Drkoop Receives Lifeline, Faces SEC Probe

Beleaguered Internet health network Drkoop.com, Inc. (Nasdaq: KOOP) announced a $20 million (US$) cash infusion and the appointment of new management Tuesday, just as it was disclosed that the company is under scrutiny from the U.S. Securities and Exchange Commission (SEC).

Drkoop.com acknowledged that it has been hit with several class action lawsuits alleging violations of federal securities laws.

“The SEC is investigating the circumstances surrounding the allegations in the litigations,” the company stated in its most recent earnings report, “and asking that the Company voluntarily provide information regarding such events and circumstances.”

Just Checking

The company stated it is looking into whether action should be taken “for alleged breaches of fiduciary duty and other matters against certain present and prior directors and officers in a stockholders derivative action.”

Drkoop.com said the letter from the SEC regional office “states that the SEC’s request for information should not be construed as an indication by the SEC that any violation of the federal securities laws has occurred.”

With respect to the class actions, the company said, “We believe that the claims asserted in the lawsuits we are aware of are without merit and [we] intend to defend these litigations vigorously.”

Pain in the Pocketbook

Drkoop.com said Monday that its second quarter losses widened to $40.6 million. In response, it has been implementing aggressive cost-cutting measures, which include the renegotiations of portal agreements, a substantial reduction in the company’s workforce, and a reduction in its advertising expenses.

The embattled company told the SEC that it filed its second quarter results late because “efforts to pursue significant corporate transactions placed significant demands on our financial staff.”

Such efforts apparently resulted in Tuesday’s announcement of the receipt of $20 million in equity financing, a new management team and a reconfigured board.

Big Boost

The cash infusion comes from a group that includes Prime Ventures, Inc., JF Shea Ventures, Cramer-Rosenthal-McGlynn, Inc. and RMC Capital.

The new management team and its investor group have invested $3.5 million as part of the new financing, which was offered solely to accredited investors in a private placement of convertible preferred stock. The total could be increased to as much as $27.5 million if outstanding overallotment options with identified investors are exercised.

In conjunction with the financing, the company has appointed three new executives. Imall founder and former Excite@Home vice president Richard M. Rosenblatt has been installed as Chief Executive Officer, replacing Drkoop co-founder Donald Hackett. Edward A. Cespedes was named President, and Stephen Plutsky Chief Financial Officer.

Hackett will remain on the board, but the new investors will take control of the board with four new appointments.

The incoming management team currently leads Prime Ventures, a venture capital fund investing primarily in technology and Internet companies.

Rosenblatt, who sold iMall to Excite in 1998, founded the fund in March.