Healthcentral
Com · 10-Q · For 3/31/01
(Securities
and Exchange Commission)
On January
29, 2001, XOR, Inc. filed an action in Adams County, Colorado
District Court against HealthCentral.com. The complaint alleges
breach of contract, unjust enrichment and promissory estoppel.
The complaint alleges monetary damages of approximately $1.3
million. The Company has responded with an answer and counter
claim for breach of contract and plans to vigorously defend
against this claim. The Company's financial statements reflect
the software capitalization of $0.5 million related to XOR.
The Company has not accrued any amount related to the resolution
of this matter.
|
Filed On 4/2/01 3:56pm ET · SEC File 0-27567 · Accession Number 929624-1-545
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
4/02/01 Healthcentral Com 10-K405 12/31/00 17:267 Donneley R R & S..Inc/FA
Annual Report -- [X] Reg. S-K Item 405 · Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 84 550K
2: EX-3.5 Amended and Restated Bylaws of the Company 28 123K
3: EX-3.8 Certificate of Designation 7 37K
4: EX-4.3 Registration Rights Agreement 12 60K
5: EX-4.4 Registration Rights Agreement 12 60K
6: EX-10.33 Lease 12 57K
7: EX-10.34 Lease Agreement 36 136K
8: EX-10.35 Lease 45 172K
9: EX-10.36 Employment Agreement 5 27K
10: EX-10.37 General Assignment 2 13K
11: EX-10.38 General Assignment 3 14K
12: EX-10.39 Common Stock Repurchase Agreement 6 23K
13: EX-10.40 Amendment I 3 15K
14: EX-10.41 Severance and Change Agreement 9 46K
15: EX-21.1 Subsidiaries of the Company 1 7K
16: EX-23.1 Consent of Independent Accountants 1 7K
17: EX-23.2 Consent of Independent Public Accountants 1 7K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 000-27567
HEALTHCENTRAL.COM
(Exact name of registrant as specified in its charter)
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Delaware 94-3250851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
HealthCentral.com
6005 Shellmound Street, Suite 250
Emeryville, CA 94608
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (510) 250-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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 than 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $12,150,729 as of February 28, 2001 based
upon the closing sale price on the Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 50,661,038 shares of the registrant's Common Stock issued and
outstanding as of February 28, 2001.
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HEALTHCENTRAL.COM
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Page
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PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 18
Item 3. Legal Proceedings.............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............ 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 19
Matters.......................................................
Item 6. Selected Financial Data........................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition and 22
Results of Operations.........................................
Item 7a. Qualitative and Quantitative Disclosures About Market Risk..... 43
Item 8. Financial Statements and Supplementary Data.................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and 43
Financial Disclosure..........................................
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 44
K.............................................................
Signatures............................................................... 47
PART I
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements. These forward-looking statements involve
risks, uncertainties and assumptions. The 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors That May Affect Future Results and Market Price of
Stock." Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's opinions only as of the date
hereof. The Company undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements.
Item 1. Business
Company 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, ComfortLiving.com, Vitamins.com, DrugEmporium.com,
HealthCentral.com and RxList.com, and through our Vitamins.com mail order and
retail operations. We derive 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. We also derive revenue from the sale of the Dr. Dean Edell Eyewear
brand eyeglasses to our distributor.
We believe our stores and catalog offerings provide an easy way for
consumers to shop for the healthcare products they use everyday by providing a
complete source of healthcare products along with a wide range of health-
related content. Our goal is to become the leader in healthcare related e-
commerce. We intend to accomplish this goal through:
. WebRx.com, our online health superstore, which offers a selection of more
than 25,000 SKU's of health, beauty, and personal care products, plus a
full service pharmacy and a complete vision center at competitive prices;
. Comfort Living.com, our online specialty store, which features personal
and home products that are designed to address a particular health
condition. These products are distinctive in quality and not widely
available from other retailers. They are intended to make some aspect of
the user's life easier, better, more enjoyable or more comfortable.
Typical product lines include ergonomically correct chairs, products for
back and pain relief, allergy and asthma relief products and beds and
mattresses;
. Vitamins.com, our online vitamin store, which offers approximately 4,000
products representing over 100 health-related national brands as well as
the Vitamins.com brand. Product offerings include vitamins, minerals,
nutraceuticals, herbs, homeopathic products, body building supplements
and other healthcare products;
. Our Vitamins catalog, a monthly publication which offers approximately
8,000 products including nutraceuticals and other healthcare products;
. Our six Vitamins.com retail stores, which operate in the Maryland and
Virginia suburbs of the Washington, DC area. These stores generally stock
approximately 5,000 products;
. Comprehensive information on over-the-counter and prescription drugs
coupled with in-depth health-related content to help customers make
better informed purchases of health related products; and
. Quality customer service assistance, which is designed to attract and
retain customers, along with systems designed to safeguard client
confidentiality.
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We also design, host and maintain healthcare institutions' websites for
healthcare content and e-commerce. These co-branded and private label websites
enable our institutional clients to build needed brand loyalty to retain and
attract members and patients. We receive both development fees for building
customized websites and an annual license fee for our content and interactive
tools. Our largest clients are currently Blue Shield of California, Tenet
Healthcare Corporation, Women's Capital Corporation, Catholic Healthcare West,
St. Vincent's Hospital, Henry Ford Health System and Scripps Clinic.
HealthCentral.com is a Delaware corporation. Our principal executive
offices are located at 6005 Shellmound Street, Suite 250, Emeryville,
California 94608. Our telephone number at that location is (510) 250-2500. The
websites of the HealthCentral.com network are www.healthcentral.com,
www.webrx.com, www.rxlist.com, www.vitamins.com, www.drugemporium.com and
www.comfortliving.com.
Recent Events
Acquisition of Certain Assets and Liabilities of Comfort Living, Inc. and
Certain Assets of more.com. On December 14, 2000, we acquired all of the
assets and properties and assumed certain liabilities associated with
more.com's Comfort Living subsidiary, and certain related more.com assets,
including its website, www.comfortliving.com, inventory and a leased 18,000
square foot warehouse and distribution center in Gaithersburg, Maryland.
Acquisition of DrugEmporium.com. On September 14, 2000, we completed an
asset purchase agreement with Drug Emporium, Inc. and its online drugstore
subsidiary, DrugEmporium.com. Under the terms of the asset purchase agreement,
we acquired substantially all of the assets of DrugEmporium.com, including a
leased 60,000 square foot distribution and a prescription fulfillment center
in Louisville, Kentucky. In connection with this acquisition, we also entered
into a 10-year services agreement with Drug Emporium, under which we receive
in-store promotional and advertising support and access to Drug Emporium's
electronic purchasing system and in-store order pickup capabilities at certain
Drug Emporium retail stores. Drug Emporium recently filed for Chapter 11
bankruptcy protection in connection with a buyout by Snyder's Drug Stores.
