UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-27567
HEALTHCENTRAL.COM
(Exact name of registrant as specified in its charter)
Delaware 94-3250851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6005 Shellmound Street, Suite 250
Emeryville, CA 94608
(Address of principal executive offices, including zip code)
(510) 250-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of August 10 2001, there were 1,041,996 shares of the registrant's
Common Stock outstanding.
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HealthCentral.com
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31,
2001 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,445 $ 14,208
Restricted cash................................................. 537 -
Accounts receivable, net of allowance for doubtful accounts of
$99 and $84, respectively...................................... 1,917 3,059
Prepaid expenses and other current assets....................... 1,962 2,065
Inventory....................................................... 6,552 9,006
--------- ---------
Total current assets......................................... 12,413 28,338
Property and equipment, net..................................... 6,210 11,686
Other assets.................................................... 203 440
Intangible assets, net.......................................... 4,118 4,922
--------- ---------
Total assets................................................. $ 22,944 $ 45,386
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 7,136 $ 12,258
Accrued expenses................................................ 2,841 3,701
Deferred revenue and other current liabilities.................. 981 1,280
Current portion of obligations under capital leases............. 2,193 3,258
--------- ---------
Total current liabilities.................................... 13,151 20,497
Deferred rent................................................... - 195
Obligations under capital leases................................ 920 1,289
Long-term debt.................................................. 1,773 -
--------- ---------
Total liabilities............................................ 15,844 21,981
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Convertible preferred stock..................................... 2,045 7,275
Common stock.................................................... 53 50
Additional paid-in capital...................................... 217,498 210,831
Notes receivable from stockholders.............................. (65) (65)
Deferred stock compensation..................................... (718) (1,487)
Accumulated deficit............................................. (211,713) (193,199)
--------- ---------
Total stockholders' equity................................... 7,100 23,405
--------- ---------
Total liabilities and stockholders' equity................... $ 22,944 $ 45,386
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
HealthCentral.com
Condensed Consolidated Statement of Operations
(unaudited, in thousands except for per share amounts)
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
E-commerce and other product sales.......................... $ 8,480 $ 10,087 $ 20,701 $ 19,992
Advertising, content and other.............................. 1,094 758 1,699 1,390
-------- -------- -------- --------
Total revenues............................................ 9,574 10,845 22,400 21,382
-------- -------- -------- --------
Operating and other expenses:
Cost of e-commerce and other product sales.................. 6,275 8,735 14,313 18,066
Cost of other product sales - restructuring................. 375 - 375 -
Content and product development ............................ 984 3,269 2,181 6,077
Sales and marketing ........................................ 6,458 13,932 13,635 36,542
General and administrative.................................. 1,306 2,592 3,369 5,233
Amortization of intangible assets .......................... 329 3,556 657 7,099
Stock compensation ......................................... 243 530 369 1,117
Asset impairment charge..................................... 2,899 - 3,779 -
Restructuring charge ....................................... 1,003 - 1,829 -
Acquisition costs........................................... - 2,428 - 2,462
-------- -------- -------- --------
Total operating and other expenses ....................... 19,872 35,042 40,507 76,596
-------- -------- -------- --------
Loss from operations ........................................... (10,298) (24,197) (18,107) (55,216)
Other income (expense), net .................................... - (20) 1 (20)
Interest expense - amortization of warrants..................... (89) - (89) -
Interest income (expense), net ................................. (190) 794 (318) 1,791
-------- -------- -------- --------
Net loss ....................................................... $(10,577) $(23,423) $(18,513) $(53,444)
======== ======== ======== ========
Basic and diluted net loss per share ........................... $ (10.43) $ (38.55) $ (18.32) $ (92.52)
Shares used in computing basic and diluted net loss per share... 1,015 608 1,011 578
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
HealthCentral.com
Condensed Consolidated Statement of Cash Flows
(unaudited, in thousands)
Six months ended June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss................................................................. $(18,513) $(53,444)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock compensation expense............................................ 369 1,118
Depreciation and amortization expense................................. 2,545 8,333
Asset impairment charge............................................... 3,779 -
Non-cash restructuring charge......................................... 138 -
Amortization of stock warrants issued with long-term debt............. 89 -
Changes in assets and liabilities:
Accounts receivable.................................................. 1,142 (1,109)
Prepaid expenses and other assets.................................... 202 1,933
Inventory............................................................ 2,455 (435)
Accounts payable..................................................... (5,122) 5,270
Accrued expenses..................................................... (840) 4,470
Deferred revenue and other liabilities............................... (494) 309
-------- --------
Net cash used in operating activities............................... (14,250) (33,555)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment...................................... (44) (3,538)
Restricted cash......................................................... (537) -
Payments to related party............................................... - (4,786)
-------- --------
Net cash used in investing activities............................... (581) (8,324)
-------- --------
Cash flows from financing activities:
Payments on capital leases.............................................. (1,434) (170)
Proceeds from issuance of long-term debt................................ 3,500 -
Proceeds from the issuance of common stock and common stock warrants.... 2 97
-------- --------
Net cash provided by (used in) financing activities................. 2,068 (73)
-------- --------
Net decrease in cash and cash equivalents................................ (12,763) (41,952)
Cash and cash equivalents at beginning of period......................... 14,208 83,690
-------- --------
Cash and cash equivalents at end of period............................... $ 1,445 $ 41,738
======== ========
Supplemental disclosures of non-cash investing and
financing activities:
Deferred stock compensation............................................. $ (400) $ (907)
Stock warrants and options issued in connection with agreements......... 1,837 (13)
Assets acquired under capital leases.................................... - 36
Revaluation of stock warrants issued for agreements..................... - (330)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
HEALTHCENTRAL.COM
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Business
HealthCentral.com (the "Company") is a leading provider of online healthcare-
related e-commerce and content to consumers through its network of websites,
which include WebRx.com, ComfortLiving.com, Vitamins.com, HealthCentral.com and
RxList.com, and through its Vitamins.com mail order and retail operations. In
addition, the Company designs, hosts and maintains healthcare institutions'
websites for healthcare content and e-commerce. HealthCentral.com offers more
than 20,000 SKU's of health, beauty, nutraceuticals, home and personal care
products, prescription drugs and vision products. The Company also offers user-
friendly interactive tools, customized health information pages, personalized
health risk assessments and topical newsletters.
The Company derives revenue from e-commerce, mail order and other product sales,
which consists of prescription and non-prescription drugs, over-the-counter
health and beauty aid products, nutraceuticals, vitamins, minerals, supplements,
back care products, baby care products, maternity care products, allergy care
products and other specialty health and wellness products. The Company also
derives revenue from advertising and vendor sponsorship agreements, as well as
from annual license fees for applications, content, hosting and maintenance
services for healthcare institutions' websites.
On May 24, 2001, the Company outsourced its pharmacy fulfillment activities. As
a result, the Company receives a transaction fee for each prescription referral
and no longer derives revenue from the sale of prescription pharmaceutical
products (see Note 10).
On June 4, 2001, the Company closed its remaining six unprofitable brick-and-
mortar retail vitamins stores. The Company plans on opening additional retail
stores in the future.
On June 19, 2001, the Company terminated its procurement and supply agreement
with Invision Optical Products and its sales and distribution agreement with
Cable Car Eyewear related to the Dr. Dean Edell brand of eyewear.
Simultaneously, the Company entered into a royalty agreement with Cable Car
Eyewear and Dr. Dean Edell that grants Cable Car Eyewear the exclusive rights to
manufacture, distribute, market and sell the Dr. Dean Edell brand of eyewear in
exchange for royalty payments. Subsequently, on August 8, 2001, the Company
assigned all of its exclusive rights related to the manufacture and distribution
of eyewear products with the Dr. Dean Edell name and likeness to an unaffiliated
private party. As a result, the Company no longer derives product sales or
royalty revenue from the sale of eyewear (see Notes 10 and 11).
Note 2 Need For Additional Financing and Nasdaq Listing
The Company has sustained net operating losses and negative cash flows from
operations since its inception. In the past, the Company experienced substantial
increases in expenditures consistent with its growth in operations and
personnel, both internally and through multiple acquisitions. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The Company has
previously financed operations through the issuance of preferred stock, the
issuance of notes payable, an initial public offering completed in December 1999
for $74.7 million in cash, through capital leases, and the proceeds of the long-
term debt financing entered into in May 2001 (see Note 8). The Company's current
cash and cash equivalents are expected to be sufficient to satisfy its liquidity
requirements through approximately 2001, provided that the Company achieves its
targeted revenues, efficiencies and cost reductions, restructures certain
partnerships and other relationships and completes certain asset sales and
collects certain accounts receivables in a timely manner. However, there can be
no assurance that the Company will not need additional funds from the issuance
of additional equity or debt securities, funds from credit facilities and/or
from the sale of certain assets, none of which may be achieved.
On April 5, 2001, the Company received a notice from Nasdaq that its stock would
be delisted from the Nasdaq National Market because the stock failed to maintain
a minimum closing bid price of $1.00 for the requisite 10 day period during the
90 calendar day grace period. The Company appealed that determination and a
hearing before a Nasdaq Listing Qualifications Panel was held on May 31, 2001.
Since the hearing, the Company effected a 1-for-50 reverse stock split on June
28, 2001 and has been successful at maintaining a minimum closing bid price
above $1.00. On July 20, 2001, the Company received a determination on its
continued listing by Nasdaq. The Panel determined that while the Company has
satisfied the minimum bid price requirement of at least $1.00 per share, the
Company does not currently satisfy the $5,000,000 market value of public float
threshold. While the Panel agreed to continue the listing of the Company's
securities on the Nasdaq National Market, the Company's stock did not
6
achieve a market value of public float of at least $5,000,000 for the 30-
consecutive trading day period ending August 9, 2001. Thus, the Company expects
that the Panel will render a determination as to whether the continued listing
of the Company's securities on the Nasdaq National Market is warranted and
whether a cure period will be granted. Should the Panel determine not to allow
the continued listing of the Company's stock on the Nasdaq National Market, the
Company believes it will qualify for listing on the Nasdaq Small Cap Market.
Note 3 Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life.) The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired prior to
July 1, 2001. The Company is required to adopt FAS 142 effective January 1,
2002. HealthCentral is currently evaluating the effect that adoption of the
provisions of FAS 142 will have on its results of operations and financial
position.
Note 4 Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's report to the
Securities and Exchange Commission on Form 10-K, as amended, for the year ended
December 31, 2000. Operating results for the six months ended June 30, 2001 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 2001. The unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for financial statements.
Reverse Stock Split
On June 28, 2001, the Company effected a 1-for-50 reverse stock split of the
outstanding shares of common stock. All prior share and per share amounts have
been restated to reflect the reverse stock split.
Revenue Recognition
E-commerce and other product sales are recognized for over-the-counter health
and beauty aid products, vitamins, minerals, supplements, baby and maternity
products, allergy care and back care products, net of discounts, when products
are shipped to customers or sold through its retail stores. Net sales include
outbound shipping and handling fees charged to customers. Revenue in the first
quarter 2001 also included the wholesale revenue from the sale of "Dr. Dean
Edell Eyewear" brand eyeglasses to the Company's brick and mortar distribution
partner. Prior to the outsourcing of the pharmacy fulfillment function on May
24, 2001, revenue included sales from pharmaceutical products. All revenues are
recognized, net of allowances for product returns, promotional discounts and
coupons, at the time the products are shipped to the customer for e-commerce
sales and at the point of sale for retail stores. The Company is responsible for
all refunds relating to all sales where a customer is not satisfied with the
products received. The Company records an estimated allowance for such returns
in the period of sale and also retains the credit risk for all sales.
