enhancement of our Web sites is dependent upon the success of
development efforts that will be performed by in-house employees and by
contractors. To the extent that these development efforts are delayed or
unsuccessful, we will incur additional development expenses and may not remain
competitive in the design and use of our Web sites.
A Lack of Security Over the Internet May Impact our Business.
A significant barrier to electronic commerce and confidential communications
over the Internet has been the need for secure transmission of confidential
information. Internet usage could decline if any well-publicized compromise of
security occurred. We may incur significant costs to protect against the threat
of security breaches or to alleviate problems caused by such breaches.
Experienced programmers could attempt to penetrate our network security.
Programmers who are able to penetrate our network security could misappropriate
proprietary information or cause interruptions in our services, and we could be
required to expand capital and resources to protect against or to alleviate
problems caused. Purposeful security breaches could have a material adverse
effect on our business, results of operation and financial condition.
We Are Dependent on our Intellectual Property.
Trademarks, copyrights and other proprietary rights are important to our
success and our competitive position. Third parties may infringe or
misappropriate our trademarks, copyrights and other proprietary rights, which
could have a material and adverse effect on our business, financial condition
and results of operations. In addition, we do not know how extensive our
intellectual property protection is since the validity, enforceability and scope
of protection of proprietary rights in Internet-related industries is uncertain
and still evolving.
We license some of our content from third parties. It is possible that we
could become subject to infringement actions based upon the content obtained
from these third parties. In addition, others may use this content and we may be
subject to claims from our licensors. These claims, with or without merit, could
subject us to costly litigation and the diversion of our financial resources and
technical and management personnel. We have entered into confidentiality
agreements with our key employees and independent consultants and we have
instituted procedures to control access to and distribution of our technology,
documentation and other proprietary information and the proprietary information
of others from which we have licensed content or technology. Despite our efforts
to protect our proprietary rights, parties may attempt to disclose, obtain or
use our content or technologies. There can be no assurance that the steps we
have taken will prevent misappropriation of our content or technologies.
Future Sales of our Common Stock by our Existing Stockholders could have an
Adverse Effect on the Market Price of our Common Stock.
The market price of our common stock could decline as a result of sales by our
existing stockholders and the former stockholders of Physicians' Online of a
large number of shares of common stock in the market after the merger, or the
perception that these sales may occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. In addition, certain holders of our common stock
and certain holders of warrants exercisable for shares of our common stock have
registration rights. If these shares are registered, sales of the shares also
could adversely affect our stock price.
Our Stock Price is Volatile and Could continue to be Volatile.
Investment interest in Mediconsult may not sustain an active or liquid trading
market. The market price of our common stock has fluctuated in the past and is
likely to continue to be volatile and subject to wide fluctuations. In addition,
the stock market has experienced extreme price and volume fluctuations. The
stock prices and trading volumes for many Internet companies fluctuate widely
for reasons that may be unrelated to their business or
36
results of operations. General economic, market and political conditions could
also materially and adversely affect the market price of our common stock.
Forward Looking Statements; Market Data
A number of statements made in this Annual Report on Form 10-K, are forward-
looking statements. These forward-looking statements are not historical facts.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
This Annual Report on Form 10-K also contains market data related to
Mediconsult and the Internet. This data has been included in the studies
prepared by the Internet market research firms of Cyber Dialogue, Jupiter
Communications and Media Metrix. This market data includes projections that are
based on a number of assumptions. The assumptions include that: (1) no
catastrophic failure of the Internet will occur; (2) the number of people who
use the Internet and the total number of hours spent online will increase
significantly over the next five years; (3) the value of online sponsorship
dollars spent for each hour a visitor is online will increase; (4) the speed at
which content can be downloaded from the Internet will increase dramatically;
and (5) Internet security and privacy concerns will be adequately addressed.
This Annual Report on Form 10-K also contains market data related to direct-
to-consumer advertising. This data has been included in the studies prepared by
Consumer Health Information Corporation and Med Ad News. This market data
includes projections that are based on a number of assumptions. The assumptions
include that: (1) there will be no adverse changes in existing direct-to-
consumer advertising regulations; (2) direct-to-consumer advertising spending
will continue to be accepted by pharmaceutical companies as an attractive
vehicle for advertising; (3) the number of pharmaceutical products covered by
direct- to-consumer advertising will continue to increase; and (4) advertisers
will increasingly use the Internet as a forum for direct-to-consumer
advertising.
If any one or more of these assumptions turns out to be incorrect, actual
results may differ from the projections given by these firms. These markets may
not grow at the rates projected by the firms named above or at all. The failure
of these markets to grow at such projected rates could have a material adverse
effect on our business, financial condition and results of operations, and the
market price of our common stock.
It may be Difficult for a Third Party to Acquire the Company.
Provisions of the Company's certificate of incorporation, its by-laws and
Delaware law could make it more difficult for a third party to acquire it, even
if it would be beneficial to the Company's stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are set forth on pages F-1 through F-21 attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth, as of December 31, 1999, the name, age and
position of the Company's directors, executive officers and other significant
employees.
NAME AGE POSITIONS
---- --- ---------
Robert A. Jennings 42 Chairman and Chief Executive Officer
David J. Austin 43 Chief Web Officer
Michel Bazinet, M.D 43 Medical Director
David M. Haselwood 24 Vice President, Business Development
E. Michael Ingram 47 General Counsel and Chief Financial Officer
Louis Leonardelli 48 Controller and Principal Accounting Officer
Timothy J. McIntyre 44 President of Pharma Marketing, LCC
Ian Sutcliffe 47 President and Director
James L. Bierman 47 Director
John Buchanan 43 Director
R. Bradford Burnham 45 Director
Jason S. Fisherman 43 Director
Barry Guld 43 Director
Fred F. Nazem 59 Director
David D. Richards 40 Director
ROBERT A. JENNINGS has served as Chairman and Chief Executive Officer of the
Company since its inception in 1996. From 1993 to 1998, Mr. Jennings acted as an
advisor to a number of companies on general business matters. Beginning in 1998,
Mr. Jennings began to work on a full-time basis on Mediconsult matters. Mr.
Jennings is a chartered accountant and was employed by Coopers & Lybrand in
Canada and England for nine years.
DAVID J. AUSTIN has served as Chief Web Officer of the Company since February,
1999 and served as Chief Operating Officer of the Company from 1998 until
February, 1999. He has 18 years of experience in developing and executing
strategies for high-tech business development. From 1995 to 1999, Mr. Austin was
the President and Chief Executive Officer of Triant Technologies Inc., a
publicly traded software company. From 1980 to 1995, he held various management
roles in operations, business development and marketing at IBM.
MICHEL BAZINET, M.D. has served as Medical Director of the Company since 1996.
He is a urologist specializing in uro-oncology and has been practicing medicine
at McGill University in Montreal since 1987. His responsibilities with
Mediconsult include the supervision of the overall medical content of the
Company's Web site. He completed his medical and specialty training at
Sherbrooke and McGill Universities in Canada and completed a fellowship in uro-
oncology at the Memorial Sloan Kettering Cancer Center in New York.
38
DAVID M. HASELWOOD has served as our Vice President, Business Development
since July 1999. From September 1997 to July 1999, he was in the corporate
finance group of Volpe Brown Whelan & Co., LLC, an investment bank. From January
1996 to September 1997, he was a research analyst at Santa Barbara Cottage
Health System, a multi-hospital health system. Mr. Haselwood earned his B.A. in
Natural Sciences in 1995 from The Johns Hopkins University.
E. MICHAEL INGRAM has served as our General Counsel since April 1999 and has
served as our Chief Financial Officer and Secretary since May 1999. Prior to
joining us and since 1980, Mr. Ingram held several legal positions with National
Data Corporation. Most recently since 1988, he was Senior Vice President,
General Counsel and Secretary of National Data Corporation. Mr. Ingram earned
his J.D. degree from the University of Georgia School of Law and his L.L.M. in
taxation from Emory University School of Law.
LOUIS LEONARDELLI has served as our Controller and principal accounting
officer since September 1, 1999. From January 1985 to August 1999 he held
several accounting positions with Katz Media Group, Inc. His final position
upon leaving Katz was Vice President of Financial Services. Mr. Leonardelli
earned his B.A. in accounting in 1976 from Bernard Baruch College.
TIMOTHY J. MCINTYRE has served as President of Pharma Marketing, LLC since
September of 1999. He has over 20 years of experience in marketing and
advertising, primarily in the healthcare sector. From 1997 until 1999, he held
several executive positions, including President and Chief Operating Officer,
with Boron Lepore & Associates, a pharmaceutical marketing company. From 1994
until 1997, Mr. McIntyre was President and Chief Executive Officer of McIntyre &
McIntyre, Inc., another pharmaceutical marketing company.
IAN SUTCLIFFE has served as President and a Director of the Company since
1996. He has 17 of years experience as a management consultant, primarily in the
high-tech sector. Most recently, from 1993 to 1996, he was a consultant
specializing in re-engineering marketing and sales processes worldwide for IBM.
From 1989 to 1993, Mr. Sutcliffe was a partner at BDO Dunwoody, a consulting
organization which he joined in 1989 upon the merger of his consulting firm,
Sutcliffe & Associates, with BDO Dunwoody, and remained at BDO Dunwoody until
1993. Mr. Sutcliffe is a chartered accountant and was employed by Coopers &
Lybrand in Canada and Europe for six years.
JAMES L. BIERMAN has served as a Director of Mediconsult since December 1999
and served as a director on the board of Physicians' Online since April 1999.
Mr. Bierman currently serves as Senior Vice President of Corporate Development
at Quintiles Transnational Corp. where he directs all merger and acquisition
activity. Prior to joining Quintiles Transnational Corp. in June 1998, Mr.