Acquisition of Vitamins.com, Inc. On June 16, 2000, we acquired
Vitamins.com, a retailer that provides dietary supplements and related health
and wellness products. Through the acquisition of Vitamins.com, we acquired
Internet, mail order and brick-and-mortar retailing operations.
Dr. Dean Edell Eyewear License Agreement. On April 11, 2000, we acquired
the exclusive licensing rights to "Dr. Dean Edell Eyewear" through 2006.
Simultaneously, we entered into a distribution agreement with Cable Car
Eyewear to sell the Dr. Dean Edell Eyewear to brick-and-mortar pharmacies and
grocery chains. This agreement requires minimum purchases of products by Cable
Car Eyewear from us for the years 2000 through 2006; we are in negotiations
with the distributor regarding changes to the existing agreement that may
result in inventory values not being realized. In addition, we entered into a
supply agreement with Invision Optical Products through 2006 to source the
Dr. Dean Edell Eyewear products and supply us with these products, and we are
in negotiations with the supplier regarding changes to the existing agreement.
As a result of the DrugEmporium.com and Comfort Living asset purchases, we
have been able to purchase products directly from manufacturers and
wholesalers, thus we were able to eliminate many of our third party
fulfillment partnerships which we believe will result in improved product
margins. These acquisitions have also allowed us direct access to vendor
promotions and rebates. In October, 2000 we consolidated our Long Island City,
New York fulfillment operation into our Louisville, Kentucky fulfillment
center. This consolidation resulted in reduced operating costs, improved
inventory controls and greater economies of scale. We plan to further
consolidate our warehouse operations by closing our Gaithersburg, Maryland
facility on or before June 2001. Further, the acquisitions of
ComfortLiving.com, Vitamins.com and the Dr. Dean Edell Eyewear brand have
allowed us to expand our product lines, gain access to additional online and
offline customers and establish multiple high margin categories throughout our
health superstore and our mail order and retail businesses. We are in the
process of reviewing pharmacy operations and, as a result, may make changes in
the future.
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Industry Background
The Internet has become an increasingly popular source for healthcare
information and products. In a November 2000 survey performed by Pew Internet
and American Life Project (www.pewinter.org), 52 million American adults, or
55% of those people with Internet access have used the Web to search for
health or medical information. The number of people retrieving health-related
information is projected to grow. This growth in demand for online health
information has been driven by consumers seeking to make better personal
healthcare decisions.
As consumers become more educated about their personal healthcare, they are
also increasingly purchasing healthcare products online. According to June
2000 data from the research firm International Data Corporation, U.S. sales of
pharmaceutical, health, and beauty products over the Internet will increase
from less than $250 million in 1999 to more than $18 billion in 2004. The
study, "U.S. Online Prescription and Nonprescription Pharmaceutical, Health,
and Beauty Market: Forecast and Analysis," predicts that the majority of
revenue, 80% or $14.8 billion, will come from online sales of prescription
drugs, and Unity Marketing estimates that 89% of U.S. adults were expected to
take vitamins in 2000.
HealthCentral.com Solution
Through our network of websites, mail order operations, brick-and-mortar
stores, interactive and convenient shopping tools and customer service center,
HealthCentral.com offers a global solution to satisfy the growing demand for
healthcare products and health-related content.
WebRx Health Superstore
Our WebRx Health Superstore is a full service online store that combines
the convenience and privacy of online shopping with tremendous product
selection and reasonable prices. WebRx features the health-related products
that people use everyday, such as over-the-counter remedies, beauty aids,
cough, cold and pain relief medications. WebRx also features a full service
pharmacy with a licensed pharmacist to provide information about prescription
medications concerning correct use and dosage, generic alternatives, potential
side effects and drug interactions. Our pharmacy department is able to
crosscheck each prescription received for allergies, therapeutic overlap,
overuse/underuse and drug interactions with other drugs or foods. We are in
the process of reviewing pharmacy operations and, as a result, may make
changes in the future.
Vitamins, Minerals, Supplements & Herbs
In order to address lifestyle changes and the growing needs of an aging
population, we offer a large selection of vitamins, nutritional and dietary
supplements, herbs, homeopathic products, minerals and natural health, sports
and fitness products. These products may be purchased through three different
distribution channels:
. Vitamins.com. Our Vitamins.com Internet website offers over 4,000
products, representing over 100 health-related national brands. Customers
may seek out products in four different ways--by specific product,
product category, health concern or brand name. We carry both national
brands and private label brands such as Vitamins.com and Drug Emporium.
. Vitamins Mail Order. The Vitamins.com catalog is a full-color publication
distributed monthly by mail to catalog shoppers. It typically contains
between 90 and 100 pages and offers approximately 8,000 products. Each
issue features up to 100 products at special prices of up to 30% off of
regular catalog prices and up to 50% off of manufacturers' suggested
retail prices.
. Vitamins Retail Stores. We operate six Vitamins.com or Vitamin Superstore
brick-and-mortar stores in the Maryland and Virginia suburbs of
Washington, D.C. These retail stores generally stock approximately 5,000
products and are strategically located in high-traffic, high volume
retail centers. We believe our stores are substantially larger than the
stores of our major retail competitors. The stores are designed to
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be comfortable and welcoming and provide the atmosphere typical of an
upscale bookstore or other specialty store.
Specialty Health Products
ComfortLiving.com is an Internet retailer specializing in non-consumable,
durable products, which are designed to address personal care, pain relief and
comfort. The products are organized around three key themes:
. Healthy environment--products used primarily in the home and office to
improve personal comfort, air and water quality, or the overall
environment, such as specialty products for allergy and asthma sufferers,
air and water conditioners, purifiers and filters, and ergonomic supplies
and furniture;
. Home healthcare--special use or hard-to-find products designed for use in
the home by people with particular assisted living and healthcare needs,
such as adjustable beds, therapeutic mattresses, lift chairs and
ergonomic supports; and
. Baby care and maternity--health, safety and comfort products for the
expecting mother or new parents and their children.
Vision Center
Through our vision center, customers can purchase a wide variety of eye
care products, such as contact lenses, contact solution and Dr. Dean Edell
Eyewear nonprescription reading glasses.
Interactive and Convenient Shopping Tools
To enhance the shopping experience, the WebRx.com site has a virtual
shopping bag that keeps a running tab of selected items and prices, allowing
shoppers to quickly purchase their needed healthcare products. The shopping
bag remains to the right of their screen while the customer browses so that
consumers do not have to click to a different page to select each product. To
quickly find a particular item, shoppers can use our search engine, browsing
the entire inventory by key word, such as the product name, brand name or
description. Shoppers may also develop their own shopping lists on the site to
be saved and used again. The customer can then add or subtract items as they
continue to shop with us in the future. We also offer a convenient and easy-
to-use Auto Reorder service, which allows customers to order products that
will be shipped automatically at any time intervals they choose. Customers can
also create and store multiple shopping lists to eliminate the task of
searching for the same products.