Advertising revenues are recognized in the period the advertising impressions
are delivered to customers. The Company uses an outside vendor to solicit
customers to use the Company's advertising services, to serve the ads to the
Company's websites and to bill and collect for these services. This outside
vendor provides monthly reports indicating the impressions delivered, the
amounts billed for advertising services and the related administrative fee. The
Company recognizes advertising revenues, as reported by the outside vendor, net
of this administrative fee, as the Company bears no collection risk for the
gross amount of the advertising fees. The advertising contracts do not guarantee
a minimum number of impressions to be delivered. The Company also enters into
vendor sponsorship agreements and provides customers with enhanced promotional
opportunities and co-branded web pages.
7
Content and other revenues are derived from contracts with healthcare
providers, health product resellers, and third party organizations and consist
of license fees for website development applications, consulting fees from
custom website development and hosting, and maintenance fees related to the
websites' maintenance. The Company recognizes software license revenue under
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9,
Modifications of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. When contracts contain multiple elements and vendor-specific
objective evidence exists for all undelivered elements, the Company accounts for
the delivered elements in accordance with the "Residual Method" prescribed by
SOP 98-9. For consulting projects, revenues are recognized at the time services
are rendered based on charges for time and materials. Deferred revenues
represent the amount of cash received or services performed and billed prior to
revenue recognition. In addition, effective May 24, 2001, the Company began
recognizing transaction fees from the fulfillment of outsourced prescriptions,
and from April 1, 2001 through August 8, 2001, the Company recognized revenues
from the receipt of royalty fees from the sale of Dr. Dean Edell eyewear (see
Note 11).
Concentration of Credit Risk
At June 30, 2001 and December 31, 2000, the Company had approximately 56% and
70%, respectively, in accounts receivable balances with one customer.
Inventory
Inventory, which consists primarily of finished goods, is valued at the lower of
cost or market, with cost determined using the weighted-average method.
Note 5 Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. Basic and
diluted net loss per share are computed by dividing the net loss for the period
by the weighted average number of shares of common stock outstanding during the
period. The calculation of diluted net loss per share excludes potential common
stock if the effect is antidilutive. Potential common stock consists of
convertible preferred stock and incremental common shares issuable upon the
exercise of stock options and warrants.
The following table sets forth potential shares of common stock that are not
included in the computation of diluted net loss per share because to do so would
be antidilutive for the periods indicated:
June 30
(in thousands)
2001 2000
---- ----
Convertible preferred stock......................... 14 -
Common stock warrants............................... 350 2
Common stock options................................ 71 62
Common stock subject to repurchase.................. -- 4
---- --
Total........................................... 435 68
==== ==
Note 6 Segment Information
Based on the criteria established by SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, the Company operates in three principal
business segments. The three segments are e-commerce and mail order sales,
retail store sales and advertising, content and other. E-commerce and mail order
sales consist of online and mail order catalog sales of health-related products.
Retail store sales include sales of health-related products through our brick-
and-mortar stores up through the closing of the remaining six unprofitable
stores on June 4, 2001 and through any new stores in the future. Advertising,
content and other revenues primarily include amounts derived from delivering
advertising impressions to companies, revenues from vendor sponsorship
agreements, royalty fees from the sale of Dr. Dean Edell eyewear, transaction
fees from the fulfillment of outsourced prescriptions, and fees from providing
website development and related services to healthcare providers and other
commercial organizations. The Company does not report any information regarding
costs by business segment as management does not produce such information to
measure the performance of the Company's segments.
8
Revenues by business segment are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(in thousands)
------------
2001 2000 2001 2000
---- ---- ---- ----
Segment:
E-commerce and mail order sales ...................... $7,493 $ 8,216 $18,240 $16,092
Retail store sales ................................... 987 1,871 2,461 3,900
Advertising, content and other ....................... 1,094 758 1,699 1,390
------ ------- ------- -------
Total revenue ................ $9,574 $10,845 $22,400 $21,382
====== ======= ======= =======
Note 7 Restructuring Charges
On April 23, 2001, the Company consolidated its Comfort Living warehouse,
customer service operations and administrative functions into its Kentucky
fulfillment center, Virginia customer service center and Company headquarters in
California. The Company recorded a charge associated with this consolidation of
approximately $362,000 which consisted of approximately $141,000 in
restructuring charges and $221,000 in asset impairment charges. The
restructuring charge was comprised of $97,000 in lease termination payments,
$34,000 in employee severance and benefits for 16 warehouse and administrative
employees, and $10,000 in cleaning and disposal charges. The asset impairment
charge was recorded in conjunction with the write-off of fixed assets with
little or no resale value.
In May 2001, the Company consolidated the L&H Catalog division into its existing
operations. The Company recorded a charge associated with this consolidation of
approximately $688,000 which consisted of approximately $189,000 in
restructuring charges and $499,000 in asset impairment charges. The
restructuring charge was comprised of severance, benefits and related legal fees
in connection with the consolidation and termination of 19 warehouse and
administrative employees. The asset impairment charge was recorded in
conjunction with the write-off of fixed assets with little or no resale value.
On May 24, 2001, the Company outsourced its pharmacy fulfillment function. The
Company recorded a charge associated with the outsourcing initiative of
approximately $414,000 which consisted of approximately $409,000 in asset
impairment charges and $5,000 in restructuring charges. The asset impairment
charge was recorded in conjunction with the write-down of $278,000 in leasehold
improvements and the write-down of $131,000 for the pharmacy fulfillment system.
The restructuring charge was comprised of severance and benefits expenses
associated with termination of 3 pharmacy employees.
The Company recorded an additional restructuring charge of $130,000 in the
second quarter of 2001 related to the closure of four unprofitable retail
Vitamins.com stores in February 2001. These additional charges are associated
with estimates of lease termination and cleaning and disposal charges which have
been revised.
On June 4, 2001, the Company closed its six remaining unprofitable retail
Vitamins.com stores. The Company recorded a charge associated with the closure
of the stores of approximately $1.8 million which consisted of $1.3 million in
asset impairment charges and approximately $519,000 in restructuring charges.
The asset impairment charge was recorded in conjunction with the write-off of
customized fixed assets with little or no resale value. The restructuring charge
was comprised of $34,000 in employee severance and benefits for 30 store
employees, $375,000 in lease termination payments, $55,000 in cleaning and
disposal charges, $33,000 in non-recoverable pre-payments and deposits and
$22,000 in miscellaneous closing expenses.
In June 2001, the Company recorded a $445,000 asset impairment charge associated
with a software development project and related to web development services,
maintenance services and systems management services (see Note 9).
In June 2001, the Company reduced its general and administrative workforce. The
Company recorded a restructuring charge of $19,000 comprised of employee
severance and benefits associated with the termination of 6 general and
administrative employees.
A summary of the restructuring costs and other special charges for the 6 months
ended June 30, 2001, is outlined as follows:
9
Restructuring
Total Noncash Cash Liabilities at
Charge Charges Charges June 30, 2001
------ ------- ------- --------------
Workforce reduction....................................... $ 613 $ - S 250 $ 364
Closure of unprofitable retail stores..................... 840 138 121 581
Consolidation of excess facilities and other charges...... 376 - 59 316
Impairment of long-lived assets due to restructuring...... 3,779 3,779 - -
------ ------ ----- ------
Total............................................ $5,608 $3,917 $ 430 $1,261
====== ====== ===== ======
Note 8 Long-Term Debt Financing
In May and June 2001, the Company issued a total of $3.5 million of long-term
notes due on December 31, 2003. Under the terms of the notes, interest is fixed
at 8.5% to be paid monthly in arrears. The debt is secured by the Company's
inventory and receivables under a UCC-1 filing. Additionally, each lender
received a warrant to purchase one share of the Company's common stock for each
$10 loaned to the Company. The warrants are immediately exercisable for a period
of five years and carry an exercise price equal to the average closing sale
price for the twenty trading days prior to the date of the warrant. The Company
valued the warrants using the Black-Scholes option pricing model using an
expected life of five years, a weighted average risk-free rate of between 4.76%
and 5.06%, depending upon the closing date, expected dividend yield of zero
percent, a volatility of 201% and a deemed value of the common stock between $10
and $18 per share, depending upon the closing date. The estimated allocated
fair value of the warrants of $1.8 million will be amortized over the period of
the borrowing agreement and included as interest expense in the statement of
operations until the notes mature on December 31, 2003. Of the total funds,
$500,000 came from Company insiders.
The notes have a covenant which requires that the outstanding amount of
principal not exceed the sum of fifty percent (50%) of the Company's inventory
plus eighty percent (80%) of the accounts receivable that are not more than 90
days past due. The Company was in compliance with this covenant during the
second quarter 2001.
Note 9 Commitments and Contingencies
In December 1999, the Company entered into an eleven month agreement with
Microsoft Corporation ("Microsoft") whereby the Company would be the premier
provider of health and fitness newsletters to Microsoft News Hotmail
subscribers. The agreement provided that the Company pay Microsoft a minimum fee
of $1,833,000 based on $.01 per copy distributed to each subscriber, but not to
exceed $2,433,000 over the term of the contract. In addition, the agreement
provided that the Company purchase an aggregate of $640,000 in advertising from
Microsoft during the term of the agreement. These expenses were accrued ratably
over the term of the agreement. As of June 30, 2001, the Company had paid
approximately $1.9 million under this agreement. In addition, Vitamins.com
entered into an agreement with Microsoft in November 1999 for advertising
services and terminated this contract in June 2000, claiming breach of contract.
The Company and Microsoft are in dispute over the breach of contract claim. On
May 4, 2001, the Company tendered an offer to settle all outstanding contract
claims between the parties to date. Microsoft has made a counter-proposal, and
discussions are continuing. However, if Microsoft were to prevail on its claim
with regard to the Vitamins.com agreement, the Company could face substantial
payment obligations.
On December 28, 2000, Bergen Brunswig Drug Company and its wholly owned
subsidiary, Medi-Mail, filed an action in Orange County, California Superior
Court (Case No. 00CC15552) against HealthCentral.com and more.com. The complaint
alleges inducement of breach of contract and fraudulent conveyance by
HealthCentral.com and breach of contract by more.com arising out of
HealthCentral's acquisition of certain of the assets of more.com. The complaint
alleges monetary damages of approximately $6 million. The Company has retained
the law firm of Rutan & Tucker, LLP to vigorously defend against this claim. The
parties have commenced settlement negotiations.
On January 29, 2001, XOR, Inc. filed an action in Adams County, Colorado
District Court against HealthCentral.com. The complaint alleges breach of
contract, unjust enrichment and promissory estoppel. The complaint alleges
monetary damages of approximately $1.3 million. The Company has responded with
an answer and counter claim for breach of contract, and is vigorously defending
this claim. In June 2001, the Company recorded a $445,000 asset impairment
charge associated with the write-off of this unfinished software development
project.
On March 29, 2001, an employee was formally notified that his promissory note,
due March 5, 2000 for $59,000 plus accrued interest and penalties, was past due
and payable immediately. The employee has responded that this note was forgiven
and returned by the Vitamins.com board of directors, but has not specified when
this action was allegedly performed, and as of March
10
2001 had asked the Company to forgive such note. The Company is actively
pursuing collection. The ultimate collectibility of this promissory note is
uncertain, however, no reserve has been provided at June 30, 2001.
The Company is involved in litigation from time to time that is routine in
nature and incidental to the conduct of its business.
Note 10 Contracts
On May 24, 2001, the Company entered into a five year contract, terminable on
180 days written notice, with Familymeds, Inc., a retailer of prescription
medications, to administer and fulfill all of its pharmacy orders. Under the
terms of the contract, Familymeds is required to pay the Company a transaction
fee based on the volume of prescriptions fulfilled. In addition, Familymeds,
Inc. purchased the Company's existing pharmaceutical inventory for approximately
$127,000.
On June 19, 2001, the Company terminated its procurement and supply agreement
with Invision Optical Products and its sales and distribution agreement with
Cable Car Eyewear related to the Dr. Dean Edell brand of eyewear.