Bierman spent 22 years with Arthur Andersen L.L.P. where, as a partner of this
international professional services organization, he worked with a diversified
broad-base of companies solving complex business problems. Mr. Bierman received
a B.A. in Economics and History from Dickinson College and a M.B.A. from Cornell
University's Johnson Graduate School of Management. Mr. Bierman is a Certified
Public Accountant and a member of the American Institute of Certified Public
Accountants and the North Carolina Association of Certified Public Accountants.
JOHN BUCHANAN has been a Director of the Company since 1999. Since 1993, he
has been President & CEO of Retek Information Systems Inc. ("Retek"), a publicly
traded subsidiary of HNC Software Inc. Retek develops, markets and supports
predictive software solutions to the enterprise software industry.
R. BRADFORD BURNHAM has served as a Director of Mediconsult since December
1999 and served as a director on the board of Physicians' Online since April
1996. Mr. Burnham is currently a General Partner at AT&T Ventures, where he
invests in early stage companies that are building businesses in electronic
commerce, Internet infrastructure, and communications services. Prior to joining
AT&T Ventures in September of 1993, Mr. Burnham was founder and, for three
years, Chief Executive Officer of Echo Logic, a software development firm. From
January of 1979 to May of 1990, Mr. Burnham held a variety of sales and
marketing positions at AT&T. In
39
addition to serving on the Physicians' Online board, Mr. Burnham is currently a
director of one public company, Audible (ADBL), and several private companies.
Mr. Burnham holds a B.A. in Political Science from Wesleyan University.
JASON S. FISHERMAN, MD has served as a Director of Mediconsult since December
1999 and served as a director on the board of Physicians Online since February
1996. Dr. Fisherman is also a director of one public company, ILEX Oncology. He
also serves as a director of a number of private healthcare and bio-
pharmaceutical companies. Dr. Fisherman is currently a Partner at Advent
International Corp., a global private equity and venture capital investment
firm. Prior to joining Advent in March of 1994, Dr. Fisherman served as Senior
Director of Medical Research for Enzon, Inc. from 1991 to 1994. Dr. Fisherman
received a B.A. in Molecular Biophysics and Biochemistry from Yale University, a
M.D. from the University of Pennsylvania and a M.B.A. from the Wharton Graduate
School of Business.
BARRY GULD has been a Director of the Company since 1999. Mr. Guld co-founded
and served as President of Zadall Systems Group, a leading vendor of pharmacy
software systems from 1980 to 1996, which was sold to National Data Corporation.
He is currently a consultant to National Data Corporation and a director of
Velocity Computer Solutions.
FRED F. NAZEM has served as a Director of Mediconsult since December 1999.
Since 1981, Mr. Nazem has been President of Nazem, Inc. and Managing General
Partner of the general partner of several Nazem & Company limited partnerships
that are affiliated venture capital funds. Mr. Nazem is a director of three
public companies in addition to Mediconsult: Tegal Corporation, Oxford Health
Plans, Inc. and Spatial Technologies, Inc., as well as a number of privately
held firms.
DAVID D. RICHARDS has served as a Director of Mediconsult since December 1999
and served as a director on the board of Physicians' Online since February 1998,
and prior to that from 1994 to 1995. Mr. Richards also currently serves as the
Chairman of the Board of Directors and the Chief Executive Officer of
Physicians' Online. Mr. Richards was a Vice President of Landmark Communications
from June 1997 to April 1998 as well as from June 1993 to May 1995 where he was
responsible for new media investments at this privately held media and
communications company. From 1995 to 1997, Mr. Richards served as the Chief
Executive Officer and President of InfiNet, an Internet services company
providing a broad array of Internet Service Provider, hosting and software
development for United States based media companies. While at InfiNet, Mr.
Richards focused on developing the strategic direction of the company and
overseeing its execution. Mr. Richards received a B.A. in Political Science from
Williams College and a M.B.A. from the Darden Graduate School of Business at the
University of Virginia .
There is no family relationship between any director or executive officer of
the Company.
The Audit Committee of the board of directors was established in October 1998,
and reviews, acts on and reports to the board of directors with respect to
various auditing and accounting matters, including the recommendation of our
independent auditors, the scope of annual audits, fees to be paid to the
independent auditors, the performance of our independent auditors and our
accounting practices. The current members of our Audit Committee are Messrs.
Buchanan and Nazem.
The Compensation Committee of the board of directors was established in
October 1998 and determines the salaries and benefits for our employees,
consultants, directors and other individuals we compensate. The Compensation
Committee also administers our compensation plans. The current members of the
Compensation Committee are Messrs. Guld and Burnham.
40
The Nominating Committee of the board of directors was established in January
1999, and recommends individuals for director positions. The members of the
Nominating Committee are Messrs. Jennings, Sutcliffe and Nazem.
The Executive Committee of the board of directors was established in December
1999, and acts on matters delegated to it by the full board of directors. The
members of the Executive Committee are Messrs. Jennings, Buchanan, Guld, Nazem
and Fisherman.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
During 1999 Forms 3 Initial Statements of Beneficial Ownership of Securities
were late filed by Messrs. David D. Richards, Bradford Burnham and Fred F.
Nazem.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation awarded to, earned by or paid
to the Company's Chief Executive Officer and its next four most highly
compensated executive officers (the "Named Executive Officers") whose total
annual salary and bonus exceeded $100,000 for the year ended December 31, 1999,
for services rendered in all capacities in 1999.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
- ------------------------------------------------------------------------------------------------------------------
Name and Principal Position Salary Bonus Other Annual Shares Underlying
Compensation Options
- ------------------------------------------------------------------------------------------------------------------
Robert A. Jennings $275,000 $250,000 $ -- --
Chief Executive Officer
- ------------------------------------------------------------------------------------------------------------------
Ian Sutcliffe $240,000 $175,000 $ -- --
President
- ------------------------------------------------------------------------------------------------------------------
E. Michael Ingram $150,000 $ 30,000 $ -- 250,000
Chief Financial Officer
- ------------------------------------------------------------------------------------------------------------------
David J. Austin $149,000 $ 23,000 $ -- --
Chief Operating Officer
- ------------------------------------------------------------------------------------------------------------------
Timothy J. McIntyre $675,300 $ -- $649,000(1) --
President of Pharma
Marketing LLC
- ------------------------------------------------------------------------------------------------------------------
Note 1: Represents payments for certain taxes payable by Mr. McIntyre with
respect to cash and stock distributions in 1999. This also excludes certain
amounts received by Mr. McIntyre in respect of the Company's purchase of its 35%
membership interest in Pharma Marketing, LLC.
OPTION GRANTS IN THE LAST FISCAL YEAR
In the year ended December 31, 1999, Mr. Ingram received options to purchase
250,000 shares of our common stock. Mr. Leonardelli received options to
purchase 21,300 shares of our common stock. These options vest in four equal
annual installments.
41
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1999 OPTION VALUES
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers at
December 31, 1999.
- ----------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised in the Money
Unexercised Options at December 31, 1999 Options at December 31, 1999 (1)
- ----------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
Robert A. Jennings -- -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------
Ian Sutcliffe -- -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------
E. Michael Ingram -- 250,000 $ -- $21,850
- ----------------------------------------------------------------------------------------------------------------------
David Austin 100,000 -- $275,000 $ --
- ----------------------------------------------------------------------------------------------------------------------
Timothy McIntyre -- -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------
(1) Options are In-the-Money if the market value of the shares covered thereby
is greater than the option exercise price. This calculation is based on the fair
market value of the common stock at December 31, 1999, of $6.25 per share, less
the exercise price.
DIRECTOR COMPENSATION
Directors of the Company do not receive any fees for their services as
directors. Each director, however, is reimbursed for all reasonable and
necessary costs and expenses incurred as a result of being a director, such as
expenses incurred for attendance at meetings of the board of directors.
In addition, on October 31, 1998, John Buchanan and Barry Guld each received
options to purchase 100,000 shares of common stock at an exercise price of $1.50
per share, which vest at a rate of 5,000 shares per month beginning on October
31, 1998 for their services on the Board of Directors.
EMPLOYMENT AGREEMENTS
Robert Jennings, Ian Sutcliffe and David Austin each has an employment
agreement with Mediconsult or one of our subsidiaries. Each agreement is
effective as of January 1, 1999, and expires on December 31, 2001, and will be
automatically renewed for 12 month periods after that date unless either party
gives the other written notice of termination at least three months prior to the
expiration of the initial or any subsequent term. The annual salary for each of
these executives is as follows: Robert Jennings, $275,000, which was increased
to $325,000 in December 1999; Ian Sutcliffe, $240,000, which was increased to
$300,000 in December 1999; and David Austin, $136,000. E. Michael Ingram has an
employment agreement with Mediconsult, effective as of April 1, 1999 and
expiring on March 31, 2003. This agreement will be automatically renewed for 12
month periods after that date unless either party gives the other written notice
of termination at least three months prior to the expiration of the initial or
any subsequent term. The annual salary for Mr. Ingram is $200,000. In addition,
Mr. Ingram is entitled to a non-accountable expense allowance of $50,000 per
year for the first two years of his employment.
Pharma Marketing, LLC ("Pharma") has entered into an employment agreement with
Timothy McIntyre for an initial term beginning September 7, 1999 and ending
December 31, 2003, renewable on a yearly basis thereafter. Under his employment
agreement, Mr. McIntyre is principally responsible for performing the services
under Pharma's service agreement with Mediconsult.com, Limited. Under his
employment agreement, Mr. McIntyre is entitled to receive a salary of $250,000
per year through December 31, 2000 and $350,000 per year
42
thereafter. Among other benefits, Mr. McIntyre is entitled to receive a non-
accountable expense allowance of $100,000 per year through September 7, 2001 and
an amount equal to up to 100% of the commissions paid under the Mediconsult.com,
Limited agreement, with a minimum of $200,000 per year through September 7,
2001. Pharma has the right to terminate the employment agreement for cause, for
the failure to have a minimum level of contracts in place under the
Mediconsult.com, Limited service agreement or without cause. Depending on the
grounds on which his employment is terminated, Mr. McIntyre has the right to
receive certain ongoing payments from Pharma.