Personalized Level of Customer Service
Our customers can have their general questions about account information,
ordering products and shipping status addressed by HealthCentral.com customer
care representatives. Our customer service representatives provide responses
to customer inquiries by e-mail or telephone and are available seven days a
week, from the hours of 8:00 a.m. to 10:00 p.m., Eastern Time, from Monday
through Friday, and from 9:00 a.m. to 5:00 p.m., Eastern Time, on Saturday and
Sunday. We offer our customers various shipping options, including next-day,
two-day or standard delivery through UPS or the United States Post Office.
Informative, Trustworthy and Engaging Health Information Content
In the Winter 2000 Scorecard, HealthCentral.com website was ranked as the
number one overall health content site on the Internet by Gomez, the Internet
quality measurement firm. Our reputation in this regard is built on the
provision of comprehensive and engaging information from medical professionals
who have established a high degree of trust with consumers through traditional
media. Currently our original content comes from established media sources
such as Dr. Dean Edell, one of the leading physician broadcasters in the
United States for the past twenty years. In addition, RxList.com, our internet
drug index, provides fast and
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reliable information to both the consumer and the medical professional. The
RxList.com database stores information regarding approximately 4,400
pharmaceuticals and other medicines in addition to Taber's Medical
Encyclopedia of more than 53,000 medical terms.
Our Strategy
Our strategy is to become the world's leading healthcare e-commerce
company. We intend to accomplish our strategy through multiple revenue
streams, high margin products, expansive product lines and the acquisition of
qualified customers at a relatively low cost while maintaining and cultivating
a relationship with our existing consumer customers:
Multiple Revenue Streams. Our strategy is to develop multiple revenue
streams from our e-commerce websites, catalog sales, Dr. Dean Edell Eyewear
sales, and sponsorship and advertising fees.
High Margin Products. We intend to focus on high price, high margin
products such as those offered at ComfortLiving.com and on high margin, high
volume products such as the vitamins, minerals and supplements sold through
our Vitamins.com website and mail order business.
Expansive Product Lines. We will continue to look for high margin, high
volume products to expand our range of consumer products and services.
Large Customer Base. In order to grow and maintain a large customer base,
we encourage repeat purchases with our emphasis on customer service. We are
also targeting to acquire new customers at a relatively low cost through
segmented emails, affiliate marketing programs, healthcare newsletters, and
engaging and informative content.
Maintain and Cultivate a Relationship of Trust with Consumers. Through our
affiliations with trusted media personalities such as Dr. Dean Edell we enjoy
a privileged and trusted status with those consumers who seek our
HealthCentral.com network based on their experience with those personalities.
We hold that level of trust in high regard and seek to maintain it by
providing consumers with reliable content and by keeping individual consumer
information confidential.
Customers
Consumer
In January 2001, the HealthCentral.com websites had the following traffic
levels, according to DoubleClick and internally generated reports.
ComfortLiving.com traffic levels were reported by WebTrends and reflect
pageviews, visits and unique visitors for the month of February 2001. "Total
unique visitors" is calculated as the sum of the unique visitors to each
individual site, thus, total unique visitors may be overstated due to
potential multiple counting.
[Download Table]
Pageviews Visits Unique Visitors
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ComfortLiving.com.................... 1,063,871 342,573 165,431
HealthCentral.com.................... 5,562,525 905,900 600,066
RxList.com........................... 5,939,491 1,014,770 709,722
WebRx.com*........................... 6,410,933 1,380,907 900,139
TOTAL................................ 18,976,820 3,644,150 2,375,358
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* Includes WebRx.com, Vitamins.com and DrugEmporium.com.
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Technology
Our HealthCentral.com network of websites employs hardware and software
architectures, which are hosted on third-party web hosting services. We are in
the process of integrating all of our applications, services and databases into
the HealthCentral.com network architecture.
Physical Architecture. We employ a server architecture in a mixed LINUX,
Solaris, UNIX and Windows NT environment. Our HealthCentral.com network sites
and online stores, as well as our institutional clients' websites, are
protected by industry standard firewalls. All sensitive data is stored on
separate, private networks that are not directly accessible from the Internet.
In addition, there are security systems that include video surveillance of
critical servers 24 hours a day. There are also well-defined audit mechanisms
in place. We have implemented a broad array of website management, search
engine, customer support, order processing and fulfillment systems using a
combination of commercially available, licensed technologies and selected
proprietary technologies. The front ends of our online stores are built on
industry standard technologies, including the Sun Solaris operating system and
an Oracle database. These technologies are integrated using a variety of
proprietary computer programs, the majority of which are written in server side
Java, HTML, JavaScript and Pearl. These programs handle user interface, product
search, ordering, order tracking and customer communications.
HealthCentral.com subcontracts the hosting of its servers to several
different hosting companies. These hosting companies have agreed to provide
Internet connections to multiple Internet access points, a secure physical
environment, climate control, redundant power and 24-hour-a-day, seven-day-a-
week monitoring services. We believe that all facilities have adequate capacity
for expansion to support.
The continued, uninterrupted operation of the HealthCentral.com websites,
mail order and retail stores and our transaction processing systems is
essential to our business. We employ system administrators to monitor and
manage the website, network operations, inventory and fulfillment and
transaction processing systems to enable their continued operation and
reliability. The systems include redundant hardware on critical components and
have been designed to survive a variety of failures with minimal downtime.
Software Architecture. We employ three-tier software architectures,
consisting of a user interface layer, an engine layer and a database layer,
which allow customization, updating and repair of each layer without
interfering with the operation of the other layers. Our database servers are
Oracle on Sun Solaris for high end applications and MS SQL servers for low-end
applications.
Sales and Marketing
Our current sales and marketing strategy is targeted to drive qualified
customers to our network of e-commerce websites at a low cost. Our online
marketing efforts are focused on identifying first time customers and repeat
purchasers, who are typically Internet users aged 35 to 54, with an emphasis on
women. We reach these groups through:
. Segmented e-Mails
We have a large customer base that totaled 1.3 million customers as of
January 2001. We rely heavily on segmented e-mails as a way to cost
effectively market to our existing customer base, which we believe
results in improved customer retention and repeat purchases. We attempt
to maximize repeat purchases through our online Auto Reorder feature. We
also acquire or rent opt-in e-mail lists to market through e-mail-based
communications. Additionally, through our Vitamins catalog, we employ a
frequency reward program based upon repeat purchases, which reinforces
our online marketing efforts through branded giveaway items in our
product packaging.
. Co-Marketing Initiatives with Affiliates
We enter into co-marketing agreements with affiliate websites that
typically target women's interests, parenting and family, travel planning
and senior-oriented sites. We share revenue with affiliates for directing
traffic that results in purchases to our site.
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. Healthcare Newsletters
We target healthy people and people who suffer from chronic conditions by
offering over 70 different topic specific newsletters (i.e., fitness,
diabetes, nutrition, hypertension, etc.) to our customers via email. This
e-mail program is effective and relatively inexpensive to administer, and
each newsletter contains e-commerce promotions.