Simultaneously, the Company entered into a five year royalty agreement with
Cable Car Eyewear and Dr. Dean Edell that grants Cable Car Eyewear the exclusive
rights to manufacture, distribute, market and sell the Dr. Dean Edell brand of
eyewear in exchange for a royalty payment. Additionally, beginning April 1,
2001, Cable Car Eyewear will pay the Company a quarterly contract maintenance
fee.
Note 11 Subsequent Events
On July 20, 2001, the Company entered into a Settlement and Release of Claims
Agreement with a former officer of the Company. Under the terms of the
settlement agreement, the former employee will receive twelve payments of
approximately $19,400 beginning July 20, 2001, which total $232,800.
On August 8, 2001, the Company signed an Assignment and Sale Agreement, which
transferred all of its exclusive rights related to eyewear products and future
royalty and maintenance fees to the Dr. Dean Edell name and likeness, to an
unaffiliated private party for $2,500,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included elsewhere in this
Form 10-Q. This discussion and analysis and other parts of this Form 10-Q
contain forward-looking statements that involve risks, uncertainties and
assumptions. These forward-looking statements are based on our current
expectations and are not guarantees of future performance. Actual results may
differ materially from those anticipated in these forward-looking statements, as
a result of many factors, including but not limited to those discussed in the
section entitled "Risk Factors That May Affect Future Results and Market Price
of Stock." The cautionary statements made in this Report should be read as being
applicable to all related forward-looking statements wherever they appear in
this Report. Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis only as of the date
hereof. We undertake no obligation to revise or publicly release the results of
any revision to these forward looking statements.
Overview
HealthCentral.com is a leading provider of online healthcare related e-commerce
and content to consumers through our network of websites, which includes
WebRx.com, Vitamins.com, HealthCentral.com, RxList.com, DrugEmporium.com and
ComfortLiving.com, and through our Vitamins.com mail order and retail
operations. In addition, we design, host and maintain healthcare institutions'
websites for healthcare content and e-commerce. We offer more than 20,000 SKU's
of health, beauty, nutraceuticals, home and personal care products. We also
offer user-friendly interactive tools, customized health information pages,
personalized health risk assessments and topical newsletters.
E-commerce and other product sales are recognized for over-the-counter health
and beauty aid products, vitamins, minerals, supplements, baby and maternity
products, allergy care and back care products, net of discounts, when products
are shipped to customers or sold through its retail stores. Net sales include
outbound shipping and handling fees charged to customers. Revenue also included
the wholesale revenue from the sale of "Dr. Dean Edell Eyewear" brand eyeglasses
to the Company's brick and mortar distribution partner of $2.4 million. Prior
to the outsourcing of the pharmacy fulfillment function from January 1, 2001 to
11
May 24, 2001, revenue included sales of $734,000 from pharmaceutical products.
All revenues are recognized, net of allowances for product returns, promotional
discounts and coupons, at the time the products are shipped to the customer for
e-commerce sales and at the point of sale for retail stores. We are responsible
for all refunds relating to all sales where a customer is not satisfied with the
products received. We record an estimated allowance for such returns in the
period of sale and also retain the credit risk for all sales.
Advertising revenues are recognized in the period the advertising impressions
are delivered to customers. We use an outside vendor to solicit customers to use
our advertising services, to serve the ads to our websites and to bill and
collect for these services. This outside vendor provides monthly reports
indicating the impressions delivered, the amounts billed for advertising
services and the related administrative fee. We recognize advertising revenues,
as reported by the outside vendor, net of this administrative fee, as we bear no
collection risk for the gross amount of the advertising fees. The advertising
contracts do not guarantee a minimum number of impressions to be delivered. We
also enter into vendor sponsorship agreements and provide customers with
enhanced promotional opportunities and co-branded web pages.
Content and other revenues are derived from contracts with healthcare providers,
health product resellers, and third party organizations and consist of license
fees for website development applications, consulting fees from custom website
development and hosting, and maintenance fees related to the websites'
maintenance. We recognize software license revenue under SOP 97-2, Software
Revenue Recognition, and SOP 98-9, Modifications of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. When contracts contain
multiple elements and vendor-specific objective evidence exists for all
undelivered elements, we account for the delivered elements in accordance with
the "Residual Method" prescribed by SOP 98-9. For consulting projects, revenues
are recognized at the time services are rendered based on charges for time and
materials. Deferred revenues represent the amount of cash received or services
performed and billed prior to revenue recognition. In addition, effective May
24, 2001, we began recognizing transaction fees from the fulfillment of
outsourced prescriptions, and from April 1, 2001 through August 8, 2001, we
recognized revenues from the receipt of royalty fees from the sale of Dr. Dean
Edell eyewear.
We incurred net losses of approximately $10.6 million and $18.5 million for the
three and six months ended June 30, 2001, respectively, compared to $23.4
million and $53.4 million for the three and six months ended June 30, 2000,
respectively. We are currently targeting to breakeven on our bottom line
(excluding non-cash items and other charges) on a monthly basis prior to year
end, provided that we achieve our targeted revenues, efficiencies and cost
reductions, restructure certain partnerships and other relationships and
complete certain asset sales and collect certain accounts receivables in a
timely manner.
Current Developments
Restructuring Costs and Other Special Charges
During the second quarter of 2001, we focused and prioritized our restructuring
activities around the more profitable areas of our business, that we determined
to have higher growth potential, continued to reduce expenses and consolidated
facilities to improve our efficiencies.
The following paragraphs provide detailed information relating to the
restructuring costs and other special charges, which were recorded during the
second quarter of 2001:
- consolidation of the Comfort Living warehouse, customer service
operations and administrative functions into the Kentucky fulfillment
center, Virginia customer service center and our headquarters in
California on April 23, 2001. We recorded a charge associated with this
consolidation of approximately $362,000 which consisted of
approximately $141,000 in restructuring charges and $221,000 in asset
impairment charges. The restructuring charge was comprised of $97,000
in lease termination payments, $34,000 in employee severance and
benefits for 16 warehouse and administrative employees, and $10,000 in
cleaning and disposal charges. The asset impairment charge was recorded
in conjunction with the write-off of fixed assets with little or no
resale value;
- consolidation of the L&H Catalog division into the existing operations,
which occurred in May 2001. We recorded a charge associated with this
consolidation of approximately $688,000 which consisted of
approximately $189,000 in restructuring charges and $499,000 in asset
impairment charges. The restructuring charge was comprised of
severance, benefits and related legal fees in connection with the
consolidation and termination of 19 warehouse and administrative
employees. The asset impairment charge was recorded in conjunction with
the write-off of fixed assets with little or no resale value;
- recorded an additional restructuring charge of $130,000 primarily
associated with lease termination and cleaning and disposal charges for
the four unprofitable retail Vitamins.com stores closed in February
2001. These additional charges are associated with estimates of lease
termination and cleaning and disposal charges which have
12
been revised;
- closure of six unprofitable retail Vitamins.com stores on June 4, 2001.
We recorded a charge associated with the closure of the six stores of
approximately $1.8 million which consisted of $1.3 million in asset
impairment charges and approximately $519,000 in restructuring charges.
The asset impairment charge was recorded in conjunction with the write-
off of customized fixed assets with little or no resale value. The
restructuring charge was comprised of $34,000 in employee severance and
benefits for 30 store employees, $375,000 in lease termination
payments, $55,000 in cleaning and disposal charges, $33,000 in non-
recoverable pre-payments and deposits and $22,000 in miscellaneous
closing expenses;
- outsourcing of our pharmacy fulfillment function on May 24, 2001. We
recorded a charge associated with the outsourcing of the pharmacy
fulfillment of approximately $414,000, which consisted of approximately
$409,000 in asset impairment charges and $5,000 in restructuring
charges. The asset impairment charge was recorded in conjunction with
the write-down of $278,000 in leasehold improvements and the write-down
of $131,000 for our pharmacy fulfillment system. The restructuring
charge was comprised of severance and benefits expenses associated with
termination of 3 pharmacy employees;
- discontinuance of a software development program. We recorded a
$445,000 asset impairment charge associated with the capitalized value
of the software development project related to web development
services;
- reduction in workforce in the general and administrative group in June
2001. We recorded a restructuring charge of $19,000 comprised of
employee severance and benefits associated with the termination of 6
general and administrative employees.
A summary of the restructuring costs and other special charges for the 6 months
ended June 30, 2001 is outlined as follows:
Restructuring
Total Noncash Cash Liabilities at
Charge Charges Charges June 30, 2001
------ ------- ------- --------------
Workforce reduction..................................... $ 613 $ - $250 $ 364
Closure of unprofitable retail stores................... 840 138 121 581
Consolidation of excess facilities and other charges.... 376 - 59 316
Impairment of long-lived assets due to restructuring.... 3,779 3,779 - -
------ ------ ----- ----
Total......................................... $5,608 $3,917 $430 $1,261
====== ====== ==== ======
Long-Term Debt Financing
In an effort to strengthen our cash position, during May and June 2001 we raised
$3.5 million in long-term notes due on December 31, 2003. Under the terms of the
notes, interest is fixed at 8.5% to be paid monthly in arrears. The debt is
secured by our inventory and receivables under a UCC-1 filing. Additionally,
each lender received a warrant to purchase one share of the Company's common
stock for each $10 loaned to us. The warrants are immediately exercisable for a
period of five years and carry an exercise price equal to the average closing
sale price for the twenty trading days prior to the date of the warrant. We
valued the warrants using the Black-Scholes option pricing model using an
expected life of five years, a weighted average risk-free rate between 4.76% and
5.06%, depending upon the closing date, an expected dividend yield of zero
percent, a volatility of 201% and a deemed value of the common stock between $10
and $18 per share, depending upon the closing date. The estimated allocated
fair value of the warrants of $1.8 million will be amortized over the period of
the borrowing agreement and included as interest expense in the statement of
operations until the notes mature on December 31, 2003. Of the total funds,
$500,000 came from Company insiders. The proceeds from these issuances were used
for working capital.
The notes have a covenant which requires that the outstanding amount of
principal not exceed the sum of fifty percent (50%) of the Company's inventory
plus eighty percent (80%) of the accounts receivable that are not more than 90
days past due. The Company was in compliance with this covenant during the
second quarter 2001.
Results of Operations
Three Months and Six Months Ended June 30, 2001 and 2000
13
Revenues
E-commerce and other product sales. E-commerce and other product sales consist
of health-related online product sales, mail order catalog sales, retail store
sales through June 4, 2001, and prior to April 1, 2001, wholesale sales of Dr.
Dean Edell brand eyewear. Total e-commerce and other product sales were $8.5
million and $20.7 million for the three months and six months ended June 30,
2001, respectively, compared to $10.1 million and $20.0 million for the three
and six months ended June 30, 2000, respectively, representing a decrease of 16%
over the three month period for the previous year and an increase of 4% over the
six month period for the previous year.
E-commerce and mail order sales. Revenues from e-commerce and mail order sales
were $7.5 million and $18.2 million for the three and six months ended June 30,
2001, respectively, and $8.2 million and $16.1 million for the three and six
months ended June 30, 2000, representing a decrease of 9% over the three month
period for the previous year and an increase of 13% over the six month period
for the previous year. The year-on-year increase over the six month period was
primarily attributable to an increased customer base, repeat purchases from
existing customers and new product offerings. The year-on-year decrease over the
three month period was primarily due to lower discounts, the outsourcing of our
pharmacy fulfillment and the restructuring of our Cable Car Eyewear agreement
into a royalty fee agreement. We are targeting revenues in the third and fourth
quarter of 2001 to increase relative to the second quarter of 2001, with the
exception of prescription drugs and sales of Dr. Dean Edell eyewear, as we aim
for continued growth in our e-commerce and mail order customer base and our
affiliate relations and as we focus our marketing efforts on our existing
customer base, on low cost customer acquisition programs and on new
partnerships. However, future sales will continue to depend upon a number of
factors, including our ability to increase sales with a greatly reduced
marketing budget, the frequency of customer purchases, the quantity and mix of
products sold and the price we charge for our products.