In addition, David Austin has received options to purchase 100,000 shares of
our common stock which have vested. Mr. Austin is entitled to receive a cash
equivalent of 12% of his base salary until he joins the applicable employee
benefit plans and programs. Also, each of these executives is entitled to
participate in a team-based performance bonus plan, with awards based upon
predetermined deliverables being developed by Mediconsult and may receive
options to purchase shares of our common stock in the future. The employment
agreements can be terminated upon delivery of written notice from us, with or
without cause. Upon termination without cause, Robert Jennings, Ian Sutcliffe,
David Austin and Debora Falk are each entitled to 12 months salary and any bonus
earned in the preceding 12 months. Mr. Ingram received options to purchase
200,000 shares of our common stock at an exercise price of $13.00 per share. Mr.
Ingram's options vest at the rate of 50,000 option shares per year beginning on
the first anniversary of the date of grant. Upon termination without cause, Mr.
Ingram is entitled to 12 months salary and any bonus earned in the preceding 12
months, except that upon termination by Mediconsult without cause or by Mr.
Ingram for good reason within 12 months after a change of control of
Mediconsult, Mr. Ingram is entitled to 24 months salary and any bonus earned in
the preceding 24 months.
Each of the executives with an employment agreement has agreed not to compete
or solicit clients or other employees during their severance period. Each of the
executives is also bound by a nondisclosure and invention assignment agreement,
which prohibits such executive from, among other things, disseminating or using
confidential information about our business or clients in any way that would be
adverse to Mediconsult.
STOCK OPTION PLAN
In April 1996, the Company's board of directors adopted the Company's 1996
Stock Option Plan. The plan was approved by the Company's stockholders during
May 1996. The plan allows the board to grant stock options from time to time to
employees, officers, directors and consultants. The board has the power to
determine at the time the option is granted whether the option will be and
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who are
employees of the Company. Vesting provisions are determined by the board at the
time options are granted. As originally adopted, the total number of shares of
common stock subject to options under the plan was not to exceed 1,000,000,
subject to adjustment in the event of certain recapitalizations, reorganizations
and similar transactions. The plan provides that all outstanding options will
vest upon a change of control. The exercise price is payable in cash, stock or
any other means as determined by the board. On December 31, 1998, the shares
eligible under the plan were increased to 2,500,000; on June 15, 1999 the shares
eligible under the plan were increased to 3,500,000, and on November 19,1999 the
shares eligible under the plan were increased to 7,000,000.
The board of directors may amend the 1996 Plan at any time, provided that the
board may not amend the plan to materially increase the number of shares
available under the plan, materially increase the benefits accruing to
participants under the plan, or materially change the eligible class of
employees without first obtaining stockholder approval.
There have been a total of 5,980,901 options granted under the plan, of which
3,346,950 have been exercised and 109,300 canceled as of December 31, 1999.
There were 4,008,651 options outstanding as of December 31, 1999.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the common stock as of December 31, 1999, by (1) each
person (or group of affiliated persons) who are known by the Company to
beneficially own 5% or more of the Company's common stock, (2) each of the
Company's directors and Named Executive Officers and (3) all of the Company's
directors and executive officers as a group.
SHARES BENEFICIALLY OWNED
PERCENT
NAME OF BENEFICIAL -------
------------------ NUMBER BENEFICIALLY
OWNER (1) ------ ------------
--------- OWNED (2)
---------
Robert A. Jennings (3) 13,097,752 26.4%
Michel Bazinet 775,000 1.6
Ian Sutcliffe 250,000 *
Timothy McIntyre (4) 200,000 *
David J. Austin (5) 100,000 *
Louis Leonardelli -- *
John Buchanan (6) 70,000 *
Barry Guld (7) 70,000 *
James L. Bierman -- --
R. Bradford Burnham -- --
Jason S. Fisherman -- --
David M. Haselwood -- --
E. Michael Ingram (8) 50,000 *
David D. Richards (9) 324,000 *
JHC Limited (10) 12,307,752 24.8
Fred F. Nazem (11) (12) 348,430 *
All Directors and Officers
as a group (15 persons) 15,285,182 30.8%
* Indicates beneficial ownership of less than 1% of the total outstanding
common stock.
(1) Under the rules of the SEC, a person is deemed to be the beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities if that person has the right to acquire beneficial ownership
within 60 days. Accordingly, more than one person may be deemed to be a
beneficial owner of the same securities. Unless otherwise indicated, the
address for each person listed in the table is in the care of
Mediconsult.com, Inc., 1330 Avenue of the Americas, New York, New York
10019.
(2) Applicable percentage of ownership is based on an estimated 49,618,275
shares outstanding on December 31, 1999.
(3) Includes 12,307,752 shares owned by JHC Limited and 790,000 shares owned by
Mr. Jennings. Mr. Jennings controls JHC Limited.
44
(4) Includes 100,000 shares owned by Pharma Marketing, LLC, which is controlled
by Mr. McIntyre.
(5) Represents currently exercisable options and options which vest within 60
days at an exercise price of $3.50 per share.
(6) Represents currently exercisable options and options which vest within 60
days at an exercise price of $1.50 per share.
(7) Represents currently exercisable options and options which vest within 60
days at an exercise price of $1.50 per share.
(8) Represents options which vest within 60 days at an exercise price of $13.00
per share.
(9) Mr. Richards has the option to purchase 300,000 shares of common stock of
Physicians' Online, of which 135,000 shares are currently vested,
convertible into approximately 324,000 shares of Mediconsult common stock
after the merger. This estimate is based on an estimated conversion ratio
of 2.4 shares of Mediconsult common stock for each share of Physicians'
Online common stock.
(10) Mr. Jennings controls JHC Limited, a Bermuda company.
(11) Mr. Nazem is a general partner of Nazem Associates IV, L.P. and may be
deemed to be the beneficial owner of 158,557 shares owned by Nazem &
Associates IV, L.P., however, Mr. Nazem disclaims beneficial ownership as
to any such shares.
(12) Mr. Nazem is a general partner of Nazem Associates Transatlantic, L.P. and
may be deemed to be the beneficial owner of 158,557 shares owned by Nazem &
Associates Transatlantic, L.P., however, Mr. Nazem disclaims beneficial
ownership as to any such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective December 9, 1999, we entered into an agreement with Treacy & Co.,
LLC, ("Treacy") under which the Strategic Consulting Interim Agreement, dated as
of November 16, 1998, as amended (the "Consulting Agreement"), by and among
Treacy, The Mediconsult Trust ("The Trust") and Mediconsult was terminated. In
relation to this termination we agreed to register 2,000,000 of our common
shares obtained by Treacy pursuant to the exercise of a stock option. In the
agreement Treacy also agreed to certain restrictions on its ability to sell the
shares so registered.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit Description
Number -----------
-------
2.1 Physicians' Online Merger Agreement including Amendment No. 1
thereto (1)
2.2 Cyber-Tech Merger Agreement and Plan of Reorganization (2)
3.1 Amended and Restated Certificate of Incorporation *
3.2 Amended and Restated By-laws*
45
4.1 Specimen common stock certificate(3)
4.2 Form of Investor Senior Preferred Stock Warrant (3)
4.3 Form of Warrant issued to Arnhold and S. Bleichroeder, Inc. (3)
10.1 Amended and Restated Mediconsult 1996 Stock Option Plan (1)
10.2 Amended and Restated Physicians' Online 1994 Stock Option Plan (1)
10.3 Escrow Agreement, dated June 14, 1999, among Mediconsult.com, Inc., Cyber-Tech,
Inc., Andre Pilevsky, Daniel Rader, M.D and SunTrust Bank (2)
10.4 Escrow Agreement, dated December 16, 1999, among Mediconsult.com, Inc., Physicians'
Online, Inc., Jason Fisherman as representative, and The Wilmington Trust Company
(1)
10.5 Worldwide Web Server Agreement dated November 6, 1996 between Tvisions, Inc. and
Mediconsult.com Limited (4)
10.6 Operating Agreement of Pharma Marketing, LLC, Dated September 7, 1999*
10.7 Service Agreement, dated September 7, 1999, between Pharma Marketing, LLC and
Mediconsult.com., Inc.*
10.8 Membership Investment Agreement, dated September 7, 1999, between Pharma Marketing,
LLC and Mediconsult.com, Inc.*
10.9 Letter agreement dated December 30, 1998 among the Company, Pharmaceutical
Information Associates, Ltd., VirSci Corporation and Pharmaceutical
Information.Net, Inc. (3)
10.10 Consulting Agreement dated March 3, 1997 between the Company and IBM Canada
10.11 Source Code License Agreement dated February 26, 1999 between Tvisions, Inc. and
Mediconsult.com Limited (3)
10.12 Agreement between Brystol-Meyers Squibb Company and Mediconsult.com Limited, dated
as of September 30, 1999 *
10.13 Agreement between the Company and Novartis Pharma AG (3)
10.14 Exclusive Sponsorship Agreement dated as of January 15, 1999 between InterNational
Council on Infertility Information Dissemination and Mediconsult.com Limited (3)
10.15 Employment Agreement effective as of January 1, 1999, between 3542491 Canada Inc.
and David J. Austin (3)
10.16 Employment Agreement effective as of January 1, 1999, between Mediconsult.com
Limited and Robert A. Jennings (3)
10.17 Employment Agreement effective as of January 1, 1999, between 3542491 Canada Inc.
and Ian Sutcliffe (3)
10.18 Employment Agreement dated as of April 1, 1999 between the Company and E. Michael
Ingram (3)
10.19 Employment Agreement, dated June 14, 1999, between Mediconsult.com
(US), Ltd. and Andre Pilevsky (2)
10.20 Employment Agreement, dated September 7, 1999, between Pharma Marketing, LLC
46
and Timothy J. McIntyre.*
10.21 Noncompetition Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd.
and Andre Pilevsky (2)
10.22 Noncompetition Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd.
and Sharon Weinberg (2)
10.23 Noncompetition Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd.
and Daniel Rader, M.D(2)
10.24 Stock Purchase Agreement dated as of February 26, 1999 between the Company and the
Investors named therein (3)
10.25 Registration Rights Agreement dated February 26, 1999, among the Company and the
Investors named therein (3)
10.26 Stockholders' Agreement dated February 26, 1999 among the Company, the Founders
identified therein and the Investors identified on Schedule 1 thereto (3)
10.27 Registration Rights Agreement dated as of February 26, 1999 between the Company and
Arnhold and S. Bleichroeder, Inc. (3)
21.1 Subsidiaries of the Company*
23.1 Consent of PricewaterhouseCoopers*
27.1 Financial Data Schedule*
___________
* Filed electronically herewith.