. Search Engine Optimization
The marketing efforts of our ComfortLiving.com site include search-engine
optimization, an efficient and cost effective technique by which we
strive to direct Internet shoppers searching for brand name products and
special needs to our site.
. Advertising and Sponsorships
Our advertising campaigns target online consumers and are designed to
promote repeat purchases as well as result in the acquisition of new
customers. We employ DoubleClick, Inc. to conduct advertising sales for
our HealthCentral.com and RxList.com websites. Under the terms of the
agreement, we cannot sell advertising, with certain exceptions, for our
HealthCentral.com website through alternate avenues; however, the
agreement is terminable by either party on 90 days notice. We directly
develop and generate sponsorship revenues for our e-commerce websites
through strategic partnerships and selected relationships with key
vendors and pharmaceutical companies.
Competition
The online e-commerce markets in the health, beauty, wellness, personal care
and pharmacy categories are fragmented and intensely competitive. This
competition has resulted in price discounting and failure to build brand
loyalty. Our competitors in these areas can be divided into several groups:
. chain drugstores, such as CVS, Eckerd and Walgreen's, and independent
drug stores, including their websites;
. mass market retailers, such as Kmart, Target and Wal-Mart, including
their websites;
. supermarkets and warehouse clubs such as Kroger, Safeway and Sam's Club;
. online retailers of health, beauty, personal care and/or pharmaceutical
products, such as drugstore.com, Rx.com and CVS.com;
. mail-order pharmacies and prescription benefits managers, such as Advance
PCS, Express Scripts and Merck-Medco, including their websites;
. internet-portals and online service providers that feature shopping
services, such as America Online, Yahoo!, Excite and Lycos;
. health and specialty stores such as General Nutritional Centers,
Brookstone and Gazoontite, including their websites; and
. cosmetics departments at major department stores, including their
websites.
Each of these competitors operates within one or more of the health, beauty,
wellness, personal care and pharmacy product categories. In addition, nearly
all of our competitors have, or have announced their intention to have, the
capability to accept orders for products online. In particular, Walgreen's,
CVS, Albertson's and Wal-Mart accept prescription refill or other orders on
their websites. Additionally, larger, better-established and better-financed
entities may acquire, invest in or form joint ventures with online competitors
or suppliers as the use of the Internet increases.
Many of these competitors have substantial competitive advantages over us,
such as:
. greater name recognition;
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. larger customer and user bases;
. substantially greater financial, technical and other resources;
. larger production and technical staffs;
. the ability to offer a wider array of online products and services; and
. more diversified content offerings.
We believe that we compete on the basis of product selection and variety,
convenience, customer service and satisfaction, quality of search tools, speed
of fulfillment for products ordered and price. We believe that the key
competitive factors in this industry are:
. brand recognition;
. the ability to attract and retain customers;
. breadth and depth of product offerings;
. product pricing;
. the availability and quality of information on nutrition, health and
wellness topics; and
. the quality and responsiveness of customer service.
We also believe that these competitive factors are significant to our
traditional brick-and-mortar retail business, as well as our mail order
operations.
In the market for health content, there are currently over 15,000 Internet
websites that provide health-related information. As a result, our industry is
fragmented and competition is extremely intense. Our HealthCentral.com and
RxList.com websites compete directly for users, advertisers, e-commerce
merchants and other partners with numerous Internet and non-Internet
businesses, including:
. health-related websites targeted at consumers, such as WebMD, drkoop.com,
DiscoveryHealth.com, InteliHealth, and Medscape.com;
. online portal companies, such as America Online, Excite, Inc., Lycos
Corporation, Microsoft Network, and Yahoo!;
. hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payors that offer healthcare information
through the Internet; and
. consumer affinity groups, such as the American Association of Retired
Persons and SeniorNet, which offer online healthcare-related content to
special demographic groups.
Intellectual Property Rights
Our intellectual property rights are important to our business. We rely on
a combination of copyright, trade secret, trademark and trade dress laws,
confidentiality procedures and contractual provisions to protect our
proprietary rights. We have obtained federal trademark registrations for the
trademarks and logos "HealthCentral," "WebRx" and "RxList" as well as other
trademarks. We have a 15-year agreement with Dr. Edell, in which he has
granted us the exclusive right to the use of his name in connection with our
business and exclusive commercialization rights to his services over the
Internet, except for the publication of radio transcripts and Internet
broadcasts of his radio program. Under this agreement, all content that Dr.
Edell creates for our HealthCentral.com network is owned by us. Enterprise Web
Services, or EWS, developed some elements of HealthView, the Personal Health
Record and the general architecture of the HealthCentral.com consumer website
during its participation in a project funded by a grant from the National
Institute of Standards and Technology. Under the terms of the grant, EWS owns
the intellectual property it developed for the project and granted a
nonexclusive, nontransferable license to the U.S. government of that
intellectual property.
8
Our policy is to enter into confidentiality and invention assignment
agreements with all employees and consultants, and nondisclosure agreements
with all potential business partners. These protections, however, may not be
adequate to protect our intellectual property rights. In addition, we may be
sued by third parties alleging, with or without merit, that we have violated
their intellectual property rights. See "Risk Factors--Any failure to protect
our intellectual property rights impair our ability to establish our brands"
and "--We may be sued by third parties for infringement of their proprietary
rights."
Government Healthcare Regulation
General. Numerous state and federal laws regulate our health business, as
described below. Generally, the laws and regulations governing the healthcare
industry are just beginning to be tested in relation to e-commerce in
healthcare products, such as prescription drugs on the Internet, and in the
provision of healthcare information. The laws may be interpreted in such a way
that we may not be permitted to conduct our business as described. The
requirement that we comply with new legislation or regulations, or any
unanticipated application or interpretation of existing laws or regulations,
may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our products, services and information offered through
our HealthCentral.com network, increase our cost of doing business or
otherwise harm our business. See "Risk Factors--Extensive and changing
government regulation of the healthcare industry is expensive to comply with
and exposes us to the risk of substantial governmental penalties."
Regulation of the Practice of Medicine. The practice of medicine is
generally defined by state law and varies from state to state. Often it is
defined as engaging in, with or without compensation, diagnosis or treatment
of a physical or mental condition. The practice of medicine requires a license
under state law and, depending on state law, engaging in the practice of
medicine without a license can be a civil or criminal violation. Many states
have laws prohibiting corporations from engaging in the practice of medicine
or employing or contracting with licensed medical professionals for the
provision of medical services. We have endeavored to structure our websites
and, in particular our personal health evaluation tools and our descriptions
of various healthcare products, to avoid the implication that we are in any
way practicing medicine in violation of state licensing requirements or in
violation of state corporate practice of medicine prohibitions. For example,
we have included within our websites disclaimers and other notices that we
have deemed appropriate to advise users that the information provided is not
intended to be a substitute for consultation with a licensed physician.
However, the application of this area of the law to Internet services such as
ours is still in its infancy with no clear guidance from federal or state
regulatory agencies regarding their interpretation of services such as ours. A
key element of our strategy is to encourage consumers to identify us with Dr.