Retail store sales. Retail store sales, consisting of brick-and-mortar sales of
healthcare related over-the-counter products, were $1.0 million and $2.5 million
for the three months and six months ended June 30, 2001, respectively, compared
to $1.9 million and $3.9 million for the three and six months ended June 30,
2000, respectively. The three month decrease of 47% and six month decrease of
36% over the same periods for the previous year were primarily due to the
closure of four unprofitable Vitamins.com stores in February 2001 and six
unprofitable stores in June 2001. We expect retail store revenues to be
insignificant for the foreseeable future as we continue to focus principally on
Internet and mail order sales.
Advertising, content and other. Advertising, content and other revenues consist
of advertising, sponsorship, content, subscription and license revenues which
were $1.1 million and $1.7 million for the three and six months ended June 30,
2001, respectively, and $758,000 and $1.4 million for the three and six months
ended June 30, 2000, respectively. Advertising, content and other revenues
increased 45% and 21% for the three and six month periods ended June 30, 2001,
respectively, from the comparable periods in 2000 primarily due to an increase
in hosting and maintenance revenues earned and an increase in vendor or product
sponsorship revenues. We are targeting our vendor sponsorship revenues to
increase in the future as we focus on providing vendors with opportunities in
which to communicate their marketing messages to customers on our e-commerce and
content websites. Content, subscription and license revenues are not expected to
increase as our marketing efforts have been significantly reduced and these
revenues are targeted to remain flat for the remainder of 2001.
Cost of Revenues
Cost of e-commerce and other product sales. Cost of e-commerce and other product
sales consists primarily of the cost of products sold to customers, certain
promotion costs and inbound shipping charges. These costs were $6.3 million and
$14.3 million in the three and six months ended June 30, 2001, respectively, as
compared to $8.7 million and $18.1 million in the three and six months ended
June 30, 2000. Cost of e-commerce and other product sales decreased 28% and 21%
for the three and six months ended June 30, 2001, respectively, from the
comparable periods in 2000. The decrease was attributable to a decrease in e-
commerce and product sales and higher gross margins in certain products in the
second quarter of 2001 as compared to the same period in 2000. We expect that
our cost of e-commerce and other product sales will continue to fluctuate in the
future with changes in the mix of products sold, changes in price discounting
and other promotion costs.
Cost of other product sales - restructuring. The cost of product sales due to
restructuring of $375,000 for the second quarter of 2001 was due to the write-
off of inventory which was lost or damaged during the closure of the ten
Vitamins.com stores in February and June of 2001. There was no cost of product
sales due to restructuring in 2000.
Other Operating Expenses
Content and product development. Content and product development expenses
consist primarily of payroll and related expenses for website development,
editorial, engineering and telecommunications operations personnel and
consultants, systems and
14
telecommunications infrastructure and cost of acquired content. Product
development costs are generally expensed as incurred, except for costs relating
to the development of internal-use software, which are capitalized and
depreciated over their estimated useful lives. Content and product developments
expenses were $984,000 and $2.2 million in the three and six months ended June
30, 2001 and $3.3 million and $6.1 million for the three and six months ended
June 30, 2000, respectively. The decrease of 70% and 64% for the three and six
months ended June 30, 2001, respectively, from the comparable periods in 2000
was primarily attributable to cost-cutting measures such as downsizing of staff
and reduction in the use of external consultants due to the completion of
development projects which were commenced in 2000 and completed or terminated in
2001. We expect content and product development costs to continue to decrease
through the third quarter of 2001, then stabilize.
Sales and marketing. Sales and marketing expenses consist primarily of
advertising and certain promotional expenditures, payroll and related expenses
for personnel engaged in marketing and customer service activities, outbound
shipping charges and certain fulfillment costs. Fulfillment costs include the
external fulfillment fee charged by our third party fulfillment partners prior
to August 2000 and the internal cost of operating and staffing the distribution
center thereafter. The shipping and external fulfillment costs for the three and
six months ended June 30, 2001 were $1.2 million and $2.4 million, respectively,
and $1.3 million and $2.9 million for the three and six months ended June 30,
2000, respectively. Sales and marketing expenses were $6.5 million and $13.6
million for the three and six months ended June 30, 2001, respectively, compared
to $13.9 million and $36.5 million for the three and six months ended June 30,
2000, respectively, representing a decrease of 53% and 63% for the three and six
months ended June 30, 2001, respectively, from the comparable periods in 2000.
The decrease was primarily attributable to a reduction of advertising expense by
$6.3 million and $18.2 million in the three and six month periods in 2001,
respectively, as compared with the same periods in the previous year, as well as
the closure of the ten unprofitable Vitamins.com brick-and-mortar stores in the
first and second quarters of 2001. We expect sales and marketing expense to
continue to decrease as we continue our efforts towards more cost effective
promotional and marketing campaigns such as segmented e-mail programs and vendor
and other partnership agreements.
General and administrative. General and administrative expenses consist
primarily of payroll and related expenses for finance, human resources, business
development, investor relations, executive and administrative personnel, as well
as professional services and other general corporate expenses. General and
administrative expenses were $1.3 million and $3.4 million for the three and six
months ended June 30, 2001 respectively, and $2.6 million and $5.2 million for
the three and six months ended June 30, 2000, respectively. The 50% decrease for
the three months ended June 30, 2001, from the comparable period in 2000 was
primarily attributable to a decrease of $500,000 in salary and $700,000 in other
direct and indirect costs as a result of reduction in personnel. The 35%
decrease for the six months ended June 30, 2001 from the comparable period in
2000 was primarily attributable to a decrease of $1.0 million in salary and
$800,000 in other direct and indirect costs as a result of reduction in
personnel. General and administrative expenses are expected to remain stable
through 2001.
Amortization of intangible assets. Amortization of intangible assets relates to
the amortization of intellectual property related to domain names and intangible
assets resulting from acquisitions. Amortization of intangible assets was
$329,000 and $657,000 for the three and six months ended June 30, 2001,
respectively, compared to $3.6 million and $7.1 million for the three and six
months ended June 30, 2000, respectively, which represented a decrease of 91%
for both periods over the previous year. This decrease is the result of the
write-off of impaired intangibles of $39.1 million during the fourth quarter of
2000. Amortization of intangible assets is expected to remain stable for 2001 as
we do not anticipate additional acquisitions at this time.
Stock compensation. Deferred stock compensation is amortized over the respective
vesting periods of the outstanding options, which is generally three to four
years. Stock compensation expense was $243,000 and $369,000 for the three and
six months ended June 30, 2001, respectively, compared to $530,000 and $1.1
million for the three and six months ended June 30, 2000, respectively, which
represented a decrease of 54% and 67%, respectively. The decrease was
attributable to a decrease in the number of employees holding stock options and
a decrease in the market valuation of our common stock.
Asset impairment charge. Asset impairment charges were $2.9 million and $3.8
million for the three and six months ended June 30, 2001, respectively, and were
primarily due to the write-off of the fixed assets related to the following:
$2.0 million from the closure of ten Vitamins.com retail stores in February and
June 2001, $221,000 from the consolidation of the Comfort Living warehouse into
the Kentucky fulfillment center, $499,000 from the consolidation of the L&H
Catalog division into current operations, $409,000 from the outsourcing of
pharmacy fulfillment, $445,000 from the write-off capitalized XOR software
development costs and $200,000 from the write-off of other long-lived assets
There were no asset impairment charges in the six months ended June 30, 2000.
Restructuring charge. Restructuring charges for the three and six months ended
June 30, 2001 were $1.0 million and $1.8 million, respectively, of which
$613,000 was attributable to a reduction in force, $840,000 to the closure of
ten retail stores, and $376,000 from the consolidation of excess facilities and
other charges. There were no restructuring charges in the six months ended June
30, 2000.
15
Interest income (expense), net. Interest income (expense), net consists of
interest on capital lease obligations partially offset by earnings on our cash
and cash equivalents. Interest income (expense), net was $(190,000) and
$(318,000) for the three and six months ended June 30, 2001, respectively,
compared to $794,000 and $1.8 million for the three and six months ended June
30, 2000, respectively. The increase in interest expense was primarily due to
financial leases and long-term notes. The decrease in interest income is
attributable to lower interest bearing asset balances as cash was utilized for
operating and other expenses.
Interest expense - amortization of warrants. In connection with the issuance of
long-term notes in May and June 2001, each lender received a warrant to purchase
one share of common stock for each $10 loaned to us. The warrants are
immediately exercisable for a period of five years and carry an exercise price
equal to the average closing sale price for the twenty trading days prior to the
date of the warrant issuance. The estimated fair value of the warrants of $1.8
million will be amortized over the period of the borrowing agreement and
included as interest expense in the statement of operations until the notes
mature on December 31, 2003. Interest expense from amortization of warrants was
$89,000 for the three and six months ended June 30, 2001. There was no interest
expense from the amortization of warrants in 2000.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through our initial
public offering, the sale of preferred stock, the issuance of notes payable and
capital leases. As of June 30, 2001, we had $1.4 million in cash and cash
equivalents and $537,000 in restricted cash. Net cash provided by financing
activities for the six months ended June 30, 2001 was $2.1 million as a result
of the issuance of secured long-term notes of $3.5 million, partially offset by
capital lease payments of $1.4 million. Net cash used in financing activities
in the six months ended June 30, 2000 was $73,000, attributable to $170,000 in
cash payments on capital leases, partially offset by $97,000 in proceeds from
the issuance of our common stock.
Net cash used in operating activities was $14.3 million for the six months ended
June 30, 2001 and $33.6 million for the six months ended June 30, 2000. Net cash
used in operating activities in the six months ended June 30, 2001 was comprised
primarily of an $18.5 million net operating loss and decreases of $6.0 million
in accounts payable and accrued expenses and $494,000 in deferred revenue and
other current liabilities. This use of cash was partially offset by $2.5 million
in depreciation and amortization of fixed and intangible assets, $3.8 million in
long-lived asset impairment charges, $369,000 in stock compensation expense,
$89,000 in amortization of the value of stock warrants and decreases of $2.5
million in inventory, $1.1 million in accounts receivable and $202,000 in
prepaid expenses and other assets. In comparison, net cash used in operating
activities for the comparable six months of 2000 was comprised primarily of a
$53.4 million net loss, increases of $1.1 million in accounts receivable and
$435,000 in inventory. This use of cash was partially offset by $8.3 million in
depreciation and amortization of fixed and intangible assets, $1.1 million in
non-cash stock compensation expense and increases of $9.7 million in accounts
payable and accrued expenses and $309,000 in deferred revenue and other
liabilities and a decrease of $1.9 million in prepaid expenses and other assets
during the six months ended June 30, 2000.
Net cash used in investing activities was $581,000 for the six months ended June
30, 2001 and $8.3 million for the six months ended June 30, 2000. In the six
months ended June 30, 2001, cash used in investing activities consisted of
$537,000 in restricted cash and $44,000 for the purchase of property and
equipment. Cash used in investing activities in the six months ended June 30,
2000 was comprised of $3.5 million for the purchase of property and equipment.
This increase in use of cash was partially offset by the receipt of
approximately $550,000 related to the reduction in the final purchase price of
L&H Vitamins.
Our capital requirements depend on numerous factors, including our ability to
integrate our acquired technology from acquisitions and improve our transaction
processing fulfillment systems and our website infrastructure without
substantial capital expenditures. We have no material commitments for capital
expenditures at present, and we do not anticipate entering into any new capital
commitments in the foreseeable future. In an effort to realize efficiencies from
acquisitions, reduce expenses, preserve our cash and improve operational
efficiencies, we have reduced our workforce, consolidated facilities, eliminated
duplicate positions, closed unprofitable retail stores and reformatted our
business model to focus principally on e-commerce and mail order sales. We will
continue to look at gaining efficiencies.
