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Filed pursuant to Rule 424(b)(4)
Registration No. 333-77665
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PROSPECTUS
SEPTEMBER 27, 1999
MEDSCAPE LOGO
6,750,000 SHARES OF COMMON STOCK
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MARKET & SYMBOL:
- - We have been approved for listing on the
Nasdaq National Market under the
symbol MSCP.
THE OFFERING:
- - We are offering 6,750,000 shares of our common stock.
- - The underwriters have an option to purchase an additional 900,000 shares from
us to cover over-allotments.
- - CBS Corporation has agreed to purchase 600,000 of the shares we are offering.
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Per Share Total
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Public offering price: $8.00 $53,664,000
Underwriting fees: .56 3,360,000
Proceeds to Medscape: 7.44 50,304,000
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THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
WIT CAPITAL CORPORATION
DLJdirect INC.
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------------------------
[ARTWORK INCLUDES MEDSCAPE'S LOGO, SCREEN SHOTS OF MEDSCAPE'S WEB SITE, A
DESCRIPTION OF SOME OF OUR SERVICE AND CONTENT OFFERINGS AND THE TRADEMARK AND
"EYE" DESIGN OF CBS.]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary................ 1
Risk Factors...................... 6
Forward-Looking Statements........ 19
Use of Proceeds................... 20
Dividend Policy................... 20
Capitalization.................... 21
Dilution.......................... 23
Pro Forma Consolidated Statements
of Operations................... 24
Selected Consolidated Financial
Data............................ 25
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 26
Business.......................... 34
Management........................ 48
Transactions with Related
Parties......................... 56
Recent Transactions............... 58
Principal Stockholders............ 63
Description of Capital Stock...... 66
Shares Eligible for Future Sale... 68
Underwriting...................... 70
Validity of the Shares............ 73
Experts........................... 73
Where You Can Find More
Information..................... 73
Index to Consolidated Financial
Statements...................... F-1
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PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
the information that is important to you or that you should consider before
buying shares in the offering. The other information is important, so please
read this entire prospectus carefully.
MEDSCAPE, INC.
OUR BUSINESS
We operate Medscape.com, a healthcare Web site that provides comprehensive,
authoritative and timely medical information and interactive programs targeted
toward physicians and allied healthcare professionals, such as pharmacists and
nurses. We offer a wide range of high-quality medical information, including
original, proprietary articles written for us by renowned medical experts. We
also offer what we believe is one of the Web's largest collection of free,
peer-reviewed, full-text medical journal articles and one of the Web's most
extensive libraries of continuing medical education accredited programs. We
supplement our medical content with a variety of non-medical information,
community features and interactive programs that make Medscape.com a
full-service professional healthcare destination Web site. We plan to launch our
separate consumer site, CBS.Medscape.com, in the third quarter of 1999. We have
also entered into a strategic relationship with America Online, Inc. under which
we have agreed to develop new versions of our consumer sites which will be
co-branded with AOL. We expect to launch our AOL co-branded consumer sites in
the fourth quarter of 1999 and the first quarter of 2000. As of June 30, 1999,
Medscape.com had more than 1,200,000 registered members worldwide, including
over 210,000 registered as physicians, 600,000 registered as allied healthcare
professionals and 400,000 registered as consumers.
Medscape.com is designed to meet the needs of our members in a personalized
and easy-to-use manner. We organize our professional information by medical
specialty area, such as oncology and cardiology, to make it easier for our
members to access the information most relevant to them. Our extensive and
up-to-date medical content and easy-to-use searching features assist medical
professionals in keeping abreast of medical advances and obtaining fast, online
answers to medical questions, helping them to make more informed diagnoses.
Through our strategic relationship with National Data Corporation, we will
integrate selected clinical data interchange and data management services
provided by NDC into Medscape.com. We will also serve as the principal content
provider to NDC's physician practice management system and an online distributor
of some of NDC's other online clinical products.
We believe our current consumer members view Medscape.com as a trusted
source of healthcare information because of our high-quality content and our
credibility with physicians. To enhance and personalize the consumer experience,
we plan to launch our consumer site, CBS.Medscape.com, and several newly
developed AOL co-branded consumer sites. We have entered into a strategic
relationship with CBS Corporation under which our CBS.Medscape.com consumer site
will be the exclusive Internet healthcare site integrated into CBS News
programming and, with the AOL co-branded consumer sites, will be promoted on CBS
media properties. Our AOL co-branded consumer sites will appear and be promoted,
through contextual links and banners, on AOL, AOL.com, CompuServe Service,
Netscape Netcenter and Digital City, all of which are AOL properties. AOL has
guaranteed a minimum number of impressions, which means a user seeing a screen
with a link to one of our co-branded sites. We are designing our consumer sites
to help consumers make better informed healthcare decisions and to simplify
management of their healthcare needs. Our consumer sites will provide
personalized, authoritative medical content written for the consumer, access to
our professional content on Medscape.com and interactive personal health
management tools, such as health diaries.
Our database of registered members, coupled with our ability to deliver
advertisements to specific demographic groups within our membership base,
enables pharmaceutical, healthcare and other consumer product companies to reach
substantially all segments of their target audience. Our advertisers and
sponsors include over 30 of the world's largest pharmaceutical companies.
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OUR MARKET OPPORTUNITY
We believe the $1 trillion healthcare industry is being changed by the
emergence of the Internet as a global medium for communications, news,
information and commerce. In particular, we believe that the Internet can
cost-effectively address the increasing need for timely, comprehensive and
authoritative medical information caused by:
- the accelerated development of new medical and pharmaceutical therapies;
- increased time constraints on physicians who are faced with an
ever-increasing volume of information; and
- consumers taking greater interest in health-related issues.
We address these needs by providing high-quality, timely and well-organized
medical content on Medscape.com and will further address these needs on our soon
to be launched consumer sites, CBS.Medscape.com and our AOL co-branded sites. We
design our Web sites to be conveniently accessible wherever and whenever our
members choose. The organization of our sites and breadth of our membership base
enables our advertisers and sponsors, including pharmaceutical, healthcare and
other consumer product companies, to deliver marketing programs and interactive
services targeted directly to specific healthcare constituencies.
OUR STRATEGY
Our objective is to operate the premier online healthcare destination Web
sites where physicians, allied healthcare professionals and consumers find
reliable and comprehensive information that enables them to make better and more
informed medical and health decisions. We believe we are positioned to become a
preferred online advertising medium and e-commerce partner in the healthcare
sector. We intend to achieve our objective by pursuing the following strategies:
- strengthening the Medscape brands;
- expanding and enhancing our content;
- growing membership;
- developing strategic relationships and enhancing distribution; and
- developing additional revenue sources.
OUR HISTORY
Medscape, Inc. was incorporated in New York in March 1996 and commenced
operations in April 1996. Medscape, Inc. was reincorporated in Delaware in
December 1998. In October 1998, we purchased Healthcare Communications Group,
LLC, which operated a leading HIV Web site.
Our executive offices are located at 134 West 29th Street, New York, New
York, 10001-5399. Our telephone number is (212) 760-3100. Our Web site is
located at www.medscape.com. Information contained on our Web site is not part
of this prospectus.
Medscape is our registered service mark. Each other trademark, trade name
or service mark of any other company appearing in this prospectus is the
property of its holder.
RECENT DEVELOPMENTS
We have recently consummated several strategic relationships.
On June 15, 1999, we entered into a License and Web Site Development
Agreement with Softwatch Ltd. and its subsidiary, Softwatch, Inc., under which
we licensed software from Softwatch to support our consumer Web site, and
Softwatch agreed to provide ongoing technical and development support. As part
of this transaction, we also purchased 1,040,170 of Softwatch's Series A
Preferred Shares for $2,999,954.
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On August 3, 1999, we entered into agreements with CBS Corporation under
which during the next seven years we will receive approximately $150 million in
advertising and promotion in the United States, and a license to the "CBS"
trademark and "Eye" design and selected health-related news content together
valued at $7 million, in exchange for 7,397,208 shares of our Class A Common
Stock and 6,541,160 shares of our Class B Common Stock, which will represent
approximately 32% of our outstanding capital stock upon completion of this
offering. Additionally, CBS has agreed to purchase 600,000 shares from us in the
offering at the initial offering price less underwriting fees. Under our
agreements with CBS, CBS has rights to maintain its then current capital stock
interest by purchasing shares in our future stock issuances and has the right to
designate three of our directors.
On August 4, 1999, we entered into a strategic development and marketing
agreement with National Data Corporation, a leading provider of healthcare
information services and electronic commerce solutions. As part of this
transaction, NDC invested $10 million cash in Medscape and has agreed to provide
$10 million in licensing and promotional value, product purchase amounts, and
credits against future commissions due by us to NDC under the agreement in
exchange for 1,000,000 shares of our Class A Common Stock and 400,000 shares of
our Series E Preferred Stock. The 400,000 shares of Series E Preferred Stock
will convert into 1,250,000 shares of our common stock upon completion of this
offering.
On September 3, 1999, we entered into a strategic agreement with America
Online, Inc. Under this agreement, we will develop separate AOL co-branded
consumer sites and AOL has guaranteed a minimum number of impressions. In
exchange, we have paid AOL $3 million and will pay an additional $30 million
over the next two years. In addition, we granted AOL two warrants, each to
purchase up to 1,352,158 shares of our Class A Common Stock.
Upon completion of this offering, the Series E stock will convert into
common stock and the Class A Common Stock and Class B Common Stock will be
redesignated as common stock.
THE OFFERING
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Common stock offered by Medscape............ 6,750,000 shares
Common stock to be outstanding after this
offering.................................. 43,693,533 shares
Use of proceeds............................. We intend to use the net proceeds of this
offering to make payments under our contract
with AOL and for general corporate purposes,
including funding operating losses, working
capital and capital needs. We may use a
portion to acquire or invest in
complementary businesses or technologies.
Nasdaq National Market Symbol............... MSCP
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The outstanding share information is based on our shares outstanding as of
August 31, 1999. This information excludes:
- 5,659,198 shares of common stock underlying options granted under our
1996 Stock Option Plan and outstanding as of August 31, 1999 at a
weighted average exercise price of $2.34 per share;
- 14,887.5 shares of common stock reserved for exercise of outstanding
warrants at an exercise price of $0.004 per share; and
- 2,704,316 shares of common stock reserved for issuance upon the exercise
of two outstanding warrants issued to AOL, 1,352,158 shares of which
under one warrant are at an exercise price of $10 and 1,352,158 shares of
which under the other warrant are at an exercise price to be determined
based upon the fair market value of our common stock at the times the
warrant becomes exercisable.
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ASSUMPTIONS WHICH APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus assumes
the following:
- the conversion of our outstanding Class B Common Stock on a one-for-one
basis into Class A Common Stock, and the redesignation of our Class A
Common Stock as common stock, both of which will occur concurrently with
the completion of this offering;
- the conversion of our Series A Preferred Stock, Series C-1 Preferred
Stock and Series D Preferred Stock, all on a 2.5-for-one basis, our
Series C Preferred Stock on a 2.68-for-one basis and our Series E
Preferred Stock on a 3.125-for-one basis, into Class A Common Stock, all
of which will occur immediately prior to the completion of this offering;
- an increase in the number of our authorized shares of common stock to
100,000,000 to be effected concurrently with this offering; and
- no exercise by the underwriters of their over-allotment option to
purchase up to 900,000 additional shares of common stock.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes our financial data for the nine months ended
December 31, 1996 and for each of the two years in the period ended December 31,
1998 and the six month periods ended June 30, 1998 and 1999, which have been
derived from our consolidated financial statements and their notes. The pro
forma data for the year ended December 31, 1998 (as restated) have been prepared
as though the acquisition of Healthcare Communications Group, LLC had occurred
on January 1, 1998. The pro forma balance sheet data give effect to the NDC and
CBS transactions as if they had occurred on June 30, 1999. For a more detailed
explanation of these financial data, see "Selected Consolidated Financial Data"
and our financial statements located elsewhere in this prospectus.
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HISTORICAL
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YEAR ENDED PRO FORMA SIX MONTHS ENDED
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------- DECEMBER 31, ---------------------
1996 1997 1998 1998 1998
(AS RESTATED) 1999
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CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues................ $ 1,015 $ 1,522 $ 3,069 $ 5,654 $ 1,078 $ 4,930
--------- --------- --------- --------- --------- ---------
Operating expenses:
Editorial, production,
content and
technology......... 1,182 1,790 2,588 4,325 853 3,916
Sales and marketing... 278 1,201 2,357 2,357 811 3,502
General and
administration..... 830 1,823 1,987 2,855 793 2,664
Depreciation and
amortization....... 41 160 287 406 96 225
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Total
operating
expenses.... 2,331 4,974 7,219 9,943 2,553 10,307
--------- --------- --------- --------- --------- ---------
Loss from operations.... (1,316) (3,452) (4,150) (4,289) (1,475) (5,377)
Interest expense
(income)........... 28 12 (249) (251) (149) (296)
--------- --------- --------- --------- --------- ---------
Net loss................ $ (1,344) $ (3,464) $ (3,901) $ (4,038) $ (1,326) $ (5,081)
========= ========= ========= ========= ========= =========
Basic net loss per
share(1).............. $ (0.66) $ (1.26) $ (1.07) $ (0.61) $ (0.47) $ (0.71)
Weighted average number
of shares of common
stock outstanding..... 2,026,233 2,750,552 3,636,558 6,628,100 2,834,172 7,164,127
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JUNE 30, 1999
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PRO FORMA FOR
CBS AND NDC PRO FORMA
ACTUAL TRANSACTIONS AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Current assets.......................................... $16,764 $26,903 $74,631
Working capital......................................... 13,018 22,297 70,026
Total assets............................................ 23,213 46,852 94,581
Stockholders' equity.................................... 19,467 42,246 89,975
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(1) We calculate loss per common share by dividing the loss attributable to
common shares by the weighted average number of shares outstanding. We do
not include outstanding common stock options and warrants in the loss per
common share calculation, as their effect is anti-dilutive.
(2) As adjusted on a pro forma basis to give effect to this offering, assuming
net proceeds of $47.7 million.
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RISK FACTORS
You should consider carefully the risks described below and the other
information in this prospectus before deciding to invest in shares of our common
stock. If any of the following risks actually occurs, our business, financial
condition and results of operations would likely suffer. In this case, the
market price of our common stock could decline, and you may lose all or a part
of the money you pay to buy our common stock.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE IS LIKELY TO BE VOLATILE.
Our stock price is likely to be volatile. The market prices of the
securities of Internet-related companies have been very volatile. Our investors
may not be able to sell their shares at or above the initial public offering
price. In the past, following periods of volatility in the market price for a
company's securities, stockholders have often instituted securities class action
litigation. If a lawsuit were to be filed against us, it could result in
substantial costs and the diversion of our management's attention and resources,
which could seriously harm our financial results.
OUR EXISTING STOCKHOLDERS WILL MAINTAIN CONTROL OF OUR COMPANY.
Our existing stockholders' control may have the effect of delaying or
preventing a change in control of Medscape, which could negatively affect our
stock price. Upon completion of this offering, our present directors and
executive officers, holders of more than 5% of our common stock, and their
affiliates will beneficially own approximately 75% of our outstanding common
stock. Furthermore, all of the members of our current board have been elected in
accordance with the terms of stockholders agreements which provided specified
stockholders, or classes of stockholders, with rights to elect directors. Our
board is comprised of ten members, eight of which were elected by pre-existing
stockholders and three of which, including one of our pre-existing directors,
were designated by CBS, in each case under stockholders agreements. While the
rights to elect directors in the stockholders agreements terminate at the
effective time of this offering, except the right of CBS to designate three of
our directors, the incumbent board of directors will continue to be composed of
the representatives of our pre-existing stockholders until they resign or are
removed. As a result, these stockholders, if they act as a group, will be able
to control all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions.
A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR RESALE, AND THEIR SALE COULD
REDUCE OUR STOCK PRICE.
After the completion of this offering, we will have a large number of
shares of common stock outstanding and available for resale beginning at various
points of time in the future. Sales of substantial amounts of shares of our
common stock in the public market following this offering, or the perception
that those sales will occur, could cause the market price of our common stock to
decline. Those sales also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate. Some
of the holders of our common stock also have demand and piggyback registration
rights enabling them to register their shares under the Securities Act for sale.
For more detailed information, see "Shares Eligible for Future Sale."
WE HAVE ANTI-TAKEOVER DEFENSES AND OTHER CONTRACTUAL PROVISIONS AND
RELATIONSHIPS THAT COULD DELAY OR PREVENT AN ACQUISITION OF MEDSCAPE.
We have anti-takeover provisions and other contractual obligations and
relationships that could serve to limit our stockholders' voting power and may
negatively affect our stock price. Our certificate of incorporation and bylaws
provide for staggered terms for members of our board of directors and give the
board the power to issue shares of preferred stock which could make it more
difficult for a third party to acquire us, even if a change in control would be
beneficial to our stockholders. Also, our agreement with CBS provides that we
will not increase our board beyond ten members, and that CBS will have the right
to designate up to three directors, depending on the percentage of our
outstanding voting securities that CBS holds. The staggered board and CBS's
rights to designate directors could make it more difficult to remove incumbent
directors.
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Additionally, CBS's obligation to provide us with approximately $150 million in
advertising and promotion may be terminated by CBS if we issue more than 9% of
our common stock to a competitor of CBS and for other events contained in the
agreement. In addition, AOL generally may terminate its agreement to provide us
with promotions and guaranteed impressions if we are acquired. These provisions
may dissuade potential acquirers from pursuing a transaction, even if that
acquisition would be beneficial to our stockholders, which could negatively
affect our stock price.
OUR SECURITIES HAVE NO PRIOR PUBLIC MARKET, AND OUR STOCK PRICE MAY DECLINE
AFTER THIS OFFERING.
Before this offering, there has not been a public market for our common
stock. The trading market price of our common stock may decline below the
initial public offering price. In addition, an active public market for our
common stock may not develop or be sustained after this offering. The initial
public offering price has been determined by negotiations between us and the
representatives of the underwriters. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The price you will pay for our common stock will be substantially higher
than the pro forma tangible book value per share of outstanding common stock. As
a result, you will experience immediate and substantial dilution in tangible
book value per share, and the current stockholders of our company will
experience an immediate increase in the tangible book value per share of their
shares of common stock. The dilution that you will experience in this offering
will be approximately $5.62 per share. Furthermore, to the extent that we issue
additional shares of common stock in connection with acquisitions or any
strategic partner agreements, or other outstanding options or warrants to
purchase common stock are exercised, there will be further dilution. For more
detailed information, see "Dilution."
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
We initiated our operations in April 1996 and have not yet launched our
consumer sites. As a result, we have only a limited operating history on which
you can base an evaluation of our business and prospects. Our prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets like ours. We may not
be successful in addressing these risks and uncertainties. Our failure to do so
could have a material adverse effect on our financial condition. Some of these
risks and uncertainties relate to our ability to:
- attract and maintain a large base of users;
- develop and introduce desirable services and compelling and original
content to members and users;
- establish and maintain strategic relationships with distribution partners
and service and content providers;
- establish and maintain relationships with sponsors and with advertisers
and their advertising agencies;
- respond effectively to competitive and technological developments; and
- build an infrastructure, including additional hardware and software,
customer support, personnel and facilities, to support our business.
IF THE LAUNCHES OF OUR CONSUMER SITES ARE DELAYED OR UNSUCCESSFUL, OUR FINANCIAL
PERFORMANCE WOULD FAIL TO MEET EXPECTATIONS.
We plan to launch our separate consumer site, CBS.Medscape.com, in the
third quarter of 1999. We also expect to launch our AOL co-branded consumer
sites in the fourth quarter of 1999 and the first quarter of 2000. If the
launches are delayed or unsuccessful, we may fail to attract the additional
users that will be required to increase our sponsorship and advertising revenues
and, as a result, our financial performance would fail to meet expectations.
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WE ARE NOT PROFITABLE AND EXPECT TO CONTINUE TO INCUR LOSSES.
We have not achieved profitability. We expect to continue to incur net
losses for the foreseeable future and may never become profitable. We have
incurred net losses of approximately $13.8 million during the period from our
inception through June 30, 1999.
Our ability to generate significant revenues is uncertain. Our growth to
date may not continue. Almost all of our revenues to date have been derived from
advertising sales and sponsorships. As our business evolves, we expect to
introduce a number of new products and services. With respect to both current
and future product and service offerings, including to a large extent our
consumer site, we expect to increase significantly our operating expenses to
increase our customer base, enhance our brand image and support our
infrastructure. To achieve profitability, our revenues and gross profit margins
will need to increase sufficiently to cover these and other future costs.
Otherwise, we may never make a profit. Even if we become profitable, we may not
sustain or increase our profits on a quarterly or annual basis in the future.
WE DEPEND ON THE PHARMACEUTICAL INDUSTRY FOR A SIGNIFICANT PORTION OF OUR
REVENUES.
Our revenues could seriously decrease if there were adverse developments in
the pharmaceutical industry. Our near-term and long-term prospects depend upon
selling our services to the pharmaceutical industry. In 1998, 92% of our
revenues were derived from services provided to pharmaceutical companies, and
three pharmaceutical companies in particular provided 48% of our 1998 revenues.
Accordingly, our success is highly dependent on the sales and marketing
expenditures of pharmaceutical companies and our ability to attract these
expenditures. Some of the adverse developments in the pharmaceutical industry
that could affect our revenues would be:
- a reduction in sales and marketing expenditures of pharmaceutical
companies;
- public or private market initiatives or reforms designed to regulate the
manner in which pharmaceutical companies promote their products;
- regulatory or legislative developments that discourage or prohibit
pharmaceutical companies' promotional activities;
- a decrease in the number of new drugs being developed; or
- the adoption of current legislative and regulatory proposals to control
drug costs for Medicare and Medicaid patients, including proposals in the
U.S. Congress.
OUR BUSINESS MODEL IS UNPROVEN AND THE MARKET MAY NOT ACCEPT IT.
Our success depends upon achieving significant market acceptance of our
services by physicians, allied healthcare professionals and consumers. Failure
to achieve or maintain market acceptance of Medscape.com and CBS.Medscape.com
and our AOL co-branded sites would result in a loss of revenues. Medical
professionals or consumers may not accept Medscape.com, CBS.Medscape.com, or our
AOL co-branded sites or even the Internet, as a replacement for traditional
sources of healthcare information. Market acceptance of Medscape.com,
CBS.Medscape.com and our AOL co-branded sites depends upon continued growth in
the use of the Internet generally and, in particular, as a source of healthcare
information services for medical professionals and consumers. The Internet may
not prove to be a viable channel for these services due to:
- inadequate development of necessary reliable network infrastructure or
complementary services, such as high-speed modems and security procedures
for the transmission of confidential healthcare information;
- development and acceptance of a competing method for delivering
healthcare information services to medical professionals and consumers;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; and
- governmental regulation.
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WE RELY UPON OUR CBS AGREEMENTS FOR SIGNIFICANT PROMOTION AND ADVERTISING, AND
THEIR EARLY TERMINATION COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS AND STOCK
PRICE.
If our agreements with CBS are terminated prior to the end of their term,
our financial results and stock price could be adversely affected.
Under a license agreement, we license the "CBS" trademark, and "Eye" design
and other health-related news content from CBS. The "CBS" trademark and "Eye"
design are very important to our marketing and brand building activities for our
consumer Web sites. Our license agreement with CBS will expire on August 3, 2006
and CBS will have no obligation to renew it. Under specified circumstances, CBS
will also have the right to terminate this agreement and keep the stock received
from us.
CBS HAS SIGNIFICANT CONTROL OVER THE CONTENT OF OUR CONSUMER WEB SITES AND ITS
ADVERTISING AND PROMOTION OF OUR WEB SITES.
Under our license agreement with CBS, CBS can require us to remove any
content on our consumer Web sites which it determines conflicts with, interferes
with or is detrimental to its reputation or business or for other reasons. We
are also required to conform to CBS's guidelines for the use of its trademark.
CBS has the right to approve all materials, such as marketing materials, that
include the "CBS" trademark and "Eye" design. Because of these restrictions, we
may not be able to perform our desired marketing activities.
CBS has agreed, with some limitations, to provide us with approximately
$150 million of advertising and on-air promotions during the period from August
3, 1999 through August 3, 2006. However, CBS has discretion as to the timing and
placement of these advertisements and promotions. CBS could change the manner in
which it promotes us. CBS also makes no guarantees to us as to the demographic
composition or size of the audience that views these advertisements or
promotions. This advertising and on-air promotion, as well as our association
with the CBS brand, are important elements of our strategy to increase our brand
awareness. This obligation to provide advertising and promotion may terminate at
CBS's option if our license agreement with CBS terminates.
WE RELY ON OUR AOL AGREEMENT FOR SIGNIFICANT PROMOTION AND ADVERTISING, AND ITS
TERMINATION COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS AND STOCK PRICE.
If our agreement with AOL is terminated prior to the end of its term, our
financial results and stock price could be adversely affected.
Our relationship with AOL and the impressions to be delivered by AOL are
very important to our marketing and brand building activities for our consumer
Web sites. Our agreement with AOL will expire on September 3, 2002. The
agreement may be extended unilaterally by AOL for nine months but AOL will have
no obligation to extend it or renew it. Under specified circumstances, AOL will
also have the right to terminate the agreement or its obligation to provide us
with the impressions and keep the warrants it received from us.
AOL MAY LIMIT THE CONTENT OF OUR AOL CO-BRANDED CONSUMER SITES AND OUR ABILITY
TO WORK WITH THIRD PARTIES, WHICH COULD IMPEDE OUR GROWTH, NEGATIVELY AFFECT
USER LOYALTY AND REDUCE TRAFFIC ON THE SITES AND COULD REDUCE REVENUES.
Under our interactive services agreement with AOL, AOL has significant
control over the content, interactive tools and links to other sites that we may
feature on our AOL co-branded consumer sites. We are also prohibited from
linking to or selling advertising to specified third parties. AOL could limit
content, the tools and links available on our co-branded consumer sites to an
extent that might make these sites less useful and attractive to users, which
could negatively affect our user loyalty and reduce traffic on the sites.
AOL HAS SIGNIFICANT CONTROL OVER ITS PROMOTION OF OUR CONSUMER SITES, WHICH MAY
NEGATIVELY IMPACT OUR OPERATING RESULTS.
If AOL does not promote our consumer sites in a manner that generates
traffic to those sites, our future prospects could be harmed and our revenues
will decline. AOL has broad discretion as to the form, placement, timing and
nature of its promotions of our co-branded sites. AOL may not promote our
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co-branded sites in a way that we believe is most effective. Our agreement with
AOL does not give us the power to redirect the AOL promotions. AOL also makes no
guarantees to us as to the demographic compositions of the audience that views
these promotions.
WE DEPEND ON REVENUES FROM ADVERTISING AND SPONSORSHIPS, AND THE ACCEPTANCE AND
EFFECTIVENESS OF INTERNET ADVERTISING AND SPONSORSHIP IS UNCERTAIN.
Our future success depends on an increase in the use of the Internet as an
advertising medium. We derive most of our revenues from the sale of
advertisements and sponsorships on our site, and we expect to continue to do so
for the foreseeable future. The market for Internet advertising may not continue
to emerge or become sustainable. If the market for Internet advertising and
sponsorships fails to develop or develops more slowly than we expect, our
revenues will decline.
The Internet advertising market is new and rapidly evolving. It cannot yet
be compared with the traditional advertising market to gauge its effectiveness.
As a result, there is significant uncertainty about the demand and market
acceptance for Internet advertising. Many of our advertising customers and
sponsors have limited experience with Internet advertising and sponsorship, and
may ultimately conclude that Internet advertising and sponsorship are not
effective relative to traditional advertising media and sponsorship
opportunities. Different pricing models are used to sell advertising on the Web,
and it is difficult to predict which model, if any, will emerge as the industry
standard. This makes it difficult to project our future advertising and
sponsorship rates and revenues.
In addition, widespread adoption or increased use by Internet users of
filter software programs that allow them to limit or remove advertising from
their desktops or the adoption of this type of software by Internet access
providers could have a material adverse effect on the viability of advertising
on the Internet and on our financial condition.
OUR OPERATING RESULTS WILL BE SEASONAL AND MAY FLUCTUATE FROM QUARTER TO
QUARTER, WHICH MAY NEGATIVELY AFFECT OUR STOCK PRICE IF INVESTORS EXPECT
CONSISTENT RESULTS FROM QUARTER TO QUARTER.