Dean Edell, a physician licensed in the state of California. Confusion by
consumers regarding the limitations on information received from Dr. Edell and
the need to consult with their own physician with respect to their medical
condition is possible. Also, we have not conducted a state by state survey of
medical personnel licensing requirements and policies. Accordingly, a state
regulatory authority and/or one or more licensed physicians or physician
advocacy groups or consumers may now or in the future allege that one or more
elements of our business requires a license to practice medicine, that we are
in violation of corporate practice of medicine prohibitions, and/or that our
disclaimers are ineffective as to particular consumers who claim to rely upon
advice or information provided by us. Any application of practice of medicine
regulations to our business could harm our business or require us to change
our business model. Further, liability based on a determination that we are
engaged in the practice of medicine without a license may cause us to be
excluded from coverage under the terms of our current general liability
insurance policy, and may subject us to a higher standard of care than would
be applicable to activities that do not require a professional license.
Regulation of Other Healthcare Professions. We provide general information
regarding pharmacology, nutrition and general mental and physical health
issues on our websites, including electronically accessible information
regarding prescription drugs and answers to frequently asked questions about
prescription drugs. The practice of pharmacology, nutrition, psychology and
certain personal counseling is defined and regulated by state law, which
varies from state to state. While we have taken the same precautions to avoid
the practice of other healthcare professions as we have with the practice of
medicine, a local professional licensing board, local
9
professionals, professional advocacy groups, or consumers may seek to impose
state law licensing requirements on some aspects of our business. Any
application of the regulation of the practice of another healthcare profession
to our business could harm our business or require us to change our business
model. Further, any liability based on a determination that we are engaged in
the practice of a healthcare profession without a license may cause us to be
excluded from coverage under the terms of our current general liability
insurance policy, and may subject us to a higher standard of care than would
be applicable to activities which do not require a professional license.
Regulation of Prescription Drug Activities and Pharmacies. Our business of
providing drugs and other medical products pursuant to a prescription is
subject to federal, state and local laws and regulations, many of which are
specific to pharmacies. For example, under the Omnibus Budget Reconciliation
Act of 1990 and related state and local regulations, pharmacists are required
to offer counseling, without additional charge, to prescription drug customers
about medication, dosage, delivery systems, common side effects, adverse
effects or interactions and therapeutic contraindications, proper storage,
prescription refill, and other information they deem significant. In addition,
state laws specify how prescription drugs and medical devices may be filled
and dispensed and which individuals and entities are allowed to fill and
dispense them. Moreover, while we believe our discussions of drugs and medical
devices on our websites are not regulated "advertising or promotion" of
prescription drugs, the FDA and many state agencies which regulate advertising
and product performance claims for prescription drugs may determine otherwise.
We are also subject to FDA regulation of product safety, including
adulteration, misbranding and mishandling of prescription drugs and medical
devices.
Pharmacy operations are also subject to federal, state and local licensing
and registration regulations with respect to the Controlled Substances Act and
federal Drug Enforcement Agency (DEA) regulations, as well as related state
and local laws and regulations relating to pharmacy operations, including
registration, security, recordkeeping, and reporting requirements related to
the purchase, storage and dispensing of controlled substances and prescription
drugs, and certain over-the-counter (OTC) drugs. We own, operate and are
linked to the WebRX website, which is licensed to fill prescriptions in all
states that require pharmacy licensing, with the exception of Michigan. We
plan to obtain a license that will enable WebRX to fill prescriptions in
Michigan in the near future.
Because we are considered a "pharmacy" under state regulations as well as
being the subject of Food and Drug Administration (FDA), Federal Trade
Commission (FTC), DEA and state agency enforcement actions, we could also be
liable to consumers in connection with adulterated drugs, false or misleading
advertising or claims or problems with the storage, transport and sale of
controlled substances. While we have rights against drug manufacturers as to
adulteration of prescription products and rights against drug and device
manufacturers as to false advertising for prescription products that are
provided to us, we may have liability if manufacturers cannot or will not
indemnify us in a specific situation.
The U.S. Congress and the General Accounting Office (GAO) are currently
investigating online pharmacies and online prescribing. They are especially
focused on those who prescribe drugs online and on pharmacies that fill
invalid prescriptions, including prescriptions that are written online. In
addition, several state Attorneys General have instituted enforcement actions
against Internet pharmacies which they believe have dispensed prescription
drugs without proper prescriptions or without first obtaining the proper state
licenses. The U.S. House of Representatives' Committee on Commerce has
requested that the GAO undertake a formal review of a number of issues
pertaining to online pharmacies, including an assessment of mechanisms to
ensure that online pharmacies are obeying the various state and federal
regulations for the industry. Moreover, there is currently before the U.S.
Congress a proposed law that would require the FDA to oversee the operations
of all Internet pharmacies. A change in the law with respect to the regulatory
requirements relating to Internet pharmacies would require our compliance with
any corresponding rules and regulations.
The National Association of Boards of Pharmacy, a coalition of state
pharmacy boards, has developed a program, the Verified Internet Pharmacy
Practice Sites (VIPPS) as a model for self-regulation for online pharmacies.
We have obtained VIPPS certification. In addition, various state legislatures
are considering new
10
legislation related to the regulation of Internet pharmacies. The inclusion of
prescription drugs as a Medicare benefit has been the subject of numerous
bills in the U.S. Congress. Should legislation on prescription drug coverage
for Medicare recipients be enacted into law, compliance with any corresponding
rules and regulations would be required, even though at this time we do not
accept Medicare prescriptions.
Regulation of the Sale of OTC Drugs, Nutritional Supplements, and
Cosmetics. The FDA and FTC and similar state agencies regulate OTC drug and
cosmetic advertising and promotion, including direct-to-consumer advertising,
done by or on behalf of drug and cosmetic manufacturers and marketers. In
addition, the FDA regulates product safety for nutritional supplements as well
as product safety of OTC drugs and medical devices. Many of our OTC products
and services are subject to FDA and FTC regulation and enforcement for false
advertising and misleading advertising. This includes overstatements regarding
product performance, especially regarding nutritional supplements. While we
have rights against manufacturers as to adulteration issues and product claims
(to the extent we have received the claims as a result of the manufacturers),
we may have liability if the manufacturers cannot or will not indemnify us in
a specific situation.
FDA and State Regulation of Computer Software as a Medical Device/Medical
Practice. Certain computer applications and software may be considered medical
devices and would, therefore, be subject to regulation by the FDA or by states
with respect to the practice of pharmacy or the practice of medicine. We do
not believe that our current applications or services will be regulated by any
of these entities; however, our applications and services may become subject
to regulation. Additionally, we may expand our applications and service
offerings into areas that subject us to regulation. We believe that complying
with such regulations would be time consuming, burdensome and expensive and
could delay or prevent our introduction of new applications or services.