Until recently, we have experienced substantial increases in expenditures since
inception, consistent with growth in operations and personnel, both internally
and through multiple acquisitions. While we are targeting to reduce our cost
structure, we currently expect to continue to use cash to fund operating losses,
to integrate acquisitions, to acquire and retain customers and to restructure
agreements. We currently are targeting that our available cash, cash equivalents
and cash flows to be generated from operations will be sufficient to meet our
targeted cash needs through approximately 2001, provided that we achieve our
targeted revenues, efficiencies and cost reductions, restructure certain
partnerships and other relationships and on a timely basis, complete certain
asset sales and collect certain accounts receivable. If we are unable to
complete any of these actions as scheduled or on the terms
16
currently contemplated, we may have to significantly reduce our operations and
our business may be jeopardized.
Any projections of future cash needs and cash flows are subject to substantial
uncertainty. We may need additional cash sooner than currently anticipated. The
sale of additional equity or debt securities that include warrants could result
in additional dilution to our stockholders. Any debt securities issued could
have rights senior to holders of common stock and could contain covenants that
would restrict our operations. Additional financing may not be available in
amounts or on terms acceptable to us, or at all. We have received a report from
our independent accountants for the year ended December 31, 2000 containing an
explanatory paragraph that describes the uncertainty as to our ability to
continue as a going concern due to our historical net operating losses and
negative cash flows.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life.) The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired prior to
July 1, 2001. The Company is required to adopt FAS 142 effective January 1,
2002. We are currently evaluating the effect that adoption of the provisions of
FAS 142 will have on our results of operations and financial position.
Risk Factors That May Affect Future Results and Market Price of Stock.
You should carefully consider the following risk factors. The risks and
uncertainties described below are intended to be the ones that are specific to
our company or industry and that we deem to be material, but are not the only
ones that we face.
WE HAVE A LIMITED OPERATING HISTORY.
We launched our HealthCentral.com website in November 1998, our Vitamins.com
website in March 1999, and our WebRx.com website in November 2000. We merged
with Vitamins.com in June 2000, and we acquired the assets and certain
liabilities of DrugEmporium.com in September 2000 and Comfort Living in December
2000. Accordingly, we have a limited operating history and are subject to the
risks, expenses and difficulties frequently encountered by early stage companies
in new and rapidly evolving markets such as the Internet healthcare market.
These challenges include our ability to:
. implement a successful e-commerce strategy through our websites;
. attract and retain a large audience of users to our HealthCentral.com
network, including WebRx.com;
. compete effectively against other established Internet health
companies, such as drugstore.com and CVS.com;
. develop and upgrade our technology;
. retain and motivate qualified personnel;
. manage inventory levels and fulfillment operations effectively;
. gain advertising and sponsorship revenue from vendors of health-
related products and services; and
. create and maintain successful strategic alliances with provider
groups, content providers and other third parties.
17
WE HAD AN ACCUMULATED DEFICIT OF APPROXIMATELY $211.7 MILLION AT JUNE 30, 2001,
AND WE MAY NOT ACHIEVE OUR TARGETED EXPENSE REDUCTIONS OR ACHIEVE PROFITABILITY.
Since our inception, we have had limited revenues and have incurred substantial
net losses in each year. While we are unable to predict accurately our future
operating expenses, we may not be able to achieve our targeted expense
reductions as we:
. restructure and/or terminate various contractual obligations;
. offer product promotions;
. integrate geographically dispersed operations as a result of
acquisitions;
. make payments to both our existing and future business partners to
gain advertising revenue; and
. develop and expand our systems infrastructure and support functions.
If we do not achieve our targeted revenues and expense reductions as planned,
our business may be jeopardized. Even if we were to achieve profitability, we
might not be able to sustain or increase profitability on a quarterly or annual
basis.
THE INTERNET HAS NOT PROVEN TO BE AN EFFECTIVE OR PROFITABLE MARKETING MEDIA FOR
ADVERTISERS AND OUR INSTITUTIONAL BUSINESS HAS NOT DEVELOPED AS INITIALLY
ANTICIPATED, AND THUS OUR BUSINESS DEPENDS ON THE SUCCESS OF OUR E-COMMERCE AND
CATALOG BUSINESS.
At the time of our public offering, we expected to build revenues from three
channels: Internet advertising, private label institutional website services,
and healthcare e-commerce. To date, the Internet has not proven to be as
effective an advertising medium as traditional media, and thus advertising
revenues contribute much less to our revenue mix than originally expected. In
addition, the institutional healthcare market has been slow to adopt the
Internet as a meaningful tool to improve patient service and revenues. Thus, we
have focused our business operations on the sale of healthcare products online
and the sale of vitamins through our mail order business, and if we do not meet
our target performance goals in any of these business lines, our business may
fail.
WE NEED TO GENERATE SUBSTANTIAL REVENUES AND PROFIT FROM OUR E-COMMERCE BUSINESS
FOR HEALTHCARE PRODUCTS, BUT THIS MARKET IS UNPROVEN AND WE HAVE LIMITED
EXPERIENCE IN IT.
The healthcare e-commerce market is unproven, and we have limited experience in
the sale of healthcare products and services online. Our rate of revenue growth
and profitability could be significantly less than that of other online
merchants, many of which have longer operating histories and greater name
recognition. The online market for pharmaceutical and other health products is
in its infancy and is highly fragmented and intensely competitive, which has
resulted in price discounting, the erosion of gross margins and business
failures by many of our better known competitors. This market is significantly
less developed than the online market for books, music, software, toys and a
number of other consumer products. Even if Internet usage and electronic
commerce continue to increase, the rate of growth and profit margins, if any, of
the online drugstore and health products market could be significantly less than
those in online markets for other products.
WE ACQUIRED OUR OWN FULFILLMENT CAPABILITIES FOR E-COMMERCE PRODUCT ORDERS
(EXCEPT FOR CONTACT LENSES AND PRESCRIPTION DRUGS) AND WE HAVE LIMITED
EXPERIENCE IN PROVIDING THESE SERVICES.
As a result of our acquisition of assets of DrugEmporium.com and the acquisition
of assets of Comfort Living, we have begun managing fulfillment of our e-
commerce product orders internally (except for contact lenses and prescription
drugs). Previously, we relied primarily upon third parties to manage most of our
product fulfillment responsibilities and therefore have limited experience in
providing these services. A failure in the ability to purchase items on
favorable terms, obtain sufficient types and quantities of supplies, manage
inventory levels effectively, or fill and ship orders on a cost-effective and
timely basis could result in customer dissatisfaction and could significantly
harm our e-commerce business. We are in the process of rationalizing various
fulfillment functions, which may lead to disruptions in inventory management and
other fulfillment problems.
We rely on third-party carriers for shipments to and from our distribution
facilities. We are therefore subject to the risks, including employee strikes
and inclement weather, associated with our distribution partners' and our
carriers' ability to provide product fulfillment and delivery services to meet
our distribution and shipping needs. Failure to deliver products to our
customers in a
18
timely manner could adversely affect our reputation, brand and business.
BECAUSE WE HAVE VERY LIMITED CASH, WE WILL NEED TO RAISE ADDITIONAL CAPITAL SOON
AND MAY NOT BE ABLE TO RAISE IT ON ACCEPTABLE TERMS, OR AT ALL.
As of June 30, 2001, we had cash and cash equivalents of approximately $1.4
million. While we are targeting to reduce our cost structure, we currently
expect to continue to use cash to fund operating losses, to integrate
acquisitions, to acquire and retain customers and to restructure agreements. We
currently are targeting that our available cash, cash equivalents and cash flows
to be generated from operations will be sufficient to meet our targeted cash
needs through approximately 2001, provided that we achieve our targeted
revenues, efficiencies and cost reductions, restructure certain partnerships and
other relationships and complete certain asset sales and collect certain
accounts receivables in a timely manner. If we are unable to complete any of
these actions as scheduled or on the terms currently contemplated, we may have
to significantly reduce our operations and our business may be jeopardized.
Any projections of future cash needs and cash flows are subject to substantial
uncertainty. We may need additional cash sooner than currently anticipated.
During the second quarter of 2001, we issued warrants to purchase 350,000 shares
of our common stock in connection with the closing of $3.5 million of our debt
financing. The sale of additional equity or debt securities that include
warrants could result in dilution to our stockholders. Any additional debt
securities issued could have rights senior to holders of common stock and could
contain covenants that would restrict our operations. Any additional financing
may not be available in amounts or on terms acceptable to us, or at all. We have
received a report from our independent accountants for the year ended December
31, 2000 containing an explanatory paragraph that describes the uncertainty as
to our ability to continue as a going concern due to our historical net
operating losses and negative cash flows.
OUR STOCK PRICE, LIKE THAT OF MANY COMPANIES IN THE INTERNET INDUSTRY, HAS BEEN
AND MAY CONTINUE TO BE EXTREMELY VOLATILE, AND WE MAY BE DELISTED FROM THE
NASDAQ NATIONAL MARKET SYSTEM.
The market price of our common stock has declined significantly, and we expect
that it will continue to be subject to significant fluctuations as a result of
variations in our quarterly operating results, results of our competitors, and
the overall decline in the Nasdaq stock market. These fluctuations have been,
and may continue to be, exaggerated because an active trading market has not
developed for our stock. Thus, investors may have difficulty selling shares of
our stock at a desirable price, or at all. On April 5, 2001 we received a notice
from Nasdaq that our stock would be delisted from the Nasdaq National Market
because the stock failed to maintain a minimum bid price of $1.00 for the
requisite 10 day period during the 90 calendar day grace period. We appealed
that determination and a hearing before a Nasdaq Listing Qualifications Panel
was held on May 31, 2001. Since the hearing, we effected a 1-for-50 reverse
stock split on June 28, 2001 and have been successful at maintaining a minimum
closing bid price above $1.00. On July 20, 2001, we received a determination on
our continued listing by Nasdaq. The Panel determined that while we have
satisfied the minimum bid price requirement of at least $1.00 per share, we do
not currently satisfy the $5,000,000 market value of public float threshold. The
Panel determined to continue the listing of our securities on the Nasdaq
National Market. However, our stock did not achieve a market value of public
float of at least $5,000,000 during the 30-consecutive trading days ending
August 9, 2001. Thus, we expect that the Panel will render a determination as to
whether the continued listing of our securities on the Nasdaq National Market is
warranted and whether a cure period will be granted. Should the Panel determine
not to allow the continued listing of our stock on the Nasdaq National Market,
we believe that we will qualify for listing on the Nasdaq Small Cap Market.
In addition, due to the technology-intensive and emerging nature of our
business, the market price of our common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant strategic partner;
. changes in estimates of our financial performance or changes in
recommendations by securities analysts; and
. reductions in operating scope.
In the past, securities class action litigation has often been brought against a
company after a period of volatility in the market price of its stock. Any
securities litigation claims brought against us could result in substantial
expense and the diversion of management's attention from our core business.
19
OUR CASH PROJECTIONS DEPEND ON OUR SUCCESSFULLY COLLECTING ACCOUNTS RECEIVABLE.
Accounts receivable due from a former distributor represented almost 56% of our
total accounts receivable as of June 30, 2001. Our collection of certain
accounts receivable presently owed to us by our former distributor are all key
components of our funding strategy, and, if we do not succeed in completing
these actions as scheduled and on the terms currently contemplated, our business
and our liquidity may be jeopardized.
WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF THE ACQUISITION OF THE ASSETS OF
DRUGEMPORIUM.COM AND COMFORT LIVING, AND THEIR INTEGRATION MAY RESULT IN
DISRUPTION TO OUR BUSINESS OR THE DISTRACTION OF OUR MANAGEMENT AND EMPLOYEES.
We may not be able to successfully assimilate the DrugEmporium.com or
ComfortLiving.com assets and operations or accomplish the execution of our e-
commerce business plan. The integration of these recent acquisitions into our
business has strained, and may continue to strain, our existing technology and
operations systems as we continue to assimilate DrugEmporium.com and Comfort
Living into our existing operations. In addition, the personnel that we have
hired pursuant to these acquisitions may decide not to continue working for us
or otherwise may not integrate successfully with our current staff. These
difficulties could disrupt our ongoing business, distract our management and
employees or increase our expenses.