Because a substantial portion of our revenues comes from sponsorships
associated with major medical conferences that occur less frequently in the
summer months, our results of operations have historically been seasonal. Our
limited operating history makes it difficult to assess the impact of this
seasonal factor on our business and our stock price. Should the major medical
conferences' schedule change, our operating results would be affected
accordingly.
Because of seasonality and other factors, our operating results will likely
continue to vary from quarter to quarter. Since a substantial portion of our
current and future costs are fixed, if our revenues fall short of expectations,
we may not be able to adjust our fixed expenses to compensate for this shortfall
on a timely basis.
OUR MEDSCAPE BRANDS MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY FOR US TO
CONTINUE TO GROW OUR MEMBERSHIP AND TRAFFIC AND ATTRACT ADVERTISERS AND
SPONSORS.
We believe that broad recognition and a favorable audience perception of
the Medscape brands are essential to our future success. If we fail to increase
our membership and traffic, we may be unable to attract advertisers and
sponsors. Successful positioning of the Medscape brands will largely depend on:
- the success of our advertising and promotional efforts; and
- our ability to continue to provide a high-quality experience for our
audience.
We incurred sales and marketing expenses of $2.4 million during the year
ended December 31, 1998. To increase awareness of the Medscape brand, we expect
to spend significantly more on sales and marketing in the future. If our brand
enhancement strategy is unsuccessful, these expenses may never be recovered and
we may not receive appropriate value for the stock issued to CBS or the payments
made and warrants issued to AOL and we may be unable to increase future
revenues. In addition, even if brand recognition increases, the number of
Medscape.com and CBS.Medscape.com users may not increase. Even if the number of
new users increases, those users may not become registered members.
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IF WE ARE UNABLE TO RETAIN ANY OF OUR MAJOR ADVERTISERS OR SPONSORS, OUR
REVENUES MAY DECLINE.
The loss of any of the advertisers or sponsors that account for a material
portion of our total revenues, or the non-payment or late payment of amounts due
from significant advertisers and sponsors, could seriously harm our financial
results. In 1998, we derived approximately 27% of our revenue from Genentech
Incorporated, 14% from Roche Laboratories and 7% from Johnson & Johnson. We
believe that a substantial amount of revenue from advertising and sponsorship
sales in any given future period may continue to come from a relatively small
number of advertisers and sponsors. If any of our major advertisers or sponsors
were to substantially cut back on advertising or sponsorship expenditures or
stop using our services, our revenues would decline.
We typically sell advertisements and sponsorships for a one-year period or
less. As a result, our current advertisers or sponsors may not purchase
advertising or sponsorships from us in the future, and we may not be able to
successfully attract additional advertisers or sponsors.
WE MAY LOSE BUSINESS IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL OR
OTHER CHANGES.
If we are unable to keep up with changing technology and other factors
related to our market, we may be unable to attract and retain users, advertisers
and sponsors, which would reduce our revenues. The markets in which we compete
are characterized by rapidly changing technology, evolving technological
standards in the industry, frequent new service and product announcements and
changing consumer demands. Our future success will depend on our ability to
adapt to these changes and to continuously improve the performance, features and
reliability of our service in response to competitive services and product
offerings and the evolving demands of the marketplace. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require us to incur
substantial expenditures to modify or adapt our services or infrastructure,
which might impact our ability to become or remain profitable.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The market for Internet content, products, services and advertising is new,
rapidly evolving and intensely competitive. We expect this competition to
increase significantly and our financial results and share value would be
adversely affected if we are unable to compete successfully. We currently
compete, or potentially compete, with many providers of Web content, information
services and products, as well as traditional media and promotional efforts, for
audience attention and advertising and sponsorship expenditures. We expect
competition to intensify in the future. Barriers to entry are not significant,
and current and new competitors may be able to launch new Web sites at a
relatively low cost. We compete, directly and indirectly, for members,
consumers, content providers, advertisers, sponsors and acquisition candidates
with:
- companies and organizations providing or maintaining online services or
Web sites targeted to physicians or the healthcare industry;
- companies and organizations providing or maintaining general purpose
consumer online services which provide access to healthcare content and
services;
- companies and organizations providing or maintaining public sector and
non-profit Web sites that provide healthcare information and services
without advertising or commercial sponsorships;
- companies and organizations providing or maintaining Web search and
retrieval services and other high-traffic Web sites;
- publishers and distributors of traditional media, including those
targeted to medical professionals, many of which have established or may
establish Web sites; and
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging.
Competition for members, users and advertisers, as well as competition in
the electronic commerce market, is intense and is expected to increase
significantly.
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WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH.
If we are unable to manage growth effectively, our financial results would
be seriously harmed. Our ability to successfully offer services and products and
implement our business plan in a rapidly evolving market requires an effective
planning and management process. We have increased, and plan to continue to
increase, the scope of our operations. These expansion efforts could be
expensive and may put a strain on management, and, if we do not manage growth
properly, could adversely affect our business. To manage our future growth, we
will need to:
- improve existing or implement new operational and financial systems,
procedures and controls;
- expand, train and manage our employee base; and
- maintain close coordination among our technical, finance, marketing,
sales and editorial staffs.
WE ARE CURRENTLY DEPENDENT UPON ONLINE MARKETING PARTNERS, AND OUR FUTURE
SUCCESS DEPENDS UPON FURTHER DEVELOPING AND ENHANCING OUR STRATEGIC
RELATIONSHIPS.
If we are not successful in developing and enhancing our strategic
relationships, we could become less competitive and our revenues could decline.
Although we have a variety of sources of traffic to our Web site, we expect a
growing percentage of our traffic to be generated by strategic distribution
partners, which are third party healthcare service vendors that facilitate
distribution of our Web site content to their customer base.
We formed our existing relationships recently and our distribution partners
may not view their relationships with us as significant to their own business.
As a result, they may reassess their commitment to us or decide to compete
directly with us in the future. We generally do not have agreements that
prohibit our distribution partners from competing against us directly or from
contracting with our competitors. Our arrangements with our distribution
partners generally do not establish minimum performance requirements, but
instead rely on the voluntary efforts of our distribution partners. As a result,
these relationships may not be successful.
WE DEPEND UPON CONTENT PROVIDERS, AND OUR REVENUES MAY DECLINE IF WE ARE UNABLE
TO MAINTAIN OUR EXISTING RELATIONSHIPS WITH CONTENT PROVIDERS, TO BUILD NEW
RELATIONSHIPS WITH OTHER CONTENT PROVIDERS AND TO CONTINUE TO OBTAIN ORIGINAL
CONTENT FROM MEDICAL EXPERTS.
Our agreements with expert medical professionals who provide us with a
majority of our original proprietary content are generally short-term and
project-based. We may not be able to attract expert medical professionals to
provide us with original proprietary content in the future. Our failure to
acquire original proprietary content written by expert medical professionals
would have a negative effect on our content, resulting in a likely decline in
our revenues.
We have entered into relationships with approximately 45 companies
representing over 100 publications, medical databases and newsfeeds to obtain
content for Medscape.com, and we intend to enter into additional relationships
in the future. Our success depends significantly on our ability to maintain our
existing relationships with these content providers, to build new relationships
with other content providers and to continue to obtain original content from
medical experts.
Many of our agreements with content providers are non-exclusive, and
competitors offer, or could offer, content that is similar or the same as ours.
If content providers, including our current providers, offer information to
users or our competitors on more favorable terms than offered to us, we could
become less competitive and our profit margins and prospects could be harmed. In
addition, the failure by our content providers to deliver high-quality content
from reliable sources and to continuously upgrade their content in response to
user demand and evolving healthcare industry trends could result in user
dissatisfaction and inhibit our ability to attract users and add members.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND WE MAY BE LIABLE FOR
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our revenues and share price could be adversely affected if unauthorized
parties infringe upon or misappropriate our products, services or proprietary
information. Our intellectual property is important to our
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business. Our efforts to protect our intellectual property may not be adequate.
In the future, litigation may be necessary to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of
others, which could be time consuming and costly.
Intellectual property infringement claims could be made against us as the
number of our competitors grows. These claims, even if not meritorious, could be
expensive and divert our attention from operating our company. In addition, if
we become liable to third parties for infringing their intellectual property
rights, we could be required to pay a substantial damage award and to develop
comparable non-infringing intellectual property or obtain a license or cease
providing the services that contain the infringing intellectual property. We may
be unable to develop non-infringing intellectual property or obtain a license on
commercially reasonable terms, or at all.
OUR SYSTEMS MAY EXPERIENCE FAILURES WHICH COULD CAUSE OUR REVENUES TO DECLINE.
Any significant interruption in our operations would cause our revenues to
decline. We have experienced periodic system interruptions in the past, which
may occur again. Any significant interruptions in our services or an increase in
response time could result in a loss of potential or existing users and members,
strategic partners or advertisers and sponsors and, if sustained or repeated,
could reduce the attractiveness of our Web sites to these parties in the future.
Our insurance policies have low coverage limits and, therefore, cannot
adequately compensate us for any material losses that may occur due to
disruptions in our service.
Our Web sites may be required to accommodate a high volume of traffic and
deliver frequently updated information. We may experience slower response times
or system failures due to increased traffic on our Web sites or for a variety of
other reasons. We depend on content providers to provide information and data
feeds on a timely basis. Our Web sites could experience disruptions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information. In addition, our members and consumers depend on
Internet service providers and other Web site operators for access to our Web
sites. These providers and operators have experienced significant outages in the
past and could experience outages, delays and other difficulties in the future
due to system failures unrelated to our systems. Moreover, the Internet
infrastructure may not be able to support continued growth in its use. We do not
maintain redundant systems or facilities for all of our services. To operate
with limited interruption, our service and content providers must guard against:
- damage from fire, power loss and other natural disasters;
- communications failures;
- software and hardware errors or failures;
- security breaches, computer viruses and similar disruptive problems; and
- other potential interruptions.
IF OUR MEMBERS DO NOT PROVIDE US WITH ACCURATE REGISTRATION INFORMATION ABOUT
THEMSELVES WE MAY BE LESS ATTRACTIVE TO ADVERTISERS.
If we are unable to accurately classify our members, we may be less
attractive to advertisers and our revenues may decline. We classify our members
as physicians, allied healthcare professionals and consumers based on the
information that members supply to us at the time of registration, and this
information may not be accurate. Possible changes in state or federal
confidentiality laws also may make it more costly and more difficult to verify
the accuracy of information about our members. We are conducting an ongoing
verification effort that may result in some members being reclassified because
of incomplete or inaccurate information that they supplied at the time of
registration. A significant amount of reclassifications may also make us less
attractive to advertisers, and revenues may decrease.
WE MAY INCUR LIABILITY FOR CONTENT AND USER DATA.
As a content provider, we may face potential liability for intellectual
property infringement, defamation, indecency and other claims. In addition, we
may incur liability for unauthorized duplication or distribution of third-party
content or materials or for information collected from and about our users.
Third parties or users
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may bring claims against us relating to proprietary rights or use of personal
information. Our general liability insurance may not cover or be adequate for
potential claims of this type.
WE HAVE LIMITED EXPERIENCE WITH INTERNATIONAL OPERATIONS, WHICH MAY RESULT IN
OUR INABILITY TO SUCCEED ON AN INTERNATIONAL LEVEL.
Our revenues could be adversely affected if we or our future foreign
business associates are unable to successfully market and operate our online
services in foreign markets. To date, we have had limited experience in
developing localized versions of our online services and in marketing and
operating our online services internationally. One element of our strategy is to
develop our online service brands in international markets. To achieve this, we
intend to enter into relationships with foreign business partners. We may
experience difficulty in obtaining these partners and managing international
operations because of distance, trade regulation, language barriers and cultural
differences.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT.
The failure of our internal systems or material third-party systems to be
Year 2000 compliant could cause a significant number of business disruptions and
inefficiencies for us, our service and content providers and our members and
users that may divert our time and attention and financial and human resources
from our ordinary business activities. The Year 2000 issue is the potential for
system and processing failures of date-related data as the result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. We may be affected by Year 2000 issues related to non-compliant
information technology systems or non-information technology systems operated by
us or by third parties. One element of our information technology system is now
in remediation stage to ensure that it will be Year 2000 compliant. We will not
complete the testing and review of our non-information technology systems until
the early part of the fourth quarter. Additionally, we have limited or no
control over the actions of our third-party suppliers, who may not achieve full
Year 2000 compliance before the end of 1999. For more detailed information
regarding our Year 2000 effort, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control may
not be Year 2000 compliant. The failure by these entities to be Year 2000
compliant could result in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, that could also
prevent us from delivering our services to our customers, decrease the use of
the Internet or prevent users from accessing our Web sites, which would lead to
a decline in our revenues.
WE MAY FAIL TO EFFECTIVELY INTEGRATE AND MANAGE OUR RECENT ACQUISITIONS WHICH
COULD LEAD TO HIGHER THAN ANTICIPATED COSTS OR LOWER THAN ANTICIPATED REVENUES.
We have recently acquired two medical Web sites. The process of integrating
acquisitions is complex and will place significant demands on our management,
technical, financial and other resources which could lead to higher than
anticipated costs or lower than anticipated revenues. The successful integration
of these acquisitions is critical to our future success. Our systems,
procedures, controls and existing space may not be adequate to support the
integration of these acquisitions into our operations. We are now finalizing the
integration of the technologies, service offerings, operations and systems of
our recently acquired sites. Potential challenges to the successful integration
of Web sites we acquired include:
- our ability to attract their users to our Web sites;
- our ability to market and sell these Web sites' services to our clients;
- centralization and consolidation of financial, operational and
administrative functions;
- elimination of unnecessary costs;
- the technological integration of these Web sites' services with ours; and
- the integration of these Web sites' personnel with ours.
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POTENTIAL ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS,
DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We may make investments in or acquire complementary products, technologies
and businesses. These acquisitions and investments could disrupt our ongoing
business, distract our management and employees and increase our expenses. Some
of the factors that will affect our ability to successfully integrate an
acquired company include:
- our ability to assimilate the personnel and operations of the acquired
company;
- whether the personnel of the acquired company decide to work for us; and
- the extent to which newly acquired services or technologies are
incompatible with and must be integrated into our existing services and
marketing, sales and support efforts.
In addition, if we finance the acquisitions by issuing equity securities, this
could dilute our existing stockholders. Any amortization of goodwill or other
assets, or other charges resulting from the costs of these acquisitions, could
adversely affect our operating results.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to satisfy
our anticipated needs for working capital, capital expenditures and business
expansion for at least the next 12 months. After that time, we may need
additional capital. Alternatively, we may need to raise additional funds sooner
to fund more rapid expansion, to develop new or enhanced services, or to respond
to competitive pressures. We currently do not have any commitments for
additional financing. If adequate funds are not available on acceptable terms,
we may not be able to fund our expansion, develop or enhance our products or
services or respond to competitive pressures. If we raise additional funds by
issuing equity or convertible debt securities, the percentage ownership of our
stockholders will be diluted. Furthermore, any new securities could have rights,
preferences and privileges senior to those of the common stock.
RISKS RELATED TO ONLINE HEALTHCARE SERVICES AND THE INTERNET
OUR ACTIVITIES MAY EXPOSE US TO MALPRACTICE LIABILITY AND OTHER LIABILITY
INHERENT IN HEALTHCARE DELIVERY.
We may be exposed to malpractice or other liability against which we may
not be adequately insured, resulting in a decline in our financial results.
Patients who file lawsuits against doctors often name as defendants all persons
or companies with any relationship to the doctors. As a result, patients may
file lawsuits against us based on treatment provided by physicians who maintain
Web pages at our site. In addition, a court or government agency may take the
position that our delivery of health information directly, including through
licensed physicians, or information delivered by a third-party site that a
consumer accesses through our Web site, exposes us to malpractice or other
personal injury liability for wrongful delivery of healthcare services or
erroneous health information. Under some circumstances, AOL may also be entitled
to terminate its agreement with us if a material claim of this nature is filed
against us. The amount of insurance we maintain with insurance carriers may not
be sufficient to cover all of the losses we might incur from these claims and
legal actions. In addition, insurance for some risks is difficult, impossible or
too costly to obtain, and as a result, we may not be able to purchase insurance
for some types of risks.
STATE RESTRICTIONS ON THE PRACTICE OF MEDICINE MAY NEGATIVELY AFFECT OUR
ACTIVITIES.
Any finding in a state that we are not in compliance with its laws could
require us to restructure our services, which could adversely affect our
revenues or share price. The laws in some states prohibit some business
entities, such as our company, from practicing medicine. This is commonly
referred to as the prohibition against the "corporate practice of medicine."
These laws generally prohibit us from employing physicians to practice medicine
or from directly furnishing medical care to patients. Each state requires
licensure for the practice of medicine within that state, and some states
consider the receipt of an electronic transmission of selected healthcare
information in that state to be the practice of medicine. These laws
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restrict our activities and the extent to which we can provide medical advice to
consumers, physicians and others. If challenged, our activities may not be found
to be in compliance with these laws.
HEALTHCARE REFORMS AND THE COST OF REGULATORY COMPLIANCE COULD NEGATIVELY AFFECT
OUR BUSINESS.
The healthcare industry is heavily regulated. Various laws, regulations and
guidelines promulgated by government, industry and professional bodies affect,
among other matters, the provision, licensing, labeling, marketing, promotion
and reimbursement of healthcare services and products, including pharmaceutical
products. Our failure or our clients' failure to comply with any applicable
regulatory requirements or industry guidelines could:
- limit or prohibit business activities;
- subject us or our clients to adverse publicity; or
- increase the costs of regulatory compliance or subject us or our clients
to monetary fines or other penalties.
A federal law commonly known as the Medicare/Medicaid antikickback law, and
several similar state laws, prohibit payments that are intended to induce
physicians or others either to refer patients or to acquire or arrange for or
recommend the acquisition of healthcare products or services, including
pharmaceuticals. Another federal law, commonly known as the "Stark" law,
prohibits physicians from referring Medicare and Medicaid patients for
designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. Some of these laws have been applied to the marketing and
promotional practices of pharmaceutical manufacturers, to payments to physicians
for services and to other benefits to physicians, and could constrain our
relationships, including financial, marketing and continuing medical education
relationships, with our sponsors and advertisers and with physicians, including
any physicians who perform services for us. It is possible that additional or
changed laws, regulations or guidelines could be adopted in the future.
In addition, implementation of government healthcare reform may adversely
affect promotional and marketing expenditures by pharmaceutical companies, which
could decrease the business opportunities available to us. Healthcare reform
measures have been considered by the U.S. Congress and other federal and state
bodies during recent years. The intent of the proposals generally has been to
reduce the growth of total healthcare expenditures and expand healthcare
coverage.
THE INTERNET IS SUBJECT TO MANY LEGAL UNCERTAINTIES AND POTENTIAL GOVERNMENT
REGULATIONS THAT MAY DECREASE DEMAND FOR OUR SERVICES, INCREASE OUR COST OF
DOING BUSINESS OR OTHERWISE HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
RESULTS OR PROSPECTS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our financial results and prospects.
Laws and regulations may be adopted in the future that address
Internet-related issues, including online content, user privacy, pricing and
quality of products and services. For example, although it was held
unconstitutional, in part, the Communications Decency Act of 1996 prohibited the
transmission over the Internet of various types of information and content. In
addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Because the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure in many areas, local exchange carriers have
petitioned the FCC to regulate Internet service providers in a manner similar to
long distance telephone carriers and to impose access fees on the Internet
service providers.
The United States or foreign nations may adopt legislation aimed at
protecting Internet users' privacy. This legislation could increase our cost of
doing business and negatively affect our financial results. Moreover, it may
take years to determine the extent to which existing laws governing issues like
property ownership, libel, negligence and personal privacy are applicable to the
Internet. Currently, U.S. privacy law consists of disparate state and federal
statutes regulating specific industries that collect personal data. Most of them
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predate and therefore do not specifically address online activities. However,
European nations are now implementing a European Union Data Privacy Directive
regulating the transmission and storage of personal information and data. In
addition, a number of comprehensive legislative and regulatory privacy proposals
are now under consideration by federal, state and local governments in the
United States.
STATE AND FEDERAL LAWS THAT PROTECT INDIVIDUAL HEALTH INFORMATION MAY LIMIT OUR
PLANS TO COLLECT, USE AND DISCLOSE THAT INFORMATION.
If we fail to comply with current or future laws or regulations governing
the collection, dissemination, use and confidentiality of patient health
information, this failure could have a material adverse effect on our business,
operating results and financial condition.
Consumers sometimes enter private health information about themselves or
their family members when using our services. Also, our systems record use
patterns when consumers access our databases that may reveal health-related
information or other private information about the user. Numerous federal and
state laws and regulations govern collection, dissemination, use and
confidentiality of patient-identifiable health information, including:
- state privacy and confidentiality laws;
- state laws regulating health care professionals, such as physicians,
pharmacists and nurse practitioners;
- Medicaid laws;
- the Health Insurance Portability and Accountability Act of 1996 and
related rules proposed by the Health Care Financing Administration; and
- Health Care Financing Administration standards for Internet transmission
of health data.
The U.S. Congress has been considering proposed legislation that would
establish a new federal standard for protection and use of health information.
In addition, the laws of other countries also govern the use of and disclosure
of health information. Our systems for safeguarding patient health information
from unauthorized disclosure or use may not preclude successful claims against
us for violation of applicable law. Other third-party sites that consumers
access through our site also may not maintain systems to safeguard this health
information. In some cases, we may place our content on computers that are under
the physical control of others, which may increase the risk of an inappropriate
disclosure of health information. For example, we may contract out the hosting
of our Web site to a third party. In addition, future laws or changes in current
laws may necessitate costly adaptations to our systems.
We intend to develop medical information systems and market research
services that we will use to collect, analyze and report aggregate medical care,
medical research, outcomes and financial data pertaining to items such as
prescribing patterns and usage habits. Some states have enacted legislation
regulating the aggregation of health information and the manipulation, use and
ownership of that aggregated data, even when this data does not reveal the
patient's identity. Because this area of the law is rapidly changing, our
collection, analysis and reporting of aggregate healthcare data maintained in
our database may not at all times and in all respects comply with laws or
regulations governing the ownership, collection and use of this data. Future
laws or changes in current laws governing the ownership, collection and use of
aggregate healthcare data may necessitate costly adaptations to our systems or
limit our ability to use this data.
FDA AND FTC REGULATIONS ON ADVERTISING MAY BE BURDENSOME AND NEGATIVELY AFFECT
OUR ABILITY TO PROVIDE SOME APPLICATIONS OR SERVICES, WHICH COULD LEAD TO HIGHER
THAN ANTICIPATED COSTS OR LOWER THAN ANTICIPATED REVENUES.
Complying with Food and Drug Administration and Federal Trade Commission
regulations may be time consuming, burdensome and expensive and could negatively
affect our ability to continue providing some applications or services, or to
introduce new applications or services in a timely manner. This may result in
higher than anticipated costs or lower than anticipated revenues. In addition,
because part of our business involves direct-to-consumer advertising of
prescription drugs, any increase in FDA or FTC regulation of these
advertisements or the enforcement of these regulations or policies could make it
more difficult for us to
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provide existing or future applications or services to our audience or obtain
the necessary corporate sponsorship to do so.
Any current or future regulatory requirements that the FDA or the FTC
impose on us or our advertisers and sponsors could harm us by:
- making it harder to persuade pharmaceutical, biotechnology and medical
device companies to advertise or promote their products on our Web sites;
- restricting our ability to continue to provide some of our services or
content, or to introduce new services or content in a timely manner;
- damaging our relationships with pharmaceutical, biotechnology and medical
device companies, particularly if programs we recommend or endorse result
in FDA or FTC enforcement action directed against us or these companies;
or
- making it more expensive and time-consuming to comply with new
requirements.
As a consequence of these harms, we might lose advertising or sponsorship
revenue, spend significant amounts of our limited resources on regulatory
experts in the area of FDA or FTC compliance, or receive adverse publicity that
negatively affects share value. In addition to existing FDA and FTC regulation
of advertising and promotion by pharmaceutical, biotechnology and medical device
companies, our business faces a potential risk of increased FDA and FTC
regulation of these activities in an online context. For more detailed
information, see "Business -- Government Regulation of the Internet and
Healthcare Industries."
CHANGES IN EXISTING REGULATORY REQUIREMENTS, OUR FAILURE TO COMPLY WITH CURRENT
OR FUTURE REQUIREMENTS OR ADOPTION OF NEW REQUIREMENTS COULD INCREASE OUR COST
OF DOING BUSINESS AND CAUSE OUR REVENUES TO DECLINE.
We face potential FDA regulation of software that we develop for use on our
Web sites. Some computer applications and software are considered medical
devices and are subject to regulation by the FDA. While the FDA's policies
regarding the regulation of software are evolving, based on the FDA's informal
policy statements regarding the scope of its regulation of stand-alone software,
we believe that our current and intended software applications are not subject
to regulation as medical devices because they do not meet the statutory
definition of a device. However, the FDA may take the view that some of our
current or future applications or services do in fact meet the definition of a
medical device and, therefore, are subject to regulation. If the FDA finds that
our software is subject to regulation as a medical device, the applicable
regulatory controls could include both premarket and postmarket requirements and
the FDA might require us:
- to obtain premarket clearance or approval of the medical device software
from the FDA, which might include the conduct of supporting clinical
trials or other studies;
- to register ourselves as a medical device manufacturer and to list our
devices with the FDA;
- to create our software in compliance with the FDA design and
manufacturing standards;
- to permit the FDA to inspect our facilities and records; and
- to make periodic reports to the FDA.
For more detailed information, see "Business -- Government Regulation of the
Internet and Healthcare Industries."
INTERNET SALES MAY BECOME LESS DESIRABLE TO CONSUMERS IF THEY BECOME TAXABLE.
The tax treatment of the Internet and e-commerce is currently unsettled and
any legislation that substantially impairs the growth of e-commerce could
seriously harm our revenues and prospects. A number of proposals have been made
at the federal, state and local level and by some foreign governments that could
impose taxes on the sale of goods and services and some other Internet
activities. The Internet Tax Freedom Act of 1998 placed a three-year moratorium
on selected types of federal, state and local taxation on Internet commerce.
This moratorium expires on October 21, 2001. We cannot predict the effect of
current attempts at taxing or regulating commerce over the Internet after the
moratorium expires.
18
<PAGE> 22
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS.
Our security measures may not prevent security breaches. Substantial or
ongoing security breaches on our system or other Internet-based systems could
reduce user confidence in our Web sites leading to reduced usage and lower
revenues. The secure transmission of confidential information over the Internet
is essential in maintaining confidence in our Web sites and will be increasingly
important as we expand our consumer-oriented offerings. Consumers generally are
concerned with security and privacy on the Internet and any publicized security
problems could inhibit the growth of the Internet and, therefore, our services.
We will need to incur significant expense to protect and remedy against
security breaches when we identify a significant business risk. Currently, we do
not store sensitive information, like patient information or credit card
information, on the site. When we launch services that require us to gather
sensitive information, our security expenditures will increase significantly. We
are in the process of moving our systems to an external server and site hosting
facility operated by Exodus Communications. As part of this service, Exodus will
provide various upgraded security features, including firewall protection.
A party that is able to circumvent our security systems could steal
proprietary information or cause interruptions in our operations. Security
breaches could also damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our insurance policies carry low coverage
limits, which may not be adequate to reimburse us for losses caused by security
breaches. We also face risks associated with security breaches affecting third
parties conducting business over the Internet.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Medscape and our
industry. We generally identify forward-looking statements in this prospectus
using words like "believe," "intend," "expect," "may," "will," "should," "plan,"
"project," "contemplate," "anticipate" or similar statements. These statements
are based on our beliefs as well as assumptions we made using information
currently available to us. Because these statements reflect our current views
concerning future events, these forward-looking statements involve risks and
uncertainties. Medscape's actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors, as
more fully described in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and elsewhere in
this prospectus. Medscape undertakes no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
19
<PAGE> 23
USE OF PROCEEDS
After deducting estimated underwriting discounts and commissions and our
estimated offering expenses, the net proceeds from the sale of the 6,750,000
shares of common stock in this offering are estimated to be approximately
$47,729,000. The net proceeds will be approximately $54,425,000 if the
underwriters' over-allotment option is exercised in full. The principal purposes
of this offering are to:
- obtain additional capital;
- create a public market for our common stock;
- enhance our ability to acquire other businesses, products or
technologies; and
- facilitate future access by us to public equity markets.