Application of State and Foreign Laws. Although our business offices are
located in California, our websites are available to users all over the United
States and the world. Therefore, the governments of other states and foreign
countries also regulate our activity and our transmissions and may take action
against us for violations of their laws. For example, many states have enacted
laws related to telemedicine, where physicians are practicing medicine by
various means of communication over state lines. The states have varied
tremendously in their approaches to this issue, including, among others,
requiring full licensing of the out of state practitioner or by requiring the
involvement of a state licensed practitioner. The states have uniformly
asserted their right to regulate telemedicine activity, based upon the
location of patients in their state, and we would expect the states to take
the same approach as to other electronic activities directed to consumers in
their states. We have not undertaken a state by state or a country by country
review of the health-related laws that could apply to our business. Violations
of these laws may be alleged or charged by state or foreign governments or may
be modified, or new laws may be enacted, in the future. Any of such changes in
laws could harm our business.
Liability for Health Information and Health Products. Due to the nature of
our business, we may become involved in litigation regarding the information
transmitted from our websites, with the risk of adverse publicity, significant
defense costs and substantial damage awards. In addition, if we are deemed to
be engaged in the practice of medicine or another healthcare profession,
including pharmacy, we could be subject to claims and/or malpractice liability
exposure for which we may not be insured. We may also be liable for personal
and property damage from products provided by us, including from prescription
drugs. Finally, the FDA could look to us first in enforcing a product recall.
In recent years, participants in the healthcare industry have been subject to
an increasing number of lawsuits alleging malpractice, product liability and
related legal theories, many of which involve large claims and significant
defense costs. We have legal rights against the manufacturer and fulfillment
companies, with some limits, for their activities related to the products we
provide. To date, we have not been the subject of any claim involving the
operation of our site. However, claims may be brought against us. Even if
these claims ultimately prove to be without merit, defending against them can
be time-consuming and expensive, and any adverse publicity associated with
these claims could adversely affect our business. Our liability insurance does
not provide coverage for professional malpractice, so these claims would not
come within the scope of or be covered by our insurance. We may not be able to
maintain existing coverage or expand its scope to address evolving risks, or
obtain increased amounts of coverage on acceptable terms or at all.
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Federal and State Anti-Kickback Laws. Provisions of the Social Security Act
known as the Federal Anti-Kickback Law prohibit knowingly or willfully,
directly or indirectly, paying or offering to pay, or soliciting or receiving,
any remuneration in exchange for the referral of patients to a person
participating in, or for the order, purchase or recommendation of items or
services that are subject to reimbursement by, Medicare, Medicaid, the
Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) and
similar other federal or state healthcare programs. Violations may result in
civil and criminal sanctions and penalties. Civil penalties include exclusion
from government health programs. Criminal sanctions include imprisonment for
up to five years and fines of up to $25,000 or both, for each violation.
Recent federal legislation expanded the sanctions to include civil monetary
penalties up to $50,000 for each prohibited act and up to three times the
total amount of remuneration offered, paid, solicited or received, even in
circumstances where a portion of such remuneration is offered, paid, solicited
or received for a lawful purpose. Certain courts reviewing the statute have
taken a broad view of the Federal Anti-Kickback Law and have ruled that it can
be violated if only one purpose of a payment arrangement is to induce
referrals. Many states also have enacted similar local anti-kickback laws.
At present, Medicare does not reimburse outpatient prescription drugs, with
the exception of a few items. However, Medicaid and CHAMPUS do include a
significant outpatient prescription drug benefit. In addition, Medicare,
Medicaid, CHAMPUS and other healthcare programs subject to the Federal Anti-
Kickback Law cover various medical supplies sold through our websites, such as
slings and splints. While we believe that we have structured our fee
relationships so that the Federal Anti-Kickback Law is not implicated for any
items or services covered by it, enforcement agencies may take a contrary
position, especially if Medicare benefits are expanded to cover prescription
drugs. Our arrangements with our e-commerce pharmacy, medical supply and
medical service affiliates, as currently structured, may not qualify as among
the practices exempted from federal prosecution or other enforcement under the
Federal Anti-Kickback Law by the regulatory safe harbors promulgated by the
Department of Health and Human Services (DHHS). Failure to meet a safe harbor,
however, does not mean that an arrangement violates the statute. Many
activities engaged in by healthcare providers and related entities fall
outside the safe harbors yet are not deemed illegal. While we believe that our
fee arrangements are not illegal as to products and services reimbursable by
Medicare, Medicaid, CHAMPUS or other programs covered by the Federal Anti-
Kickback Law, given the breadth of the statute, the limited scope of the
existing safe harbors and the desire of the agencies to eliminate programs
that create financial incentives to provide excessive care, we may face
adverse regulatory positions. The Office of Inspector General is authorized to
issue advisory opinions regarding the interpretation and applicability of the
Federal Anti-Kickback Law, including whether an activity or proposed activity
constitutes grounds for the imposition of civil or criminal sanctions. We have
not sought this kind of opinion and are aware of no opinion that has been
issued regarding website sponsorships or planned sales activities.
In addition, most states have enacted anti-kickback, or illegal
remuneration, laws that are similar to the Federal Anti-Kickback Law. Some of
these state laws are very closely patterned on the Federal Anti-Kickback Law;
others, however, are broader and reach reimbursement by private payors, and
still others are more narrow, applying, for example, only to kickbacks paid or
received by providers. We have not conducted a survey of these laws in all
fifty states and therefore, our arrangements with our e-commerce affiliates
may result in investigation or prosecution by state regulators or attorneys
general.
If our activities were deemed to be inconsistent with the Federal Anti-
Kickback Law or with state anti-kickback or illegal remuneration laws, we
could face civil and criminal penalties or be barred from such activities, any
of which could harm our business. Further, we could be required to restructure
our existing or planned sponsorship compensation arrangements and e-commerce
activities in a manner that could harm our business.
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Federal and State Self-Referral Prohibitions. The federal physician self-
referral statute, often identified as the Stark Law, generally forbids
payments under Medicare or Medicaid that are based on a physician referral for
"designated health services" to any entity with which the physician or an
immediate family member has a financial relationship. The financial
relationship can be direct or indirect. The financial relationship can take
the form of an ownership or investment interest or a compensation
relationship. A referral, under the Stark Law, can include prescribing or
requesting designated health services, and also establishing a plan of care
for the designated health services. The Stark Law applies to clinical
laboratory services and other designated health services, including outpatient
prescription drugs, prosthetics, orthotics, prosthetic devices and durable
medical equipment. Penalties for violating the Stark Law include denial of
payment from Medicare and Medicaid programs for any services referred to an
entity in violation of the Stark Law, civil monetary penalties of up to
$15,000 for each offense and exclusions from the Medicare and Medicaid
programs. Many states have adopted similar self-referral laws, which may
extend to governmental and third-party payors. We have not conducted a survey
of these laws in all fifty states.