(1) Exhibits are incorporated by reference to the Annexes to Mediconsult's
joint information/proxy statement/prospectus on Schedule 14C (File No. 000-
29282) filed November 19, 1999.
(2) Exhibits are incorporated by reference to Mediconsult's Current Report on
Form 8-K (File No. 333-73059) filed June 29, 1999.
(3) Exhibits are incorporated by reference to Mediconsult's Registration
Statement on Form S-1 (Registration No. 333-73059) filed April 2, 1999.
(4) Exhibits are incorporated by reference to Mediconsult's Registration
Statement on Form 10-SB (File No. 333-21883) filed December 16, 1996.
(B) REPORTS ON FORM 8-K.
We filed a current report on Form 8-K on December 20, 1999, reporting the
issuance, and attaching as an exhibit, a press release announcing the completion
of the Physicians' Online merger.
47
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ Robert A. Jennings
----------------------------- March 30, 2000
Robert A. Jennings
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ E. Michael Ingram
----------------------------- March 30, 2000
E. Michael Ingram
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
/s/ Ian D. Sutcliffe
----------------------------- March 30, 2000
Ian Sutcliffe
DIRECTOR, PRESIDENT
----------------------------- March 30, 2000
Fred Nazem
DIRECTOR
/S/ Jason Fisherman
----------------------------- March 30, 2000
Jason Fisherman
DIRECTOR
/s/ David Richards
----------------------------- March 30, 2000
David Richards
DIRECTOR
/s/ Bradford Burnham
----------------------------- March 30, 2000
Bradford Burnham
DIRECTOR
/s/ Barry Guld
----------------------------- March 30, 2000
Barry Guld
DIRECTOR
----------------------------- March __, 2000
John Buchanan
48
DIRECTOR
/s/ James L. Bierman
----------------------------- March 30, 2000
James L. Bierman
DIRECTOR
49
INDEX TO FINANCIAL STATEMENTS
MEDICONSULT.COM, INC. PAGE
----
Report of Independent Accountants.................................................................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998....................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997......................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998
and 1997........................................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997......................... F-7
Notes to Consolidated Financial Statements......................................................................... F-8
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of Mediconsult.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Mediconsult.com, Inc. and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers
Hamilton, Bermuda
March 20, 2000, except for footnote 20 which is dated as of March 31, 2000.
F-2
MEDICONSULT.COM, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31,
1999 1998
---- ----
Current assets:
Cash and cash equivalents $ 22,320,814 $ 135,053
Accounts receivable, net of allowance for doubtful accounts of 1,062,574 135,790
$31,875 and $0 at December 31, 1999 and 1998, respectively (Note 3)
Unbilled Revenue 3,433,663
Prepaid expenses and other current assets 556,646 --
------------ ----------
Total current assets 27,373,697 270,843
Fixed assets, net (Note 7) 2,291,772 52,790
Intangible assets, net (Note 8) 193,115,481 818,750
------------ ----------
Total assets $222,780,950 $1,142,383
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,591,054 $ 243,413
Advances from shareholder (Note 10) 314,979 513,589
Deferred revenue 322,488 107,000
Notes payable (Note 9) 4,974,100 --
-------------- -------------
Total current liabilities 16,202,621 864,002
-------------- -------------
Commitments and contingencies (Note 17) -- --
Mandatorily redeemable
Senior preferred stock, $0.001 par value, 5,000,000 shares authorized, -- --
1,000,000 shares designated, no shares issued and outstanding at
December 31, 1999 and 1998
Stockholders' equity:
Junior preferred stock $0.001 par value, 4,000,000 shares designated, -- 4,300,000
none and 430,000 shares issued and outstanding at December 31, 1999
and 1998, respectively
Common stock, $.001 par value, 100,000,000 shares authorized, 49,634 18,520
49,633,275 and 18,519,950 shares issued and outstanding at December
31, 1999 and 1998, respectively
Additional paid-in capital 257,263,537 5,242,981
Deferred compensation (16,051,925) (884,109)
Accumulated deficit (34,682,917) (8,399,011)
-------------- -------------
Total stockholders' equity 206,578,329 278,381
-------------- -------------
Total liabilities and stockholders' equity $ 222,780,950 $ 1,142,383
-------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MEDICONSULT.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Revenues $ 6,362,226 $ 1,030,934 $ 256,374
------------ ----------- -----------
Operating expenses:
Product and content development 7,574,171 1,316,188 765,864
Marketing, sales and client services (Note 5) 11,934,645 1,811,710 1,130,340
General and administrative 7,055,865 1,012,719 792,213
Depreciation and amortization 3,758,210 170,439 132,768
Fair value of options granted to employees 2,031,251 275,145 40,235
Fair value of options and warrants granted to 1,834,175 1,354,000 ---
consultants and third parties ------------ ----------- -----------
Total operating expenses 34,188,317 5,940,201 2,861,420
------------ ----------- -----------
Loss from operations (27,826,091) (4,909,267) (2,605,046)
Interest income (expense), net 1,542,185 --- (20,000)
------------ ----------- -----------
Net loss (26,283,906) (4,909,267) (2,625,046)
Dividends on preferred stock (945,505) --- ---
------------ ----------- -----------
Net loss attributable to common stockholders $(27,229,411) $(4,909,267) $(2,625,046)
Per common share data:
Basic and diluted net loss per share $ (1.02) $ (0.27) $ (0.16)
============ =========== ===========
Weighted average shares of common stock 26,711,890 17,910,898 16,729,900
outstanding used in computing basic and ============ =========== ===========
diluted net loss per share
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MEDICONSULT.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
JUNIOR PREFERRED ADDITIONAL
STOCK COMMON STOCK PAID IN DEFFERED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 --- $ --- 16,209,400 $ 16,209 $ 994,976 $ --- $ (864,698) $ 146,487
Conversion of --- --- 1,000,000 1,000 499,000 --- --- 500,000
debentures
Options exercised --- --- 82,000 82 3,768 --- --- 3,850
Stockholder advances 50,000 2,500,000 --- --- --- --- 2,500,000
converted to shares
Issuance of --- --- --- 153,512 (153,512) --- ---
compensatory stock
options
Amortization of --- --- --- --- 40,235 --- 40,235
deferred compensation
Net loss --- --- --- --- --- --- (2,625,046) (2,625,046)
------------------------------------------------------------------------------------------------------
Balance at December 31 250,000 2,500,000 17,291,400 17,291 1,651,256 (113,277) (3,489,744) 565,526
1997
Shares issued in --- --- 100,000 100 119,900 --- --- 120,000
exchange for services
Shares issued for --- --- 100,000 100 818,650 --- --- 818,750
acquisition of
PharmInfoNet
Stockholder advances 180,000 1,800,000 --- --- --- --- 1,800,000
converted to shares
Stock options exercised --- --- 1,028,550 1,029 253,199 --- --- 254,228
Compensation to non- --- --- --- 1,354,000 --- --- 1,354,000
employees
Issuance of --- --- 1,045,976 (1,045,976) --- ---
compensatory stock
options
Amortization of --- --- --- 275,144 --- 275,144
deferred compensation
Net loss --- --- --- --- --- --- (4,909,267) (4,909,267)
------------------------------------------------------------------------------------------------------
Balance at December 31 430,000 4,300,000 18,519,950 18,520 5,242,981 (884,109) (8,399,011) 278,381
1998
Issuance of common --- 200,000 200 1,649,800 (1,650,000) --- ---
stock in exchange for
services and
membership interest in
PharmaMarketing
Shares issued for --- 19,446,571 19,447 166,732,938 --- --- 166,752,385
acquisition of
subsidiaries
Beneficial conversion --- --- 859,505 --- --- 859,505
of Senior Redeemable
Preferred Stock
Issuance of common --- 4,800,000 4,800 56,983,992 --- --- 56,988,792
stock in secondary
public offering, net of
issuance costs of
$5,411,208.