We intend to use up to $30 million of the net proceeds to finance the
payments due to AOL over the next two years, of which $10 million is due within
15 days after completion of this offering. We expect to use the balance of the
net proceeds of this offering for general corporate purposes, including funding
operating losses, working capital and capital needs. We also may use a portion
of the net proceeds of this offering to acquire or invest in complementary
businesses or technologies, although we have no present commitments or
agreements with respect to any material acquisition or investment. Pending the
application of the proceeds towards one of the above uses, we intend to invest
the net offering proceeds in short-term, interest-bearing, investment-grade
securities.
The forgoing represents our present intentions based upon our present plans
and business conditions. The occurrence of unforeseen events or changed business
conditions, however, could result in the application of the proceeds of this
offering in a manner other than as described in this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and we do not intend to pay any cash dividends with respect to
our common stock in the foreseeable future. We intend to retain any earnings for
use in the operation of our business and to fund future growth.
20
<PAGE> 24
CAPITALIZATION
The following shows the cash and cash equivalents and capitalization of
Medscape as of June 30, 1999 (1) on an actual basis, (2) as adjusted on a pro
forma basis to give effect to the issuance of 7,397,208 shares of Class A Common
Stock and 6,541,160 shares of Class B Common Stock to CBS and 1,000,000 shares
of Class A Common Stock and 400,000 shares of Series E Preferred Stock in the
NDC transaction, and (3) as adjusted on a pro forma basis to give effect to the
sale of 6,750,000 shares of common stock offered by Medscape at the initial
public offering price and the application of the estimated net proceeds as
described in "Use of Proceeds," the authorization of 5,000,000 shares of
preferred stock effective as of the closing of the offering, and the automatic
conversion of Preferred and Class B Common Stock into Class A Common Stock and
the redesignation of Class A Common Stock into Common Stock to occur upon the
closing of this offering. The table should be read together with the financial
statements and the related notes and the other information included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------------
PRO FORMA
FOR CBS AND PRO FORMA
ACTUAL NDC TRANSACTIONS AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 12,954 $ 23,093 $ 70,822
======== ========= =========
Shareholders' equity:
Series A Preferred Stock, par value $.01; 788,200 shares
authorized, issued and outstanding (actual); 788,200
shares authorized, issued and outstanding (pro forma);
no shares authorized, issued or outstanding (pro forma
as adjusted).......................................... 8 8 --
Series C Preferred Stock, par value $.01 1,478,359
shares authorized, issued and outstanding (actual);
1,478,359 shares authorized, issued and outstanding
(pro forma); no shares authorized, issued or
outstanding (pro forma as adjusted)................... 15 15 --
Series C-1 Preferred Stock, par value $.01; 932,401
shares authorized, issued and outstanding (actual);
932,401 shares authorized, issued and outstanding (pro
forma); no shares authorized, issued or outstanding
(pro forma as adjusted)............................... 9 9 --
Series D Preferred Stock, par value $.01; 1,757,683
shares authorized, issued and outstanding (actual);
1,757,683 shares authorized, issued and outstanding
(pro forma); no shares authorized, issued or
outstanding (pro forma as adjusted)................... 17 17 --
Series E Preferred Stock, par value $.01; no shares
authorized, issued and outstanding (actual); 400,000
shares authorized, issued and outstanding (pro forma);
no shares authorized, issued or outstanding (pro forma
as adjusted).......................................... -- 4 --
Preferred Stock, par value $.01; no shares authorized,
issued or outstanding (actual); no shares authorized,
issued or outstanding (pro forma); 5,000,000 shares
authorized, no shares issued or outstanding (pro forma
as adjusted).......................................... -- -- --
Class A Common Stock, par value $.01; 27,500,000 shares
authorized, 1,079,000 issued and outstanding (actual);
35,897,208 shares authorized, 9,476,208 issued and
outstanding (pro forma); no shares authorized, issued
or outstanding (pro forma as adjusted)................ 11 95 --
Class B Common Stock, par value $.01; 15,000,000 shares
authorized, 6,995,602.5 shares issued and outstanding
(actual); 21,541,160 shares authorized, 13,536,762.5
issued and outstanding (pro forma); no shares
authorized, issued or outstanding (pro forma as
adjusted)............................................. 70 135 --
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------------
PRO FORMA
FOR CBS AND PRO FORMA
ACTUAL NDC TRANSACTIONS AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Common Stock, par value $.01; no shares authorized,
issued and outstanding (actual), no shares authorized,
issued or outstanding (pro forma); 100,000,000 shares
authorized, 43,693,533 issued or outstanding (pro
forma as adjusted).................................... -- -- 437
Warrants................................................ 85 85 85
Additional paid-in capital.............................. 36,223 212,209 259,784
Treasury stock.......................................... (3) (3) (3)
Notes receivable........................................ (628) (628) (628)
Deferred compensation................................... (2,550) (2,550) (2,550)
Distribution of services................................ -- (153,360) (153,360)
Accumulated deficit..................................... (13,790) (13,790) (13,790)
-------- --------- ---------
Total shareholders' equity......................... 19,467 42,246 89,975
-------- --------- ---------
Total capitalization............................... $ 19,467 $ 42,246 $ 89,975
======== ========= =========
</TABLE>
The outstanding share information is based on our shares outstanding as of June
30, 1999. This information excludes:
- 5,380,588 shares of common stock subject to options granted under our
1996 Stock Option Plan and outstanding as of June 30, 1999 at a weighted
average exercise price of $1.29 per share; and
- 14,887.5 shares of common stock reserved for issuance upon exercise of
outstanding warrants at an exercise price of $0.004 per share.
- 2,704,316 shares of common stock reserved for issuance upon exercise of
two outstanding warrants issued to AOL, 1,352,158 shares of which under
one warrant are at an exercise price of $10 and 1,352,158 shares of which
under the other warrant are at an exercise price to be determined based
upon the fair market value of our common stock at the future times that
the warrant becomes exercisable.
22
<PAGE> 26
DILUTION
Our net tangible book value as of June 30, 1999 was approximately $17
million, or $0.83 per share of common stock. Net tangible book value per share
is equal to Medscape's total net tangible book value, which is total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding on that date. Dilution per share equals the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the net tangible book value per share of shares of common stock offered by
us in this offering. At an initial public offering price of $8.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, and after the application of the estimated net
proceeds from this offering, Medscape's pro forma net tangible book value as of
June 30, 1999 would have been $64.8 million, or $2.38 per share. This represents
an immediate increase in pro forma net tangible book value to existing
stockholders of $1.55 per share and an immediate dilution to purchasers in this
offering of $5.62 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $8.00
Pro forma net tangible book value per share prior to this
offering............................................... $ .83
Increase per share attributable to this offering.......... 1.55
-----
Adjusted pro forma net tangible book value per share after
this offering............................................. 2.38
-----
Dilution per share to new investors(1)...................... $5.62
=====
</TABLE>
- ---------------
(1) Assuming the exercise in full of the underwriters' over-allotment option,
the adjusted pro forma net tangible book value of Medscape at June 30, 1999
would have been approximately $2.55 per share, representing an immediate
increase in net tangible book value of $1.72 per share to our existing
stockholders and an immediate dilution in net tangible book value of $5.45
per share to purchasers in this offering.
The following table illustrates, on a pro forma basis, as of June 30, 1999,
the difference between (1) the number of shares of common stock purchased from
Medscape, the total consideration paid and the average price per share paid or
to be paid by existing stockholders, option holders, warrant holders and (2) by
the purchasers in this offering at the initial public offering price of $8.00
per share and before deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
OR TO BE PURCHASED PAID OR TO BE PAID
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 20,420,775 40% $ 31,548,369 11% $ 1.54
Existing optionholders and warrant
holders, other than AOL.......... 5,395,475 11 7,028,763 3 1.30
Pro forma for Warrants issued to
AOL.............................. 2,704,316 5 24,338,844 8 9.00
Pro forma for CBS and NDC
Transactions..................... 16,188,368 31 177,000,000 60 10.93
Purchasers in this offering........ 6,750,000 13 53,664,000 18 7.95
---------- --- ------------ --- ------
Total.................... 51,458,934 100% $293,579,976 100% $ 5.70
========== === ============ ===
</TABLE>
The discussion and table assume exercise of options outstanding under our
1996 Stock Option Plan as of June 30, 1999. As of June 30, 1999, there were
options outstanding to purchase a total of 5,380,588 shares of common stock at a
weighted average price of $1.29 per share and 14,887.5 shares issuable upon
exercise of outstanding warrants with a weighted average exercise price of
$0.004 per share. On September 3, 1999, we issued two warrants to AOL, one for
1,352,158 shares at an exercise price of $10 per share and the other for
1,352,158 shares at exercise prices per share to be determined based upon the
fair market value of our common stock at the times the warrant becomes
exercisable which, for purposes of this discussion and table, has been assumed
to be $8.00 per share.
23
<PAGE> 27
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
The following unaudited pro forma consolidated statements of operations
present Medscape's consolidated results of operations for the year ended
December 31, 1998, after giving effect to the Healthcare Communications Group,
LLC acquisition and the other adjustments referred to below, in each case as if
this transaction had occurred on January 1, 1998. The pro forma data does not
give effect to this offering. The pro forma data is not necessarily indicative
of the results that would have been achieved, nor is it indicative of Medscape's
future results.
<TABLE>
<CAPTION>
HEALTHCARE
COMMUNICATIONS
HISTORICAL GROUP, LLC
YEAR ENDED JANUARY 1, 1998 PRO FORMA
DECEMBER 31, TO PRO FORMA YEAR ENDED
1998 OCTOBER 27, 1998 ADJUSTMENTS(1) DECEMBER 31,
(AS RESTATED)(3) 1998
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues................................. $ 3,069 $2,585 $ -- $ 5,654
--------- ------ ----- ---------
Operating expenses:
Editorial, production, content and
technology.......................... 2,588 1,737 -- 4,325
Sales and marketing.................... 2,357 -- -- 2,357
General and administration............. 1,987 868 -- 2,855
Depreciation and amortization.......... 287 9 110 406
--------- ------ ----- ---------
Total operating expenses....... 7,219 2,614 110 9,943
--------- ------ ----- ---------
Loss from operations..................... (4,150) (29) (110) (4,289)
Interest expense (income).............. (249) (2) -- (251)
--------- ------ ----- ---------
Net loss................................. $ (3,901) $ (27) $(110) $ (4,038)
========= ====== ===== =========
Basic net loss per share(2).............. $ (1.07) $ (0.61)
Weighted average number of shares of
common stock outstanding............... 3,636,558 6,628,100
</TABLE>
- ---------------
(1) Adjustment represents amortization of goodwill for the 10 months ended
October 27, 1998.
(2) We calculate loss per common share by dividing the loss attributable to
common shares by the weighted average number of shares outstanding. We do
not include outstanding common stock options and warrants in the loss per
common share calculation, as their effect is anti-dilutive.
(3) As restated, see Note 14 of Notes to Consolidated Financial Statements.
24
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
Shown below are selected financial data for the nine months ended December
31, 1996 and for each of the years in the two year period ended December 31,
1998 and for the six month periods ended June 30, 1998 and 1999. The selected
consolidated financial data presented below with respect to the nine months
ended December 31, 1996 and for the years ended December 31, 1997 and 1998 (as
restated) and the six month periods ended June 30, 1998 and 1999 have been
derived from the financial statements appearing elsewhere in this prospectus.
Deloitte & Touche LLP, independent auditors, have audited the consolidated
financial statements for the nine months ended December 31, 1996 and two year
period ended December 31, 1998. In our opinion the unaudited consolidated
financial statements as of June 30, 1998 and 1999 and for the respective six
month periods, have been prepared on the same basis as the audited financial
statements and include all adjustments, which consist only of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the six month
periods ended June 30, 1998 and 1999 are not necessarily indicative of the
results that may be expected for the full year. The information shown below is
qualified by reference to and should be read together with the financial
statements and their notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ------------------------- --------------------------
1996 1997 1998 1998 1999
(AS RESTATED)
(2)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues........................ $ 1,015 $ 1,522 $ 3,069 $ 1,078 $ 4,930
--------- --------- --------- --------- ----------
Operating expenses:
Editorial, production, content
and technology............. 1,182 1,790 2,588 853 3,916
Sales and marketing........... 278 1,201 2,357 811 3,502
General and administration.... 830 1,823 1,987 793 2,664
Depreciation and
amortization............... 41 160 287 96 225
--------- --------- --------- --------- ----------
Total operating
expenses............ 2,331 4,974 7,219 2,553 10,307
--------- --------- --------- --------- ----------
Loss from operations............ (1,316) (3,452) (4,150) (1,475) (5,377)
Interest expense (income)..... 28 12 (249) (149) (296)
--------- --------- --------- --------- ----------
Net loss........................ $ (1,344) $ (3,464) $ (3,901) $ (1,326) $ (5,081)
========= ========= ========= ========= ==========
Basic loss per share(1)......... $ (0.66) $ (1.26) $ (1.07) $ (0.47) $ (0.71)
Weighted average number of
shares of common stock
outstanding................... 2,026,233 2,750,552 3,636,558 2,834,172 7,164,127
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------- ----------------
1996 1997 1998 1998 1999
(AS RESTATED)(2)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets........................... $ 560 $4,294 $3,038 $5,922 $16,764
Working capital.......................... (1,570) 2,350 1,368 4,995 13,018
Total assets............................. 836 4,633 5,874 6,290 23,213
Stockholders' (deficit) equity........... (1,294) 2,689 4,204 5,363 19,467
</TABLE>
- ---------------
(1) We calculate loss per common share by dividing the loss attributable to
common shares by the weighted average number of shares outstanding. We do
not include outstanding common stock options and warrants in the loss per
common share calculation as their effect is anti-dilutive.
(2) As restated, see Note 14 to the Consolidated Financial Statements.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and operations should
be read in conjunction with the consolidated financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our 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
described under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We operate Medscape.com, a healthcare Web site for physicians and allied
healthcare professionals, such as pharmacists and nurses. To enhance and
personalize the consumer experience, we plan to launch a separate consumer site,
CBS.Medscape.com, in the third quarter of 1999 and to develop and launch several
additional co-branded consumer sites in the fourth quarter of 1999 and the first
quarter of 2000 under an agreement with America Online, Inc. Medscape, Inc.
commenced operations in April 1996. In October 1998, we acquired Healthcare
Communications Group, LLC, which operated a leading HIV Web site. In the first
quarter of 1999, we acquired the trademarks and hired key employees of
Bonehome.com, a leading orthopedic Web site, and CompuRx, Inc., a healthcare
market research company serving pharmaceutical and other healthcare companies.
The Bonehome.com and CompuRx transactions were not material to our financial
statements. These transactions are consistent with our strategy to be the
leading online information source for selected medical specialties and to
broaden our revenue streams.
Since our inception, we have derived substantially all of our revenues from
advertising and sponsorships from pharmaceutical companies. We also generate
revenues from our e-commerce partners who either provide us with a placement fee
or a commission on sales of their products generated through our Web site. We
offer banner advertising to third-party advertisers and generally guarantee
delivery of a specified number of advertising impressions. We derive sponsorship
revenues from the development of client-sponsored content, including modules on
disease topics and editorial coverage of medical conferences. We expect our
revenues to be seasonal due to the scheduling of major medical conferences.
We recognize banner advertising revenues in the period that we display the
advertisement, provided that no significant obligations remain and collection of
the resulting receivable is probable. We recognize revenues from modules on a
cost of completion basis and editorial coverage of medical conferences in the
period in which the conference was held. We recognize revenues from e-commerce
based on commissions when earned from our third-party partners or, in cases
where third-party partners pay placement fees to us, over the life of the
product placement. We generally invoice for our services at the inception of a
project and record a receivable. Accordingly, our receivables have increased in
connection with our increase in revenues and due to an increase in the number of
large scale sponsored programs which have become a more prominent part of our
business following our acquisition of Healthcare Communications Group, LLC.
To date, we have incurred substantial costs to create and enhance our
content, build brand awareness, develop our infrastructure and grow our
business, and have yet to achieve significant revenue. As a result, we have
incurred operating losses in each fiscal quarter since we were formed. We expect
operating losses and negative cash flow to continue for the foreseeable future
as we intend to significantly increase our operating expenses to grow our
business. These costs could have an adverse effect on our future financial
condition or operating results. We believe that period-to-period comparison of
our financial results is not necessarily meaningful and you should not rely upon
them as an indication of our future performance.
RESULTS OF OPERATIONS
RESTATEMENT
Subsequent to the issuance of our 1998 Consolidated Financial Statements,
our management determined that the valuation of Class B Common Stock and related
options should be revised for Class B Common Stock and options issued after
August 1, 1998. As a result, the 1998 Consolidated Financial Statements have
26
<PAGE> 30
been restated from the amounts previously reported to recognize additional stock
based compensation expense of $257,109, deferred compensation of $715,436 and
additional goodwill of $459,523 based upon the revised fair value of Class B
Common Stock and options. Additional paid-in capital has also been increased by
$1,432,068.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
AT DECEMBER 31, 1998: REPORTED AS RESTATED
<S> <C> <C>
Goodwill -- Net........................................... $ 1,950,268 $ 2,409,791
Additional Paid-In Capital................................ 12,726,241 14,158,309
Accumulated Deficit....................................... 8,451,914 8,709,023
Deferred Stock Compensation............................... -- 715,436
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AS PREVIOUSLY
DECEMBER 31, 1998: REPORTED AS RESTATED
<S> <C> <C>
Editorial, Production, Content & Technology............... $ 2,563,419 $ 2,588,353
Sales and Marketing....................................... 2,343,962 2,356,432
General and Administrative................................ 1,774,649 1,987,183
Depreciation and Amortization............................. 279,528 286,699
Net Loss.................................................. 3,643,510 3,900,619
Basic net loss per share.................................. $1.00 $1.07
</TABLE>
REVENUE AND EXPENSE COMPONENTS
The following descriptions of the components of revenues and expenses apply
to the Comparison of Results of Operations:
Revenues. Revenues consist primarily of sales of advertising banners and
sponsorships for developing content for modules and medical conferences.
Revenues also include commission revenues or placement fees from product sales,
such as medical books, and market research services to pharmaceutical and other
healthcare companies.
Editorial, Production, Content and Technology. Product development
expenses consist primarily of salaries, third-party content acquisition costs,
the development of sponsored content and expenditures associated with
maintaining and enhancing our Web site.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, promotions and related marketing costs.
General and Administration. General and administration expenses consist
primarily of salaries, facility costs and fees for professional services.
Depreciation and Amortization. Depreciation expense reflects the charge
for depreciation of capitalized fixed assets, including computer equipment, Web
site servers and related equipment, and the amortization of office leasehold
improvements. Additionally, this category includes goodwill amortization related
to corporate acquisitions.
Interest Expense/Income. Interest expense is related to loans that a
related party provided to Medscape, which were fully repaid by the end of 1998.
Interest income consists primarily of interest earned on cash and cash
equivalents generated from private placements of equity securities.
The following tables present, for the periods given, selected data from
Medscape's statements of operations and this data as a percentage of net
revenues. We have derived our statements of operations data for 1996, 1997 and
1998 periods from our audited financial statements. We have derived the
statement of operations data for the first quarters of 1998 and 1999 from our
unaudited financial statements which, in our opinion, have been prepared on
substantially the same basis as the audited financial statements and includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the
27
<PAGE> 31
financial information. This information should be read together with the
financial statements and their notes included elsewhere in this prospectus. The
operating results in any period are not necessarily indicative of the results
that may be expected for any future period.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
NINE MONTHS YEAR ENDED SIX MONTHS ENDED
ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------- -----------------
1996 1997 1998 1998
(AS RESTATED) 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 1,015 $ 1,522 $ 3,069 $ 1,078 $ 4,930
------- ------- ------- ------- -------
Operating Expenses:
Editorial, production, content and
technology........................ 1,182 1,790 2,588 853 3,916
Sales and marketing................. 278 1,201 2,356 811 3,502
General and administration.......... 830 1,823 1,987 793 2,664
Depreciation and amortization....... 41 160 288 96 225
------- ------- ------- ------- -------
Total operating expenses....... 2,331 4,974 7,219 2,553 10,307
------- ------- ------- ------- -------
Loss from operations..................... (1,316) (3,452) (4,150) (1,475) (5,377)
Interest expense (income)........... 28 12 (249) (149) (296)
------- ------- ------- ------- -------
Net loss................................. $(1,344) $(3,464) $(3,901) $(1,326) $(5,081)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
NINE MONTHS YEAR ENDED SIX MONTHS ENDED
ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, --------------- ----------------
1996 1997 1998 1998
(AS RESTATED) 1999
(IN PERCENT)
<S> <C> <C> <C> <C> <C>
Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ -------
Operating expenses:
Editorial, production, content and
technology........................... 116.5 117.6 84.3 79.1 79.5
Sales and marketing.................... 27.4 78.9 76.8 75.2 71.0
General and administration............. 81.8 119.8 64.7 73.6 54.0
Depreciation and amortization.......... 4.0 10.5 9.4 8.9 4.6
------ ------ ------ ------ -------
Total operating expenses.......... 229.7 326.8 235.2 236.8 209
------ ------ ------ ------ -------
Loss from operations........................ (129.7) (226.8) (126.8) (136.8) (109.1)
Interest expense (income).............. 2.8 0.8 (8.1) 13.8 (6.0)
------ ------ ------ ------ -------
Net loss.................................... (132.4)% (227.6)% (118.7)% (123.0)% (103.1)%
====== ====== ====== ====== =======
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Revenues and operating expenses for the first half of 1999 include
Healthcare Communications Group, which we acquired in October 1998.
Revenues. Revenues increased 357% from $1.1 million for the six months
ended June 30, 1998 to $4.9 million for the six months ended June 30, 1999. The
increase in revenues was driven by the inclusion of Healthcare Communications
Group revenues during the first six months of 1999 and an increase in the number
of advertisers and sponsors on our Web site. Advertising and sponsorship
revenues, for both comparison periods, comprise more than 95% of total revenues.
Editorial, Production, Content and Technology. Product development
expenses increased 359% from $853,000 for the six months ended June 30, 1998 to
$3.9 million for the six months ended June 30, 1999. The increase in costs was
primarily due to increased variable costs related to the development of
sponsored
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<PAGE> 32
content and costs associated with expanding and enhancing editorial content and
the functionality of our Web site.
Sales and Marketing. Sales and marketing expenses increased 332% from
$811,000 for the six months ended June 30, 1998 to $3.5 million for the six
months ended June 30, 1999. The increase in costs was primarily due to increased
costs related to the continued development and implementation of our marketing
and branding campaigns and additional sales and marketing personnel.
General and Administration. General and administration expenses increased
236% from $793,000 for the six months ended June 30, 1998 to $2.7 million for
the six months ended June 30, 1999. The increase in costs was primarily a result
of expenses related to increased personnel and other employee compensation
expenses, professional service fees and facility expenses necessary to support
our growth.
Depreciation and Amortization. Depreciation and amortization expenses
increased 134% from $96,000 for the six months ended June 30, 1998 to $225,000
for the six months ended June 30, 1999. The increase in costs was attributable
to increased purchases of fixed assets and amortization of goodwill related to
the Healthcare Communications Group acquisition in October 1998.
Interest Expense/Income. Net interest income for the six months ended June
30, 1999 was $296,000 compared to $149,000 for the six months ended June 30,
1998. The higher interest income was due to a higher average of net cash and
cash equivalents balance as a result of our issuance of preferred stock in March
1999.
Income Taxes. As of June 30, 1999, Medscape had federal net operating loss
carryforwards of approximately $13.7 million which will be available to reduce
future taxable income. The federal net operating loss carryforwards expire
beginning in 2011 through 2019. A valuation allowance has been recorded for the
entire deferred tax asset as a result of uncertainties regarding the realization
of the asset due to our lack of earnings history.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Operating results for the year ended December 31, 1998 include the results
of Healthcare Communications Group, which we acquired in October 1998.
Revenues. Revenues increased 102% from $1.5 million for the year ended
December 31, 1997 to $3.1 million for the year ended December 31, 1998. The
increase in revenues was driven by the inclusion of Healthcare Communications
Group revenues for November and December 1998 and an increase in the number of
advertisers and sponsors on our Web site. Advertising and sponsorship revenues,
for both comparison periods, comprise more than 98% of total revenues.
Editorial, Production, Content and Technology. Product development
expenses increased 45% from $1.8 million for the year ended December 31, 1997 to
$2.6 million for the year ended December 31, 1998. The increase in costs was
primarily due to increased variable costs associated with the development of
sponsored content as well as from additional editorial, production and
technology personnel.
Sales and Marketing. Sales and marketing expenses increased 96% from $1.2
million for the year ended December 31, 1997 to $2.4 million for the year ended
December 31, 1998. The increase in costs was primarily due to the expansion of
our sales force and client services staff and costs related to marketing and
branding campaigns.
General and Administration. General and administration expenses increased
9% from $1.8 million for the year ended December 31, 1997 to $2.0 million for
the year ended December 31, 1998. The increase in costs was primarily due to the
hiring of several senior managers and related recruitment fees and increased
support costs in line with the increase in our number of personnel.
Depreciation and Amortization. Depreciation and amortization expenses
increased 80% from $160,000 for the year ended December 31, 1997 to $288,000 for
the year ended December 31, 1998. The increase in
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<PAGE> 33
costs was largely attributable to increased purchases of fixed assets and
amortization of goodwill resulting from the Healthcare Communications Group
acquisition in October 1998.
Interest Expense/Income. Net interest expense for the year ended December
31, 1997 was $12,000. Net interest income for the year ended December 31, 1998
was $249,000. The improvement was due to higher average net cash and cash
equivalents balances as a result of the issuance of preferred stock at the end
of 1997 and in 1998, as well as the payment in full of all outstanding loans in
1998.
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31,
1997
Revenues. Revenues increased 50% from $1.0 million for the period from
April 1, 1996, when we commenced operations, to December 31, 1996 to $1.5
million, for the year ended December 31, 1997. The increase in revenues was
driven primarily by an increase in the number of advertisers and sponsors on our
Web site and the inclusion of twelve months of revenues for the year ended
December 31, 1997 versus nine months for the prior period. Advertising and
sponsorship revenues, for both comparison periods, comprise more than 99% of
total revenues.
Editorial, Production, Content and Technology. Product development
expenses increased 51% from $1.2 million for the nine months ended December 31,
1996 to $1.8 million for the year ended December 31, 1997. The increase in costs
was primarily due to increased number of personnel required to develop our core
product offerings and the inclusion of twelve months of costs for the year ended
December 31, 1997 versus nine months for the prior period.
Sales and Marketing. Sales and marketing expenses increased 332% from
$278,000 for the nine months ended December 31, 1996 to $1.2 million for the
year ended December 31, 1997. The increase in costs was primarily due to
increased sales and marketing personnel and promotional costs and inclusion of
twelve months of costs for the year ended December 31, 1997 versus nine months
for the prior period.
General and Administration. General and administration expenses increased
120% from $830,000 for the nine months ended December 31, 1996 to $1.8 million
for the year ended December 31, 1997. The increase in costs was primarily a
result of non-recurring items in 1997, including service fees paid to a related
party and the twelve month period versus nine months of operations.
Depreciation and Amortization. Depreciation and amortization expenses
increased 290% from $41,000 for the nine months ended December 31, 1996 to
$160,000 for the year ended December 31, 1997. The increase in costs was
primarily attributable to increased purchases of fixed assets and the inclusion
of twelve months of costs for the year ended December 31, 1997 versus nine
months for the prior year.
Interest Expense/Income. Interest expense for the nine months ended
December 31, 1996 was $28,000 as compared with $12,000 for the year ended
December 31, 1997. We earned income on net cash and cash equivalents balances
from the issuance of preferred stock offset by interest paid, at commercial
rates, on a loan to Medscape.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have largely financed our operations through the
private placement of equity securities and, to a lesser extent, from revenues
generated from advertising and sponsorship sales and loans received from a
related party.