Other Governmental Regulation
General. There is an increasing number of laws and regulations pertaining
to the Internet. In addition, a number of legislative and regulatory proposals
are under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, it may take years to determine whether and
how existing laws such as those governing issues such as intellectual property
ownership and infringement, privacy, libel, copyright, trademark, trade
secret, obscenity, personal privacy, taxation, regulation of professional
services, regulation of medical devices and the regulation of the sale of
other specified goods and services apply to the Internet and Internet
advertising. The requirement that we comply with any new legislation or
regulation, or any unanticipated application or interpretation of existing
laws, may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our service, increase our cost of doing business or
otherwise harm our business.
Online Content Regulations. Several federal and state statutes prohibit the
transmission of indecent, obscene or offensive content over the Internet to
certain persons. In addition, pending legislation seeks to ban Internet
gambling and federal and state officials have taken action against businesses
that operate Internet gambling activities. The enforcement of these statutes
and initiatives, and any future enforcement activities, statutes and
initiatives, may result in limitations on the type of content and
advertisements available on HealthCentral.com. Legislation regulating online
content could slow the growth in use of the Internet generally and decrease
the acceptance of the Internet as an advertising and e-commerce medium, which
could impair our ability to generate revenues.
Privacy of Individually Identifiable Health Information and Consumer
Information. There have recently been increased efforts in both the United
States and in other countries to safeguard the privacy and security of
individually identifiable health information and consumer information.
These efforts are reflected in changing federal and state laws governing
the storage, transmission and disclosure of medical information and healthcare
records. In addition to having recently enacted legislation, the U.S. Congress
is currently considering several bills dealing with privacy of personal health
information which may create a need for us to modify our practices concerning
the collection and use of such information. Our database contains personally
identifiable health information submitted by users in response to questions on
our personal health evaluation form and in connection with a customer's
request for a prescription drug and certain healthcare product orders. We
expect that our websites will also contain information compiled by users for
their personal healthcare histories. While this information is not intended to
constitute or be treated as formal medical records, users or regulatory
agencies may seek to characterize this information as medical records and
impose requirements and/or sanctions upon us related to the maintenance and
handling of medical records. We have a stringent privacy policy covering this
information, and we only grant access to this information as required by
13
law or to third party contractors who are also bound by a stringent privacy
policy or, as disclosed to our users, to third parties where it is necessary
for the delivery of goods or services ordered by the user.
The FTC has recently promulgated regulations implementing the financial
privacy provisions of the Gramm-Leach-Bliley Financial Services Reform Act
(GLB), and has been active in investigating alleged misrepresentations by
Internet sites regarding their privacy practices. Although the GLB rules do
not directly apply to us, we have established a set of privacy principles and
practices based upon those proposed by Health Internet Ethics, of which we are
a founding member. The FTC, as part of its inquiry into privacy practices by
e-health sites, looked into our privacy practices last year. The agency
subsequently closed its inquiry without taking any action after expressing
satisfaction with the steps we took to clarify our privacy practices and to
safeguard against any inadvertent disclosure of personal information.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
requires personally identifiable health information be used and disclosed only
in compliance with specified rules and regulations, which have not yet been
finalized. Our pharmacy operations will more likely than not be directly or
indirectly subject to certain HIPAA requirements. We have not to date
undertaken an evaluation of the impact of HIPAA on our operations, but intend
to review such regulations once they are finalized.
In December, 2000 DHHS published privacy regulations under HIPAA, which may
be revised before they are implemented. They describe the permissible uses and
disclosures of individually identifiable health information by health care
providers, health plans and health care clearinghouses, known collectively as
"covered entities." It is possible that we could be considered a covered
entity if we are deemed to be a health care provider. Covered entities are
required to enter into agreements with their "business associates," extending
applicable provisions of the regulations to those business associates.
These regulations establish a complex regulatory framework for a variety of
subjects, including (1) disclosure and use of health information, (2)
individuals' rights to access and amend their health information, and (3)
individuals' rights to an accounting of disclosures. They generally prohibit
covered entities and their business associates from disclosing protected
health information unless they first obtain patient consent or authorization,
and then only allow the disclosure of the minimum necessary amount of
protected health information. We will need to comply with these requirements
if we are deemed to be a covered entity or a business associate of a covered
entity.
In August, 1998 DHHS issued proposed regulations addressing security
standards for the transmission of protected health information under HIPAA.
These standards require affected entities to establish and maintain reasonable
and appropriate administrative procedures, physical safeguards, technical
security services, and technical security mechanisms to ensure the integrity,
confidentiality and availability of such information. The proposed regulations
are designed to protect such information against reasonably anticipated
threats or hazards to its security or integrity. They require covered entities
to enter into "chain of trust partner agreements" with all entities with whom
they share protected health information. We will need to comply with these
standards if we are deemed to be a health care provider, or if we are required
to enter into chain of trust partner agreements with any of our customers,
such as health care providers.
If third persons were able to penetrate our network security and gain
access to, or otherwise misappropriate or misuse, our users' personal
information, we could be subject to liability. This liability could include
claims for misuses of personal information, such as for unauthorized marketing
purposes or unauthorized use of credit cards. These claims could result in
litigation, our involvement in which, regardless of the outcome, could require
us to expend significant financial resources. Moreover, to the extent any of
the data constitute or are deemed to constitute individually identifiable
health information, a breach of privacy could violate federal law. Because
there are both pharmacy components and consumer components to our websites, we
may be subject to different requirements and be required to comply with
different privacy policies for these separate components.
14
The confidentiality of medical information and the circumstances under
which such information may be provided to us are also subject to substantial
regulation by state governments. Many states have laws and regulations that
govern both the disclosure and use of confidential medical information.
Although compliance with these requirements is at present principally the
responsibility of health care providers, it is possible that we could be
deemed to be a health care provider, and even if we are not the requirements
are evolving rapidly. The HIPAA privacy regulations do not supercede
conflicting state laws that are more restrictive. Therefore, we may have to
comply with various different state requirements depending upon the location
of our customers.
The federal Children's Online Privacy Protection Act (COPPA) prohibits
Internet companies from seeking or obtaining certain information from children
under the age of thirteen. While we have safeguards in place to comply with
the provisions of COPPA, we may be unable to detect when an underage person is
utilizing our services such that we have obtained information prohibited under
COPPA.
It is possible that the use of "cookies" may become subject to laws
limiting or prohibiting their use. The term cookies refers to information
keyed to a specific server, file pathway or directory location that is stored
on a user's hard drive, possibly without the user's knowledge and which is
used to track demographic information and to target advertising. Cookies do
not personally identify the user, unless the owner of the cookie also has
personally identifiable information about the user which can be linked to the
cookie numerical identifier. Both we and DoubleClick use cookies to
personalize the websites and to target advertising. Most currently available
Internet browsers allow users to modify their browser settings to remove
cookies at any time or prevent cookies from being stored on their hard drives.
In addition, a number of Internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
limiting or abolishing the use of cookies. Limitations on or elimination of
the use of cookies could limit our ability to personalize the websites for the
user, and could limit the effectiveness of the targeting of advertisements,
both of which could impair our ability to generate advertising revenue.