Our acquisitions of the assets of DrugEmporium.com and Comfort Living, could
adversely affect our combined financial results or the market price of our
common stock. If the benefits of the merger or the acquisitions do not exceed
the costs associated with them, including any dilution to our stockholders
resulting from the issuance of shares in connection with the merger and
acquisitions, our financial results, including earnings per share, could be
adversely affected. In addition, if we do not achieve the perceived benefits of
these acquisitions as rapidly as, or to the extent, anticipated by financial or
industry analysts, the market price of our common stock may decline.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK PRICE.
We have filed S-3 Registration Statements covering the resale of approximately
636,000 shares of our common stock by selling stockholders. In addition to the
shares being registered on the Forms S-3, approximately 326,000 shares are
saleable in the public market without restriction under the Securities Act or
are saleable under Rule 144 of the Securities Act, subject to volume, manner of
sale, notice and current reporting information requirements. In addition, as of
June 30, 2001, approximately 70,583 shares of our common stock were subject to
options outstanding, and approximately 33,644 of these options were repriced in
December 2000 and carry an exercise price of $20.31 per share. Because our stock
price is currently low and the trading volume is thin, the sale of a substantial
number of shares could depress the price of our stock dramatically and could
jeopardize our ability to maintain our Nasdaq listing. Any substantial sales
could also make it more difficult for us to sell equity-related securities in
the future at an appropriate price, or at all.
CONSUMER PROTECTION PRIVACY CONCERNS MAY RESULT IN A DECREASE IN TRAFFIC OR A
DECREASE IN REVENUES.
Our network of websites captures information regarding our users in order to
personalize our websites for them and to assist sponsors and advertisers in
targeting their products and advertising campaigns to particular demographic
groups. Any changes in privacy policies and practices, whether self-imposed or
imposed by government regulation, could affect the way in which we conduct our
business, especially those aspects that involve the collection of, use of and
access to personal identifying information. For example, limitations on or
elimination of the use of cookies could limit our ability to personalize our
website for the user, and could limit the effectiveness of the targeting of
advertisements, both of which could impair our ability to generate sponsorship
and advertising revenue. Any perception of security and privacy concerns by the
public, whether or not valid, could inhibit market acceptance of our network of
websites. Privacy concerns may cause users not to visit our websites or, if they
visit, not to provide the personal data necessary to target our content and
advertising.
Because of the interest in the privacy of health-related information, we or any
other e-health company could become either a target of, or a witness in, a
federal or state agency or private party claim regarding privacy issues, any of
which could be expensive and time-consuming, could divert the attention of
senior management from our core business and could harm our business.
20
WE FACE SUBSTANTIAL COMPETITION FROM BETTER-ESTABLISHED COMPANIES, WHICH COULD
RESULT IN OUR FAILURE TO GAIN NEEDED MARKET SHARE.
Over 15,000 healthcare websites compete with us for customers, users,
advertisers, content and product providers, institutional clients and other
sources of online revenue. We compete with other dedicated healthcare product
retailers and healthcare information websites, such as drugstore.com, CVS.com,
WebMD, drkoop.com, DiscoveryHealth.com, InteliHealth, and Medscape.com. In
addition, we compete with:
. traditional brick-and-mortar drug stores, including drug store chains,
supermarkets, mass market retailers, nutraceutical stores and
independent drug stores, many of whom have begun or have announced
their intention to offer online services;
. other online drug stores;
. other online dietary supplement stores, such as VitaminShoppe.com;
. pharmacy benefit managers, or PBMs, that direct sales of
pharmaceuticals; and
. hospitals, HMOs and mail order prescription drug providers, many of
whom are beginning to offer products and services over the Internet.
Most of our current and potential competitors enjoy substantial competitive
advantages, such as:
. greater name recognition and larger marketing budgets and resources;
. established marketing relationships with manufacturers and
advertisers;
. larger customer and user bases;
. substantially greater financial, technical and other resources; and
. larger production and technical staffs.
The intense competition in the online drug store business has resulted in price
discounting and difficulty in building customer loyalty. We believe that we may
face a significant competitive challenge from our online competitors forming
alliances with brick and mortar drug stores, HMOs, PBMs or other competitors,
which could both strengthen our competitors and/or preclude us from entering
into similar relationships with their partners. For instance, Merck/Medco has
entered into an alliance with CVS.com and drugstore.com has formed an alliance
with RiteAid. Increased competition in the online drug store business has
resulted in, and could continue to result in, price reductions, fewer customer
orders, reduced margins and loss of, or failure to build, market share.
In the market for enterprise web services, we compete mainly with payors' and
providers' internal systems development teams, with local web development
companies, and with other consumer-oriented websites that are selling
applications to institutions, such as drkoop.com and WebMD. We also compete with
drugstore.com and CVS.com in the sale of e-commerce solutions to healthcare
institutions. Healthcare participants may determine that our tools and website
development and maintenance services are inferior to those of our competitors,
that our product mix is inappropriate for their needs, or that it would be
better for them to independently develop and manage their own websites.
CONSUMERS MAY REJECT THE CONCEPT OF AN ONLINE HEALTH PRODUCTS STORE IN FAVOR OF
A BRICK-AND-MORTAR STORE.
Historically, many pharmaceutical and other healthcare products have been sold
through the personal referral of a physician or pharmacist, and thus there is no
established business model for the sale of healthcare products or services over
the Internet. Specific factors that could prevent widespread customer acceptance
of our online drug and health product stores include:
. lack of coverage of customer prescriptions by, or additional steps
required to obtain reimbursement from, insurance carriers or pharmacy
benefit managers;
. lack of consumer awareness of our online drug and health product
stores;
. longer delivery times for Internet orders, delays in responses to
customer inquiries and/or difficulties in returning products
21
as compared to brick-and-mortar stores;
. shipping charges and problems related to shipping, such as product
damage or failure to ship the correct order;
. lack of face-to-face interaction with a pharmacist or other retail
store personnel;
. failure to meet shoppers' pricing expectations for prescription drugs,
over-the-counter medicines and health and beauty products;
. customer concerns about security and privacy with regard to
transmitting personal health information over the Internet; and
. inability to meet immediate delivery or pick-up requirements for
prescriptions for acute conditions.
SOME OF OUR MAJOR CONTRACTUAL RELATIONSHIPS HAVE BEEN TERMINATED OR ARE IN THE
PROCESS OF BEING TERMINATED OR RENEGOTIATED, WHICH COULD RESULT IN DISRUPTION OF
OUR BUSINESS AND/OR PAYMENT OBLIGATIONS.
We are currently in dispute with Microsoft with regard to our claims of breach
of contract by Microsoft and their payment claims against us. We have tendered
an offer to settle all outstanding contract claims, but have not finalized
settlement discussions. If Microsoft were to prevail on its claim, we could face
potentially substantial payment obligations.
We are in the process of renegotiating and/or terminating certain major
contractual relationships such as employment agreements, lease agreements,
licensing agreements and advertising agreements, and may renegotiate certain
additional contractual relationships, any of which could disrupt our business
and/or cause us to incur additional costs or make additional payments.
IF CONSUMERS PERCEIVE OUR HEALTHCARE CONTENT TO BE INFLUENCED BY OUR
RELATIONSHIPS WITH ADVERTISERS OR HEALTH-RELATED PRODUCT VENDORS, OUR REPUTATION
COULD SUFFER.
We receive sponsorship revenues from advertisers of health-related products on
our websites and revenues from sales of health-related products. However, our
success in attracting and retaining users to our websites depends on our being a
trusted source of independent health-related information. Any consumer
perception that our editorial content is influenced by our commercial
relationships could harm our reputation and business.
WE HAVE EXPERIENCED AND MAY EXPERIENCE SYSTEMS INTERRUPTIONS AND CAPACITY
CONSTRAINTS ON OUR HEALTHCENTRAL.COM NETWORK, WHICH COULD RESULT IN ADVERSE
PUBLICITY, REVENUE LOSSES AND EROSION OF CUSTOMER TRUST.
In the past, we have experienced system interruptions in the performance of our
websites. Any additional system problems in the HealthCentral.com network, such
as system disruptions, slower system response times and degradation in customer
service levels, could result in negative publicity, cause our users to use our
competitors' services and reduce our revenues. Additionally, if we fail to meet
the website performance standards in our contracts with our institutional
clients, they may terminate their agreements, require refunds or fail to renew
contracts with us, any of which could decrease our institutional revenues.
We are also vulnerable to breaches in our security and to natural disasters. We
may not be able to correct any problem in a timely manner. Because we outsource
the server hosting function to third parties, some systems interruptions may be
outside of our control. We have no formal disaster recovery plan, and our
insurance may not adequately compensate us for losses that may occur due to
systems interruptions.
BREACHES IN OUR SECURITY AND OTHER UNEXPECTED PROBLEMS COULD RESULT IN LAWSUITS
BY CUSTOMERS AND A VIOLATION OF FEDERAL LAW.
We retain confidential customer and patient information on our servers. Any
breach of security from a physical break-in, computer virus, programming error
or attack by a third party or an unexpected natural disaster could subject us to
a lawsuit. We have expended, and may be required to expend, significant sums to
protect against security breaches or to alleviate problems caused by breaches.
In addition, a breach of privacy of patient health records could constitute a
violation of federal law.
22
WE DEPEND ON OUR RELATIONSHIP WITH DOUBLECLICK TO GENERATE ADVERTISING REVENUES,
AND DOUBLECLICK CAN TERMINATE THIS RELATIONSHIP ON SHORT NOTICE.
A portion of our revenues consists of the sale of advertising, all of which is
currently derived through our relationship with DoubleClick, an online
advertising sales agency. DoubleClick is our exclusive representative for
advertising sold on our HealthCentral.com website; however, DoubleClick can
enter into advertising sales contracts with our competitors, and either party
can terminate the contract on 90 days notice. We have no control over
DoubleClick's sales efforts, and if it fails to sell advertising in accordance
with our expectations, our revenues would likewise be lower.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND OUR
STOCK PRICE MAY CONTINUE TO DECLINE IF WE DO NOT MEET REVENUE GOALS OR QUARTERLY
EXPECTATIONS OF INVESTORS AND ANALYSTS.
In part because of our limited operating history, it is difficult to forecast
accurately our future revenues or results of operations. We have reduced our
marketing budget substantially and thus it may be difficult for us to achieve
our revenue targets. A variety of factors may cause our annual and quarterly
operating results to fluctuate significantly including:
. reductions in spending on marketing and other promotional activities;
. customer visits and purchases on the WebRx.com, Vitamins.com,
DrugEmporium.com, ComfortLiving.com, HealthCentral.com and RxList.com
websites and associated costs;
. demand for our products and mix of products sold;
. shifts in the nature and amount of publicity about us or our
competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. changes in the frequency and size of repeat purchases by customers of
our online stores and retail stores;
. management of our inventory levels and fulfillment operations;
. interruptions in product supply, supplier channels or relationships;
. fluctuations in the wholesale prices of the products we sell, as well
as shipping costs or delivery times;
. seasonal patterns of spending by customers, advertisers and sponsors
and trends in advertising rates;
. costs related to acquisitions of businesses or the timing of payments
to our strategic partners;
. fluctuations in expected revenues from our strategic relationships;
. changes in reimbursement policies and practices of pharmacy benefit
managers and other third party payors;
. systems problems, such as disruptions, slower system response times
and degradation in customer service; and
. changes in government regulation.
If we do not meet the expectations of investors and analysts in any given
quarter, our stock price could decline.
ANY FAILURE TO MANAGE OUR OPERATIONS COULD INCREASE OUR OPERATING COSTS.