Net cash used in operating activities was $80,000, $3.6 million and $4.2
million for the period from April 1, 1996 through December 31, 1996 and for the
years ended December 31, 1997 and 1998, respectively. Net cash used in operating
activities for the six months ended June 30, 1999 was $4.4 million. Cash used in
operating activities from April 1, 1996 through June 30, 1999 was attributable
to funding net operating losses and increases in accounts receivable and prepaid
expenses, which were partially offset by increases in deferred revenues, accrued
expenses and accounts payable.
Net cash used in investing activities was $318,000, $222,000 and $1.5
million for the period from April 1, 1996 through December 31, 1996 and for the
years ended December 31, 1997 and 1998, respectively. Net
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<PAGE> 34
cash used in investing activities for the six months ended June 30, 1999 was
$3.8 million. Cash used in investing activities for the six months ended June
30, 1999 related primarily to the investment in Softwatch.
Cash provided by financing activities was $597,000, $7.3 million and $3.6
million for the period from April 1, 1996 through December 31, 1996 and for the
years ended December 31, 1997 and 1998, respectively. For the six months ended
June 30, 1999, gross proceeds provided by financing activities were $19.6
million.
As of June 30, 1999, the primary source of liquidity for Medscape was $13
million of cash and cash equivalents. As of this date, we had no bank credit
facility.
We expect to incur significantly higher costs, particularly content
creation costs and sales and marketing costs to grow our business. For 1999, we
expect total marketing costs, and related capital expenditures, to be
approximately $30 million. We plan to launch CBS.Medscape.com, our separate
consumer site, in the third quarter of 1999, and our AOL co-branded consumer
sites in the fourth quarter of 1999 and first quarter of 2000. CBS.Medscape.com
and the AOL co-branded sites will provide consumer-oriented information
organized by health topic and offer community features and interactive
healthcare information programs. A large portion of our promotional expenditures
for our consumer sites will be funded through the approximately $150 million in
advertising and promotion to be provided by CBS.
On June 15, 1999, we entered into a License and Web Site Development
Agreement with Softwatch Ltd., an Israeli company, and its U.S. subsidiary,
Softwatch, Inc., under which we licensed software from Softwatch to support our
consumer site and to provide ongoing support services for our consumer site. At
the same time we purchased 1,040,170 Series A Preferred Shares of Softwatch
Ltd., an Israeli company, for $2,999,954.
We believe that the net proceeds from this offering, together with current
cash and cash equivalents and any cash generated from operations, will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures for at least the next 12 months following the offering. However, if
during or following that period we are not successful in generating sufficient
cash flow from operations or in raising additional capital when required in
sufficient amounts and on terms acceptable to us, these failures could have a
material adverse effect on our business, results of operations and financial
condition. If we raise additional funds through the issuance of equity
securities, the percentage ownership of our then current stockholders would be
reduced.
SUBSEQUENT FINANCING EVENTS
On August 4, 1999, we entered into a strategic development and marketing
agreement with National Data Corporation, an electronic data interchange and
data management company for medical practices. As part of this transaction, NDC
invested $10 million cash in Medscape, and has agreed, over the three year term
of the agreement, to provide $10 million in licensing and promotional value and
credits against future commission and product purchase amounts due by us to NDC.
$6,000,000 will be expensed as used over the three-year life of the agreement,
commencing August 4, 1999 and terminating August 31, 2002. In addition, the
license fee of $4,000,000 will be amortized on a straight line basis over the
life of the agreement. Under the agreement, NDC received 1,000,000 shares of our
Class A Common Stock and 400,000 shares of our Series E Preferred Stock. The
400,000 shares of Series E Preferred Stock will convert into 1,250,000 shares of
our common stock upon the completion of this offering. In accordance with
instructions by NDC, 25,000 of the 1,000,000 shares of Class A Common Stock and
10,000 of the 400,000 shares of Series E Preferred Stock were delivered to NDC's
financial advisor in the transaction, Lazard Freres & Co., LLC.
On August 3, 1999, we entered into agreements with CBS Corporation under
which, during the next seven years, we will receive approximately $150 million
in advertising and promotion in the United States and a license to the "CBS"
trademark and "Eye" design and selected health-related news content in exchange
for 7,397,208 shares of our Class A Common Stock and 6,541,160 shares of our
Class B Common Stock, which will represent approximately 32% of our outstanding
capital stock upon completion of this offering.
On September 3, 1999, we entered into an agreement with America Online,
Inc., under which AOL has agreed, among other things, to deliver to us a
guaranteed number of impressions. In addition, we will develop
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<PAGE> 35
separate co-branded Web sites on AOL, AOL.com, CompuServe Service and Netscape
Netcenter and Digital City, which are AOL properties. In exchange, we have paid
AOL $3 million and will pay an additional $30 million over the next two years.
These amounts will be charged to earnings over the three-year life of the
contract. In addition, we granted AOL two seven-year warrants, each to purchase
up to 1,352,158 shares of our Class A Common Stock. One of the warrants is fully
vested now and has an exercise price of $10 per share. The other warrant will
vest over a three-year period based on AOL meeting specified performance
requirements and will have exercise prices equal to the fair market value of our
common stock at the times the warrant becomes exercisable. Each warrant has a
value of approximately $2,530,000 as determined using the Black Scholes option
pricing model. The value of the fully vested warrant will be charged to earnings
over the three-year AOL contract period and the warrant that vests over three
years will be charged to earnings adjusted variably over the vesting period.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes new rules for the reporting and display
of comprehensive income and its components. We have no elements of comprehensive
income; we operate in one segment in the United States.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities for our year ended
December 31, 2001. Generally, it requires that a entity recognize all
derivatives as either an asset or liability and measure those instruments at
fair value, as well as identify the conditions for which a derivative may be
specifically designated as a hedge. We currently do not have any derivative
instruments and we do not engage in any hedging activities.
During 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Policy No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement is applicable to our 1999 financial statements and
will require us to capitalize various payroll and payroll-related costs and
other costs that are directly related to the development of some of our systems.
Amortization of these costs will be over the life of the systems.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many software and computer systems used by companies and governmental
agencies may need to be upgraded or replaced in order to correctly process dates
beginning in 2000 and comply with Year 2000 requirements.
We are conducting a comprehensive review of both information technology and
non-information systems to ensure that they are, or prior to the end of 1999
will be, Year 2000 compliant. Significant information technology systems include
our production system, composed of the servers, networks and software that
comprise the underlying technical infrastructure that runs our business, and
various internal office systems. Our significant non-information technology
systems include the telephone systems, air conditioning and security system. Our
Year 2000 review project includes the following phases:
- conducting a comprehensive inventory of our internal systems and the
systems acquired or to be acquired by us;
- assessing and prioritizing any required remediation;
- remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems; and
- testing all remediated systems for Year 2000 compliance.
With the exception of one element of our production system, which is in
remediation stage now, all other elements of our information technology systems
have been certified as Year 2000 compliant. We expect to
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complete remediation for the one outstanding element by October 31, 1999. We are
in the process of completing our testing and review of all non-information
technology systems and expect to complete this work by the early part of the
fourth quarter.
Based upon the results of our review to date, it appears that there are no
significant Year 2000 issues within our systems that would have a negative
effect on our ability to conduct business.
In addition to assessing the readiness of our systems, we have gathered
information from, and have directly communicated through written correspondence,
telephone calls and in face-to-face meetings with our third-party systems and
software vendors, as well as other suppliers, to identify and, to the extent
possible, resolve issues involving the Year 2000 problem. Based on
representations made to us by applicable suppliers, we believe that the
third-party software and systems that are material to our business are Year 2000
compliant. We have approximately six major vendors with whom we have met and/or
corresponded to determine Year 2000 issues and appropriate compliance. However,
we have limited or no control over the actions of our third-party suppliers.
Thus, while we expect that we will be able to resolve any significant Year 2000
problems with our systems, we cannot guarantee that our third-party suppliers
will resolve all Year 2000 problems with their systems before the occurrence of
a material disruption to our business. Any failure of material third-party
suppliers to resolve Year 2000 problems with their systems in a timely manner
would have a negative effect on our ability to conduct business.
To date, we have spent an immaterial amount on Year 2000 compliance issues
but expect to incur approximately an additional $50,000 in connection with
evaluating and addressing these issues. We expect to pay for these expenses from
our working capital. Most of our expenses have related to operating costs
associated with the time spent by employees and consultants in the evaluation
process and Year 2000 compliance matters generally. These expenses, if higher
than anticipated, could have a negative effect on our financial condition.
We have identified and expect to resolve by October 31, 1999 all Year 2000
problems that could materially adversely affect our business, financial
condition or operating results. We cannot assure you, however, that we will
achieve full Year 2000 compliance before the end of 1999. A failure of our
computer systems or the failure of our suppliers or customers to effectively
upgrade their software and systems for transition to the year 2000 could have a
material adverse effect on our business, financial condition and results of
operations.
In addition, we cannot be certain that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by these
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
that could prevent us from delivering our services to our customers, decrease
the use of the Internet or prevent users from accessing our Web site, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
We completed an acquisition during 1998 and are finalizing the integration
of the systems of the acquired business into our operations. Those systems are
included in our Year 2000 review. For any other acquisitions that we may
complete prior to the end of 1999, we will evaluate the extent of the Year 2000
problems associated with the potential acquisitions and the cost and timing of
remediation. This work will be done as part of the due diligence process as well
as post-acquisition integration. We cannot assure you, however, that the systems
of any acquired business will be Year 2000 compliant when we acquire them or
will be capable of timely remediation.
As discussed above, we are engaged in an ongoing Year 2000 assessment and
have not yet developed any contingency plans. We will take the results of our
assessment into account in determining the nature and extent of any contingency
plans. We have established a contingency plan to remedy issues for a key element
of our production system. If the planned remediation is not successful by the
end of the third quarter of 1999, we will execute the contingency plan. This
plan will involve outsourcing the service and could be implemented within a
reasonable time frame.
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BUSINESS
MEDSCAPE
We operate Medscape.com, a healthcare Web site targeted at physicians and
allied healthcare professionals, such as pharmacists and nurses. Our Web site is
a valuable resource that enables our members to make better informed healthcare
decisions. We provide comprehensive, authoritative and timely medical
information, including original proprietary articles written for us by renowned
medical experts. We supplement our medical content with a variety of non-medical
information, community features and interactive programs that make Medscape.com
a full-service professional healthcare destination site. We plan to launch our
separate consumer site, CBS.Medscape.com, in the third quarter of 1999. We have
also entered into a strategic relationship with America Online, Inc. under which
we have agreed to develop new versions of our consumer site which will be
co-branded with AOL. We expect to launch our AOL co-branded sites in the fourth
quarter of 1999 and the first quarter of 2000. As of June 30, 1999, Medscape.com
had more than 1,200,000 registered members worldwide, including over 210,000
registered as physicians, 600,000 registered as allied healthcare professionals
and 400,000 registered as consumers. Our registered member base allows us to
provide pharmaceutical, healthcare and other consumer product companies with
direct access to their target audiences.
Medscape.com is currently organized by medical specialty area, such as
oncology and cardiology, to make it easier for our members to access the
information most relevant to them. Our medical content and interactive programs
assist medical professionals in keeping abreast of medical advances. Our
original, exclusive and proprietary content includes such innovative features as
next day summaries of major medical conferences and online, peer-reviewed
medical journals. We also provide proprietary interactive programs that test a
medical professional's diagnostic skills and understanding of recent medical
developments. We provide access to extensive online medical databases and what
we believe is one of the Web's largest collection of free, peer-reviewed,
full-text medical articles. In addition, we offer physicians the opportunity to
earn continuing medical education credits that are required by most states'
licensing boards. Through our strategic relationship with National Data
Corporation, a leading provider of healthcare information services and
electronic commerce solutions, we will integrate selected clinical data
interchange and data management services provided by NDC into Medscape.com. We
will also serve as the principal content provider to NDC's physician practice
management system and be an online distributor of some of NDC's other online
clinical products.
We believe our current consumer members view Medscape.com as a trusted
source of healthcare information because of our high-quality content and our
credibility with physicians. To enhance and personalize the consumer experience,
we plan to launch our consumer site, CBS.Medscape.com, and several newly
developed AOL co-branded consumer sites. We have entered into a strategic
relationship with CBS Corporation under which our CBS.Medscape.com consumer site
will be the exclusive Internet healthcare site integrated into CBS News
programming and, with the AOL co-branded consumer sites, will be promoted on CBS
media properties. Our AOL co-branded consumer sites will appear and be promoted,
through contextual links and banners, on AOL, AOL.com, CompuServe Service,
Netscape Netcenter and Digital City, all of which are AOL properties. AOL will
guarantee a minimum number of impressions, which means a user seeing a screen
with a link to one of our co-branded sites. We will design our consumer sites to
help consumers make better informed healthcare decisions and to simplify
management of their healthcare needs. Our consumer sites will provide
personalized, authoritative medical content written for the consumer, access to
our professional content on Medscape.com and interactive health management
tools, such as health diaries. All visitors to our consumer sites will be able
to access our general content and features. However, visitors will be required
to register as members in order to have full access to all the content and
features of our consumer sites.
Medscape was incorporated in New York in March 1996 and commenced
operations in April 1996. Medscape was reincorporated in Delaware in December
1998. In October 1998, we purchased Healthcare Communications Group, which
operated a leading HIV Web site.
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INDUSTRY BACKGROUND
THE INTERNET
The Internet has emerged as a global medium for communications, news,
information and commerce. International Data Corporation estimates that the
number of Web users worldwide will increase from approximately 97 million at the
end of 1998 to 320 million by the end of 2002. IDC also estimates that the
number of Web users in the United States will increase from approximately 52
million at the end of 1998 to 136 million by the end of 2002. A number of
factors drive the Internet's continued growth, including the large and growing
installed base of personal computers, a rapidly expanding and improving Internet
delivery infrastructure and an explosion of content and commerce offerings on
the Web.
The Internet allows content delivery in a manner not possible through
traditional broadcast and print media. These traditional media can have large
audiences but generally are limited to a specific geographic area, can deliver
only limited content and are not effective for distributing detailed information
quickly. The Internet is distinct from traditional media in that it offers
immediate access to dynamic and interactive content and enables instantaneous
communication among users. As a result, the Internet has become an important
alternative to traditional media, enabling users to seek current information and
to communicate with one another. These characteristics, combined with the fast
growth of the Internet, have created a powerful, rapidly expanding direct
marketing and sales channel. Advertisers can target very specific demographic
groups, measure the effectiveness of advertising campaigns and quickly revise
them in response to the prompt feedback allowed by the Internet's technology.
As users increasingly rely on the Internet for their information needs,
they have sought more detailed content on a wide variety of specific subjects.
Utilizing subject-specific sites, users can find information on selected topics
quickly, easily and cost effectively, making these sites a very attractive
resource for users. In addition to offering detailed and comprehensive content,
many of these subject-specific sites have developed online communities that
allow users to communicate with each other and to engage in other interactive
activities. We believe these community features are attractive to users who want
to express themselves and who seek to interact with other users who have similar
interests.
RELEVANT DYNAMICS IN THE HEALTHCARE INDUSTRY
Healthcare is the largest sector of the U.S. economy, accounting for
approximately $1 trillion in annual spending. As the focal point of the
healthcare delivery system, the approximately 620,000 prescribing physicians in
the United States directly or indirectly influence approximately 80% of the $1
trillion in annual expenditures. This makes physicians attractive marketing
targets for pharmaceutical companies, medical device manufacturers and other
healthcare companies. According to IMS Health, in 1998, pharmaceutical companies
spent over $10 billion on promotional and educational activities targeting
physicians in the United States. According to Scott-Levin, approximately $5.7
billion of these expenditures were on 59 million face-to-face product details, a
process in which a sales representative explains to a physician the therapeutic
benefits and adverse effects of new or existing drugs. This amount represents an
increase of 14.6% over 1997 detailing expenditures. In addition, pharmaceutical
companies spent approximately $1.9 billion on medical journal print advertising,
promotional meetings and events.
Continuing changes in the healthcare industry, including the increasing
adoption of managed care plans and the need to keep informed about rapidly
emerging medical and pharmaceutical therapies, are placing increasing pressures
on physicians' time. Physicians must keep abreast of the latest developments
within their medical specialty to provide their patients with the best possible
care and to meet continuing medical education requirements. There is a vast flow
of information from many sources, including traditional medical journals,
medical textbooks, industry conferences and other trade literature. The sheer
volume of medical information and the time constraints that physicians face make
it extremely difficult for them to stay current and to quickly and efficiently
access the information most relevant to their practice. We believe that
physicians value services that allow them to easily find and manage information
they are seeking.
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Consumers are taking a more active role in seeking information sources on
health and wellness topics and educating themselves on available treatment
options. This trend is driven by the proliferation of new therapies and the
increased oversight of treatment options by payors. Traditional media have
sought to meet this demand for consumer-oriented healthcare information by
introducing magazines focused on health and wellness and by increasing news
coverage of healthcare-related issues. We believe that consumers, like
physicians, value a comprehensive healthcare site with high-quality content,
community features and interactive programs that help them make better informed
healthcare decisions and simplify management of their healthcare needs.
Pharmaceutical, medical device and other healthcare companies recently have
increased their efforts to influence consumer behavior with targeted advertising
and promotions. This trend has been influenced in part by new guidelines for
direct-to-consumer advertising of pharmaceuticals issued by the U.S. Food and
Drug Administration in August 1997. As a result, according to Scott-Levin,
pharmaceutical companies spent an estimated $1.3 billion on direct-to-consumer
advertising for prescription drugs in 1998, an increase of 30% over 1997.
CONVERGENCE OF THE INTERNET AND THE HEALTHCARE INDUSTRY
The Internet is an effective medium for accessing timely and relevant
medical information. Health and medical information is a rapidly growing area of
interest on the Internet. According to Cyber Dialogue, one-third of all Web
users in the United States use the Internet to locate healthcare information,
half of whom are searching for information on a specific disease or health
condition.
Physicians are using the Internet as a valuable source of the latest
medical information. According to a June 1998 PERQ/HCI report, over 52% of
physicians accessed medical information online, up from 37% in the prior year.
The Internet allows physicians to access, at their convenience, recent
healthcare articles and reports, link to authoritative medical databases and
earn continuing medical education credits.
Consumers are also using the Internet to find information that will enable
them to better understand and manage their own, their family's and their
friends' healthcare needs and to interact with other users who have similar
healthcare interests. According to Cyber Dialogue, during the 12-month period
ending June 1998, approximately 17 million adults in the United States searched
online for health and medical information. It is estimated that this number will
grow to over 33 million by 2000. We believe that community features are
particularly important to healthcare consumers, because medical information is
often complex and intimidating, and consumers value communication, information
and testimonials from peers who share similar health concerns. According to
Cyber Dialogue, 70% of consumers who access healthcare information on the
Internet feel more empowered to make healthcare decisions. In addition,
approximately 50% of such consumers make offline purchases after seeking
information on the Internet. Cyber Dialogue also reports that Web users seeking
healthcare information are typically better educated, have higher household
incomes and are more experienced with the Internet than the general population
of Internet users.
THE MEDSCAPE SOLUTION
Medscape.com is a healthcare destination site that provides medical
professionals and consumers with comprehensive, authoritative and timely medical
information and interactive programs. We believe Medscape.com is positioned to
help users make better informed healthcare decisions and change the way people
access information and communicate about healthcare.
We believe the following factors drive our success:
We provide high-quality, timely and original medical information. We
provide high-quality, timely and original content on important healthcare trends
and disease topics. Using the real-time publishing capabilities of the Internet,
we can deliver this content to our audience faster and more cost effectively
than traditional print media, which is limited by publication schedules and
physical distribution. Many of our articles are written by industry-leading
medical experts and are peer-reviewed by other physicians to insure they meet
the highest standards of medical integrity. Our experienced editorial staff is
headed by Medscape's Editor in
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Chief, Dr. George D. Lundberg, who was the Editor of the prestigious Journal of
the American Medical Association for 17 years. We supplement our extensive
original content with one of the Web's largest collections of free,
peer-reviewed, full-text medical articles, one of the Web's most extensive
libraries of continuing medical education accredited programs, and under our
agreement with Hearst Corporation, third-party Web access to the National Drug
Data File, a leading drug and disease database of Hearst Corporation's First
DataBank. Our medical specialty areas are carefully designed and their features
are regularly updated by our editorial and quality control staff.
Our sites are well organized and easy-to-use. We design our Web sites to
meet the needs of our members in a personalized and easy-to-use manner. We
organize our professional information on Medscape.com by medical specialty area,
the way physicians practice, and we plan to organize CBS.Medscape.com and our
related AOL co-branded sites by health topic like diabetes and asthma. In
addition to high-quality medical content, our consumer site will provide
community features and interactive programs to help consumers make better
informed healthcare decisions and to simplify management of their healthcare
needs. Unlike many other healthcare Web sites, by including content from our
professional site at CBS.Medscape.com and our related AOL co-branded sites, we
will allow consumers to access the same high-quality medical information as
physicians.
We provide our clients with cost-effective access to our audience. Our
membership registration profiles give us the ability to segment our audience
based on their medical specialty or healthcare interest. In addition, our
proprietary membership profile and traffic database enables us to provide
advertising and sponsored content targeted to the specific profile our clients
seek to reach. Medscape.com also offers online programs that complement many of
the pharmaceutical companies' off-line promotional and educational efforts. For
example, we expand the audience of sponsored medical conferences by making
next-day summaries of the proceedings available to members who were unable to
attend. In addition, we believe Medscape.com creates and our consumer sites will
create an attractive e-commerce environment for health-related products because
they will have a large audience with a focused interest on healthcare issues and
related products.
We have a strategic relationship with CBS. We believe that our strategic
relationship with CBS will position our consumer Web site, CBS.Medscape.com, and
our related AOL co-branded sites, as preeminent branded sources of
consumer-oriented health and wellness information on the Web. We will receive
approximately $150 million in advertising and promotion across all CBS media
properties and a license to the "CBS" trademark and "Eye" design and selected
health-related news content during the next seven years in exchange for
7,393,208 shares of our Class A Common Stock and 6,541,160 shares of our Class B
Common Stock, which will represent approximately 32% of our outstanding capital
stock upon completion of this offering. We believe that CBS's equity stake in us
aligns CBS's incentives with ours in building consumer traffic for
CBS.Medscape.com. and the AOL co-branded sites.
We have a strategic relationship with AOL. We have entered into a
strategic relationship with America Online, Inc. under which AOL has agreed to
promote, through contextual links and banners, new versions of our consumer site
to be developed and co-branded with AOL. Under the Agreement, we are obligated
to pay AOL $33 million over a 24-month period and have issued to AOL warrants to
purchase up to 2,704,316 shares of our common stock. We believe that this
promotion by AOL and our association with AOL brands will greatly enhance
recognition of our brand and consumer traffic on our Web sites.
GROWTH STRATEGY
Our objective is to operate the premier online healthcare destination Web
sites where physicians, allied healthcare professionals and consumers find
reliable and comprehensive information that enables them to make better and more
informed medical and health decisions. We believe we are positioned to become a
preferred online advertising medium and e-commerce partner in the healthcare
sector. We intend to achieve this objective by pursuing the following
strategies:
Strengthening the Medscape Brands. We intend to establish Medscape.com as
the leading single brand for online professional healthcare information and
CBS.Medscape.com, and our related AOL co-branded
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sites, as the leading brands for online consumer healthcare information. We
believe that strengthening our brand awareness is critical to attracting and
retaining members, advertisers, sponsors and strategic partners. We plan to
pursue an aggressive brand development strategy through strategic distribution
relationships, online and off-line advertising, promotions, media coverage and
word-of-mouth support. We believe our brand visibility will significantly
benefit from promotion on CBS and AOL properties.
Expanding and Enhancing Our Content. We intend to expand the content on
both our professional and consumer sites by adding new medical specialty areas,
enlarging our editorial staff and utilizing our extensive relationships with
leading medical experts. We intend to enhance the consumer experience by adding
consumer-oriented health condition and general health and wellness information,
community features and interactive programs that take advantage of our
credibility with medical professionals and our existing professional medical
specialty content.
Growing Membership. We intend to grow our medical professional membership
and increase the frequency and length of their visits to our site by
establishing Medscape.com as an integral part of the medical professional's
daily work flow and by continuing to offer compelling content, providing
interactive programs and services and building relationships with relevant
healthcare organizations. We plan to attract CBS.Medscape.com members and
visitors to our AOL co-branded sites by offering a superior consumer experience
with compelling content, community features and interactive programs that we
believe will increase member and user loyalty, repeat usage and time spent on
our site.
Developing Strategic Relationships and Enhancing Distribution. We plan to
increase traffic, market share and revenues through strategic relationships,
distribution relationships and selected acquisitions. We are pursuing
distribution relationships with high-traffic Web sites that target both medical
professionals and consumers. We are also pursuing professional distribution
relationships with healthcare companies to provide medical content to their
medical professionals and become a part of their daily work flow. For example,
we are a content provider to PhyCor Online, the private physician intranet of
PhyCor, the United States' largest physician practice management company with
over 27,000 physicians. Through our strategic relationship with National Data
Corporation, we will be the preferred content supplier to NDC's LYTEC physician
practice management product and an online distributor of some of NDC's other
clinical information products.
Developing Multiple Revenue Sources. We believe our attractive audience
demographics and high-quality content offerings provide us with significant
opportunities to develop multiple sources of revenue. In addition to advertising
and sponsorships, we have begun to generate e-commerce revenues from our online
medical bookstore, drugstore, and pay-per-view services for selected full-text
articles, and from our online market research services. We plan to expand our
e-commerce offerings to include medical supplies and other health-related
offerings. We are also developing other research products that we expect will
complement pharmaceutical companies' product detailing efforts. In addition, we
plan to introduce products and services that appeal directly to our
international and allied healthcare members.
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THE MEDSCAPE.COM SITE
MEDICAL SPECIALTY AREAS
We designed our professional Web site to meet the needs of our members in a
personalized and easy-to-use manner. We currently organize our professional
information by the following medical specialty and subject areas:
<TABLE>
<CAPTION>
<S> <C>
Cardiology Orthopedics
Diabetes and Endocrinology Pediatrics
Gastroenterology Pharmacotherapy
HIV/AIDS Primary Care
Infectious Diseases Psychiatry
Internal Medicine Respiratory Care
Managed Care Surgery
Molecular Medicine Urology
Multispecialty Women's Health
Oncology
</TABLE>
Each of the medical specialty and subject areas will have a program
director and a scientific advisory board dedicated to developing the content for
that area. We plan to expand into new medical specialty areas that appeal to our
current membership base and attract new members. Our objective is to be the
category leader in each of our medical specialty areas by delivering the highest
quality specialty-based content and selectively acquiring other high-quality
medical specialty Web sites. As part of this strategy, we acquired Healthcare
Communications Group, which operated a leading HIV Web site, in October 1998,
and Bonehome.com, a leading orthopedic site, in February 1999.
OUR CONTENT
Medscape.com offers three distinct types of high-quality content to
members:
Original, exclusive and proprietary content. Our original content is
written exclusively for Medscape by medical experts, many of whom are
internationally renowned in their specialties. This content includes:
- Next Day Summaries(SM) -- highlights of selected presentations at major
medical conferences, published on our site the day after the
presentations are delivered, providing physicians and other members with
immediate, easy-to-read authoritative summaries of new data, therapies
and procedures discussed at the meeting;
- Medscape General Medicine(SM) -- pioneering, primary-source,
peer-reviewed general medical journal launched in March 1999. Published
exclusively online and accessible free of charge to all Medscape.com
members, Medscape General Medicine will provide prompt delivery of
articles relating to important new clinical research and trials, public
health studies and other significant medical developments;
- Clinical Management Series -- interactive practice modules that include
state-of-the-art treatment information and clinical cases for particular
diseases, each of which is accredited for continuing medical education;
- Treatment Updates -- authoritative evaluations of significant new changes
in therapies; and
- eMed Journals -- peer-reviewed, electronic medical journals written
exclusively for Medscape.com covering HIV/AIDS, cardiology, oncology,
psychiatry, orthopedics, respiratory medicine and women's health. Two of
our eMed Journals, Clinical Care Options in HIV and Medscape Women's
Health, have already been indexed in Index Medicus, the National Library
of Medicine's prestigious MEDLINE database.