Accretion of Senior --- --- (859,505) --- --- (859,505)
Preferred redeemable
dividend
F-5
Accretion of Junior 8,600 86,000 --- (86,000) --- --- ---
Preferred dividend
Conversion of Senior --- 506,329 506 3,159,494 --- --- 3,160,000
Preferred Stock to
Common Stock
Junior preferred shares (438,600) (4,386,000) 3,732,752 3,733 4,382,267 --- --- ---
converted to common stock
Stock options exercised 2,236,400 2,237 249,361 --- --- 251,598
Amortization of --- --- --- 1,454,300 --- 1,454,300
deferred compensation
related to shares issued
to Pharma Marketing LLC
Issuance of --- --- 13,162,053 (13,162,053) --- ---
compensatory stock options
Deferred compensation 3,841,314 (3,841,314) --- ---
associated with options
issued to in connection
with acquisitions
Issuance of stock upon 91,273 91 111,262 111,353
warrants exercise
Issuance of stock upon 100,000 100 (100) ---
cash-less exercise of
warrants
Issuance of warrants to --- --- 1,834,175 (1,834,175) --- ---
consultants for services
Amortization of --- --- --- 2,031,251 --- 2,031,251
deferred compensation
Amortization of --- --- --- 1,834,175 --- 1,834,175
deferred compensaton
to third parties
Net loss --- --- --- --- --- (26,283,906) (26,283,906)
-------------------------------------------------------------------------------------------------------
Balance at December 31, --- $ --- 49,633,275 $ 49,634 $ 257,263,537 $(16,051,925) $(34,682,917) $206,578,329
1999
-------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MEDICONSULT.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (26,283,906) $ (4,909,267) $ (2,625,046)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of fixed assets 626,440 170,439 132,768
Amortization of intangible assets 3,131,770 --- ---
Services received in exchange for common stock --- 120,000 ---
Amortization of deferred compensation related to shares 1,454,300 --- ---
issued for services and membership interest in Pharma
marketing
Fair value of options and warrants granted to consultants 3,865,426 1,629,144 40,235
and employees
Changes in assets and liabilities:
Accounts receivable (618,499) 22,020 (157,810)
Deferred medical content costs --- --- 161,600
Unbilled revenue (3,433,663) --- ---
Prepaid expenses and other current assets (401,322) --- ---
Accounts payable and accrued expenses 7,374,835 201,014 (19,301)
Deferred revenue (107,000) 107,000 ---
------------- ------------ ------------
Net cash used in operating activities (14,391,619) (2,659,650) (2,467,554)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed assets purchases (2,405,857) (30,225) (120,474)
Acquisition of subsidiaries, net of cash acquired of (21,329,896) --- ---
$166,220 ------------- ------------ ------------
Net cash used in investing activities (23,735,753) (30,225) (120,474)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of advances from shareholder 629,989 2,169,751 2,591,997
Repayment of advances from shareholder (828,599) --- ---
Proceeds from issuance of senior redeemable preferred shares,
net of offering costs of $40,000 3,160,000 --- ---
Proceeds from exercise of warrants 111,353 --- ---
Proceeds from issuance of common stock in a secondary 56,988,792 ---- ----
offering, net of issuance costs of $5,411,208
Proceeds from exercise of stock options 251,598 254,228 3,850
------------- ------------ ------------
Net cash provided by financing activities 60,313,133 2,423,979 2,595,847
------------- ------------ ------------
Increase (decrease) in cash 22,185,761 (265,896) 7,819
Cash and cash equivalents at beginning of year 135,053 400,949 393,130
------------- ------------ ------------
Cash and cash equivalents at end of year $ 22,320,814 $ 135,053 $ 400,949
============= ============ ============
Non-cash financing and investing activities (Notes 4, 5 and 6)
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
1. ORGANIZATION
Mediconsult.com, Inc. ("Mediconsult" or the "Company") is a provider of
physician and patient-oriented healthcare information and services on the World
Wide Web. The Company's sites provide a source of medical information and are
designed to empower physicians and consumers through increased professional and
consumer education regarding medical conditions and treatment alternatives.
These sites also provide a destination on the Internet where visitors can
interact with others in communities centered around chronic medical conditions
and other health issues. The Company facilitates this environment through an
array of complementary services such as moderated on-line support groups and
discussion forums. The Company operates in an environment of rapid change in
technology and is dependent upon the continued services of its current
employees, consultants and subcontractors.
The Company was originally incorporated under the laws of the State of
Colorado in October 1989. In April 1996, the Company purchased Mediconsult.com
Limited, a Bermuda corporation (MCL), through a merger in which MCL became a
wholly-owned subsidiary of the Company. In December 1996, the Company
consummated a reincorporation merger pursuant to which Mediconsult became a
Delaware corporation.
In April 1999 the Company sold 4,800,000 shares of common stock in a
secondary public offering for $13 per share. The Company raised $56,988,792, net
of offering expenses.
2. NEED FOR FUTURE CAPITAL
The Company has sustained losses and negative cash flows from operations
since inception and expect these conditions to continue for the foreseeable
future. At December 31, 1999 and 1998, the Company had an accumulated deficit of
$34,682,917 and $8,399,011 respectively and working capital (deficit) of
$11,171,076 and $(593,159), respectively. Management expects that available cash
resources as of December 31, 1999, in addition to future revenue generated from
clients, will be sufficient to meet anticipated needs for working capital and
capital expenditures through at least the end of the first quarter of fiscal
2001. Although the Company believes it has sufficient resources to support its
operations, it may need to raise additional funds in order to fund more rapid
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures, to acquire complementary products, businesses or
technologies and to execute its long term business strategy. There can be no
assurance that any required additional financing will be available on terms
favorable to the Company if at all. If additional funds are raised by the
issuance of equity securities, stockholders will experience dilution of their
ownership interest and these securities may have rights senior to those of the
holders of the common stock. If additional funds are raised by the issuance of
debt or preferred stock, it may subject the Company to certain limitations of
its operations, including limitations on the payment of dividends. If adequate
funds are not available or not available on acceptable terms, the Company may
need to scale back or discontinue operations, including our inability to fund
its expansion, successfully promote its brand name, take advantage of
acquisition opportunities, develop or enhance services or respond to competitive
pressures or execute its business strategy, any of which could have a material
adverse effect on our business, financial condition and results of operations.
3. SIGNIFICANT ACCOUNTING POLICIES
A) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting
F-8
period. Significant estimates made by management include allowance for
doubtful accounts, valuation of intangibles, estimated useful lives of
tangible and intangible assets, contingencies, percentage of completion
contracts, fair value of options and warrants and accruals. Actual
results could differ from those estimates.
B) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of
Mediconsult and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated on consolidation.
C) REVENUE RECOGNITION
The Company's revenues are derived primarily from the development and
implementation of on-line marketing and advertising programs for
pharmaceutical and other healthcare companies. Development work could
include marketing research, focus-group testing, on-line testing of
visitor preferences, and development of customized client Web sites.
Such revenues are recognized on the basis of contractual commitments
over the period of each engagement using the percentage-of-completion
method based on labor hours and costs incurred as the measure of
progress towards completion. Provisions for contract adjustments and
losses are recorded in the period that such items are identified.
Deferred revenue represents amounts billed in advance of services being
performed. Unbilled revenue represents revenue recognized but not
billed. At December 31, 1999, unbilled revenue primarily relates to one
client, Bristol-Myers Squibb. The Company has billed and collected $2
million of such unbilled revenue subsequent to December 31, 1999.
Revenue from the sale of banner advertisements is recognized ratably in
the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection is probable.
Company obligations typically include guarantees of minimum number of
"impressions", or times that an advertisement appears in pages viewed
by users of our on-line properties. To the extent minimum guaranteed
impressions are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impression levels
are achieved.
Other revenues include licensing, Internet Service Provider
subscriptions in connection with Physicians' Online, and electronic
commerce. Revenues from the licensing of content are recognized ratably
over the period of the license agreement. Subscription service revenues
are recognized over the period that services are provided.
D) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash and
cash equivalents, and accounts receivable. Cash and cash equivalents
are held at six institutions. Accounts receivable are typically
uncollateralized and are derived from revenues earned from
pharmaceutical customers primarily located in the United States and
Europe. Management performs ongoing credit evaluations of the Company's
customers and maintains reserves for potential credit losses. One
customer accounted for 75% of the accounts receivable and unbilled
revenue balance at December 31, 1999. Another customer accounted for
53% of the accounts receivable and unbilled revenue balance at December
31, 1998. During 1999 and 1998, two customers accounted for 76% and 65%
of total revenues, respectively.
F-9
E) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments which have original
maturities of three months or less, when acquired, to be cash
equivalents. The carrying amount reported in the balance sheet for cash
and cash equivalents approximates its fair value.
F) SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for
Costs of Computer Software to Be Sold, Leased or Marketed" which
requires that certain software product development costs incurred after
establishment of technological feasibility has been established, be
capitalized and amortized, commencing the general release of the
software to the public, over the economic life of the product. To date,
the Company did not incur such costs.
Software acquired from third parties or obtained in business
combinations is depreciated over its useful lives.
G) FIXED ASSETS
Property and equipment, mainly comprised of purchased computer
equipment and software is recorded at cost and depreciated using the
straight-line method over their estimated useful lives of two years.
The carrying amounts and accumulated depreciation for fixed assets sold
or retired are eliminated from the respective accounts and gains or
losses realized on disposition are reflected in the accompanying
consolidated statements of operations.
H) INTANGIBLE ASSETS
Intangible assets are comprised mainly of software, customer lists,
goodwill and the content and design of certain web sites. Intangible
assets are amortized on a straight-line basis over the estimated future
periods to be benefited ranging from three to five years.
Intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to future
undiscounted cash flows of the businesses acquired. If the assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets. To date, no impairment loss has
occurred.
I) MARKETING, SALES AND CLIENT SERVICES
Advertising costs are recorded as expense the first time an
advertisement appears. All other advertising costs are expensed as
incurred. The Company does not incur any direct-response advertising
costs.
F-10
J) EMPLOYEE STOCK OPTION COMPENSATION
The Company accounts for employee stock-based compensation in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123 "Accounting For Stock-Based Compensation." The Company
recognizes as an expense the fair value of options granted to
employees, on the date of the grant, and amortizes such expense over
the vesting period. The fair value of stock options is estimated using
the Black-Scholes option-pricing model that takes into account the
exercise price, expected life of the options, current market price of
the common stock and its expected volatility, expected dividends on the
common stock, and the risk-free interest rate based on zero-coupon U.S.
government issues with a remaining term equal to the expected life of
the options.
K) CONSULTANT STOCK OPTION AND THIRD PARTY WARRANT COMPENSATION
The fair value of options and warrants granted to non-employees for
services rendered is recognized as an expense in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
L) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of SFAS 109, "Accounting for Income Taxes." SFAS 109 requires that the
Company recognize deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined on the basis of the difference
between the tax basis of assets and liabilities and their respective
financial reporting amounts ("temporary differences") at the enacted
tax rates in effect for the years in which the temporary differences
are expected to reverse. A valuation allowance is established for any
deferred tax assets not expected to be recoverable.