Our recent restructuring has placed, and will continue to place, a significant
strain on our resources. As we continue to rationalize our cost structure, we
will need to improve our efficiency, which we may not be able to accomplish. Any
failure to successfully manage our operations and increase our efficiency could
distract management attention and result in our failure to execute on our
business plan. As a result of our acquisitions, we assimilated the operations of
Vitamins.com, DrugEmporium.com and Comfort Living into our operations. We will
23
need to implement and integrate transaction-processing, operational, reporting,
and financial systems, rationalize and train our employee base, and maintain
close coordination among our technical, finance, marketing, and merchandising
staffs. Our integration and operational efforts are complicated by the fact that
our customer service call center operates in the Washington D.C. and our
warehouse operations are based in Kentucky. Thus, we have to manage an
enterprise operating over a wide geographical area. We will need to expend
significant amounts of our time and financial resources as we restructure these
operations to achieve efficiencies from these acquisitions, which may distract
management and further strain our technology and staffing resources. We also
need to devote resources to website development, strategic relationships,
technology infrastructure and operational infrastructure.
IN ORDER TO EXECUTE OUR BUSINESS PLAN WE MUST RETAIN AND MOTIVATE HIGHLY SKILLED
EMPLOYEES, AND WE FACE SIGNIFICANT COMPETITION FROM OTHER INTERNET, HEALTHCARE
AND NEW MEDIA COMPANIES IN DOING SO.
If we fail to retain and motivate our current personnel, our business and future
growth prospects could be severely harmed. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in retaining highly skilled employees with appropriate qualifications. Recent
layoffs within our company may make it harder to retain key employees.
Additionally, the loss of any of our key executive officers could have a
significant negative impact on our operations.
WE MAY BE EXPOSED TO LIABILITIES THAT ARE NOT COVERED BY THE INDEMNIFICATION
AVAILABLE UNDER THE DRUGEMPORIUM.COM ASSET PURCHASE AGREEMENT OR THE MORE.COM
AND COMFORT LIVING ASSET PURCHASE AGREEMENT, WHICH MAY HARM OUR RESULTS OF
OPERATION AND FINANCIAL CONDITION.
Upon consummation of our asset purchase agreements, we assumed certain
liabilities of DrugEmporium.com and more.com/Comfort Living. As a result, we may
be exposed to liabilities that are not covered by the indemnification available
under the asset purchase agreements. In addition, it is possible that
liabilities may arise in the future which we did not discover or anticipate. To
the extent these liabilities are inconsistent with representations and
warranties made in the respective agreements, we may have a claim for
indemnification against the former stockholders of DrugEmporium or more.com. The
DrugEmporium.com and more.com agreements provide that 10% of the
HealthCentral.com stock issued in each purchase will be placed in an escrow
account for indemnification and held for a period of one year. The escrow amount
will be our sole recourse for indemnification claims other than in the case of
fraud. However, the assumed liabilities, both at the time of and arising after
the consummation of the agreements, may exceed our expectations and the escrow
amount may be insufficient to cover these liabilities. If liabilities for which
indemnification is available exceed the escrow amount, we will suffer financial
losses, which may harm our business, results of operation and financial
condition.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS
TO OUR BUSINESS AND/OR THE DISTRACTION OF OUR MANAGEMENT.
To date, we have completed mergers or asset acquisitions of six companies,
Enterprise Web Services, HealthCentralRx.com, RxList.com, Vitamins.com,
DrugEmporium.com and more.com/Comfort Living. We are not currently planning any
additional acquisitions; however we may acquire or make investments in other
complementary businesses and technologies in the future. We may not be able to
identify other future suitable acquisition or investment candidates, and even if
we do identify suitable candidates, we may not be able to make these
acquisitions or investments on commercially acceptable terms, or at all. If we
do acquire or invest in other companies, we may not be able to realize the
benefits we expected to achieve at the time of entering into the transaction and
will likely face integration risks, including but not limited to:
. expenses related to funding the operation, development and/or
integration of complementary businesses;
. expenses associated with the transactions;
. additional expenses associated with amortization of acquired
intangible assets;
. the difficulty of maintaining uniform standards, controls, procedures
and policies;
. the impairment of relationships with employees and customers as a
result of any integration of new personnel;
. the potential unknown liabilities associated with acquired businesses;
and
24
. the issuance of convertible debt or equity securities, which could be
dilutive to our existing stockholders.
Our failure to adequately address these issues could harm our business.
WE COULD FACE SIGNIFICANT NON-CASH STOCK-BASED CHARGES.
In light of the recent decline in our stock price and in an effort to retain our
employee base, in December 2000 we exchanged stock options held by employees and
certain consultants. In exchange for accepting new vesting schedules, the
exercise price of all eligible employee and certain consultant options with an
exercise price in excess of $20.31 was reduced to $20.31, the closing market
price on the Nasdaq on December 11, 2000. As a result of this repricing, options
to purchase approximately 33,644 shares will be subject to variable accounting
treatment, which means that any increase in our stock price will result in non-
cash accounting charges, which would increase our net loss.
ANY FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD IMPAIR OUR ABILITY
TO ESTABLISH OUR BRANDS.
If we fail to adequately protect our proprietary rights in our content,
technology, products and services, our competitors could use the intellectual
property that we have developed to enhance their products and services, which
could harm our business. We rely on a combination of copyright and trademark
laws, trade secrets, confidentiality provisions and other contractual provisions
to protect our proprietary rights, but these legal means afford only limited
protection. Unauthorized parties may attempt to copy aspects of our websites or
to obtain and use information that we regard as proprietary. Our competitors or
others may adopt service names similar to ours, thereby impeding our ability to
build our brand identity and potentially confusing consumers. We also rely on a
variety of technologies that are licensed from third parties, including our
database and Internet server software. These third-party licenses may not be
available to us on commercially reasonable terms in the future.
ANY ERRORS IN FILLING OR PACKAGING THE PRESCRIPTION DRUGS THAT FAMILYMEDS
DISPENSES ON OUR BEHALF MAY EXPOSE US TO LIABILITY AND NEGATIVE PUBLICITY.
Pharmacy errors relating to prescriptions, dosage and other aspects of the
medication dispensing process could produce liability for us. Pharmacists are
required by law to offer counseling, without additional charge, to their
customers about medication, dosage, delivery systems, common side effects and
other information they deem important. This counseling is expected to be
accomplished by telephone access to pharmacists, but also in part through
inserts included with the prescription, which may increase the risk of
miscommunication because the customer is not personally present. We also post
product information on our WebRx.com, RxList.com, Vitamins.com, DrugEmporium.com
and ComfortLiving.com websites, which creates additional potential for claims to
be made against us. Our insurance may not cover potential claims of this type or
may not be adequate to protect us from all liability that may be imposed.
We are currently party to an agreement with Familymeds Group, Inc. relating to
the fulfillment of prescription orders placed on our website. We have limited
control over Familymeds and they may make errors. Any pharmacy errors, whether
through Familymeds or otherwise, may produce significant adverse publicity
either for us or the entire online pharmacy industry. The amount of negative
publicity that we or the online pharmacy industry may receive as a result of
pharmacy or prescription processing errors could be disproportionate in relation
to the negative publicity received by traditional pharmacies making similar
mistakes. We believe that any negative publicity could erode consumer trust and
result in an immediate reduction in product purchases.
WE MAY BE SUED BY CONSUMERS AS A RESULT OF THE HEALTH-RELATED PRODUCTS WE SELL
THROUGH OUR ONLINE AND OFFLINE CHANNELS.
Consumers may sue us if any of our products or services that are sold through
our online or offline channels are defective, fail to perform properly or injure
the user, even if such goods and services are manufactured and provided by
unrelated third parties. Liability claims could require us to spend significant
time and money in litigation or to pay significant damages and could seriously
damage our reputation.
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.
The healthcare and Internet industries are characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement or other violations of intellectual property rights. As the number
of entrants into our market
25
increases, the possibility of an intellectual property claim against us grows.
Our content, technology, products and services may not be able to sustain any
third party claims or rights against their use. Some of the information in our
website network databases regarding dietary supplements, drug descriptions,
clinical pharmacology, indications and usage, warnings and the like is copied
from information contained in package inserts, which accompany the particular
drug. We have not obtained licenses to reproduce this information from the
various pharmaceutical companies. Although we have not received a copyright
claim to date, we could face potential copyright infringement claims in this
regard. Any intellectual property claims, with or without merit, could be time
consuming and expensive to litigate or settle and could divert management
attention from administering our core business.
AS A PUBLISHER OF ONLINE CONTENT, WE MAY HAVE LIABILITY FOR INFORMATION WE
PROVIDE ON, OR WHICH IS ACCESSED FROM, THE HEALTHCENTRAL.COM NETWORK.
Because users of our network and the websites of our institutional licensees
access health-related information, including information regarding possible
adverse reactions or side effects from medications or a particular medical
condition they may have, or may distribute our content to others, third parties
may sue us for various causes of action based on the nature and content of
materials that we publish. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought successfully against online services in the past. Others could also sue
us for the content and services that are accessible from our network through
links to other websites or through content and materials that may be posted by
our users in chat rooms or bulletin boards, none of which we edit.
Any indemnification provisions that we may have in agreements may not be
adequate to protect us. Our insurance may not adequately protect us against
these types of claims. Further, our business is based on establishing the
HealthCentral.com network as a trustworthy and dependable provider of healthcare
information and services. Allegations of impropriety, even if unfounded, could
therefore harm our reputation and business.
A FAILURE TO BUILD OUR BRAND NAMES QUICKLY AND SIGNIFICANTLY WILL RESULT IN
LOWER THAN EXPECTED REVENUES.
If we do not gain significant brand recognition quickly, we may lose the
opportunity to build a critical mass of customers, and our business may fail.
Some of our competitors, such as drugstore.com, CVS.com, drkoop.com, WebMD and
medscape.com, may have stronger name recognition than do we. The increasing
competition in our markets makes building a brand more expensive and difficult
than it otherwise would be. To increase brand recognition, we may need to offer
product promotions and discounts, all of which are expensive.
DR. DEAN EDELL PROVIDES US WITH UNIQUE CONTENT AND CREDIBILITY, AND ANY FAILURE
BY DR. EDELL TO PARTICIPATE IN OUR BUSINESS COULD RESULT IN REDUCED SITE TRAFFIC
AND REVENUES.
Dr. Dean Edell provides us with unique content for, and drives traffic to, our
HealthCentral.com network. Dr. Edell is not contractually obligated to provide
content or drive traffic to our network, and he is not compensated for such
activity. If Dr. Edell ceased providing us with content or ceased mentioning our
HealthCentral.com network on his television and radio shows, we would have to
find a replacement for this unique content or an alternative means of driving
traffic to our site, both of which would be difficult and expensive to do.
In addition, under his agreement with Premiere Radio Networks, the syndicator of
his radio show, Dr. Edell has agreed not to authorize the use of his name or
likeness to promote any product or service in any way that would conflict with
his programs' advertisers or potential advertisers, or would impair his
credibility as a program host.
Any diminishment in Dr. Edell's reputation as a medical expert and advisor, his
death or incapacity, the expiration of his 15 year agreement with us, or any
other development that would cause us to lose the benefits of our affiliation
with Dr. Edell, could diminish our standing with healthcare consumers as a
credible source of healthcare information. Although we maintain key person life
insurance for Dr. Edell, his role in our company is sufficiently critical that
the insurance would not adequately protect us in the event of his death.
IN ORDER TO ATTRACT AND RETAIN USERS TO OUR HEALTHCENTRAL.COM NETWORK, WE NEED
TO CONTINUE TO PROVIDE CONTENT, WHICH IS EXPENSIVE AND DIFFICULT TO OBTAIN
AND/OR DEVELOP.