We have also developed innovative, proprietary interactive medical programs
that allow physicians to enter clinical data points and obtain feedback on
available treatment options. We also offer an array of
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proprietary, challenging and instructional interactive features to test a
physician's medical knowledge. Interactive self-assessment elements include:
- PicTours(R) -- image-based case challenges testing the physician's
diagnostic skills;
- Today's Question -- testing the physician's understanding of recent
developments in the physician's medical specialty; and
- ECG of the Week -- images of cardiograms with case histories testing the
physician's diagnostic skills, supplied by leading cardiologists.
High-quality, third-party content. We believe Medscape.com contains one of
the Web's largest collection of free, peer-reviewed, full-text medical articles
and one of the Web's most extensive libraries of continuing medical education
accredited programs. Medscape.com also provides third-party Web access to the
National Drug Data File, a leading drug and disease database of Hearst
Corporation's First DataBank. Numerous prestigious medical publishers,
universities, hospitals and professional organizations are part of our strategic
content partner program known as Medscape Publishers' Circle(R). Through this
program, Medscape.com aggregates, organizes, and places in context content from
over 100 medical journals, textbooks, news services and other publications, and
offers integrated, easy-to-use searching of vast medical databases, including
over nine million abstracts of medical journals available in the National
Library of Medicine's MEDLINE, AIDSLINE and TOXLINE databases. In addition,
through an agreement with Dow Jones & Company, Medscape.com provides free
searching of more than 500 leading medical publications, including the Journal
of the American Medical Association, the British Medical Journal, The Lancet,
and abstracts from the New England Journal of Medicine. Members can immediately
retrieve online a full-text copy of the article or abstract for a fee.
Non-medical content. We also provide an array of non-medical content on
subjects of particular interest to medical professionals and health-conscious
consumers. Medscape Money & Medicine offers personal finance features, including
stock quotes, portfolio tracking and business news, and valuable practice
management features that provide business information that is directly relevant
to a medical practice. Members can also learn about the developments in managed
care in a special Managed Care topic area. The Medscape Humor & Medicine section
provides readers with medical jokes, cartoons, DeFUNitions, crossword puzzles
and other entertaining features that generate traffic to and increase usage of
our site.
OUR MEMBER SERVICES
We offer a number of services that complement our high-quality content
offerings and make Medscape.com a preferred professional destination site,
including:
Continuing Medical Education. Approximately half the states require
physicians and selected other medical professionals to certify annually that
they have accumulated a minimum number of continuing medical education hours to
maintain licensure. Medscape.com offers our professional members what we believe
is one of the Web's largest libraries of continuing medical education programs.
Our extensive continuing medical education programs are produced in association
with entities accredited by the Accreditation Council for Continuing Medical
Education. From the convenience of their home or office computer, our
professional members can obtain continuing medical education credits by
accessing a variety of accredited editorial resources and programs including
online journal articles, our Next Day Summaries of medical conferences, in-depth
Treatment Updates and our state-of-the-art Clinical Management Series.
Physician Web Sites. We offer our members registered as physicians the
opportunity to create home pages for their medical practices that can be
accessed by their patients and the general public. In addition to details about
their practice, including office address, phone number, medical specialty, types
of insurance accepted, hospital affiliations and languages spoken, our Physician
Web Sites will soon permit a physician to offer links to disease-specific
information from Medscape.com as well as the general searching capability of
Medscape.com. We believe these Physician Web Sites will keep Medscape's
high-quality medical information at the center of the communication between
physician and patient, and keep the physician at the center of the healthcare
dialogue.
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e-Commerce and Services. Through a series of strategic partners, we offer
our audience the opportunity to purchase a variety of goods and services. The
Medscape MedBookstore offers members the opportunity to purchase discounted
medical texts from a collection of over 90,000 titles through our partner
MedSite Publishing Inc. The Medscape Job Center offers a comprehensive
job-listing/posting service for medical professionals through our partner
NetMed, Inc. The Medscape Drugstore offers our members the ability to purchase
online a wide range of health, beauty and wellness products through
drugstore.com. Through our strategic relationship with National Data
Corporation, we will be an online distributor of some of NDC's clinical
information products.
Community Features. Medscape Mail, a free service, enables members to send
and receive Web-based email. Medscape Mail, powered by CommTouch, is especially
useful for mobile professionals like physicians, who often require email access
from multiple locations, such as their homes, offices, clinics and hospitals or
during travel. Discussion areas on many medical articles and physician-only
discussion groups are also available. Our new Ask-the-Expert feature, which will
allow members registered as physicians to present interesting cases to leading
experts online for comments, is expected to be launched later this year.
OUR HEALTHCARE COMPANY SERVICES
We offer healthcare companies many value-added online services including:
Medscape Profiles. The Internet offers significant advantages over
traditional mail surveys and focus groups in terms of speed and cost savings.
U.S. pharmaceutical and other healthcare companies are estimated to spend as
much as $1 billion annually on custom and syndicated market research. Medscape
Profiles, our online market research division, has already successfully piloted
several custom research projects and has recruited a 1,000+ physician panel from
our member base to conduct custom and syndicated online research quickly and
efficiently. In addition, our registration and traffic pattern database provides
us with a valuable and expanding source of proprietary data about viewing habits
and usage patterns. This database helps pharmaceutical companies correlate
prescribing behavior with promotions and content seen by physicians and
consumers.
Medscape MedPyx. We plan to introduce Medscape MedPyx as an educational
research program that will assist pharmaceutical companies in better
understanding the physician's knowledge base and prescribing patterns. In 1998,
pharmaceutical company sales representatives conducted more than 59 million
details to office- and hospital-based physicians. We believe that Medscape
MedPyx will provide pharmaceutical companies with a cost-effective method of
evaluating and improving their existing detailing activities.
THE CBS.MEDSCAPE.COM AND AOL CO-BRANDED SITES
We plan to launch CBS.Medscape.com in the third quarter of 1999 and our AOL
co-branded sites during the fourth quarter of 1999 and the first quarter of
2000. We are designing our CBS.Medscape.com and AOL co-branded consumer sites to
help consumers make better informed healthcare decisions and to simplify
management of their healthcare needs. Our consumer sites will provide
personalized, authoritative medical content written for the consumer, access to
our professional content on Medscape.com and interactive personal health
management tools, such as health diaries.
In addition to general health and wellness information, CBS.Medscape.com
and the AOL co-branded sites will offer information organized around specific
health conditions, such as diabetes or asthma. In an effort to simplify the
consumer experience we plan to include convenient links to health sites operated
by the consumer's physician, employer and health insurer.
REGISTERED MEMBERS
To utilize all of the features of Medscape.com and our consumer sites,
users must register as members. This information enables us to deliver targeted
medical content based on our members' registration profiles. As of June 30,
1999, Medscape.com had over 1,200,000 registered members worldwide, an increase
of 36% from January 1, 1999 and 197% from January 1, 1998.
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The registration process enables professional members to choose a home page
tailored to their medical specialty or interest. Accordingly, a cardiologist
accessing Medscape.com is automatically directed to Medscape Cardiology, rather
than a more generic home page. Every member, however, regardless of medical
specialty or professional status, has access to the full suite of exclusive,
original and licensed content through a uniform, easy-to-use interface.
To encourage initial use, our consumer sites will allow visitors to access
selected features without registering as members. Visitors, however, will have
to register as members to have access to all the features of our consumer sites,
including the interactive programs such as health diaries.
Registration information will also enable us to deliver targeted
advertising messages to the specific audience profile our clients seek to reach
either through Medscape.com or our consumer sites, or both. For example, through
Medscape.com, an oncologist in New York can be targeted with different messages
than a cardiologist in Chicago. The same targeting capabilities will be offered
on CBS.Medscape.com and the AOL co-branded sites, where a consumer interested in
diabetes can be targeted with different messages than a consumer interested in
cancer.
EDITORIAL, DESIGN AND PRODUCTION
Our editorial staff is headed by Dr. George D. Lundberg, Medscape Editor in
Chief and the former Editor of the Journal of the American Medical Association.
As of August 31, 1999, our editorial, design and production staff consisted of
52 professionals who are all experienced medical editors, writers and producers.
We intend to significantly increase our number of editors as we add additional
medical specialty areas. We have assembled specialty-specific editorial boards
for Medscape.com and have also assembled a Medscape.com scientific advisory
board consisting of 16 of the world's leading physicians, academicians and
healthcare experts, who will also serve as the editorial board of Medscape
General Medicine, our newly launched primary source online medical journal.
We have an easy-to-use interface that incorporates original and proprietary
content written by medical experts with an extensive library of licensed content
and medical databases. Each medical specialty area is headed by a program
director responsible for building and continuously updating that area's content.
We seek to be the premier online information resource in each of our medical
specialty areas. To support this effort, we cover major medical conferences in
many specialties and plan to attend over 20 different conferences in 1999, with
our editors and medical experts summarizing and reporting on the breaking
medical research and news delivered at these events.
SALES
As of August 31, 1999, we had a direct sales organization consisting of 13
sales professionals, with an average of 14 years experience, and eleven sales
operations staff employees. We plan to hire additional sales professionals, many
of whom will be focused on selling banner advertisements and sponsorships in our
expanded CBS.Medscape.com consumer site. We generally seek to hire individuals
with significant experience selling to pharmaceutical, other healthcare and
consumer companies and their advertising agencies.
MARKETING AND PUBLIC RELATIONS
We employ a variety of methods to promote the Medscape brand and to attract
traffic and new members, including advertising on other Internet sites and in
medical journals, pharmaceutical and other healthcare publications, and other
targeted publications. To extend the Medscape brand, we encourage other
healthcare sites to integrate our branded search box directly into their
services. This feature permits a Web site viewer in another healthcare site full
searching capability across all the Medscape.com databases by clicking on our
branded search box appearing by agreement in the other site. Under our agreement
with CBS, we will receive approximately $150 million in advertising and
promotion in the United States over seven years. In addition, under our
agreement with AOL, AOL will provide us with a guaranteed number of impressions
over a three-year period through promotions like banners and contextual links to
our sites. We believe our brand visibility will significantly benefit from
promotion on CBS and AOL properties. In addition,
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CBS.Medscape.com will be the exclusive healthcare Internet site integrated into
CBS News programming. This integration will be accomplished by CBS News, when
appropriate and at its discretion, directing viewers of CBS News programs to
CBS.Medscape.com for more information regarding health-related news stories and
features.
We believe in the value of direct, in-person marketing and plan to staff a
Medscape.com booth at over 13 major medical meetings and conferences in 1999. We
use our booth presence to cross promote our Next Day Summaries(SM) of the
medical conferences. We have also effectively used Medscape Academies, in which
we offer free Internet training for physicians at major medical meetings, as a
way to introduce physicians to the power of the Internet as a communications and
educational medium, and to Medscape.com as a premier source of high-quality
medical information on the Internet.
We supplement these efforts with direct mail campaigns targeted at medical
professionals, and plan to significantly increase these activities in 1999.
Our professional distribution strategy is designed to have Medscape.com's
medical content be available within major Internet-accessible healthcare
information system platforms like hospital intranets, electronic medical record
systems and physician practice management company intranets. This strategy
integrates Medscape.com into the daily workflow of their medical professionals
with frequent reminders of and easy access to our selection of medical content.
Consistent with this strategy in 1998, we signed a content distribution
agreement with PhyCor, the largest physician practice management organization in
the United States. Most recently, we entered into a License and Product
Development Agreement with National Data Corporation under which we are the
preferred content supplier to NDC's LYTEC physician practice management product
and an online distributor of some of NDC's other clinical information products.
Our internal public relations staff oversees a comprehensive public
relations program which we believe is a key component of our marketing and brand
recognition strategy. We target key business, medical and healthcare marketing
publications, and encourage their reporters to use Medscape.com for their
medical news and research needs, in an effort to build both brand awareness and
loyalty among news organizations.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Our business is supported by a reliable, expandable and secure system
platform. Using a combination of proprietary online solutions and commercially
available licensed technologies, we have deployed systems for online content
dissemination, site analysis, and Web- and email-based member support.
We have developed a database management and online publication system to
index, retrieve and display information. This system allows for rapid searching,
viewing and distribution of content including text, photos, graphics and other
images. Our hardware and software systems are based on a distributed processing
model that allows applications to be distributed among multiple parallel
servers. Our hardware servers, storage systems, Internet connections and
networks allow our online systems to operate continuously 24 hours a day and
seven days a week. We do not maintain offsite redundant systems and facilities
but we have taken initial steps to outsource our Web-hosting. This outsourcing
will provide faster and more reliable connections to the Internet and enhanced
reliability and expandability.
COMPETITION
We face competition both in attracting visitor traffic and in generating
revenue across all our business lines. We compete with numerous companies and
organizations for the attention of medical professionals and consumers including
traditional off-line media such as print journals, conferences, continuing
medical education programs and symposia. We also face significant competition
from online information resources. There are thousands of healthcare-related
sites on the Internet. Also, several large consumer sites offer specialized
healthcare channels as part of their general services. In addition, there are
many companies that provide non-Internet based marketing and advertising
services to the healthcare industry. These competitors include advertising
agencies, consulting firms, marketing and communications companies and contract
sales
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and marketing organizations. We believe that competition for our audience and
sources of revenue will continue to increase.
Some of our current and potential competitors may have competitive
advantages compared to us, including:
- greater resources to devote to the development, promotion and sale of
their services;
- greater financial, technical and marketing resources;
- greater brand recognition and larger marketing budgets; and
- larger customer and user bases.
We believe that the principal competitive factors in attracting and
retaining members are the depth, breadth and timeliness of services and brand
recognition. Other important factors in attracting and retaining members include
ease of use, quality of service and cost. We believe that the principal
competitive factors that will continue to attract advertisers and sponsors to
Medscape.com and our consumer sites include price, the number of medical
professionals and consumers who use our Web sites, the demographics of our
member base and the creative implementation of advertisement placements.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. There can be no assurance
that we will be able to compete successfully against current and future
competitors or that the competitive pressures we face will not seriously harm
our business.
SIGNIFICANT CUSTOMERS
In 1998, we derived approximately 27% of our revenue from Genentech
Incorporated, 14% from Roche Laboratories and 7% from Johnson & Johnson.
GOVERNMENT REGULATION OF THE INTERNET AND HEALTHCARE INDUSTRIES
THE INTERNET
We are subject to various laws and regulations relating to our business.
Currently, few laws or regulations are directly applicable to access to the
Internet. Because of the Internet's popularity and increasing use, however, new
laws and regulations may be adopted. These laws and regulations may cover issues
such as:
- user privacy;
- pricing;
- content;
- copyrights and other intellectual property rights;
- distribution; and
- characteristics and quality of products and services.
Currently, U.S. privacy law consists of disparate state and federal
statutes regulating specific industries that collect personal data. Most of them
pre-date and therefore do not specifically address online activities. However,
European nations are now implementing a European Union Data Privacy Directive
regulating the transmission and storage of personal information and data. In
addition, a number of comprehensive legislative and regulatory privacy proposals
are now under consideration by federal, state and local governments in the
United States. For example, the Federal Trade Commission recently published
proposed regulations implementing the Children's On-line Privacy Protection Act
of 1998 and, under authority established in the Health Insurance Portability and
Accountability Act of 1996, regulations are being prepared by the Secretary of
Health and Human Services that will be applicable to electronically transmitted
or stored health information. These regulations are scheduled to be published in
late 1999, absent intervening Congressional action.
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The growth of the Internet and e-commerce, coupled with publicity regarding
Internet fraud, may lead to the enactment of more stringent consumer protection
laws. These laws may impose additional burdens on our business. For example, the
Department of Commerce is actively developing safe harbors for activities in
various industry sectors to help U.S. companies meet standards for conducting
electronic commerce with EU countries as they implement the EU Data Privacy
Directive. In addition, the Federal Trade Commission has informed Congress of
its intentions to use its general consumer protection authority to protect
online consumers from deceptive practices that jeopardize online consumers'
privacy. In addition, state legislatures are considering and are likely to adopt
more protective consumer and health privacy legislation. States also may elect
to use their consumer protection statutes in ways that are analogous to the FTC
activities. The enactment of any additional laws or regulations may impede the
growth of the Internet, which could decrease our potential revenues from
e-commerce or otherwise adversely affect our business, financial condition and
operating results.
Laws and regulations directly applicable to e-commerce and Internet
communications are becoming more prevalent. The most recent session of Congress
enacted Internet laws regarding online copyright infringement. Although not yet
enacted, Congress is considering laws regarding Internet taxation. These are
recent enactments, and there is uncertainty regarding their marketplace impact.
In addition, various jurisdictions already have enacted laws that are not
specifically directed to e-commerce but that could affect our business. The
applicability of many of these laws to the Internet is uncertain and could
expose us to substantial liability.
Any new legislation or regulation regarding the Internet, or the
application of existing laws and regulations to the Internet, could negatively
affect us. If we were alleged to violate federal, state or foreign, civil or
criminal law, even if we could successfully defend such claims, it could
negatively affect us.
THE U.S. FOOD AND DRUG ADMINISTRATION AND THE FEDERAL TRADE COMMISSION
Current FDA and FTC rules and enforcement actions and regulatory policies
or those that the FDA or the FTC may develop in the future could have a material
adverse effect on our ability to provide existing or future applications or
services to our audience or obtain the necessary corporate sponsorship to do so.
We believe that complying with FDA and FTC regulations may be time consuming,
burdensome and expensive and could negatively affect our ability to continue
providing some applications or services, or to introduce new applications or
services in a timely manner. If we or our sponsors and advertisers fail to
comply with applicable FDA or FTC requirements, the FDA or FTC might pursue an
enforcement action. An FDA enforcement action might include:
- warning letters or notices or adverse publicity;
- fines, injunctions, recall or seizure of products or total or partial
suspension of production;
- failure of the government to grant premarket clearance or premarket
approval for medical devices, withdrawal of marketing clearances or
approvals;
- imposition of civil or criminal liability on us or our corporate
officers; and
- direction to the advertiser or sponsor to correct or remove information
on our Website and to convey FDA required corrective information to our
audience.
An FTC enforcement action might include:
- cease and desist orders;
- corrective advertising;
- civil penalties;
- consumer redress; and
- injunctions.
The FDA and the FTC regulate the form, content and dissemination of
labeling, advertising and promotional materials, including direct-to-consumer
prescription drug and medical device advertising,
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<PAGE> 49
prepared by, or for, pharmaceutical, biotechnology, or medical device companies.
The FTC regulates over-the-counter drug advertising and, in some cases, medical
device advertising. Generally, regulated companies must limit their advertising
and promotional materials to discussions of the FDA-approved claims and, in
limited circumstances, to a limited number of claims not approved by the FDA.
Therefore, any information that promotes the use of pharmaceutical or medical
device products that is put on our Web site or our co-branded sites is subject
to the full array of the FDA and FTC requirements and enforcement actions. Areas
of our Web site or our co-branded sites that we believe are subject to FDA or
FTC regulation include banner advertisements, sponsorship links, and any
educational programs that lack independent editorial control. The FDA and the
FTC place the principal burden of compliance with advertising and promotional
regulations on the advertiser that places materials on our Web site or our
co-branded sites. If the FDA or FTC finds that any regulated information on our
site violates FDA or FTC regulations, they may take regulatory action against us
or the advertiser or sponsor of that information.
Following a public meeting in October 1996, the FDA announced it would
develop a guidance document expressing a broad set of policies dealing with the
promotion of pharmaceutical, biotechnology, and medical device products on the
Internet. Although the FDA has yet to issue that guidance document, agency
officials continue to predict its eventual release. The FDA guidance document
may reflect new regulatory policies that more tightly regulate the format and
content of promotional information on the Internet.
Another regulatory issue that we face involves increased FDA regulation of
direct-to-consumer advertising of prescription drugs. Because part of our
business involves direct-to-consumer advertising, any increase in FDA regulation
of these advertisements or the enforcement of these regulations or policies
could make it more difficult for us to provide existing or future applications
or services to our audience or obtain the necessary corporate sponsorship to do
so. In the last 15 years, the FDA has gradually relaxed its formerly restrictive
policies on direct-to-consumer advertising of prescription drugs. Companies can
now advertise prescription drugs for serious conditions to consumers in any
medium. However, physician groups and others have criticized the FDA's current
policies, and have called for restrictions on any advertising of prescription
drugs to consumers. These critics point to both public health concerns and to
the laws of many other countries that make direct-to-consumer advertising of
prescription drugs a criminal offense. In response to these critics, the FDA or
FTC may alter its present policies on the direct-to-consumer advertising of
prescription drugs or medical devices in a way that would reduce or restrict the
amount of this information available to consumers.
We also face potential regulation of software that we develop for use on
our Web sites. Some computer applications and software are considered medical
devices and are subject to regulation by the FDA. In some cases, while the FDA
has found the product to qualify as a medical device, the agency has decided to
exempt the device from most regulatory requirements. Many types of medical
software are regulated as components of or accessories to other medical devices,
like software that controls an implanted pacemaker and is regulated as a
component of the pacemaker. In some instances the FDA also has asserted
jurisdiction over stand-alone software if it is used in the diagnosis,
treatment, mitigation, prevention or cure of a disease, or is intended to affect
the structure or function of the body. While the FDA's policies regarding the
regulation of software are evolving, based on the FDA's informal policy
statements regarding the scope of its regulation of stand-alone software, we
believe that our current and intended software applications are not subject to
regulation as medical devices because they do not meet the statutory definition
of a device. However, the FDA may take the view that some of our current or
future applications or services do in fact meet the definition of a medical
device and, therefore, are subject to regulation. If the FDA does regard some of
our applications as medical devices, the level of FDA regulation would depend on
several characteristics of the programs such as the degree to which there is
competent human intervention between the software output and the diagnosis or
treatment of the patient. If the FDA finds that the software is subject to
regulation as a medical device, the applicable regulatory controls could include
both premarket and postmarket requirements and the FDA might require us:
- to obtain premarket clearance or approval of the medical device software,
which might include the conduct of supporting clinical trials or other
studies;
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<PAGE> 50
- to register ourselves as a medical device manufacturer and to list our
devices with the FDA;
- to create our software in compliance with the FDA design and
manufacturing standards;
- to permit the FDA to inspect our facilities and records; and
- to make periodic reports to the FDA.
The FDA's regulations and policies on the regulation of software products
and the transmission of medical information are evolving.
We cannot predict future changes in the regulatory environment. Changes in
existing regulatory requirements, our failure to comply with current or future
requirements or adoption of new requirements could negatively affect us. We may
face additional FDA or FTC regulation if the FDA or the FTC adopt new regulatory
policies.
INTELLECTUAL PROPERTY AND DOMAIN NAME
We protect our intellectual property through a combination of license
agreements, trademark, service mark, copyright and trade secret laws and other
methods. We obtain the majority of our content under license agreements with
publishers, through assignments or work for hire arrangements with third parties
and from internal staff development. Generally, our license agreements are for a
period of one to three years and we consider the materials obtained through
these agreements as important to the continued enhancement of the content on our
Web site. We currently have no patents or patents pending for our current online
services and do not anticipate that patents will become a significant part of
our intellectual property in the foreseeable future. We also enter into
confidentiality agreements with our employees, consultants, vendors and
customers and license agreements with third parties and we generally seek to
control access to and distribution of our technology, documentation and other
proprietary information. We currently hold the domain name Medscape.com. The
legal status of intellectual property on the Internet is currently subject to
various uncertainties. The current system for registering, allocating and
managing domain names has been the subject of litigation and proposed regulatory
reform. Additionally, legislative proposals have been made by the federal
government that would afford broader protection to owners of databases of
information, such as stock quotes. This protection of databases already exists
in the European Union.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
EMPLOYEES
As of August 31, 1999, we had 146 full-time employees. None of our
employees is covered by a collective bargaining agreement. We consider our
employee relations to be good.
FACILITIES
We are headquartered in New York, New York, where we lease approximately
17,975 square feet of office space, under two leases that expire June 30, 2004
and June 30, 2009. To accommodate our rapid growth, we recently rented 5,537
square feet of office space located near our headquarters on a short-term basis.
We are in the process of renovating our New York headquarters to ensure that our
space will meet our business and technological needs as we grow in 1999. We
expect to spend approximately $250,000 in 1999 on these renovations. We are also
considering the possibility of leasing additional space at our present location
or relocating our headquarters to a larger space in New York, New York, which
might result in significant additional expenses. We have also leased offices in
Fairfield, New Jersey; Chicago, Illinois and Milford, Massachusetts. We
currently anticipate that we will require additional space as we hire more
personnel.
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<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Shown below are the names, ages and positions of the executive officers and
directors of Medscape:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul T. Sheils............................. 45 President, Chief Executive Officer and
Director
Peter M. Frishauf.......................... 50 Executive Committee Chairman, Founder and
Director
Jeffrey L. Drezner, M.D., Ph.D............. 52 Executive Vice President and Director
Steven R. Kalin............................ 35 Chief Operating Officer and Chief Financial
Officer
George D. Lundberg, M.D.................... 66 Editor in Chief
Meg Walsh.................................. 36 President, Medscape Consumer
David Yakimischak.......................... 38 Chief Technology Officer
Mark E. Boulding........................... 38 General Counsel and Vice President of
Regulatory Affairs
Marc Butlein............................... 60 Director
Esther Dyson............................... 47 Director
Andrew Heyward............................. 48 Director
Alan J. Patricof........................... 64 Director, Chairman of the Board
Fredric G. Reynolds........................ 48 Director
Carlo A. von Schroeter..................... 35 Director
Oakleigh Thorne............................ 41 Director
</TABLE>
PAUL T. SHEILS, President, Chief Executive Officer and Director. Prior to
joining Medscape in February 1998, Mr. Sheils was Vice President of Dow Jones
Interactive Publishing from 1994 to 1998 and was Executive Director from 1993 to
1994. Mr. Sheils was responsible for all of Dow Jones' corporate and consumer
online businesses including The Wall Street Journal Interactive Edition, the
largest subscription-based publication on the Web, and Dow Jones Interactive, an
award-winning online business intelligence and research service. Mr. Sheils
holds a BA from Williams College and a JD from Fordham Law School.
PETER M. FRISHAUF, Executive Committee Chairman, Founder and Director. Mr.
Frishauf has over 20 years of experience in the medical information field. In
1982, Mr. Frishauf founded the predecessor of SCP Communications, Inc., a
medical publishing, education and clinical trial company, and served as SCP's
President and Chief Executive Officer until April 1996. Mr. Frishauf continues
to serve on the board of directors of SCP Communications, Inc. From April 1996
through February 1998, Mr. Frishauf served as the Chief Executive Officer of
Medscape. In addition to being a director of Medscape since it commenced
operations in 1996, he holds the executive position of Executive Committee
Chairman. Mr. Frishauf holds a BA from New York University and an MS in
Journalism from Columbia University.
JEFFREY L. DREZNER, M.D., Ph.D., Executive Vice President and
Director. Dr. Drezner practiced medicine for 14 years before founding
Integrated Care Systems, Inc., an HIV-focused, alternate-site healthcare
delivery company, in 1987. From 1992 to 1995, Dr. Drezner was Vice President of
Clinical Programs at Homedco, Inc., a home and alternate-site healthcare
delivery company. In 1995, Dr. Drezner founded Healthcare Communications Group,
LLC, which developed one of the first online continuing medical education
programs and summaries of next day medical conferences programs on the Internet,
operated the highly acclaimed Clinical Care Options for HIV and Oncology Web
sites and is now a wholly owned subsidiary of Medscape. Dr. Drezner became a
director and officer of Medscape when Medscape acquired Healthcare
Communications Group in October 1998. Dr. Drezner holds a BS from the University
of California at Berkeley, an MD degree from the University of Southern
California School of Medicine and a Ph.D. from the Southern California
Psychoanalytic Institute.
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<PAGE> 52
STEVEN R. KALIN, Chief Operating Officer and Chief Financial
Officer. Prior to joining Medscape in October 1998, Mr. Kalin was with ESPN
since 1995, most recently as Vice President of Business Development for ESPN
Internet Ventures, where he was responsible for ESPN.com's strategic
partnerships. From 1990 to 1995, Mr. Kalin was a Senior Engagement Manager with
McKinsey & Co., specializing in the media industry. Mr. Kalin holds a BA from
Brown University and an MBA from Harvard Business School.
GEORGE D. LUNDBERG, M.D., Editor in Chief. Prior to joining Medscape in
February 1999, Dr. Lundberg served as Editor of the Journal of the American
Medical Association for 17 years. Dr. Lundberg also served as the Editor in
Chief of Scientific Information and Multimedia, a publication of the American
Medical Association, from 1982 until 1999. Dr. Lundberg holds an MS degree from
Baylor University and BS and MD degrees from the University of Alabama. Dr.