M) BASIC AND DILUTED NET LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing the net loss
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss)
per share gives effect to all dilutive potential common shares
outstanding during a period, consisting primarily of the incremental
common shares issuable upon conversion of the convertible preferred
stock (using the if-converted method) and shares issuable upon the
exercise of stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Loss available to common shareholders is
computed by increasing net loss for dividends declared in the period on
preferred stock and the dividends accumulated for the period on
cumulative preferred stock from net loss.
N) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting comprehensive income (loss) and its components
in a financial statement. Comprehensive income (loss) as defined
includes all changes in equity (net assets) during a period from non-
owner sources. For all years presented, the Company's comprehensive
loss was equal to net loss.
F-11
O) SEGMENTS
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments Of
An Enterprise And Related Information." This statement establishes
standards for reporting information about operating segments in annual
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company operates in a single segment and therefore, the
adoption of SFAS 131 has had no impact on the financial statements of
the Company.
P) FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107 "Disclosure About The Fair Value Of Financial Instruments,"
requires disclosure about the fair value of certain financial
instruments. The Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued
liabilities, notes payable and advances from shareholder are carried at
cost which approximates their fair value because of the short-term
maturity of these instruments.
Q) RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
to the 1999 consolidated financial statement presentation.
R) RECENT PRONOUNCEMENTS
Management believes that the future adoption of recently issued
accounting standards will not have a material impact on the Company's
financial statements, except that the Company is currently evaluating
the future impact that Staff Accounting Bulletin 101, "Revenue
Recognition," issued in December 1999 by the Securities and Exchange
Commission, may have on the Company's financial statements in the
future.
4. ACQUISITIONS
All acquisitions were accounted for as purchased business combinations
under APB 16 "Business Combinations."
A) PHARMINFO.COM
On December 31, 1998, the Company acquired the content and design of
the PharmInfo.com Web site in exchange for 100,000 shares of
Mediconsult common stock. The total purchase price was $0.8 million,
equivalent to the quoted market price of the Company's shares on the
date of close, which was recorded as goodwill. The goodwill is being
amortized on a straight-line basis over an estimated useful life of
three years
B) CYBERDIET, INC.
On May 11, 1999, the Company completed the acquisition of CyberDiet,
LLC, which provides tailored nutritional information and programs, in
exchange for 400,000 shares of Mediconsult common stock. The total
purchase price, including acquisition costs and assumption of net
liabilities, was $2.8 million. The fair value of shares provided as
consideration was determined by the market price of the shares at the
announcement date (February 25, 1999). The excess of the purchase price
over net assets acquired was recorded as goodwill and is being
amortized on a straight-line basis over five years.
F-12
C) CYBER-TECH, INC.
On June 14, 1999, the Company acquired all of the capital stock of
Cyber-Tech, Inc. ("Cyber-Tech"), a company that has developed on-line
content and tools focused on heart disease and related areas. The
consideration paid to Cyber-Tech shareholders consisted of $3,765,000
in cash and 267,732 shares of Mediconsult common stock. Mediconsult and
the shareholders of Cyber-Tech also entered into an Escrow Agreement
with respect to certain of the shares of Mediconsult Common Stock
issued to the former Cyber-Tech shareholders. The total transaction
value, including acquisition costs, was $7.6 million. The fair value of
shares provided as consideration was determined by the market price of
the shares at the transaction date. The excess of the purchase price
over net assets acquired was allocated to goodwill and other intangible
assets. Goodwill and other intangible assets are being amortized on a
straight-line basis over an estimated useful life of three to five
years.
A summary of the total purchase price for the acquisition of Cyber-Tech
is as follows:
Cash $ 3,765,000
Mediconsult Common Stock 3,750,000
Other direct acquisition costs 99,219
-------------
$ 7,614,219
=============
A summary of the allocation of the total purchase price is as follows:
Tangible net assets acquired $ 4,403
Other intangible assets 500,000
Goodwill 7,109,816
-------------
$ 7,614,219
=============
D) MOOD SCIENCES, INC.
Mood Sciences, a company that specializes in mental health disease
management innovations, was acquired on October 27, 1999, in exchange
for 215,000 shares of Mediconsult common stock. The total purchase
price, including acquisition costs of $0.2 million and assumption of
net liabilities of $0.2 million, was $1.9 million. The fair value of
shares provided as consideration was determined by the market price of
the shares at the transaction date. The excess of the purchase price
over net assets acquired was recorded as goodwill and is being
amortized on a straight-line basis over five years.
E) PHYSICIANS' ONLINE, INC.
On December 16, 1999, the Company acquired the shares of Physicians'
Online, Inc. ("POL"), a provider of an exclusive network for physicians
in addition to on-line medical information and communications. POL
operates a secure, physicians-only environment featuring access to
medical databases, daily medical news, continuing medical education
credits, clinical symposia, e-mail accounts, Internet access, and other
services. As consideration for the acquisition, the Company issued
approximately 18.5 million shares of Mediconsult common stock. The
total value of consideration was $183.1 million, including the
assumption of debt and acquisition costs. The fair value of shares
provided as consideration to the previous shareholders was determined
by the market price of the shares at the announcement date (September
7, 1999). The effect on the purchase price of the POL vested options
was computed in accordance with SFAS 123, the value of which was not
material. Identifiable intangible assets resulting from the transaction
are amortized over periods ranging from three to five years.
F-13
A summary of the total purchase price for the acquisition of
Physicians' Online, Inc. is as follows:
Mediconsult common stock issued to POL stockholders $156,779,105
Other direct acquisition costs 6,885,346
Assumption of liabilities 20,333,786
-------------
$183,998,237
=============
A summary of the allocation of the total purchase price is as follows:
Current Assets $ 419,483
Fixed Assets 430,779
Customer list 6,206,000
Software 7,730,000
Work force 2,142,000
Trademark 6,152,000
Goodwill 160,917,975
-------------
$183,998,237
=============
The fair value assigned to intangible assets acquired was based on an
appraisal of such assets as of the date of acquisition and the assets
are being amortized on a straight-line basis over their respective
useful lives. The estimated useful life of software is three years,
work force is four years, and all other intangible assets, including
goodwill, have an estimated useful life of five years. Goodwill
represents the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired.
F) UNAUDITED PRO FORMA RESULTS OF OPERATIONS
Had the acquisitions of Pharminfo.com, CyberDiet, Cyber-Tech, and Mood
Sciences occurred on January 1, 1998, the unaudited pro forma revenue,
net loss and related basic and diluted net loss per share for the years
ended December 31, 1999 and 1998 would have been $7.0 million and $2.2
million, $29.5 million and $7.4 million, and $1.12 and $0.39,
respectively. Had the acquisition of Physicians' Online, Inc. occurred
on January 1, 1998, the unaudited pro forma revenue, net loss and
related basic and diluted net loss per share for the years ended
December 31, 1999 and 1998 would have been $12.0 million and $7.1
million, $74.7 million and $52.9 million, and $1.68 and $1.45,
respectively. Had all acquisitions occurred on January 1, 1998, the
unaudited pro forma revenue, net loss and related basic and diluted net
loss per share for the years ended December 31, 1999 and 1998 would
have been $12.6 million and $8.2 million, $77.0 million and $37.4
million, and $1.72 and $1.48, respectively. Note that the per share
data was adjusted to reflect the weighted average number of shares of
common stock as a result of the acquisitions. These unaudited pro forma
results are based on various assumptions and are not necessarily
indicative of what would have occurred had the acquisitions been
consummated on January 1, 1998.
5. PHARMA MARKETING, LLC
On September 7, 1999 the Company entered into various agreements
(collectively "Agreements") whereby, among other things, the Company
purchased a 35% membership interests of Pharma Marketing LLC ("Pharma"), an
entity organized to perform certain sales and marketing operations of the
Company and operate solely on behalf of the Company, for $1,250,000 and
200,000 shares of Mediconsult common stock. The remaining 65% of Pharma is
owned by a certain individual ("Individual"). Under the terms of the
Agreements, Pharma distributed to the individual the $1,250,000 contributed
by the Company and 100,000 of the 200,000 shares contributed by the
Company. The remaining 100,000 shares will be distributed to the individual
in the future. For financial reporting purposes, the cash contributed to
Pharma have been deemed to be cost of services provided by the Individual
F-14
and as such have been expensed. Total expense, which includes the cash
contributed, other expenses, and the fair value of Company common stock
issued to the Individual, recorded in connection with these agreements for
the year ended December 31, 1999 approximated $3,730,000. The remaining
100,000 shares of the Company's common stock to be issued to the Individual
are being accounted for in accordance with EITF 96-18. Accordingly, the
Company will be required to recognize as an expense the fair value of the
shares of common stock over the vesting period.
Mediconsult.com, Limited, a subsidiary of the Company, has entered into a
service agreement with Pharma under which Pharma agrees to provide
pharmaceutical sales and marketing services to Mediconsult.com, Limited and
its affiliates. Under this service agreement, Pharma is entitled to receive
a monthly retainer and commissions based on revenues generated under
contracts that Pharma assists in obtaining. Pharma entered into an
employment agreement with the Individual, under which, the Individual is
principally responsible for performing the services under Pharma's service
agreement with Mediconsult.com, Limited.
Subject to certain conditions described in the operating agreement, the
members of Pharma, other than Mediconsult, have the right to put their
Pharma membership interests to the Company in exchange for shares of the
Company's common stock.
6. NON-CASH FINANCING and INVESTING ACTIVITIES
Non-cash financing activities include, on April 6, 1999, in conjunction
with a public offering of the Company's common stock, $3.2 million of the
senior preferred stock and $4.3 million of the junior preferred stock were
converted to common stock. In addition, the Company assumed debt in the
amount of $5.3 million of which $4.7 million was outstanding at December
31, 1999 (Note 9). Non-cash investing activities included the acquisitions
noted in Notes 4 and 5. These resulted in a total of 19,446,569 shares
being issued with a deemed value of $166.8 million.
