Investors in white hats and armed with $20 million in equity financing rode in at the 11th-hour Tuesday to save ailing online health company drkoop.com Inc. from certain collapse.
The investors — including Prime Ventures, JF Shea Ventures, Cramer-Rosenthal-McGlynn Inc., and RMC Capital — came through with the financing mere hours after Monday’s announcement that the company had run out of cash and that securities regulators are conducting an informal investigation into whether it violated securities laws.
The investor group has already invested $3.5 million as part of this round of financing. drkoop said the financing was offered solely to accredited investors in a private placement of convertible preferred stock, which is convertible into shares of common stock at 35 cents per share. The newly issued shares will be restricted securities and not freely tradable. drkoop said it is not obligated to register the securities until May 2001.
The financing could be increased to as much as $27.5 million if outstanding overallotment options with identified investors are exercised.
The investors will install a new management team led by Richard Rosenblatt. Rosenblatt was co-founder, chairman and chief executive officer of iMALL Inc. until Excite@Home acquired the company in 1999 for $565 million. He went on to serve as Excite@Home’s senior vice president of E-Business Services. While Rosenblatt steps in as chief executive officer of drkoop, Edward A. Cespedes will step in as president and Stephen Plutsky will take over the role of chief financial officer. The three currently lead Prime Ventures LLC.
The Placement Agent and investors also have the right to designate up to four new directors. drkoop said Chairman Dr. C. Everett Koop will continue in his role, and Donald Hackett will remain a director as well. Rosenblatt will also take a seat on the board. The rest of the new directors will be elected once a mandatory notice to stockholders is prepared and mailed.
It has been a long road for drkoop.com. The company hit its all-time high of $45.75 in July 1999 following its June 8, 1999 IPO at $9 per share. By the end of Sept. 1999, the company announced that it had burned through more than a quarter of the $88.5 million war chest raised in its IPO and its revenues were less than $3 million. A number of poorly structured content deals hurt the company further. Then, in Feb. 2000, a number of executives added fuel to the fire by selling off part of their holdings.
By July, the stock was trading at a little over $1 a share. That was when the class action law suits started rolling in — seven to date as far as the company is aware. The suits allege that company officials — including Dr. Koop and certain present and prior directors and officers — concealed doubts expressed by auditors that the company could continue as a going concern. The suits also allege that insiders aware of the doubt rid themselves of their holdings before the stock price plummeted.
After market close Monday, the company disclosed in a Form 10-Q filing that the Securities and Exchange Commission is investigating the allegations. The SEC has requested that the company voluntarily provide information regarding the events. The company said it will defend itself against the allegations and added that the SEC’s information request should not be construed as an indication by the SEC that any violation of federal securities law has occurred.
In the 10-Q filing, the drkoop revealed that its net loss for the three months that ended on June 30 was $40.56 million, up from $17.68 million for the same period in 1999. Meanwhile revenue increased to $2.52 million from $1.01 million. Those figures were in line with the company’s expectations last week.