Lundberg holds honorary degrees from four U.S. universities.
MEG WALSH, President, Medscape Consumer. Prior to joining Medscape in
March 1999, Ms. Walsh founded HealthTech Digital, a leading interactive consumer
healthcare agency, in 1996 and sold that company to Lowe McAdams
Healthcare/Interpublic Group in September 1997 after which she continued as
Managing Director until joining Medscape. From 1995 to 1996, Ms. Walsh was
Director of Marketing for Time Life Medical. Ms. Walsh also held positions as
Assistant V.P. of Sales for Physicians World, a professional healthcare
communications organization, from 1992 to 1995, and before that was a Sales
Manager for Johnson & Johnson. Ms. Walsh holds a BA from Rider University.
DAVID YAKIMISCHAK, Chief Technology Officer. Prior to joining Medscape in
March 1999, Mr. Yakimischak was the Director of Product Development at Dow Jones
Interactive Publishing where he was responsible for bringing all new electronic
products to market. Mr. Yakimischak had been with Dow Jones since 1994. Mr.
Yakimischak studied engineering and computer science at the University of
Toronto.
MARK E. BOULDING, General Counsel and Vice President of Regulatory
Affairs. Prior to joining Medscape in June, 1999, Mr. Boulding was a partner of
Long Aldridge & Norman LLP since 1998, specializing in healthcare and technology
law, with a particular focus on Internet-based companies and healthcare
e-commerce. From 1991 to 1998, Mr. Boulding was an associate and then a partner
with the firm of Fox, Bennett & Turner in Washington, D.C. Mr. Boulding is a
co-founder and sits on the board of directors of the Internet Healthcare
Coalition and is the co-chair of the Internet Law Subcommittee of the American
Bar Association's Cyberspace Law Committee. Mr. Boulding holds a BA from Yale
University and a JD from University of Michigan Law School.
MARC BUTLEIN, Director. Mr. Butlein is Chairman of MAS Communications, an
e-commerce consulting business. In 1989, he co-founded META Group, a leading
worldwide information technology market assessment and consulting firm. Mr.
Butlein served as Chairman of META Group until April 1998. Mr. Butlein is a
director of META Group and Aeneid, an Internet software business. Mr. Butlein
joined the Medscape board in October 1997 as a designee of Media Technology
Ventures. Mr. Butlein received a BA from the University of Connecticut and
worked on his doctorate in political science at the Maxwell School of
Citizenship and Public Affairs at Syracuse University.
ESTHER DYSON, Director. Ms. Dyson has been the Chairman of EDventure
Holdings, publisher of the newsletter Release 1.0, since 1982. Ms. Dyson is the
author of Release 2.0, an acclaimed book about cyberspace. Ms. Dyson joined the
Medscape board in June 1996. She is also interim chairman of the Internet
Corporation for Assigned Names and Numbers and is a director of three software
companies -- Accent Software, Graphisoft and Scala Business Solutions. She also
sits on the boards of directors of Uproar.com, an online game company, and PRT
Group, a systems integrator. Ms. Dyson holds a BA from Harvard College.
ANDREW HEYWARD, Director. Mr. Heyward has served as President of CBS News
since January 1996. From October 1994 until January 1996, he was Executive
Producer of "CBS Evening News with Dan Rather" and Vice President of CBS News.
From February 1993 until October 1994, Mr. Heyward served as Executive Producer
of the CBS News Magazine "Eye to Eye with Connie Chung." Prior to that time, he
was responsible for developing CBS's "48 Hours" series. Mr. Heyward holds a BA
from Harvard University.
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<PAGE> 53
ALAN J. PATRICOF, Chairman of the Board. Mr. Patricof is co-Chairman of
Patricof & Co. Ventures, Inc., a venture capital firm with operations in eight
countries and over $6 billion under management, which he founded in 1969. Mr.
Patricof joined as Chairman of the Board in 1996. Mr. Patricof serves on the
boards of directors of Boston Properties, a real estate investment trust; NTL
Corp., a communications company; and CORECOMM, Inc., a telecommunications
company. In 1995, he served as Chairman of the White House Conference on Small
Business Commission. Mr. Patricof holds a BS in finance from Ohio State
University and an MS from Columbia University Graduate School of Business.
FREDRIC G. REYNOLDS, Director. Mr. Reynolds has been Executive Vice
President and Chief Financial Officer of CBS Corporation since December 1997.
Earlier, Mr. Reynolds had served as Executive Vice President and Chief Financial
Officer of Westinghouse Electric Corporation since February 1994 and,
additionally, as Chief Financial Officer of CBS, Inc. since April 1996. Prior to
joining Westinghouse in 1994, Mr. Reynolds spent 13 years at PepsiCo Inc. in
various financial positions, including Senior Vice President and Chief Financial
Officer for PepsiCo Foods International, PepsiCo's Frito-Lay unit, and Chief
Financial Officer of several other units, including Kentucky Fried Chicken,
Pepsi-Cola International and Pizza Hut. Mr. Reynolds holds a BBA from the
University of Miami.
CARLO A. VON SCHROETER, Director. Mr. von Schroeter is a General Partner
of Weston Presidio Capital, a private equity and venture capital firm. Prior to
joining Weston Presidio Capital at its inception in September 1992, Mr. von
Schroeter was a Vice President with Security Pacific Capital. Mr. von Schroeter
has served as a director of Medscape since March 1999 as a designee of Weston
Presidio Capital. Mr. von Schroeter also serves on the boards of directors of
MapQuest.com, Inc., a leading online provider of mapping and destination
information, and several private companies. Mr. von Schroeter holds a BS from
Queen's University, Canada and an MBA from Harvard Business School.
OAKLEIGH THORNE, Director. Since October 1996, Mr. Thorne has served as
the Chairman and Chief Executive Officer of TBG Information Investors, LLC, a
private equity partnership, and as the Co-President of Blumenstein/Thorne
Information Partners I, L.P., a private equity partnership. From April 1995 to
August 1996, Mr. Thorne was President and CEO, and from January 1991 to April
1995, the Executive Vice President, of Commerce Clearing House, Inc., a leading
provider of tax and business law information, software and services. Mr. Thorne
joined the Medscape board in March 1998 as TBG Information Investors LLC's
designee. He also serves as the Chairman of the Board of SCP Communications,
Inc. Mr. Thorne holds a BS from Boston University School of Journalism and an
MBA from Columbia University Graduate School of Business.
BOARD COMPOSITION
We currently have ten directors. Under our restated certificate of
incorporation, which will become effective upon the closing of this initial
public offering, the terms of office of the directors will be divided into three
classes: Class I, whose term will expire at the annual meeting of stockholders
to be held in 2000; Class II, whose term will expire at the annual meeting of
stockholders to be held in 2001; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2002. The Class I directors will be
Paul T. Sheils, Peter M. Frishauf and Marc Butlein, the Class II directors will
be Esther Dyson, Oakleigh Thorne and Jeffrey D. Drezner, M.D., Ph.D. and the
Class III directors will be Alan J. Patricof, Carlo A. von Schroeter, Fredric
Reynolds and Andrew Heyward. At each annual meeting of stockholders after the
initial classification or special meeting held in place of an annual meeting,
the successors to directors whose terms will then expire will be elected to
serve from the time of election and qualification until the third annual meeting
following election or similar special meeting. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of one
third of the directors. This classification of our board of directors may have
the effect of delaying or preventing changes in control or management of
Medscape. CBS is entitled to designate three of our directors. CBS's current
designees are Fredric Reynolds, Andrew Heyward, and Oakleigh Thorne.
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<PAGE> 54
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a
compensation committee. The audit committee assists the board of directors in
fulfilling its responsibilities of ensuring that management is maintaining an
adequate system of internal controls to assure:
- that assets are safeguarded and that financial reports are properly
prepared;
- consistent application of generally accepted accounting principles; and
- compliance with management's policies and procedures.
In performing these functions, the audit committee meets periodically with
the independent auditors and management to review their work and confirm that
they are properly discharging their respective responsibilities. The audit
committee also:
- recommends an independent audit firm to audit financial statements and to
perform services related to the audit;
- reviews the scope and results of the audit with the independent
accountants;
- reviews with management and the independent accountants our annual
operating results;
- considers the adequacy of the internal accounting control procedures; and
- considers accountants' independence.
The audit committee currently consists of Oakleigh Thorne and Marc Butlein.
The primary function of the compensation committee is to determine
management and executive compensation and establish fringe benefit and other
compensation policies. The compensation committee is also responsible for the
administration of our stock option plan, including reviewing management
recommendations with respect to option grants and taking other actions as may be
required in connection with our compensation and incentive plans. The
compensation committee currently consists of Esther Dyson and Alan J. Patricof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Patricof, a member of the compensation committee, is Co-Chairman of
Patricof & Co. Ventures, Inc., that manages APA Excelsior IV, L.P., Coutts & Co.
Cayman Ltd. c/o APA Excelsior IV/Offshore L.P., Patricof Private Investment Club
and APA Excelsior Fund. In our March 5, 1999 private placement of Series D
Preferred Stock, APA Excelsior IV, L.P. purchased 71,365 shares, Coutts & Co.
Cayman Ltd. c/o APA Excelsior IV/Offshore, L.P. purchased 12,595 shares and
Patricof Private Placement Investment Club, L.P. purchased 1,365 shares, all at
a purchase price of $11.72 per share.
DIRECTOR COMPENSATION
Medscape reimburses its directors for out-of-pocket expenses related to
attending meetings of the board of directors. Non-employee directors are also
entitled to stock option grants under our stock option plan. Medscape currently
does not intend to pay cash fees to directors for attendance at meetings.
EXECUTIVE COMPENSATION
The following table shows the total compensation paid for the year ended
December 31, 1998 for our Chief Executive Officer and the Executive Committee
Chairman, the only other executive officer whose
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annual salary and bonus exceeded $100,000 in 1998. Our Chief Executive Officer,
Paul T. Sheils, joined Medscape in February 1998. His annualized salary for 1998
was $195,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
<S> <C> <C> <C>
Paul T. Sheils.............................. $171,750 $85,000 750,000.0
President and Chief Executive Officer
Peter M. Frishauf........................... $ 80,000 -- 152,617.5
Executive Committee Chairman
</TABLE>
In accordance with the terms of his employment agreement, Mr. Frishauf
elected to receive options to purchase 152,617.5 shares of common stock instead
of a cash bonus of $35,000 to which he would have otherwise been entitled.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows grants of stock options to Medscape's Chief
Executive Officer and to the Executive Committee Chairman for the year ended
December 31, 1998. We have never granted any stock appreciation rights. The
percentages in the table below are based on options to purchase an aggregate of
1,990,117.5 shares of common stock granted under our stock option plan in the
year ended December 31, 1998 to our employees, consultants and directors. The
exercise price per share of each option was equal to the fair market value of
the common stock on the date of grant as determined by the board of directors.
Potential realizable values are net of exercise price before taxes, and are
based on the assumption that our common stock appreciates at the annual rate
shown, compounded annually, from the date of grant until the expiration of the
ten-year term. These numbers are calculated based on the requirements of the SEC
and do not reflect our estimate of future stock price growth.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
---------------------------------------------------------- RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED FISCAL YEAR(%) SHARE($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Paul T. Sheils....... 750,000.0 37.7% .172 2/15/08 $210,177 $334,593
Peter M. Frishauf.... 152,617.5 7.7 .344 12/14/08 85,516 136,173
</TABLE>
FISCAL YEAR END OPTION VALUES
The following table provides summary information concerning stock options
held as of December 31, 1998 by our Chief Executive Officer and by the Executive
Committee Chairman. The value realized by our Executive Committee Chairman,
Peter M. Frishauf, is based on a value of $0.172 per share, the fair market
value of the common stock at August 18, 1998, as determined by the board of
directors, less the exercise
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price per share. The value of unexercised in-the-money options at fiscal
year-end is based on $0.344 per share, the assumed fair market value of the
common stock at December 31, 1998, less the exercise price per share.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF
UNEXERCISED OPTIONS UNEXERCISED IN-THE MONEY
SHARES AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Paul T. Sheils....... -- -- -- 750,000 $ -- $ 258,000
Peter M. Frishauf.... 161,125 -- 162,617.5 88,375 55,940 30,401
</TABLE>
1996 STOCK OPTION PLAN
The following is a summary description of the Medscape, Inc. 1996 Stock
Option Plan. You may refer to the exhibits that are part of the registration
statement for a copy of the stock option plan.
Types of Awards. The stock option plan provides for grants of incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code of
1986 and stock options which are not intended to qualify as incentive stock
option, or nonqualified stock options.
Shares Subject to the Stock Option Plan. The total number of shares of
common stock that may be issued under the stock option plan is 8,250,000 shares.
These shares may be authorized but unissued common stock or authorized and
issued common stock that has been reacquired by Medscape and held in our
treasury. If any grant expires or for any reason is terminated or unexercised,
the shares of common stock relating to that grant again become available for
issuance with respect to grants under the stock option plan.
The compensation committee has the authority to make appropriate
adjustments to the total number of shares available for issuance under the stock
option plan and to the number of shares that may be purchased and the exercise
price applicable to outstanding stock options under the stock option plan in the
event of a merger, consolidation, reorganization, stock dividend, stock split,
or other similar change affecting our capital structure.
Eligibility. Grants may be made to any full or part-time employee of
Medscape and of our current or future subsidiaries, and to any consultant,
director or independent contractor providing services to Medscape or any of our
subsidiaries, in each case as determined by the compensation committee.
Administration. Our compensation committee administers the stock option
plan. The compensation committee has the authority to make grants under the
stock option plan, including the authority, in its discretion, to select the
individuals to receive grants, to determine, consistent with the stock option
plan, the terms of the grant, and the terms and provisions of each option
agreement under the stock option plan reflecting awards, and to prescribe rules
and make interpretations regarding the stock option plan which are final and
conclusive.
Stock Options. The compensation committee may grant incentive stock
options and nonqualified stock options to eligible persons that permit the
optionee to purchase shares of common stock from Medscape at a fixed price and
in accordance with terms, as determined by the compensation committee, relating
to, among others, option exercise price, exercisability, method of payment of
the option exercise price, and the option exercise periods applicable after the
optionee's termination of service, with all terms set forth in the option
agreement and not otherwise inconsistent with the stock option plan. The term of
any nonqualified stock option granted under the stock option plan may not exceed
15 years from the grant date.
In the case of any grant intended to constitute an incentive stock option,
the exercise price will be no less than the fair market value of the common
stock on the date of grant and the option term may not exceed 10 years from the
grant date. Further, the aggregate fair market value, determined at the date the
option is granted, of stock with respect to which incentive stock options
granted under the stock option plan are exercisable for the first time in any
calendar year by any eligible employee may not exceed $100,000.
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Unless otherwise provided in an option agreement, if we undergo a "change
in control," as defined in the stock option plan, then all outstanding options
will become fully exercisable.
Nonassignability. Except as may otherwise be provided in a option
agreement with respect to the grant of a nonqualified stock option, no grant is
assignable or transferable by an optionee other than by will or the laws of
descent and distribution and during the optionee's lifetime the grant may be
exercisable only by the optionee.
Amendment and Termination. Our board of directors may amend or discontinue
the stock option plan at any time, provided that any stock option plan amendment
that would increase the maximum number shares of common stock available for
issuance under the stock option plan, modify the eligibility requirements for
participation in the stock option plan, decrease the minimum option price, or
extend the maximum option term will require stockholder approval. In addition,
the board of directors may not change the terms of any outstanding grant if a
change would be materially adverse to the optionee without the optionee's
consent.
Federal Income Tax Consequences. The following is a brief description of
various U.S. federal income tax consequences of grants under the stock option
plan based upon the laws in effect on the date of this Prospectus.
Incentive Stock Options. No federal taxable income should be recognized by
the employee upon the grant or exercise of an incentive stock option. If the
shares of common stock acquired upon exercise of an incentive stock option are
not disposed of within two years of the date of grant or within one year after
the transfer of the shares to the employee upon exercise of the incentive stock
option, then:
- upon the sale of the shares, any amount realized in excess of the
exercise price of the option will be taxed as long-term capital gain; and
- no deduction will be allowed to us for federal income tax purposes.
The exercise of an incentive stock option may result in an alternative minimum
tax liability to the employee.
If the stock acquired upon the exercise of an incentive stock option is
disposed of prior to the expiration of the holding periods described above,
then, generally:
- the employee will recognize ordinary income in an amount equal to the
excess, if any, of the fair market value of the shares at exercise, or,
if less, the amount realized on the disposition of the shares, over the
exercise price of the option; and
- we will be entitled to a tax deduction in the same amount.
Any further gain recognized by the employee will be taxed as short-term or
long-term capital gain, depending upon the length of time the employee held the
shares, and this amount will not be deductible by Medscape.
Nonqualified Stock Options. With respect to nonqualified stock options:
- no federal taxable income should be recognized by the optionee at the
time the option is granted;
- generally upon exercise of the option, the optionee will recognize
ordinary income in an amount equal to the difference between the exercise
price of the option and the fair market value of the shares purchased on
the date of exercise and we generally will be entitled to a tax deduction
in the same amount; and
- upon disposition of the shares acquired, generally any appreciation or
depreciation after the date of exercise is treated by the optionee either
as long-term or short-term capital gain or loss, depending upon the
length of time that the optionee held the shares.
Section 162(m) Limitations. The stock option plan is subject to a special
initial public offering-related transition rule under Internal Revenue Code
Section 162(m). Medscape's tax deduction upon the exercise of a nonqualified
stock option by certain executive officers would be subject to the limitations
of Section 162(m) of the Code if a nonqualified stock option is granted after
this offering with an exercise price less than the fair market value of the
common stock on the date of grant.
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As of August 31, 1999, there were options to purchase 5,659,198 shares
outstanding and 828,680 shares available for future grant. As of August 31,
1999, 1,762,122.5 shares had been issued upon exercise of options granted under
the option plan.
EMPLOYMENT AGREEMENTS
Agreement with Paul T. Sheils. Under a three-year employment agreement
dated January 26, 1998, Paul T. Sheils became our President and Chief Executive
Officer on February 16, 1998 at an initial base salary of $195,000. Mr. Sheils'
base salary was increased to $225,000 effective February 16, 1999. The
employment agreement includes a $35,000 signing bonus, a 1998 performance bonus
of up to $52,500 based on reaching performance targets, and 1999 and 2000
performance bonuses, the target amounts of which cannot be less than $35,000 per
year and are based on meeting performance targets developed by our compensation
committee.
The employment agreement also granted Mr. Sheils incentive stock options to
purchase 750,000 shares of our common stock at $0.172 per share. These incentive
stock options are subject to the provisions of our stock option plan and an
incentive stock option agreement between Mr. Sheils and Medscape. One-third of
Mr. Sheils' incentive stock options vested on the first anniversary of his
employment and the remaining incentive stock options will vest after that date
in equal monthly installments until the third anniversary of Mr. Sheils'
employment. Regardless of these vesting provisions, the incentive stock options
are 100% exercisable on the date of a "corporate change," which is defined in
the stock option plan.
On February 16, 1999, Mr. Sheils was granted options to purchase an
additional 250,000 shares of common stock at an exercise price of $1.00 per
share.
If Mr. Sheils' employment is terminated for any reason other than his
death, disability or serious misconduct, he may exercise any vested incentive
stock options within 90 days of his termination. However, the incentive stock
options are forfeited if Mr. Sheils is terminated for serious misconduct. Also,
if Mr. Sheils' employment is terminated because of his death or disability, Mr.
Sheils or his estate may exercise any vested incentive stock options within one
year after termination.
Under his employment agreement, Mr. Sheils agreed not to compete with
Medscape and not to solicit our customers or employees for one year after the
termination of his employment, with limited exceptions. However, if he is
terminated without cause, the noncompetition and nonsolicitation restrictions
are limited to six months and the noncompetition restrictions will apply only to
his employment by certain healthcare-oriented Web sites. Mr. Sheils is also
entitled to six months' salary if he is terminated by us without cause, and may
himself terminate the employment agreement for any reason upon 60 days' notice.
In accordance with the terms of the employment agreement, Mr. Sheils was also
elected as a director of Medscape.
Agreement with Peter M. Frishauf. Under a three-year employment agreement
dated February 16, 1998, Peter M. Frishauf became Chairman of the executive
committee of Medscape at a base salary of $80,000. Under the employment
agreement, Mr. Frishauf has agreed to dedicate at least one-half of his business
time to Medscape. His employment agreement provides for performance bonuses of
up to $50,000 per year if performance targets are met. The performance bonuses
may be paid, at Mr. Frishauf's option in cash, in shares of our common stock,
the fair market value of which will be equal to the performance bonus amount, or
options for shares of our common stock, the fair market value of which will be
equal to 150% of the performance bonus amount. Mr. Frishauf also agreed not to
compete with Medscape and not to solicit our customers or employees for one year
following the termination of his employment, with limited exceptions. Mr.
Frishauf may terminate the employment agreement for any reason upon 60 days'
notice to us.
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TRANSACTIONS WITH RELATED PARTIES
Since January 1, 1998, there has not been nor is there currently proposed
any transaction or series of similar transactions to which Medscape or any of
its subsidiaries was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer, holder of more than 5% of
the common stock of Medscape or any member of the immediate family of any of
those people had or will have a direct or indirect material interest other than
(a) compensation agreements and other arrangements that are described above for
the named executive officers and (b) the transactions described below.
SERIES D TRANSACTION
On March 5, 1999, we sold 1,757,683 shares of Series D Preferred Stock at a
purchase price of $11.72 per share, which was paid in cash. The purchasers of
the Series D Preferred Stock included the following holders of more than 5% of
the common stock, assuming the conversion of outstanding preferred shares:
- Media Technology Ventures, L.P. -- 75,568 shares.
- MTV Entrepreneurs Fund, L.P. -- 9,757 shares.
- CSK Venture Capital Co. Ltd. (CSK-1(A)) -- 28,442 shares.
- CSK Venture Capital Co., Ltd. (CSK-1(B)) -- 28,442 shares.
- CSK Venture Capital Co., Ltd. (CSK-2) -- 28,441 shares.
- Weston Presidio Capital II, L.P. -- 255,973 shares.
- Weston Presidio Capital III, L.P. -- 406,392 shares.
- WPC Entrepreneur Fund, L.P. -- 20,229 shares.
- Highland Capital Partners IV -- 655,290 shares.
- Highland Entrepreneurs Fund IV -- 27,304 shares.
- APA Excelsior IV, L.P. -- 71,365 shares.
- Patricof Private Investment Club, L.P. -- 1,365 shares.
- Coutts & Co. Cayman Ltd. c/o APA Excelsior IV/Offshore, L.P. -- 12,595
shares.
Alan J. Patricof, the Chairman of Medscape's board, is a Co-Chairman at
Patricof & Co. Ventures, Inc., that manages APA Excelsior IV, L.P., Coutts & Co.
Cayman Ltd. c/o APA Excelsior IV/Offshore, L.P., Patricof Private Investment
Club and APA Excelsior Fund. Carlo A. von Schroeter, a director of Medscape and
designee of Weston Presidio Capital, is a General Partner at Weston Presidio
Capital, that manages Weston Presidio Capital II, L.P., Weston Presidio Capital
III, L.P. and WPC Entrepreneur Fund, L.P. Mr. von Schroeter was elected as a
director as a condition to the investment by these entities.
ACQUISITION OF HEALTHCARE COMMUNICATIONS GROUP, LLC
In October 1998, we acquired all the membership interests of Healthcare
Communications Group, LLC for 1,825,435 shares of our Class B Common Stock, and
$1,075,000 in cash. Dr. Jeffrey L. Drezner owned the majority of the membership
interests of Healthcare Communications Group. Contemporaneously with our
acquisition of Healthcare Communication Group, we hired Dr. Drezner as Executive
Vice President with an initial base salary of $195,000 and, as a condition to
the acquisition, Dr. Drezner was elected as a director of Medscape. In
connection with Dr. Drezner's employment agreement, he purchased 1,825,435
restricted shares of Class B Common Stock in exchange for a promissory note in
the principal amount of $627,950 with 5.12% interest per annum. This note is
secured by a pledge of the stock and the principal remains outstanding. These
restricted shares will vest in yearly installments over a three year period
through December 31, 2001, based upon the achievement of targeted revenue
performance goals. Restricted shares which do not vest are subject to
forfeiture.
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SERIES C TRANSACTION
On March 17, 1998, pursuant to amendments to an earlier financing agreement
entered into by various investors in October 31, 1997 involving the purchase of
1,478,359 shares of Series C Preferred Stock at $4.60 per share, we sold an
additional 932,401 shares of Series C Preferred Stock at a purchase price of
$4.29 per share, which was paid in cash. This investment triggered anti-dilution
provisions inherent in the outstanding 1,478,359 shares of Series C Preferred
Stock, making them convertible into 1,585,186 shares of common stock upon
conversion. The 932,401 shares of Series C Preferred Stock, which are
convertible into 932,401 shares of common stock upon conversion, were
redesignated as Series C-1 Preferred Stock on March 5, 1999, in connection with
the Series D Transaction described above to distinguish their conversion rate
from that of the March 1997 investors. The purchasers of the 932,401 shares of
Series C Preferred Stock included the following holders of more than 5% of the
common stock, assuming the conversion of outstanding preferred shares:
- TBG Information Investors, LLC -- 699,301 shares.
- Media Technology Ventures, L.P. -- 206,433 shares.
- Media Technology Ventures Entrepreneurs Fund, L.P. -- 26,667 shares.
Oakleigh Thorne, a director of Medscape, is Chairman and Chief Executive
Officer of TBG Information Investors, LLC. Mr. Thorne was elected as a director
as a condition to the investment by TBG Information Investors, LLC. Marc
Butlein, a designee of Media Technology Ventures, L.P. and Media Technology
Ventures Entrepreneurs Fund, L.P., was elected as a director as a condition to
the earlier investment by Media Technology Ventures, L.P. and Media Technology
Entrepreneurs Fund, L.P. in March 1997.
TRANSACTIONS WITH SCP COMMUNICATIONS, INC.
On April 1, 1996, we entered into an agreement with SCP Communications,
Inc. for administrative and support services, including accounting, clerical,
secretarial and receptionist assistance. We renewed this agreement in each of
1997 and 1998. From April 1, 1996 until March 31, 1997, we paid SCP
Communications $35,000 per month for these services. Beginning on April 1, 1997
through June 30, 1998, as we expanded our own administrative and support
services, this amount was reduced to $12,000 per month. The service agreement
increased to $14,950 for the period July 1, 1998 to April 30, 1999 to reflect
additional services. Under this agreement, we agreed to reimburse out-of-pocket
costs incurred by SCP Communications in connection with these services. We
terminated the agreement on April 30, 1999.
On April 1, 1996, we also entered into a financing agreement with SCP
Communications that provided that they would advance funds to us under specified
circumstances. The agreement provided for financing of up to $1 million, payable
on demand, with interest at SCP Communications' borrowing rate plus 2%, payable
quarterly. We received loan proceeds of $550,000 in 1996 and further proceeds of
$1 million in 1997. In 1997 we repaid $1.15 million to SCP Communications
reducing the balance to $359,000 at December 31, 1997. We fully repaid this
balance in 1998.
Peter M. Frishauf and Oakleigh Thorne currently serve as directors of SCP
Communications. Peter M. Frishauf was the Chief Executive Officer of SCP
Communications until April 1996, and an employee of SCP Communications until
January 15, 1999. TBG Information Investors, LLC owns a majority of the
outstanding voting stock of SCP Communications. Alan J. Patricof resigned as a
director of SCP Communications, Inc. on November 25, 1997.
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RECENT TRANSACTIONS
TRANSACTIONS WITH CBS
On the date of this Prospectus, we entered into an agreement with CBS under
which CBS agreed to purchase 600,000 shares in this offering at $7.44 per share.
On July 7, 1999, we entered into a common stock purchase agreement and on
August 3, 1999, in related transactions we entered into an advertising and
promotion agreement, a trademark and content agreement, a stockholders'
agreement and a registration rights agreement with CBS Corporation.