To attract and retain users to our HealthCentral.com network, we need to
continue to provide informative content. We will need to purchase or license
much of this content from third persons. Competition for content from people
with the professional reputation, name recognition and expertise that we require
is intense and increasing. This competition may increase the fees charged by
high quality content providers, resulting in increased expenses for us. We will
not only have to expend significant funds to obtain and
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improve our content, but we must also properly anticipate and respond to
consumer preferences for this content. If we are unable to enter into agreements
for the delivery of desirable content, or lose any existing agreements, it could
delay market acceptance of the HealthCentral.com network.
THE SUCCESS OF OUR BUSINESS MODEL IS DEPENDENT ON GROWTH AND ACCEPTANCE OF THE
INTERNET AND GROWTH OF THE ONLINE MARKET FOR HEALTHCARE INFORMATION, PRODUCTS
AND SERVICES.
Our business model assumes that consumers will be attracted to and use
healthcare information and related content available on our Internet-based
consumer healthcare network, which will, in turn, allow us the opportunity to
sell advertising and sponsorships designed to reach those consumers. Our
business model also assumes that those consumers will purchase health-related
products online using our website and that healthcare organizations and other
Internet healthcare companies will partner with us to reach these consumers.
This business model is not yet proven and may not be successful. Our future
revenues and profits, if any, substantially depend upon the widespread
acceptance and use of the Internet as an important channel for the delivery of
healthcare information, products and services. The Internet may not prove to be
a viable commercial medium due to inadequate development of a reliable network,
delays in development of high speed modems, or delays in the adoption of new
technologies or adapt our network, proprietary technology and transaction-
processing systems to customer requirements or emerging industry standards.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES AFFECTING THE INTERNET
HEALTHCARE INDUSTRY, OUR PRODUCTS AND SERVICES COULD BECOME OBSOLETE.
Any failure to respond to technological advances and emerging industry standards
could impair our ability to attract and retain customers. As the Internet and
online commerce industry evolve, we must address the increasingly sophisticated
and varied needs of our prospective customers and respond to technological
advances and emerging industry standards and practices on a cost- effective and
timely basis. We may not be able to successfully implement new technologies or
adapt our network, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards.
EXTENSIVE AND CHANGING GOVERNMENT REGULATION OF THE HEALTHCARE, DIETARY
SUPPLEMENTS AND PHARMACY INDUSTRIES IS EXPENSIVE TO COMPLY WITH AND EXPOSES US
TO THE RISK OF SUBSTANTIAL GOVERNMENT PENALTIES.
Numerous state and federal laws regulate our health business covering areas such
as:
. storage, transmission and disclosure of medical information and
healthcare records;
. the practice of medicine and other healing arts professions;
. the sale of controlled products such as pharmaceuticals and other
healthcare products;
. prohibitions against the offer, payment or receipt of remuneration to
induce referrals to entities providing healthcare services or goods;
. dispensing and delivering prescription or over-the-counter drugs and
other medical products;
. advertising drugs, cosmetics and nutritional supplements; and
. state insurance regulations.
Further, because the Internet health business is novel, federal and state
agencies may apply laws and regulations to us in unanticipated ways, and may
produce new legislation regulating our business, which could increase our costs
or reduce or eliminate certain of our activities or our revenues.
GOVERNMENTAL REGULATION OF THE INTERNET COULD INCREASE OUR OPERATING COSTS.
We receive confidential medical and credit card information from our customers
and website visitors. Laws and regulations directly applicable to communications
or commerce over the Internet are becoming more prevalent, and compliance with
any new laws could increase our operating expenses. In particular, many
government agencies and consumers are focused on the privacy and security of
medical and pharmaceutical records. The law of the Internet, however, remains
largely unsettled, even in areas
27
where there has been some legislative action. The rapid growth and development
of the market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online and, in particular,
on companies that maintain medical or pharmaceutical records.
A number of proposals have been made to impose additional taxes on the sale of
goods through the Internet. Taxation of online commerce could impair the growth
of our e-commerce business and add to the complexity of our transaction
processing system.
THE HEALTH INDUSTRY IS EXTREMELY DYNAMIC AND CONSTANTLY CHANGING, AND THUS OUR
BUSINESS MAY BE AFFECTED BY PRICING PRESSURES AND HEALTHCARE REFORM INITIATIVES.
The pressures of cost management, consumer demand for quality and safety and
professional concern about consumer reliance on non-professional advice will
dominate the healthcare marketplace for the foreseeable future. Any efforts to
contain costs by managed care entities will place downward pressures on gross
margins from sales of prescription drugs and other over-the-counter healthcare
products. Healthcare reform initiatives of federal and state governments,
including proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs, may further impact our revenues from
prescription drug sales. As a result, any company in the health business is
subject to the risk of an extremely changeable marketplace, which could result
in our need to continually modify our business model, which could harm our
business.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include the following:
. establishment of a classified board in which only a portion of the
total board members will be elected at each annual meeting;
. authorization for the board to issue preferred stock;
. prohibition of cumulative voting in the election of directors;
. advance notice requirements for nominations for election of the board
of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings; and
. change of control clauses in the employment agreements with several
company officers.
MANAGEMENT HAS BROAD DISCRETION OVER HOW OUR AVAILABLE CASH IS BEING USED.
Our officers and directors have broad discretion with respect to the use of our
available cash. We currently expect to use our existing cash balances to fund
operating losses, costs associated with integrating acquisitions and website
development. In addition, we are continuing to evaluate possible acquisitions or
investments in complementary businesses.
IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRANDS AND
REPUTATION COULD BE DAMAGED, AND WE COULD LOSE CUSTOMERS.
The regulation of domain names in the United States and in foreign countries is
subject to change. Regulatory bodies could establish additional top-level
domains, appoint additional domain name registrars or modify the requirements
for holding domain names. As a result, we may not acquire or maintain our
existing domain names in all of the countries in which we conduct business.
The relationship between regulations governing domain names and always
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our brands, trademarks and other
proprietary rights. In addition, we may be unable to prevent third parties from
acquiring and using domain names relating to our brands. Any confusion that may
result from information on or related to any websites with domain names relating
to our brands could impair both our ability to capitalize upon our brands and
our marketing strategy.
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Item 3. Qualitative and Quantitative Disclosure About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which is
affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of the cash
equivalents, we believe that we are not subject to any material interest rate
risk. We did not have any foreign currency hedges or other derivative financial
instruments as of June 30, 2001.
We do not enter into financial instruments for trading or speculative purposes
and do not currently utilize derivative financial instruments. Our operations
are conducted primarily in the United States and as such are not subject to
material foreign currency exchange rate risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 28, 2000, Bergen Brunswig Drug Company and its wholly owned
subsidiary, Medi-Mail, filed an action in Orange County, California Superior
Court (Case No. 00CC15552) against HealthCentral.com and more.com. The complaint
alleges inducement of breach of contract and fraudulent conveyance by
HealthCentral.com and breach of contract by more.com arising out of
HealthCentral's acquisition of certain of the assets of more.com. The complaint
alleges monetary damages of approximately $6 million. The Company intends to
vigorously defend against this claim. The parties have commenced settlement
negotiations.
On January 29, 2001, XOR, Inc. filed an action in Adams County, Colorado
District Court (Case No. 01 CV 108) against HealthCentral.com. The complaint
alleges breach of contract, unjust enrichment and promissory estoppel. The
complaint alleges monetary damages of approximately $1.3 million. The Company
has responded with an Answer and Cross Complaint for breach of contract, and
intends to vigorously defend against this claim.
The Company is involved in litigation from time to time that is routine in
nature and incidental to the conduct of its business.
Item 2. Changes in Securities and Use of Proceeds
On December 7, 1999, in connection with our initial public offering, a
Registration Statement on Form S-1 (File No. 333-88019) was declared effective
by the Securities and Exchange Commission, pursuant to which 150,000 shares of
our common stock were offered and sold on December 7, 1999 for our account,
generating net proceeds of approximately $74.6 million. We used the entire
amount of the net offering proceeds through June 30, 2001, of which $63.3
million was used for funding working capital and operating losses, $6.2 million
was used for capital expenditures and $5.8 million for acquisition costs. Other
than $1.4 million paid to Dr. Dean Edell, a director, for the purchase of the
Dr. Dean Edell Eyewear license, and $1.3 million paid to Neil Sandow, an
officer, in connection with the purchase of RxList, none of these payments
represented direct or indirect payments to our directors, officers or other
affiliates. The remaining initial public offering proceeds have been invested in
short-term, investment grade, interest bearing securities.
In May and June 2001, we issued a total of $3.5 million of long-term notes due
on December 31, 2003. Under the terms of the notes, interest is fixed at 8.5% to
be paid monthly in arrears. The debt is secured by inventory and receivables
under a UCC-1 filing. Additionally, each lender received a warrant to purchase
one share of common stock for each $10 loaned to us. The
29
warrants are immediately exercisable for a period of five years and carry an
exercise price equal to the average closing sale price for the twenty trading
days prior to the date of the warrant. We valued the warrants using the Black-
Scholes option pricing model using an expected life of five years, a weighted
average risk-free rate of between 4.76% and 5.06%, depending upon the closing
date, expected dividend yield of zero percent, a volatility of 201% and a deemed
value of the common stock between $10 and $18 per share, depending upon the
closing date. The estimated allocated fair value of the warrants of $1.8 million
will be amortized over the period of the borrowing agreement and included as
interest expense in the statement of operations until the notes mature on
December 31, 2003. Of the total funds, $500,000 came from Company insiders. The
proceeds from these issuances are being used for working capital.
The notes have a covenant which requires that the outstanding amount of
principal not exceed the sum of fifty percent (50%) of our inventory plus eighty
percent (80%) of the accounts receivable that are not more than 90 days past
due. We were in compliance with this covenant during the second quarter 2001.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 14, 2001,
1. The following individuals were elected to the Board of Directors, with
terms expiring in 2004:
Affirmative Votes
Votes Withheld
James Hornthal 731,524 4,872
Michael McDonald 712,173 24,223
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
2. To approve the amendment to the Certificate of 686,255 48,353 1,788
Incorporation to effect a 1-for-50 reverse stock split
of the Company's common stock
3. Ratify the appointment of PricewaterhouseCoopers LLP 732,935 1,847 1,614
as independent auditors for the fiscal year ending
December 31, 2001
Immediately upon approval of Item 1 above, the directors of HealthCentral.com
consisted of the following individuals:
Dean Edell
James Hornthal
Michael McDonald
Miles Munger
Thomas Simone
C. Fred Toney
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8K
(a) Exhibits:
3.5++ Amended and Restated Bylaws of the Company
10.42+ Termination Agreement among the Company, Invision Optical
Products and Sunglass Products of California dated June 19, 2001
10.43+ License Agreement among the Company, Invision Optical Products
and Sunglass Products of California dated June 19, 2001
10.44 Note and Warrant Purchase Agreement between the Company and
certain purchasers dated May 10, 2001
10.45 Form of Note relating to the Company's debt financing
10.46 Form of Warrant relating to the Company's debt financing
10.47 Security Agreement between the Company and certain secured
parties dated May 10, 2001
10.48 Amendment to the Security Agreement between the Company and
certain secured parties dated May 11, 2001
10.49 Registration Rights Agreement between the Company and certain
purchasers dated May 10, 2001
+ Confidential treatment has been requested from the Securities and Exchange
Commission with respect to certain information in these exhibits.
++ Supercedes previously filed exhibit.
(b) Reports on Form 8-K:
A current report on Form 8-K was filed with the Securities and Exchange
Commission by HealthCentral.com on June 29, 2001 to report a one-for-fifty
reverse stock split which became effective on June 28, 2001.
A current report on Form 8-K was filed with the Securities and Exchange
Commission by HealthCentral.com on July 26, 2001 to report that it had received
a determination on its continued listing by the Nasdaq Listing Qualifications
Panel.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HealthCentral.com
Date: August 14, 2001 By: /s/ C. Fred Toney
-------------------------------
C. Fred Toney,
Chief Executive Officer,
Chief Financial Officer and
Director
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