7. FIXED ASSETS
Fixed assets consist of the following:
December 31,
----------------------------
1999 1998
------------ -----------
Computer equipment $1,935,382 $ 132,626
Computer programming 1,019,440 223,371
Furniture and equipment 242,335 --
Leasehold improvements 24,262 --
3,221,419 355,997
Accumulated depreciation and amortization (929,647) (303,207)
------------ -----------
$2,291,772 $ 52,790
============ ===========
8. Intangible Assets
The Company's intangible assets consist of the following:
December 31,
------------------------------
1999 1998
-------------- -------------
Goodwill $ 173,517,251 $ 818,750
Other intangible assets 500,000 ---
Software 7,730,000 ---
Customer lists 6,206,000 ---
Trademarks 6,152,000 ---
Work force 2,142,000 ---
F-15
-------------- -------------
196,247,251 818,750
Accumulated amortization (3,131,770) --
-------------- -------------
$ 193,115,481 $ 818,750
============== ============
9. NOTES PAYABLE
Notes payable consist of advances from POL's shareholders made to provide
POL with working capital prior to the acquisition by Mediconsult. The notes
bear interest at 11% and are repayable as follows:
February 29, 2000 $ 2,639,551
October 31, 2000 2,334,549
-----------
Total $ 4,974,100
===========
Accrued interest payable at December 31, 1999 in the amount of $477,276 is
included in accounts payable and accrued liabilities. Subsequent to
December 31, 1999, the Company had repaid the notes payable which were due
on February 29, 2000.
10. ADVANCES FROM SHAREHOLDER
Advances from shareholder are interest free and repayable on demand.
11. CAPITAL STOCK
SENIOR PREFERRED STOCK
On February 26, 1999, the Company sold in a private placement an aggregate
of 506,329 shares of newly designated voting senior preferred stock at
$6.32 per share and warrants exercisable for five years to purchase 224,000
shares of the senior preferred stock at $6.32 per share to Nazem & Company
IV, L.P. Transatlantic Venture Fund C.V. (a joint venture of Nazem &
Company and Banque Nationale de Paris) and certain other individual
investors, for an aggregate of $ 3.2 million. The senior preferred stock
contains a redemption provision whereby the holder has the option to
receive $6.32 per share, plus declared and unpaid dividends, at any time
after February 25, 2003. In addition, the Company has recognized a senior
preferred stock dividend of approximately $859,000. Such amount represents
the intrinsic value of the beneficial conversion feature using the
conversion terms that are most beneficial to the holders. During April
1999, all shares of senior preferred stock and accumulated dividends were
converted into an equal number of common shares. As of December 31, 1999
the 224,000 warrants remain outstanding, however such warrants are
exercisable into an equal number of shares of common stock.
JUNIOR PREFERRED STOCK
In September 1998, the Board of Directors and the stockholders,
respectively, approved an amendment (the "Amendment") to the Certificate of
Designation of the Preferred Stock to, among other things,
F-16
change the existing $10 Non-Cumulative Preferred Stock to a cumulative
preferred stock and change the name to "Preferred Stock". Under the
amendment each issued and outstanding share of Preferred Stock entitles the
holder of record to receive cumulative dividends payable in additional
shares of Preferred Stock at the rate of 8% per annum, payable semi-
annually. Each share of Preferred Stock is automatically convertible into
shares of Common Stock, subject to an adjustment, upon certain occurrences.
The conversion rate of the Preferred Stock has standard anti-dilution
protections in the event of stock splits, dividends, combinations, mergers
and reorganizations, but is not protected from issuances below the base
conversion rate. No dividends were declared prior to September 30, 1998,
when dividends on such shares became cumulative. During April 1999, all
shares of junior preferred stock and accumulated dividends were converted
into 3,732,752 common shares.
12. STOCK OPTIONS
The Company maintains its 1996 Stock Option Plan (the "Plan") to provide
incentives to employees, directors and consultants. The maximum term of
options granted under the Plan is ten years. The Board of Directors has the
exclusive power over the granting of options and their vesting provisions.
During the year ended December 31, 1999, the number of shares of common
stock covered by the Plan was increased from 2,500,000 to 7,000,000.
Stock options for common stock comprise:
1999 1998 1997
--------------------------- ------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number of -------- Number of -------- Number of --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of year 2,716,000 $0.37 1,150,000 $0.25 980,000 $0.03
Granted during the year 3,627,851 5.30 2,605,050 0.38 252,000 1.03
Exercised during the year (2,236,400) 0.11 (1,028,550) 0.23 (82,000) 0.05
Canceled during the year (98,800) 4.33 (10,500) 0.29 --- ---
------------- ------------- -------------
Outstanding - End of year 4,008,651 4.50 2,716,000 $0.37 1,150,000 0.25
============= ============= =============
Exercisable - End of year 1,564,285 1.84 2,318,800 $0.12 967,000 $0.28
============= ============= =============
The options granted during the year include 1,465,151 Physicians' Online
options converted to options to acquire the Company's common stock upon the
closing of the acquisition. The weighted-average exercise price of these
options after conversion was $1.53. The number of converted shares exercisable
at December 31, 1999 was 1,050,770.
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Exercisable
- ------------------ ------------------------------------------------------------ ------------------------------------
F-17
Price Price
- ------------------ ------------------------------------------------------------ ------------------------------------
$0.50 - $3.50 1,956,151 8.11 $ 1.53 1,492,785 $ 1.53
$5.63 - $6.97 351,700 9.79 $ 6.05 9,000 $ 6.50
$7.00 - $7.97 932,500 9.71 $ 7.16 -- $--
$8.00 - $9.94 502,300 9.76 $ 8.55 58,000 $ 8.26
$11.12 - $17.25 266,000 9.28 $12.58 4,500 $11.19
During the years ended December 31, 1999 and 1998 the fair values of the
options granted to employees, recognized as deferred expense, excluding options
converted from Physicians' Online in 1999, were $13,162,050 and $1,045,976
respectively. The weighted average exercise price and weighted average fair
value of options whose exercise price was less than the market value at the
grant date during 1999 were $11.43 and $8.71, respectively. The weighted average
exercise price and weighted average fair value of options whose exercise price
was equal to the market value at the grant date during 1999 were $7.30 and
$5.85, respectively. The fair value of unvested options issued in exchange for
POL options was valued at $3,841,314. Such amount will be expensed over the
remaining vesting period.
The fair values of each option granted was estimated using the Black-
Scholes option-pricing model. The following assumptions were used in computing
the fair value of the option grants in 1999: expected volatility of the common
stock ranging between 110% and 133%; expected lives ranging from one to five
years; zero dividend yield and weighted average risk-free interest rates ranging
between 4.63% and 6.45%.
13. WARRANTS
In addition to the warrants issued in connection with the Senior preferred
stock as discussed in Note 11A, the Company issued warrants to purchase 400,000
shares of common stock at an exercise price of $1.22 per share to Arnhold and S.
Bleichroeder, Inc. in consideration of investment advisory services. These
warrants have been delivered or are being held in escrow and are deliverable as
follows: 200,000 were delivered upon initial filing of Mediconsult's secondary
offering prospectus in April 1999 and have been exercised; 100,000 were
delivered on March 15, 2000; and 100,000 will be delivered on September 15,
2000. The delivery of the remaining 100,000 warrants is subject to the continued
performance of financial advisory services for the Company by a particular
individual on behalf of this firm. Such remaining 100,000 warrants deliverable
in 2000, are being accounted for in accordance with EITF 96-18. Accordingly, the
Company will be required to recognize as an expense the fair value of the
warrants over the vesting period. These warrants, which expire on March 1,
2004, have net issue election and anti-dilution provisions comparable to the
senior preferred stock warrants. These warrants do not confer upon the holder
any voting or any other right of a stockholder. Total expense associated with
these warrants was $1.8 million during 1999.
14. Earnings per share
For each of the years ended December 31, 1999, 1998 and 1997, the Company
reported net losses and, therefore, common stock equivalents were not included
in the calculation of diluted earnings per share since such inclusion would have
been anti-dilutive. The following common stock equivalents have been excluded
from diluted per share amounts because their effect would have been anti-
dilutive:
December 31,
--------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------
F-18
Options 4,008,651 2,716,000 1,150,000
Warrants 424,000 -- --
Convertible preferred stock -- 4,300,000 2,500,000
--------------------------------------------------------------------
4,432,651 7,016,000 3,650,000
====================================================================
15. INCOME TAXES
The Company's operations are conducted by its U.S., Bermudan and Canadian
subsidiaries. The Bermuda subsidiary has received an undertaking from the
Bermuda Government exempting it from all local income, profits and capital gains
taxes until the year 2016. At the present time, no such taxes are levied in
Bermuda, however, there can be no assurance that the Bermuda subsidiary will not
be deemed to be transacting business in the U.S. by regulatory authorities and
therefore become subject to U.S. taxation. The Company and its U.S. subsidiary
are Delaware companies and the Canadian subsidiary is incorporated under the
laws of that country. The Company and its U.S. and Canadian subsidiaries are
subject to income tax, however no income tax provision has been recorded for the
years ended December 31, 1999, 1998 or 1997 as the Company has experienced net
operating losses in each year for both U.S. and foreign income tax purposes.
The primary difference between the Company's effective income tax rate and
the Federal statutory tax rate is attributable to the valuation allowance
recorded on all deferred tax assets and the difference between the U.S. and
foreign income tax rates.
The tax effect of temporary differences, net operating losses and tax
credit carryforwards as of December 31, 1999 and 1998 are as follows:
1999 1998
---------------------------------
U.S. Deferred tax assets 3,530,011 -----
Foreign Deferred tax assets 2,884,139 580,060
Valuation allowance (6,414,150) (580,060)
---------------------------------
-- --
---------------------------------
The Company has recorded a valuation allowance against all deferred tax
assets considering its history of net operating losses and uncertainty regarding
the Company's ability to generate sufficient taxable income in the future to
utilize these deferred tax assets.