Stock Purchase Agreement. Under the stock purchase agreement, we issued
7,397,208 shares of Class A Common Stock and 6,541,160 shares of Class B Common
Stock to CBS for an aggregate purchase price of $139,383.68, which was paid in
cash, and $156,860,616.32, to be paid through the provision by CBS of
advertising services under the advertising and promotion agreement and a license
to the "CBS" trademark and "Eye" design and selected health-related news content
under the trademark and content agreement.
Advertising and Promotion Agreement. Over the term of the advertising and
promotion agreement, CBS will arrange for the placement of approximately $150
million worth of advertising and promotion in the United States for our consumer
and professional Web sites and our other products and services. The possible
media categories in which this advertising and promotion will be placed include:
- CBS television network programming;
- CBS owned and operated television and radio station programming;
- CBS outdoor billboards;
- CBS Internet sites; and
- CBS cable.
All advertising and promotional materials are subject to CBS's advertising
guidelines and preemption policies and CBS is not required to make any ad
placements if the exigencies of time or contractual obligations prevent or
restrict CBS from doing so.
The term of the advertising and promotion agreement will expire on August
3, 2006. In addition, CBS may terminate the agreement and have no further
obligation to us under the agreement if:
- we issue to a CBS competitor a number of voting securities that result in
the competitor owning or controlling 9% or more of our voting securities;
- we materially breach a material term of the advertising and promotion
agreement or any of the other agreements with CBS of the same date;
- we become insolvent or commence bankruptcy or similar proceedings, or
- CBS.Medscape.com ceases to operate for specified periods of time.
In addition, in the event of a breach by CBS of the advertising and
promotion agreement, we may terminate the agreement in which case CBS's
obligation to provide advertising and promotion would continue unless CBS elects
to pay us, over the remaining term of the agreement, the cash equivalent of the
difference between approximately $150 million and the value of advertising and
promotion already provided, or unless CBS is required to pay such amount because
it is unable to provide the advertising and promotion because the parties cannot
agree on a media plan for a contract year which is consistent with prior media
plans.
Trademark and Content Agreement. Under the trademark and content
agreement, CBS granted us a non-exclusive license to use on our consumer Web
site, CBS.Medscape.com, the "CBS" trademark and "Eye" design and selected
health-related news content contained in CBS network television news programs.
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Under the agreement, CBS retains significant control over the use and
presentation of the CBS health content and CBS trademarks. For example:
- our use of the CBS health-related news content and trademarks must
conform to CBS's guidelines; and
- CBS may refuse to deliver, or require us to cease using, content that CBS
determines conflicts with, or interferes with or is detrimental to CBS's
interests, reputation or business or which might subject CBS to legal
liability or regulatory action.
During the term of the agreement, our consumer Web site will be the
exclusive healthcare Internet site integrated into CBS News programming. This
integration will be accomplished by CBS News, when appropriate and at its
discretion, directing viewers of CBS News programs to CBS.Medscape.com for more
information regarding health-related news stories and features. In addition,
during the term of the agreement, with limited exceptions, CBS may not:
- license the CBS trademarks in connection with the branding of any
competitive Web site; or
- make available any CBS health content on any competitive Web site.
The term of the trademark and content agreement expires on August 3, 2006.
In addition, CBS may terminate the agreement if:
- we issue to a CBS competitor a number of voting securities that result in
the competitor owning or controlling 9% or more of our voting securities;
- we breach a material term of the trademark and content agreement or any
of the other agreements with CBS of the same date; or
- we become insolvent or subject to bankruptcy or similar proceedings.
The agreement provides that we and CBS can mutually decide to use a brand name
other than CBS.Medscape.com for our consumer site.
Stockholders' Agreement. The stockholders' agreement provides that CBS is
entitled to designate up to three members to our board of directors as long as
it holds at least 30% of our outstanding voting securities; two, as long as it
holds at least 20% but less than 30% of our outstanding voting securities; or
one, as long as it holds at least 12.5% but less than 20%, of our outstanding
voting securities. If CBS's holdings of our outstanding voting securities fall
below 12.5% but the reduction is not caused by the sale of any securities by
CBS, CBS will continue to have the right to designate one individual to our
board of directors. If the size of our board of directors is increased beyond
ten members, the number of individuals that CBS is entitled to designate will be
adjusted upward to reflect the percentage of our outstanding voting securities
that it holds. We have agreed to use our best efforts to cause any shares of our
stock for which our management or board of directors hold proxies or are
otherwise entitled to vote, to be voted in favor of the CBS designees. As a
condition to the closing of the transaction with CBS, substantially all holders
of more than 5% of our common stock and our Chief Executive Officer, Executive
Vice President and Executive Committee Chairman have entered into a joinder
agreement to the CBS stockholders' agreement under which they agree to the above
provisions relating to CBS's rights to designate members to our board of
directors.
In addition, if we propose to issue new voting securities, or securities
convertible into or exchangeable for voting securities that would reduce CBS's
percentage of ownership of our voting securities, CBS will have the right to
purchase for cash a number of securities on the same terms in an amount
necessary to maintain its percentage ownership of voting securities, not to
exceed a percentage equal to the percentage of the outstanding voting securities
held by CBS upon the consummation of this offering. If we receive non-cash
consideration for an issuance, the purchase price for CBS will be a per share
price equal to the "fair market value" of the non-cash consideration.
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This purchase right will not apply to issuances by us in any calendar year
of:
- up to an aggregate of 7.5% of our outstanding common stock pursuant to
stock option plans approved by our board of directors, plus shares issued
upon the exercise of outstanding option and warrants, conversion of or
exchange for any outstanding convertible or exchangeable securities or
the effectuation of a stock split or dividend payable in shares of common
stock or other securities or rights convertible into our common stock;
- up to an aggregate of 7.5% of our outstanding common stock in follow-on
public offerings, the proceeds of which are to be used for general
corporate purposes; and
- up to 5% of our outstanding common stock per acquisition in connection
with acquisitions approved by our board of directors, provided we do not
issue, in the aggregate, more than 10% of our outstanding common stock in
connection with these acquisitions in any year.
Furthermore, if we consummate an acquisition by issuing more than 5% of our
outstanding common stock and the price for our common stock is below a specified
level, we will be required to issue CBS a warrant to purchase the number of
shares of our common stock necessary to maintain CBS's then current percentage
ownership. The warrant will expire on the third anniversary of the acquisition.
Registration Rights Agreement. Under the registration rights agreement,
CBS has "piggyback" registration rights. If we propose to register any common
stock under the Securities Act, CBS may require us to include all or a portion
of its securities in the registration. However, the managing underwriter, if
any, of any common stock offering has rights to limit the number of CBS's
securities proposed to be included in the registration.
We would bear all registration expenses incurred in connection with these
registrations. CBS would pay all underwriting discounts, selling commissions and
stock transfer taxes applicable to the sale of its securities.
The registration rights of CBS under the registration rights agreement will
terminate when CBS may sell all of its shares in a three-month period under Rule
144 promulgated under the Securities Act.
TRANSACTIONS WITH NATIONAL DATA CORPORATION
On August 4, 1999, we sold 400,000 shares of Series E Preferred Stock at a
purchase price of $25 per share and 1,000,000 shares of Class A Common Stock at
a purchase price of $10 per share to National Data Corporation. The 400,000
shares of Series E Preferred Stock will convert into 1,250,000 shares of our
common stock upon completion of the offering. In exchange for the shares, we
received $10,000,000 in cash and will receive $10,000,000 of value attributed to
licensing and promotional value, product purchase amounts and credits against
future commissions due by us to NDC, to be provided under the terms of a
separate license and product development agreement, also dated July 7, 1999.
Under the license and product development agreement:
- our Web site will be the exclusive healthcare content Web site integrated
into NDC's physician practice management product until September 30,
2000, after which we will have the right of first negotiation to extend
the exclusive arrangement;
- NDC will have the right of first negotiation to provide us with clinical
data interchange and data management services in the United States;
- we will have the right of first negotiation to provide healthcare content
to NDC's healthcare products in the United States; and
- we will work jointly with NDC to identify market opportunities and to
develop, market and sell new products.
The term of the license and product development agreement expires on July 7,
2002.
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TRANSACTION WITH AMERICA ONLINE, INC.
On September 3, 1999, we entered into an interactive services agreement
with America Online, Inc., under which AOL must provide us with a guaranteed
number of impressions, through promotions like banners and links to our sites on
various AOL properties, over a three-year period. An impression occurs any time
a user sees a screen that combines our name or brand with a link to one of our
co-branded sites. In exchange for this promotion, we agreed to pay AOL $33
million over a two-year period and issued AOL two seven-year warrants, each to
purchase up to 1,352,158 shares of our Class A Common Stock. Of the $33 million,
$3 million was paid at the time of signing and $10 million will be due within 15
days after completion of this offering. One of the warrants is fully vested now
and has an exercise price of $10 per share. The other will vest over the next
three years based on AOL's achievement of specified performance targets and will
have exercise prices equal to the fair market value of our common stock at the
time of vesting.
Under the agreement, we will develop separate AOL co-branded consumer sites
which will appear and be promoted on AOL, AOL.com, CompuServe Service, Netscape
Netcenter and Digital City, which are AOL properties. The content, advertising
and format of these sites must comply with AOL guidelines. We must complete
development of the co-branded sites between January 2 and March 1, 2000. If the
sites are not prepared within this time frame, AOL may reduce the number of
impressions that it must deliver on a pro rata basis based on the number of days
of the delay and may terminate this agreement after 60 days. We must also
mention AOL in a substantial portion of our advertising and promotion of the
consumer sites, including advertising placed through our agreement with CBS.
Our agreement with AOL expires on September 3, 2002, but may be extended
unilaterally by AOL for nine months with no additional payments due from us. AOL
may terminate the agreement early in the event of the following:
- on, or within 90 days after, September 2, 2001 if AOL exercises its
buy-out right and pays us a specified termination fee plus the value of
any shortfall in the number of impressions delivered during the 24-month
period, in which case any unexercised performance-based warrants will be
extinguished;
- a material claim or proceeding is brought against us for professional
negligence or wrongdoing, including malpractice or practicing medicine
without the appropriate license, which on its face appears to be
meritorious and which appears to have the potential for significantly
damaging AOL's or our reputation;
- we are acquired by, or merge with, selected companies specified in the
agreement, in which case we will be required to make the next payment
installment to AOL and all of AOL's unvested warrants will automatically
vest;
- we are acquired by, or merge with, an entity other than the selected
companies specified in the agreement in which case AOL may elect to
terminate the agreement with no further payments from us, or continue it
and receive all of the payments due to it under the agreement; or
- we do not complete preparation of the co-branded sites within 60 days of
the time frames established in the agreement.
In addition, AOL may terminate its promotional obligations if all of the
following occur:
- we no longer employ a nationally recognized high-quality editorial staff
and independent editorial board to monitor our content;
- at any time 180 days after the effective date of the agreement, our
sites, taken as a whole, are not ranked among the top five health content
and interactive tool sites, not including Dr. Koop and AOL Health, for at
least two consecutive months in terms of both traffic and audience reach;
and
- at any time our Web sites, taken as a whole, are not one of the top five
health content and interactive tool sites for at least two consecutive
months in terms of quality, with respect to all material quality averages
or standards in the industry, based on a cross-section of independent
third-party reviewers who are recognized authorities in the healthcare
industry.
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The agreement may also be terminated by either AOL or us in the event of a
material breach by the other. If the agreement is terminated because of AOL's
material breach, any unexercised performance-based warrants will be
extinguished.
On the AOL co-branded sites, our agreement specifies the types of
programming that we will provide on AOL's properties, and limits us to providing
consumer healthcare content. Any of our content that appears on AOL's
proprietary online service is limited to the programming specified in our
agreement, and any new types of programming require AOL's prior written
approval. In addition, the agreement limits us to providing links to our current
suite of healthcare tools and requires AOL's approval of future healthcare
tools.
The agreement further limits our ability to advertise, promote or enter
into commercial arrangements with specified entities including several major
media and internet companies. These restrictions may impair our ability to
create further strategic relationships which could impede our growth and provide
opportunities for our competitors.
On our co-branded consumer sites, the agreement:
- prevents us from linking to or selling advertisements to any entity
reasonably construed to be competitive with AOL or any entity in a
category where there is a pre-existing exclusive relationship with AOL;
and
- requires us to design the co-branded sites so that users stay on them or
AOL properties, and are not sent to external Web sites.
On our consumer sites in general, including CBS.Medscape.com, our agreement
with AOL requires us to implement Web calendar and instant messaging systems
that are compatible with AOL's and that are not developed by an AOL competitor.
We must also offer AOL the opportunity to develop any online tools, other than
healthcare tools, for our consumer sites on commercially reasonable terms, and
if we do not use AOL, we are restricted in some aspects of our promotion and
co-branding of these tools. On our AOL co-branded sites, the agreement limits
our developmental flexibility further by prohibiting us from using some AOL
competitors for development and placing limits on our promotion of new tools.
The agreement also prevents us, in some cases, from using our television
advertising to promote some competitors of AOL.
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PRINCIPAL STOCKHOLDERS
The following table shows information with respect to beneficial ownership
of our common stock, as of August 31, 1999, after giving pro forma effect to the
preferred stock conversion at the initial offering price of $8.00 per share and
as adjusted to reflect the sale of the common stock offered by Medscape in this
offering, for:
- each person known by Medscape to beneficially own more than 5% of the
common stock;
- each director of Medscape;
- each executive officer named in the Summary Compensation Table; and
- all directors and executive officers of Medscape as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.
Unless indicated otherwise below, the address for each listed director and
officer is Medscape, Inc., 134 West 29th Street, New York, New York 10001-5399.
Except as indicated by footnote, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares of
common stock underlying options held by that person that are exercisable within
60 days of August 31, 1999 but excludes shares of common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
36,943,533 shares of common stock outstanding as of August 31, 1999, after
giving effect to the conversion of the convertible preferred stock, and
43,693,533 shares of common stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
SHARES OF ------------------------------
COMMON STOCK BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
<S> <C> <C> <C>
CBS Corporation(1)................................... 13,938,368.0 37.7% 31.9%
National Data Corporation(2)......................... 2,193,750.0 5.9 5.0
Entities associated with Patricof & Co. Ventures,
Inc.(3)............................................ 3,506,062.5 9.5 8.0
Entities associated with CSK Venture Capital Co.,
Ltd.(4)............................................ 1,378,812.5 3.7 3.2
Entities associated with Highland Capital Partners,
Inc.(5)............................................ 1,706,485.0 4.6 3.9
Entities associated with Media Technology
Ventures(6)........................................ 1,961,825.0 5.3 4.5
TBG Information Investors, LLC(7).................... 1,748,252.5 4.7 4.0
Entities associated with Weston Presidio Capital
Funds(8)........................................... 1,706,485.0 4.6 3.9
Paul T. Sheils(9).................................... 416,666.5 1.1 *
Jeffrey L. Drezner, M.D., Ph.D.(10).................. 3,431,817.5 9.3 7.9
Peter M. Frishauf(11)................................ 1,794,492.5 4.9 4.1
Marc Butlein(12)..................................... 27,500.0 * *
Esther Dyson(13)..................................... 68,512.5 * *
Alan J. Patricof(14)................................. 3,614,812.0 9.8 8.3
Carlo A. von Schroeter(15)........................... 1,706,485.0 4.6 3.9
Oakleigh Thorne(16).................................. 1,769,502.5 4.8 4.0
Andrew Heyward....................................... -- * *
Fredric G. Reynolds.................................. -- * *
All executive officers and directors as a group
(15 persons)(17)................................... 12,829,788.5 34.7% 29.4%
</TABLE>
- ---------------
* Less than one percent.
(1) CBS has agreed to purchase 600,000 shares in the offering which will result
in it beneficially owning 14,538,368 shares or 33.3% of the outstanding
shares after the offering.
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<PAGE> 67
(2) Represents 975,000 shares of common stock into which 975,000 shares of
Class A Common will convert and 1,218,750 shares of common stock into which
the 390,000 shares of Series E Preferred Stock will convert at a
3.125-for-one basis assuming an initial offering price of $8.
(3) Represents 665,825 shares held in record by APA Excelsior IV, L.P.,
117,502.5 shares held of record by Coutts & Co. Cayman Ltd. c/o APA
Excelsior IV/Offshore, L.P., 12,735 shares held of record by Patricof
Private Investment Club, L.P., 2,632,000 shares held of record by APA
Excelsior Fund and 78,000 shares held of record by Patricof & Co. Ventures,
Inc. APA Excelsior IV Partners, L.P. is the general partner of Coutts & Co.
Cayman Ltd., Patricof Private Investment Club, L.P. and APA Excelsior IV,
L.P. APA Excelsior IV Partners, L.P., has one general partner, Patricof &
Co. Managers, Inc. The sole shareholder of Patricof & Co. Managers, Inc. is
Alan Patricof. Mr. Patricof is also the General Partner of APA Excelsior
Fund and the Chairman of Patricof & Co. Ventures, Inc. Each of the above
funds disclaims beneficial ownership of any of the shares owned by any
other above fund. The address for Patricof & Co. Ventures, Inc. is c/o Alan
J. Patricof, 445 Park Avenue, New York, NY 10021.
(4) Represents 459,605 shares held of record by CSK Venture Capital Co., Ltd.,
as investment manager for CSK-1(B) Investment Fund, 459,602.5 shares held
of record by CSK Venture Capital Co., Ltd., as investment manager for CSK-2
Investment Fund, 459,605 shares held of record by CSK Venture Capital Co.,
Ltd., as investment manager for CSK-1(A) Investment Fund. Each of the above
funds disclaims beneficial ownership of any of the shares owned by any
other above fund. Messrs. Isao Okawa and Masahiro Aozono serve as the
representative directors of CSK Venture Capital Co., Ltd. Each of CSK
Venture Capital Co., Ltd, Isao Okawa and Masahiro Aozono disclaims
beneficial ownership of these shares except to the extent of their
pecuniary interest, if any. The address for the CSK Venture Capital Co.,
Ltd. is CSK Corporation, Kenchikukaikan, 7F, 5-26-20 Shiba, Minato-Ku,
Tokyo 108-0014, Japan.
(5) Represents 1,638,225 shares held of record by Highland Capital Partners IV
Limited Partnership and 68,260 shares held of record by Highland
Entrepreneurs' Fund IV Limited Partnership. Each of the above funds
disclaims ownership of any of the shares owned by any other above fund. The
above funds have agreed to purchase an aggregate of 75,000 shares in the
offering, which will result in them owning 1,781,485 shares or 4.1% of the
outstanding shares after the offering. Highland Capital Partners, Inc.
manages, and each of Messrs. Daniel Nova, Robert Higgins, Paul Maeder and
Wycliffe Grousbeck serve as general partners of, Highland Capital Partners
IV Limited Partnership and Highland Entrepreneurs' Fund IV Limited
Partnership. Each of Messrs. Nova, Higgins, Maeder and Grousbeck disclaims
beneficial ownership of these shares except to the extent of their
pecuniary interests, if any. The address for the Highland Capital Partners,
Inc. is Two International Place, Boston, MA 02100.
(6) Represents 1,737,455 shares held in record by Media Technology Ventures,
L.P. and 224,370 shares held of record by Media Technology Ventures
Entrepreneurs Fund, L.P. Each of the above funds disclaims ownership of any
of the shares owned by any other above fund. Media Technology Ventures,
L.P. and Media Technology Ventures Entrepreneurs Fund, L.P. are managed by
Media Technology Management, LLC of which Messrs. Robert Ackerman and
Jonathan Funck and AVI Management, LLC are managing partners. Messrs. Barry
Weinman, Peter Wolken and Brian Grossi are general partners of AVI
Management, LLC. Messrs. Ackerman, Funck, Weinman, Wolken and Grossi
disclaim beneficial ownership of these shares except to the extent of their
pecuniary interest. The address for the Media Technology Ventures entities
is One First Street, Los Angeles, CA 94022.
(7) Messrs. Jack W. Blumenstein and Oakleigh Thorne serve as managers of TBG
Information Investors, LLC. Each of Mr. Blumenstein and Mr. Thorne
disclaims beneficial ownership of the shares held by TBG Information
Investors, LLC, except to the extent of their pecuniary interest, if any.
(8) Represents 639,932.5 shares held of record by Weston Presidio Capital II,
L.P., 1,015,980 shares held of record by Weston Presidio Capital III, L.P.
and 50,572.5 shares held of record by WPC Entrepreneur Fund, L.P. The above
funds have agreed to purchase an aggregate of 75,000 shares in the
offering, which will result in them owning 1,781,485 shares or 4.1% of the
outstanding shares after the offering.
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<PAGE> 68
Each of the above funds disclaims beneficial ownership of any of the shares
owned by any other above fund. Weston Presidio Capital Management III, LLC,
is the general partner of Weston Presidio Capital III, L.P. and WPC
Entrepreneur Fund, L.P. The managing members of Weston Presidio Capital
Management III, LLC, are Messrs. Michael F. Cronin, Michael P. Lazarus,
James B. McElwee, Carlo A. von Schroeter, Philip W. Halperin and Mark L.
Bono, each of whom disclaims beneficial ownership of the shares except to
the extent of their pecuniary interests if any. Weston Presidio Capital
Management II, L.P., is the general partner of Weston Presidio Capital II,
L.P. The general partners of Weston Presidio Capital Management II, L.P.,
are Messrs. Michael F. Cronin, Michael P. Lazarus, James B. McElwee, Carlo
A. von Schroeter and Philip W. Halperin, each of whom disclaims beneficial
ownership of the shares except to the extent of their pecuniary interests,
if any. The address for Weston Presidio Capital is One Federal Street, 21st
Floor, Boston, MA 02110-2004.
(9) Includes 416,666 shares of common stock issuable upon the exercise of
options exercisable within 60 days of August 31, 1999.
(10) Includes 1,825,435 shares of restricted stock issued pursuant to the terms
of Dr. Drezner's employment agreement.
(11) Includes 6,250 shares of common stock issuable upon exercise of options
exercisable within 60 days of August 31, 1999.
(12) Includes 27,500 shares of common stock issuable upon exercise of options
exercisable within 60 days of August 31, 1999.
(13) Includes 3,750 shares of common stock issuable upon exercise of options
exercisable within 60 days of August 31, 1999.
(14) Represents 665,825 shares held in record by APA Excelsior IV, L.P.,
117,502.5 shares held of record by Coutts & Co. Cayman Ltd. c/o APA
Excelsior IV/Offshore, L.P., 12,735 shares held of record by Patricof
Private Investment Club, L.P., 2,632,000 shares held of record by APA
Excelsior Fund, 78,000 shares held of record by Patricof & Co. Ventures,
Inc. and 15,000 shares held of record by Mr. Patricof's sons. Also includes
93,749.5 shares of common stock issuable upon exercise of options
exercisable within 60 days of August 31, 1999. Mr. Patricof disclaims
beneficial ownership to the shares held of record by his sons, and
disclaims beneficial ownership of the shares held of record by the above
entities except to the extent of his pecuniary interest. The address for
all of the above is c/o Alan J. Patricof, 445 Park Avenue, New York, NY
10021.
(15) Includes 639,932.5 shares held of record by Weston Presidio Capital II,
L.P., 1,015,980 shares held of record by Weston Presidio Capital III, L.P.
and 50,572.5 shares held of record by WPC Entrepreneur Fund, L.P., for both
of which Mr. von Schroeter is a general partner of the managing partner.
Mr. von Schroeter disclaims beneficial ownership of the shares held of
record by the above entities except to the extent of his pecuniary
interest.
(16) Includes 21,250 shares of common stock issuable upon exercise of options
exercisable within 60 days of August 31, 1999. Also includes 1,748,252.5
shares held of record by TBG Information Investors, LLC, for which Mr.
Thorne serves as a manager, Chairman and CEO. Mr. Thorne disclaims
beneficial ownership of the shares held of record by TBG Information
Investors, LLC except to the extent of his pecuniary interest.
(17) Includes 569,166.5 shares issuable upon the exercise of options exercisable
within 60 days of August 31, 1999.
65
<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our amended and restated certificate of
incorporation will authorize the issuance of up to 100,000,000 shares of common
stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share, the rights and preferences of which may be established
from time to time by our board of directors. As of August 31, 1999, 23,034,860.5
shares of common stock were outstanding and 5,356,643 shares of convertible
preferred stock convertible into 13,908,672.5 shares of common stock upon the
completion of this offering were issued and outstanding. As of August 31 1999,
we had 99 stockholders.
COMMON STOCK
Upon the closing of this offering, all shares of Class B Common Stock will
automatically convert on a one-for-one basis into Class A Common Stock, which
will be redesignated as common stock. Each holder of common stock is entitled to
one vote for each share on all matters to be voted upon by the stockholders and
there are no cumulative voting rights. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, holders of common
stock are entitled to receive ratable dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. In the event of a liquidation, dissolution or winding up of Medscape,
holders of common stock would be entitled to share in our assets remaining after
the payment of liabilities and liquidation preferences on any outstanding
preferred stock. Holders of common stock have no preemptive or conversion rights
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and shares of common stock offered by Medscape in this offering, when
issued and paid for, will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will convert into shares of common stock. Upon the closing of this
offering, the board of directors will be authorized, subject to Delaware law,
without stockholder approval, from time to time to issue up to an aggregate of
5,000,000 shares of preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We have no present plans to issue any shares of preferred stock.
WARRANTS
Upon the completion of this offering, we will have the following
outstanding warrants to purchase
shares of common stock:
- a warrant to purchase 14,887.5 shares at a weighted average exercise
price of $0.004 per share which will become exercisable on March 5, 2000
and expire on March 5, 2002.
- two warrants, each to purchase up to 1,352,158 shares. One of the
warrants is fully vested now and has an exercise price of $10 per share.
The other warrant will become exercisable over a three-year period based
on AOL meeting specified performance requirements and will have exercise
prices equal to the fair market value of our common stock at the times of
becoming exercisable. Both of these warrants are exercisable until August
31, 2006.
REGISTRATION RIGHTS
After the offering, the holders of 33,357,858 shares of our common stock
will be entitled to registration rights. Additionally, the holders of our
warrants are entitled to registration rights in connection with the 2,719,203.5
shares issuable upon exercise of their warrants. These rights include rights to
require us to include
66
<PAGE> 70
their common stock in future registration statements we file with the SEC and,
in some cases, demand registration rights. Some holders may also require us to
register their common stock once we are eligible to use a short-form
registration statement. However, holders of substantially all of these shares
have agreed not to exercise their registration rights until 180 days after the
date of this prospectus. Registration of shares of common stock upon the
exercise of demand registration rights would result in the covered shares
becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of this registration.
CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
Under Delaware law, we may not engage in a "business combination," which
includes a merger or sale of more than 10% of our assets, with any "interested
stockholder," namely, a stockholder who owns 15% or more of Medscape's
outstanding voting stock, as well as affiliates and associates of any of these
such persons, for three years following the time that stockholder became an
interested stockholder unless:
- the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of Medscape outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers; or
- at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder.
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Medscape. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of Medscape.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Medscape's certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware law. In addition, the
certificate of incorporation and Bylaws provide that Medscape will indemnify
directors and officers of Medscape to the fullest extent permitted by Delaware
law. We believe that the provisions in our certificate of incorporation and
bylaws are necessary to attract and retain qualified persons as directors and
officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
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<PAGE> 71
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity-related
securities in the future and at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
43,693,533 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. As of
August 31, 1999, we had approximately 99 holders of common stock, after giving
effect to the conversion of the convertible preferred stock. Of these shares,
all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves 36,943,533 shares eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
<S> <C>
61,225................................... After 90 days from the date of this
prospectus.
19,468,765................................... After 180 days from the date of this
prospectus (subject, in some cases, to volume
limitations).
17,413,543................................... At various times after 180 days from the date
of this prospectus (subject, in some cases,
to volume limitations).