Foreign countries and political entities, such as the European Union (EU)
have adopted legislation and regulatory requirements regarding notification of
Internet users about the use of information collected by them by website
usage, including notification that data may be used by both the websites and
third party marketing entities. The EU has adopted a directive that imposes
restrictions on the collection and use of personal data. Under this EU
directive, persons in the EU are guaranteed rights, including the right of
access to their data, the right to know where the data originated, the right
to have inaccurate data rectified, the right to recourse in the event of
unlawful processing and the right to withhold permission to use their data for
direct marketing. The EU directive could, among other things, affect U.S.
companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In particular,
companies with offices located in EU countries may not be allowed to send
personal information to countries that do not maintain standards of privacy
that are determined not to be equivalent to those of the EU. The EU directive
does not, however, define what standards of privacy are adequate. As a result,
the EU directive may adversely affect the activities of companies like ours,
which plan to engage in data collection from users in EU member countries.
We will likely incur additional expenses regarding privacy and security
practices and policies. We continually review our policies to provide notice
of the use of information to users and to improve our practices and technology
to maintain confidentiality of user information. Any changes in policies and
practices, whether self-imposed or imposed by government regulation could
affect the way in which we conduct our business, especially those aspects that
involve the collection, use and access to personal identifying information,
could have a material adverse effect on our business, financial condition and
operating results.
Data Protection. Legislative proposals have been made by the federal
government that would afford broader protection to owners of databases of
information, such as stock quotes and sports scores. This kind of protection
already exists in the EU. If enacted, this legislation could result in an
increase in the price of services that provide data to websites. In addition,
this legislation could create potential liability for unauthorized use of this
data.
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Internet Taxation. A number of legislative proposals have been made at the
federal, state and local level, and by foreign governments, that would impose
additional taxes on the sale of goods and services over the Internet, and some
states have taken measures to tax Internet-related activities. Although in
1998 the U.S. Congress placed a moratorium until October 21, 2001 on state and
local taxes on Internet access and on discriminatory taxes on electronic
commerce, existing state or local laws were expressly excepted from this
moratorium. Congress is currently considering extending this moratorium. If it
were to be lifted, some type of federal and/or state taxes may be imposed upon
Internet commerce. Attempts at regulating commerce over the Internet may
substantially impair the growth of commerce on the Internet and, as a result,
adversely affect our opportunity to derive financial benefit from these
activities.
Domain Names. Domain names are the user's Internet address. Domain names
have been the subject of significant trademark litigation in the United
States. Third parties may bring claims for infringement against us for the use
of the HealthCentral, and RxList trademarks, as well as for the use of the
trademarks we acquired. Moreover, because domain names derive value from the
individual's ability to remember these names, our domain names may lose their
value if, for example, users begin to rely on mechanisms other than domain
names to access online resources.
The current system for registering, allocating and managing domain names
has been the subject of litigation and of proposed regulatory reform. Our
domain names may lose their value, or we may have to obtain entirely new
domain names in addition to or in lieu of our current domain names if
litigation or reform efforts result in a restructuring in the current system.
State Insurance Regulation. In the future we may market insurance online.
The use of the Internet in the marketing of insurance products is a relatively
new practice. It is not clear whether or to what extent state insurance
licensing laws apply to these activities. If we were required to comply with
such licensing laws, compliance could be costly or impossible, which could
harm our business or require us to change our business plans.
Jurisdiction. Due to the global reach of the Internet, it is possible that,
although our transmissions over the Internet originate primarily in the State
of California, the governments of other states and foreign countries might
attempt to regulate Internet activity and our transmissions or take action
against us for violations of their laws. Violations of these laws may be
alleged or charged by state or foreign governments, or these laws may be
modified, or new laws enacted, in the future. Any of the foregoing could harm
our business.
Employees
As of February 28, 2001, we employed a total of 228 employees, of whom 20
were employed in engineering, 23 were employed in marketing and merchandising,
71 were employed in our warehouses, 24 were employed in general management and
administration, 25 were employed in customer service, 22 were employed in
activities related to the catalog business, 38 were employed in activities
related to the Vitamins.com retail stores and 5 were employed in pharmacy.
From time to time, independent contractors are employed to supplement our
staff. None of our employees is represented by a labor union, and we have
never experienced a work stoppage. We believe our relationship with our
employees is good.
Executive Officers
The following sets forth the name, age and biographical information for
each of our executive officers as of March 31, 2001:
C. Fred Toney, age 35, has served as Chief Executive Officer since February
2001, as President since November 2000 and as Chief Financial Officer since
July 1999 when he joined HealthCentral. From August 1992 to July 1999, Mr.
Toney served as Senior Managing Director, Senior Research Analyst, Medical,
Technology and Health Care Information Technology and Director of Research at
Pacific Growth Equities, Inc., an
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investment banking firm. Previously he held investment or research analyst
positions at Volpe, Welty & Company; Donaldson, Lufkin & Jenrette Securities
Corporation and RCM Capital Management; and sales and merchandising positions
at Pharmavite Pharmaceutical Corporation, a pharmaceutical manufacturing and
distribution company. He also serves on the boards of directors of private
companies. Mr. Toney received a B.A. in both Economics and English from the
University of California, Davis.
Jay Hammer, age 45, has served as President of our ComfortLiving division
since December 2000, when we acquired the Comfort Living business. From
December 1999 to December 2000, Mr. Hammer served as Chief Executive Office
and President for ComfortLiving.com. From February 1999 to November 1999, Mr.
Hammer was a private investor and consultant to internet companies. From
January 1997 to February 1999, Mr. Hammer served as Director of Stores and
Corporate Secretary for Urban Outfitters, a retailer of home and fashion
apparel. From March 1990 to December 1996, Mr. Hammer served as Regional
Manager for The Gap, an apparel retailer. Mr. Hammer received a B.A. in
English Literature from the University of Chicago and an M.B.A. from Harvard
University.
Karin Hern, age 50, has served as Vice President and General Counsel since
January 2000. From May 1997 to January 2000, Ms. Hern was a legal and business
consultant to several non-profit organizations, including Alta Bates Medical
Center. From September 1984 to May 1997, Ms. Hern served as Western Division
Counsel for Sutter Health System, a California non-profit healthcare
organization, and its wholly controlled subsidiary, Alta Bates Health System.
Ms. Hern received a B.A. in Criminology from the University of California,
Berkeley and a J.D. from the University of California, Davis.
Miles Munger, age 42, has served as Vice President of Marketing and General
Merchandising Manger since January 2000, when he joined HealthCentral, and
previously served as a consultant to HealthCentral from November 1999 to
January 2000. From April 1997 to October 1999, Mr. Munger was Vice President
of Merchandising for West Marine, a marine retail company. From January 1995
to April 1997, Mr. Munger was Director of Product Procurement for The North
Face, an apparel and sports retail company. Mr. Munger received a B.S. in
Economics and Business Administration from Portland State University.
Neil Sandow, age 53, has served as Vice President of Pharmacy since
November 2000. He previously served as Vice Pres |