As of December 31, 1999 and December 31, 1998, the Company has available,
for U.S. and Canadian tax reporting purposes, net operating loss carryforwards
of approximately $16.6 million and $1.3 million respectively which will expire
in various years through 2019. In addition, at December 31, 1999 and 1998 the
Company has no undistributed foreign earnings.
16. DEFINED CONTRIBUTION BENEFIT PLANS
Beginning in 1999, through a professional organization, NELCO Companies,
Mediconsult made available a 401K employee savings plan to the United States
based employees. The plan is not contributed to by Mediconsult. Employee
contributions are limited to the lesser of 15% of each employee's annual
compensation and the statutory limit on such contributions.
F-19
Physicians' Online established a 401K employee savings plan on January 1,
1995, which was amended on April 1, 1998. The plan is not contributed to by
Physicians' Online. Employee contributions are limited to the lesser of 15% of
each employee's annual compensation and the statutory limit on such
contributions. The Physicians' Online 401K employee savings plan was adopted by
the Company in connection with the acquisition of POL.
17. Commitments and contingencies
The Company has various operating leases in effect for corporate and
operating activities. The operating leases expire over the next one to five
years. Certain leases contain escalation charges for real estate taxes and
electricity. Rent expense for the year ended December 31, 1999 was
$497,340. Future minimum lease payments under non cancelable operating
leases are as follows:
2000............................... $ 434,000
2001............................... 227,000
2002............................... 227,000
2003............................... 218,000
2004............................... 160,000
18. Litigation
The Company's wholly owned subsidiary, POL is a defendant in a lawsuit in
which a former officer and director of POL alleges, among other things,
that POL violated securities laws in selling stock to the former officer
and that POL breached its employment agreement with the former officer.
This action is currently in the United States District Court in New York.
POL has made a motion in the United States District Court action seeking
dismissal of the action. By Order dated August 14, 1997, United States
District Court Judge for the Southern District of New York (a) dismissed
the first two counts of the former officer's Amended Complaint alleging
violation of certain provisions of the Securities Act of 1933 with
prejudice, and (b) dismissed the third, fourth and sixth counts of the
former officer's Amended Complaint alleging securities fraud, common law
fraud and negligent misrepresentation; with leave to replead. By letter
dated November 4, 1997, the former officer notified the Court of the former
officer's decision not to replead the former officer's third, fourth and
sixth counts at this time.
Management, based on the advice of its legal counsel, believes that the
ultimate outcome of this action will not have a material adverse effect
on the Company's financial position or results of operations.
The Company is also party to a number of other claims and lawsuits that are
incidental to the ordinary course of business. Management, based on the
advice of its legal counsel, believes that the outcome of any such claims
and lawsuits will not have a material adverse effect on the Company's
results of operations.
19. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1998 and 1999, advances from
shareholders of $2,169,751 and $315,000, respectively, were made to the Company,
of which $1,800,000 and $0 were converted to common stock respectively and
$30,000 and $513,610, respectively, were repaid.
The Company has an office in Hamilton, Bermuda, occupying space in the
office of Robert A. Jennings, Chief Executive Officer and shareholder, at no
cost.
F-20
20. SUBSEQUENT EVENTS
On February 11, 2000, the Company acquired Web North Star Interactive Corp.
("NIC"), an entity engaged in the development and marketing of certain market
research software and services, in exchange for 435,161 shares of the Company's
common stock in addition to cash consideration which will be determined based on
the collection of NIC accounts receivable. For the purpose of the acquisition,
the Company established Northstar Acquisition Inc., ("NAI") a wholly owned
subsidiary of the Company. On February 11, 2000, NIC merged with and into NAI.
The Company intends to amortize the intangible assets associated with the
acquisition over the estimated useful live periods ranging from three to five
years.
On March 21, 2000, the Company acquired certain assets of Doerr Consulting,
including the storknet.com URL, customer lists and other intangible and tangible
assets for a total consideration of $200,000 payable in 33,676 shares of the
Company's common stock. The Company intends to amortize the intangible assets
over their estimated useful live periods ranging from three to five years.
On March 23, 2000 the Company and Andersen Consulting LLP ("Andersen")
entered into a two years marketing alliance agreement for the joint marketing of
certain products and services to the pharmaceutical industry by the Company and
Andersen. Under the terms of the agreement, the Company will pay Andersen
marketing assistance fees calculated on the basis of revenues generated from the
sale of such products and services. The Company and Andersen also entered into a
warrant agreement under which the Company issued Andersen warrants to purchase
1,503,425 shares of the Company's common stock at an exercise price of $3.8125
per share in connection with consulting services rendered by Andersen to the
Company under a consulting services agreement signed on September 10, 1999. The
warrants have a term of five-years and vest over time, based upon consulting
services performed by Andersen on the Company's behalf. In connection with the
issuance of these warrants the Company reserved 1,503,425 shares of common stock
issuable upon exercising of these warrants. The Company will account for these
warrants in accordance with EITF 96-18 and accordingly, the fair value of the
warrants will be expenses over the respective vesting period.
On March 24, 2000, the Company entered into a non-cancelable operating
lease for office space in Philadelphia. The lease commences on April 1, 2000 and
will expire in three years. The minimum annual rent payable is $454,356.
On March 28, 2000, the Company entered into a non-cancelable operating
lease for office space in Tarrytown, NY. The lease commences on April 1, 2000
and will expire in five years. The minimum annual rent payable is $460,800.
F-21
Exhibit
Number Description
- -------- -----------
2.1 Physicians' Online Merger Agreement including Amendment No. 1 thereto (1)
2.2 Cyber-Tech Merger Agreement and Plan of Reorganization (2)
3.1 Amended and Restated Certificate of Incorporation *
3.2 Amended and Restated By-laws*
4.1 Specimen common stock certificate(3)
4.2 Form of Investor Senior Preferred Stock Warrant (3)
4.3 Form of Warrant issued to Arnhold and S. Bleichroeder, Inc. (3)
10.1 Amended and Restated Mediconsult 1996 Stock Option Plan (1)
10.2 Amended and Restated Physicians' Online 1994 Stock Option Plan (1)
10.3 Escrow Agreement, dated June 14, 1999, among Mediconsult.com, Inc.,
Cyber-Tech, Inc., Andre Pilevsky, Daniel Rader, M.D and SunTrust Bank (2)
10.4 Escrow Agreement, dated December 16, 1999, among Mediconsult.com, Inc., Physicians' Online,
Inc., Jason Fisherman as representative, and The Wilmington Trust Company (1)
10.5 Worldwide Web Server Agreement dated November 6, 1996 between Tvisions, Inc. and
Mediconsult.com Limited (4)
10.6 Operating Agreement of Pharma Marketing, LLC, Dated September 7, 1999*
10.7 Service Agreement, dated September 7, 1999, between Pharma Marketing, LLC and
Mediconsult.com., Inc.*
10.8 Membership Investment Agreement, dated September 7, 1999, between Pharma Marketing, LLC and
Mediconsult.com, Inc.*
10.9 Letter agreement dated December 30, 1998 among the Company, Pharmaceutical Information
Associates, Ltd., VirSci Corporation and Pharmaceutical Information.Net, Inc. (3)
10.10 Consulting Agreement dated March 3, 1997 between the Company and IBM Canada
10.11 Source Code License Agreement dated February 26, 1999 between Tvisions, Inc. and
Mediconsult.com Limited (3)
10.12 Agreement between Brystol-Meyers Squibb Company and Mediconsult.com Limited, dated as of
September 30, 1999 *
10.13 Agreement between the Company and Novartis Pharma AG (3)
10.14 Exclusive Sponsorship Agreement dated as of January 15, 1999 between InterNational Council
on Infertility Information Dissemination and Mediconsult.com Limited (3)
10.15 Employment Agreement effective as of January 1, 1999, between 3542491 Canada Inc. and David
J. Austin (3)
10.16 Employment Agreement effective as of January 1, 1999, between Mediconsult.com Limited and
Robert A. Jennings (3)
10.17 Employment Agreement effective as of January 1, 1999, between 3542491 Canada Inc. and Ian
Sutcliffe (3)
10.18 Employment Agreement dated as of April 1, 1999 between the Company and E. Michael Ingram (3)
10.19 Employment Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd. and Andre Pilevsky (2)
10.20 Employment Agreement, dated September 7, 1999, between Pharma Marketing, LLC and Timothy J.
McIntyre.*
10.21 Noncompetition Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd. and Andre
Pilevsky (2)
10.22 Noncompetition Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd. and
Sharon Weinberg (2)
10.23 Noncompetition Agreement, dated June 14, 1999, between Mediconsult.com (US), Ltd. and
Daniel Rader, M.D(2)
10.24 Stock Purchase Agreement dated as of February 26, 1999 between the Company and the
Investors named therein (3)
10.25 Registration Rights Agreement dated February 26, 1999, among the Company and the Investors
named therein (3)
10.26 Stockholders' Agreement dated February 26, 1999 among the Company, the Founders identified
therein and the Investors identified on Schedule 1 thereto (3)
10.27 Registration Rights Agreement dated as of February 26, 1999 between the Company and Arnhold
and S. Bleichroeder, Inc. (3)
21.1 Subsidiaries of the Company*
23.1 Consent of PricewaterhouseCoopers*
27.1 Financial Data Schedule*
- ----------
* Filed electronically herewith.
(1) Exhibits are incorporated by reference to the Annexes to Mediconsult's
joint information/proxy statement/prospectus on Schedule 14C (File No. 000-
29282) filed November 19, 1999
(2) Exhibits are incorporated by reference to Mediconsult's Current Report on
Form 8-K (File No. 333-73059) filed June 29, 1999
(3) Exhibits are incorporated by reference to Mediconsult's Registration
Statement on Form S-1 (Registration No. 333-73059) filed April 2, 1999
(4) Exhibits are incorporated by reference to Mediconsult's Registration
Statement on Form 10-SB (File No. 333-21883) filed December 16, 1996