</TABLE>
LOCK-UP AGREEMENTS
All of our officers and directors and stockholders holding substantially
all of our outstanding stock have signed lock-up agreements with our
underwriters under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
Under the terms of the CBS transaction, CBS has agreed not to offer, sell
or otherwise dispose of the 13,938,368 shares of stock to be issued to it, or
any other of our securities that may be held by it, including the 600,000 shares
to be purchased by CBS in this offering, until August 3, 2000.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 436,000 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Medscape, Inc.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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<PAGE> 72
Therefore, unless otherwise restricted, Rule 144(k) shares may be sold
immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares of our common
stock from us in connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares 90 days after the effective
date of this offering in reliance on Rule 144, but without compliance with some
of the restrictions, including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of 33,357,858 shares of our common stock,
or their transferees, will be entitled to rights with respect to the
registration of those shares under the Securities Act. Additionally, the holders
of our warrants, or their transferees, are entitled to rights with respect to
the registration of the 2,719,203.5 shares issuable upon exercise of their
warrants. After this registration, these shares of our common stock become
freely tradeable without restriction under the Securities Act. These sales could
have a material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Shortly after this offering, we intend to file a registration statement on
Form S-8 covering the shares of common stock reserved for issuance under our
stock option plan. Shares of common stock registered under any registration
statement will, subject to Rule 144 volume limitations applicable to affiliates,
be available for sale in the open market, unless the shares are subject to
vesting restrictions or the lock-up agreements described above.
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<PAGE> 73
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated as
of September 27, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston
Corporation, Bear, Stearns & Co. Inc., Wit Capital Corporation and DLJdirect
Inc. have severally agreed to purchase from Medscape the respective number of
shares of common stock shown opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 2,177,875
Credit Suisse First Boston.................................. 1,100,400
Bear, Stearns & Co. Inc..................................... 1,031,625
Wit Capital Corporation..................................... 137,550
DLJdirect Inc............................................... 137,550
BancBoston Robertson Stephens............................... 75,000
Deutsche Bank Securities.................................... 75,000
Goldman, Sachs & Co. ....................................... 75,000
Hambrecht & Quist LLC....................................... 75,000
ING Barings................................................. 75,000
Lehman Brothers Inc. ....................................... 75,000
Merrill Lynch & Co. ....................................... 75,000
J.P. Morgan & Co. .......................................... 75,000
Salomon Smith Barney........................................ 75,000
SG Cowen.................................................... 75,000
George K. Baum & Company.................................... 35,000
Doft & Co., Inc. ........................................... 35,000
EVEREN Securities, Inc. .................................... 35,000
First Union Capital Markets Corp. .......................... 35,000
Gruntal & Co., L.L.C. ...................................... 35,000
HCFP/Brenner Securities L.L.C. ............................. 35,000
Janney Montgomery Scott Inc. ............................... 35,000
McDonald Investments Inc. .................................. 35,000
Needham & Company, Inc. .................................... 35,000
Punk, Ziegel Company, L.P. ................................. 35,000
Raymond James & Associates, Inc. ........................... 35,000
Sanders Morris Mundy........................................ 35,000
Sands Brothers & Co., Ltd. ................................. 35,000
Suntrust Equitable Securities............................... 35,000
Sutro & Co. Incorporated.................................... 35,000
Tucker Anthony Cleary Gull.................................. 35,000
C.E. Unterberg, Towbin...................................... 35,000
Volpe Brown Whelan & Company, LLC........................... 35,000
B.C. Ziegler and Company.................................... 35,000
---------
Total............................................. 6,000,000
=========
</TABLE>
We have agreed to sell the additional 750,000 shares offered by this
prospectus directly to three purchasers.
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered in this prospectus require the approval by their counsel
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<PAGE> 74
of legal matters and other conditions. The underwriters must purchase and accept
delivery of 6,000,000 the shares of common stock offered through this
prospectus, other than those shares covered by the over-allotment option
described below.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of the shares of common stock to dealers, including the
underwriters, at the public offering price less a concession not in excess of
$.34 per share. The underwriters may allow, and these dealers may re-allow, to
other dealers a concession not in excess of $.10 per share. After the initial
offering of the common stock, the representatives of the underwriters may change
the public offering price and other selling terms at any time without notice.
The underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
<S> <C> <C>
Per Share............................................ .56 .56
Total................................................ 3,360,000 3,864,000
</TABLE>
We will pay the offering expenses, estimated to be $2,575,000.
An electronic prospectus is available on the Web sites maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, Wit Capital Corporation, and other dealers and selected dealers
designated by Wit Capital Corporation. Other than the prospectus in electronic
format, the information on these Web sites relating to the offering is not part
of this prospectus and has not been approved and/or endorsed by Medscape or the
underwriters, and should not be relied on by prospective investors.
In July 1999, Donaldson, Lufkin & Jenrette Securities Corporation was hired
to serve as financial advisor to Medscape in connection with potential strategic
transactions. Medscape has agreed to pay Donaldson, Lufkin & Jenrette Securities
Corporation customary compensation in the form of a retainer fee as well as
transaction fees for rendering financial advisory services for the transactions
with CBS Corporation and National Data Corporation. These transactions and fees
are independent of, and not contingent upon, the completion of the offering.
Wit Capital Corporation, a member of the National Association of Securities
Dealers, Inc., will participate in the offering as one of the underwriters. The
NASD approved the membership of Wit Capital on September 4, 1997. Since that
time, Wit Capital has acted as an underwriter in over 100 public offerings,
including 80 initial public offerings. Wit Capital's Chairman and co-Chief
Executive Officer has made an indirect investment in our Series C Preferred
Stock, par value $0.01, which will represent less than 1% of our outstanding
shares after this offering. Except for its participation as an underwriter in
this offering and the indirect ownership of our shares by one of its Chairman
and co-Chief Executive Officer, Wit Capital has no relationship with us or any
of our affiliates.
Credit Suisse First Boston Corporation acted as placement agent in
connection with a private placement of our Series D Preferred Stock, for which
it received customary compensation.
Medscape has granted to the underwriters an option, exercisable within 30
days after the date of this prospectus, to purchase, from time to time, in whole
or in part, up to an aggregate of 900,000 additional shares of common stock at
the public offering price less underwriting discounts and commissions. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, under conditions
specified in the underwriting agreement, to purchase its pro rata portion of the
additional shares based on that underwriter's percentage underwriting commitment
as indicated in the preceding table.
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<PAGE> 75
Medscape has agreed to indemnify the underwriters against liabilities
specified in the underwriting agreement, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make because of these liabilities.
Each of Medscape, our executive officers and directors and substantially
all of our stockholders has agreed, for a period of 180 days after the date of
this prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, not to:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
The underwriting agreement contains limited exceptions to these lock-up
agreements.
In addition, during this 180-day period, Medscape has also agreed not to
file any registration statement for, and each of its executive officers,
directors and several stockholders of Medscape has agreed not to make any demand
for, or exercise any right for, the registration of any shares of common stock
or any securities convertible into or exercisable or exchangeable for common
stock without Donaldson, Lufkin & Jenrette Securities Corporation's prior
written consent.
Prior to the offering, there has been no established trading market for the
common stock. Medscape and the underwriters negotiated the public offering price
for the shares of common stock offered by this prospectus. The factors they
considered in determining the public offering price included:
- the history of and the prospects for the industry in which Medscape
competes;
- the past and present operations of Medscape;
- the historical results of operations of Medscape;
- the prospects for future earnings of Medscape;
- the recent market prices of securities of generally comparable companies;
and
- the general condition of the securities markets at the time of the
offering.
Other than in the United States, no action has been taken by Medscape or
the underwriters that would permit a public offering of the shares of common
stock offered by this prospectus in any jurisdiction where action for that
purpose is required. The shares of common stock offered through this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements associated with the offer and sale
of any the shares of common stock offered through this prospectus be distributed
or published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction. You
should inform yourself and observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of common stock offered in this prospectus in any jurisdiction in which an offer
or a solicitation is unlawful.
As a result of the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a syndicate
short position. The underwriters may bid for and purchase shares of common stock
in the open market to cover a syndicate short position or to stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or in some other way or if Donaldson, Lufkin & Jenrette Securities
Corporation receives a report that indicates clients of such syndicate members
have "flipped" the common stock. These activities may stabilize or
72
<PAGE> 76
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end any
of these activities at any time.
The underwriters, at our request, have reserved for sale at the initial
public offering price 350,000 shares of common stock to be sold in this offering
for sale to our employees, directors and other persons designated by us. The
number of shares available for sale to the general public will be reduced to the
extent that any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the underwriters on the same basis as the other
shares offered through this prospectus.
We have reserved 750,000 shares of common stock to be sold directly to
three purchasers. CBS Corporation has agreed to purchase 600,000 shares at $7.44
per share, which it has agreed not to dispose of until August 3, 2000. Each of
Highland Capital Partners, Inc. and Weston Presidio Capital Funds, current
Medscape stockholders, has agreed to purchase 75,000 shares from us at $8.00 per
share and has agreed not to dispose of the shares for a period of 180 days.
VALIDITY OF THE SHARES
The validity of the shares of common stock offered through this prospectus
will be passed upon for us by Patterson, Belknap, Webb & Tyler LLP, New York,
New York. Selected legal matters in connection with this offering will be passed
upon for the underwriters by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The financial statements of Medscape as of and for the years ended December
31, 1998, as restated, and December 31, 1997 and the nine months ended December
31, 1996, included in this prospectus, which reports express our unqualified
opinion and include an explanatory paragraph referring to the restatement of the
financial statements as of and for the year ended December 31, 1998, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing in this prospectus and are included in reliance upon the
reports of that firm given upon their authority as experts in accounting and
auditing.
The financial statements of Healthcare Communications Group, LLC as of and
for the period ended October 27, 1998 and as of and for the year ended December
31, 1997 included in this prospectus, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing in this
prospectus and are included in reliance upon the reports of that firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
amendments to it, relating to the common stock offered by us. This prospectus
does not contain all of the information in the registration statement and its
exhibits and schedules. For further information with respect to Medscape and our
common stock, you should review the registration statement and its exhibits and
schedules. A copy of the registration statement may be inspected without charge
at the SEC's principal office in Washington, D.C. and copies of all or any part
of the registration statement may be obtained from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, the New York
Regional Office located at Seven World Trade Center, New York, New York 10048,
and the Chicago Regional Office located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of fees
prescribed by the SEC. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the SEC's Web site is http://www.sec.gov.
Medscape intends to furnish its stockholders with annual reports containing
audited financial statements certified by its independent auditors.
73
<PAGE> 77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MEDSCAPE, INC.
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1998 (As Restated)........................... F-3
Consolidated Statements of Operations for Nine Months Ended
December 31, 1996, and for the Years Ended December 31,
1997 and December 31, 1998 (As Restated).................. F-4
Consolidated Statements of Shareholders' Equity (Deficiency)
for the Nine Months Ended December 31, 1996, and for the
Years Ended December 31, 1997 and December 31, 1998 (As
Restated)................................................. F-5
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 1996, and for the Years Ended December
31, 1997 and December 31, 1998 (As Restated).............. F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
1998 and June 30, 1999 (unaudited)........................ F-18
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 1998 and June 30, 1999
(unaudited)............................................... F-19
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and June 30, 1999
(unaudited)............................................... F-20
Notes to the Condensed Consolidated Financial Statements.... F-21
HEALTHCARE COMMUNICATIONS GROUP, LLC
Independent Auditors' Report................................ F-24
Balance Sheets as of December 31, 1997 and October 27,
1998...................................................... F-25
Statements of Operations for the Year Ended December 31,
1997 and the Ten Months Ended October 27, 1998............ F-26
Statements of Member's Capital for the Year Ended December
31, 1997 and the Ten Months Ended October 27, 1998........ F-27
Statements of Cash Flows for the Year Ended December 31,
1997 and the Ten Months Ended October 27, 1998............ F-28
Notes to Financial Statements............................... F-29
</TABLE>
F-1
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
Medscape, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Medscape,
Inc. and its subsidiary ("Medscape") as of December 31, 1997 and 1998, and the
related consolidated statements of operations, shareholders' equity
(deficiency), and cash flows for the nine months ended December 31, 1996 and
each of the two years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of Medscape's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Medscape at
December 31, 1997 and 1998 and the results of its operations and its cash flows
for the nine months ended December 31, 1996 and the two years then ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 14, the accompanying 1998 financial statements have
been restated.
DELOITTE & TOUCHE LLP
New York, New York
February 12, 1999 (May 17, 1999 as to Note 13 and July 22, 1999 as to Note 14)
F-2
<PAGE> 79
MEDSCAPE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
(AS RESTATED
SEE NOTE 14)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 2)........................ $ 3,627,903 $ 1,594,939
Accounts receivable....................................... 634,200 1,350,194
Prepaid expenses and other assets......................... 31,691 92,911
----------- -----------
Total current assets.............................. 4,293,794 3,038,044
Property and equipment -- Net............................... 279,005 379,588
Intangible assets -- Net.................................... 59,831 46,144
Goodwill -- Net............................................. -- 2,409,791
----------- -----------
Total assets...................................... $ 4,632,630 $ 5,873,567
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 90,948 $ 330,402
Accrued expenses.......................................... 154,529 308,394
Accrued compensation...................................... 13,000 152,248
Accrued vacation.......................................... 56,679 28,812
Due to related party...................................... 465,918 50,862
Loan payable.............................................. 358,949 --
Deferred revenue.......................................... 803,884 799,523
----------- -----------
Total current liabilities......................... 1,943,907 1,670,241
----------- -----------
Commitments (Notes 10 and 12)
Shareholders' Equity:
Common stock, Class A -- par value $.01; 15,000,000 shares
authorized, 1,079,000 issued and outstanding........... 10,790 10,790
Common stock, Class B -- par value $.01; 15,000,000 shares
authorized, 1,726,645 and 5,792,318 issued and
outstanding............................................ 17,265 57,923
Preferred stock, Series A -- par value $.01; 1,000,000
shares authorized, 788,200 shares issued and
outstanding............................................ 7,882 7,882
Preferred stock, Series B -- par value $.01; 1,000,000
shares authorized, 0 issued and outstanding............ -- --
Preferred stock, Series C -- par value $.01; 4,000,000
shares authorized, 1,478,359 and 2,410,760 issued and
outstanding............................................ 14,784 24,108
Additional paid-in capital................................ 7,446,406 14,158,309
Deferred stock compensation............................... -- (715,436)
Treasury stock............................................ -- (3,277)
Notes receivable.......................................... -- (627,950)
Accumulated deficit....................................... (4,808,404) (8,709,023)
----------- -----------
Total shareholders' equity........................ 2,688,723 4,203,326
----------- -----------
Total liabilities and shareholders' equity........ $ 4,632,630 $ 5,873,567
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 80
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, ---------------------------
1996 1997 1998
(AS RESTATED,
SEE NOTE 14)
<S> <C> <C> <C>
Revenues............................................. $ 1,015,358 $ 1,522,183 $ 3,069,045
----------- ----------- -----------
Operating expenses:
Editorial, production, content and technology...... 1,181,783 1,790,588 2,588,353
Sales and marketing................................ 278,269 1,200,745 2,356,432
General and administration......................... 830,354 1,822,595 1,987,183
Depreciation and amortization...................... 41,325 159,862 286,699
----------- ----------- -----------
Total Operating Expenses................... 2,331,731 4,973,790 7,218,667
----------- ----------- -----------
Loss from operations................................. (1,316,373) (3,451,607) (4,149,622)
Interest (income) expense.......................... 28,117 12,307 (249,003)
----------- ----------- -----------
Net loss............................................. $(1,344,490) $(3,463,914) $(3,900,619)
=========== =========== ===========
Basic net loss per share............................. $ (0.66) $ (1.26) $ (1.07)
Weighted average number of shares of common stock
outstanding........................................ 2,026,233 2,750,552 3,636,558
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 81
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES A SERIES B SERIES C
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ------------------- ---------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1996.... -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
Initial capitalization --
April 1, 1996.......... 1,079,000 10,790 1,604,500 16,045 788,200 7,882 -- -- -- --
Exercise of stock
options................ -- -- 22,500 225 -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ -------- ------- --------- -------
Balance, December 31,
1996..................... 1,079,000 10,790 1,627,000 16,270 788,200 7,882 -- -- -- --
Issuance of Preferred B
Stock.................. -- -- -- -- -- -- (123,974) 1,240 -- --
Conversion of Preferred
Stock.................. -- -- -- -- -- -- (123,974) (1,240) 326,087 3,261
Issuance of Preferred C
Stock.................. -- -- -- -- -- -- -- -- 1,152,272 11,523
Exercise of stock
options................ -- -- 99,645 995 -- -- -- -- -- --
Contributed capital...... -- -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ -------- ------- --------- -------
Balance, December 31,
1997..................... 1,079,000 10,790 1,726,645 17,265 788,200 7,882 -- -- 1,478,359 14,784
Purchase of Treasury
Stock.................. -- -- -- -- -- -- -- -- -- --
Options issued to
nonemployees........... -- -- -- -- -- -- -- -- -- --
Deferred Stock
Compensation related to
issuance of options.... -- -- -- -- -- -- -- -- -- --
Issuance of Preferred C
Stock.................. -- -- -- -- -- -- -- -- 932,401 9,324
Issuance of Common B
Stock (acquisition).... -- -- 3,650,870 36,510 -- -- -- -- -- --
Exercise of stock
options................ -- -- 414,803 4,148 -- -- -- -- -- --
Amortization of Deferred
Stock Compensation..... -- -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- ------- ------ -------- ------- --------- -------
Balance, December 31, 1998
(As Restated, see Note
14)...................... 1,079,000 $10,790 5,792,318 $57,923 788,200 $7,882 -- $ -- 2,410,760 $24,108
========= ======= ========= ======= ======= ====== ======== ======= ========= =======
<CAPTION>
ADDITIONAL DEFERRED
PAID-IN ACCUMULATED TREASURY NOTES STOCK
CAPITAL DEFICIT STOCK RECEIVABLE COMPENSATION TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1996.... $ -- $ -- $ -- $ -- $ -- $ --
Initial capitalization --
April 1, 1996.......... 15,283 -- -- -- -- 50,000
Exercise of stock
options................ 18 -- -- -- -- 243
Net loss................. -- (1,344,490) -- -- -- (1,344,490)
----------- ----------- ------- --------- --------- -----------
Balance, December 31,
1996..................... 15,301 (1,344,490) -- -- -- (1,294,247)
Issuance of Preferred B
Stock.................. 1,498,760 -- -- -- -- 1,500,000
Conversion of Preferred
Stock.................. (2,021) -- -- -- -- --
Issuance of Preferred C
Stock.................. 5,288,924 -- -- -- -- 5,300,447
Exercise of stock
options................ 3,078 -- -- -- -- 4,073
Contributed capital...... 642,364 -- -- -- -- 642,364
Net loss................. -- (3,463,914) -- -- -- (3,463,914)
----------- ----------- ------- --------- --------- -----------
Balance, December 31,
1997..................... 7,446,406 (4,808,404) -- -- -- 2,688,723
Purchase of Treasury
Stock.................. -- -- (3,277) -- -- (3,277)
Options issued to
nonemployees........... 65,000 -- -- -- 65,000
Deferred Stock
Compensation related to
issuance of options.... 497,445 -- -- -- (497,445) --
Issuance of Preferred C
Stock.................. 3,990,675 -- -- -- -- 3,999,999
Issuance of Common B
Stock (acquisition).... 2,154,013 -- -- (627,950) (467,311) 1,095,262
Exercise of stock
options................ 4,770 -- -- -- 8,918
Amortization of Deferred
Stock Compensation..... -- -- -- -- 249,320 249,320
Net loss................. -- (3,900,619) -- -- -- (3,900,619)
----------- ----------- ------- --------- --------- -----------
Balance, December 31, 1998
(As Restated, see Note
14)...................... $14,158,309 $(8,709,023) $(3,277) $(627,950) $(715,436) $ 4,203,326
=========== =========== ======= ========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 82
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
DECEMBER 31, ---------------------------
1996 1997 1998
(AS RESTATED,
SEE NOTE 14)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(1,344,490) $(3,463,914) $(3,900,619)
Adjustments to reconcile net loss to net cash used
in operating activities:
Deferred stock compensation expense............. -- -- 249,320
Depreciation and amortization................... 41,325 159,862 286,699
Recruiting fees -- issuance of options.......... -- -- 65,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... (350,733) (283,467) 474,365
Increase in prepaid expenses.................... (10,431) (21,260) (6,489)
Increase in accounts payable and accruals....... 225,979 89,178 149,742
Increase (decrease) in due to related party..... 645,758 (179,840) (415,056)
Increase (decrease) in deferred revenue......... 712,224 91,660 (1,125,556)
----------- ----------- -----------
Net cash used in operating activities...... (80,368) (3,607,781) (4,222,594)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment................. (245,543) (221,850) (261,732)
Acquisition of intangible assets................... (72,632) -- --
Payments for business acquired, net of cash
acquired (note 1)............................... -- -- (1,195,330)
----------- ----------- -----------
Net cash used in investing activities...... (318,175) (221,850) (1,457,062)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from loan................................. 546,667 962,283 --
Payment of loan.................................... -- (1,150,000) (358,949)
Proceeds from issuance of preferred stock.......... 7,882 6,800,447 3,999,999
Proceeds from exercise of stock options............ 42,361 4,073 8,918
Purchase of treasury stock......................... -- -- (3,276)
Contributed capital................................ -- 642,364 --
----------- ----------- -----------
Cash provided by financing activities...... 596,910 7,259,167 3,646,692
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents..... 198,367 3,429,536 (2,032,964)
Cash and cash equivalents, beginning of period....... -- 198,367 3,627,903
----------- ----------- -----------
Cash and cash equivalents, end of period............. $ 198,367 $ 3,627,903 $ 1,594,939
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 83
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS
Medscape, Inc. was formed and incorporated under the laws of the State of
New York in March 1996, and commenced operations in April 1996. Medscape was
reincorporated in Delaware in December 1998. Medscape operates Medscape.com, a
healthcare Web site for physicians, allied healthcare professionals such as
pharmacists and nurses, and consumers. The Medscape Web site is a valuable
resource that enables members to make better informed healthcare decisions.
Medscape provides comprehensive, authoritative and timely medical information,
including original proprietary articles written by renowned medical experts.
Medscape sells advertising and sponsorship, market research and other services
to pharmaceutical, medical device and other healthcare companies. Medscape also
sells products, such as medical books, to physicians, allied healthcare
professionals and consumers.
Effective October 27, 1998, Medscape consummated an acquisition in
accordance with a purchase agreement with Healthcare Communications Group, LLC,
("HCG") a Maryland corporation. HCG is a medical communications/education
company that develops, produces and distributes unique live, print, digital and
Internet-based programs for healthcare professionals funded by pharmaceutical
companies. The agreement provided for the purchase of the membership interests
of HCG.
The purchase price of $2,304,671 was allocated principally to working
capital and assets, including accounts receivable and goodwill (see below).
The acquisition of HCG has been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their respective estimated fair
values at the date of acquisition. The excess of the purchase price over the
aggregated estimated fair values of the net tangible assets acquired has been
recorded as goodwill, which is being amortized over fifteen years.
The purchase price was allocated in the following manner:
<TABLE>
<S> <C> <C>
Purchase price:
Cash at closing........................................... $ 1,075,000
Legal and accounting fees................................. 134,409
Common stock 1,825,435 shares at $0.60 (Note 8)........... 1,095,262
-----------
2,304,671
Liabilities assumed:
Accounts payable.......................................... $ 74,777
Demand note, Medscape..................................... 275,000
Deferred revenue.......................................... 1,121,193
Payroll tax liabilities................................... 5,182 1,476,152
---------- -----------
Assets purchased:
Cash...................................................... 14,081
Accounts receivable....................................... 1,190,359
Prepaid expenses.......................................... 54,730
Fixed assets.............................................. 76,777
Intangibles............................................... 5,383 (1,341,330)
---------- -----------
Total goodwill.............................................. $ 2,439,493
===========
</TABLE>
F-7
<PAGE> 84
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following presents, on a pro forma basis, Medscape's operations as if
Medscape and HCG were combined as of the beginning of the periods presented.
<TABLE>
<CAPTION>
JANUARY 1,
-------------------------
1997 1998
(UNAUDITED)
<S> <C> <C>
Total revenue.............................................. $ 4,677,687 $ 5,653,660
=========== ===========
Net loss................................................... $(3,086,341) $(3,928,202)
=========== ===========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Medscape and
its subsidiary, HCG. The results of the subsidiary acquired are included from
the date of acquisition. All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, Medscape considers all highly
liquid short-term cash investments purchased with maturities of three months or
less as cash and cash equivalents.
CONCENTRATION OF CREDIT RISK
Medscape's financial instruments that are exposed to concentration of
credit risks consist primarily of cash and cash equivalents and trade accounts
receivable. Medscape maintains its cash and cash equivalents in bank accounts
which, at times, exceeds federally insured limits. Medscape has not experienced
any losses in these accounts. Medscape believes it is not exposed to any
significant credit risk on cash and cash equivalents. Concentrations of credit
risks with respect to accounts receivable are limited because of Medscape's
expanding customer base and the credit worthiness of its three major customers
(see Note 11), making up the majority of the accounts receivable balance.
DEPRECIATION AND AMORTIZATION
Medscape provides for depreciation of property and equipment based on the
estimated useful lives of the applicable assets and the life of leases or the
life of the leasehold improvement if less, using the straight-line method.
Expenditures for renewals and improvements which extend the useful lives of
assets are capitalized, while maintenance and repairs are charged to operations
as incurred.
GOODWILL, INTANGIBLE ASSETS AND RELATED AMORTIZATION
Goodwill represents the excess of cost over the fair value of the net
assets acquired of HCG and is being amortized using the straight-line method
over fifteen years. Medscape periodically reviews the value of its
F-8
<PAGE> 85
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
goodwill to determine if impairment has occurred. Medscape measures the
potential impairment of recorded goodwill by comparing the undiscounted value of
estimated future cash flows to the carrying amount of goodwill. If indicated
cash flows are less than the carrying amount of goodwill, Medscape would reduce
the carrying value of goodwill. Based on its review, Medscape does not believe
an impairment of goodwill has occurred.
Intangible assets consist of trademarks and organization costs, which are
being amortized using the straight-line method over their estimated useful life.
IMPAIRMENT OF ASSETS
Medscape's long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur, Medscape
measures impairment by comparing the carrying value of the long-lived asset to
the estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows is less than the carrying amount of the assets, Medscape would
recognize an impairment loss. Medscape determined that, as of December 31, 1997
and 1998, there had been no impairment in the carrying value of the long-lived
assets.
REVENUE RECOGNITION
Income is derived from a variety of sources including advertising,
sponsorship of on-line journals, medical conferences, market research and
e-commerce. Revenues from advertising are recognized in the period in which the
advertisement is displayed. Revenue from sponsored programs, such as medical
conferences, are recognized when the conference is completed and the next-day
conference summary is published on the Medscape Web site. Revenues from
sponsored content is recognized on a percentage of completion basis. (At
December 31, 1998 and 1997, there were no uncompleted projects.) Revenues from
market research are recognized upon completion of the project.
DEFERRED REVENUE
Deferred revenue represents amounts billed in excess of revenues
recognized. Included in accounts receivable are amounts due (under contract)
relating to deferred revenue.
INCOME TAXES
Medscape accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 establishes financial accounting and reporting standards for the
effect of income taxes that result from activities during the current and
preceding years. SFAS No. 109 requires an asset and liability approach for
financial reporting for income taxes.
NET LOSS PER COMMON SHARE
Basic loss per common share was computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Diluted loss per
common share has not been presented since the impact for options, warrants and
conversion of preferred shares would have been anti-dilutive(see notes 8 and 9).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
"SFAS" No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
F-9
<PAGE> 86
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
its components. Medscape has no elements of other comprehensive income or loss;
consequently net loss is equal to comprehensive loss. Medscape operates in one
segment in the United States.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities for Medscape's year
ended December 31, 2001. Generally, it requires that an entity recognize all
derivatives as either an asset or liability and measure those instruments at
fair value, as well as identify the conditions for which a derivative may be
specifically designated as a hedge. Medscape currently does not have any
derivative instruments and is not engaged in hedging activities.
During 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP No. 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use. This
statement is applicable to Medscape's 1999 financial statements and will require
Medscape to capitalize various payroll and payroll related costs and other costs
that are directly related to the development of some of the systems of Medscape.
Medscape will amortize these costs over the anticipated life of the systems.
Management is currently evaluating the effect of this statement on Medscape's
financial statements.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the
current year presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- USEFUL LIFE
DESCRIPTION 1997 1998 (IN YEARS)
<S> <C> <C> <C>
Computers.......................................... $ 268,032 $ 601,501 3
Furnitures and fixtures............................ 62,196 66,163 5
Leasehold improvements............................. 137,163 138,855 2
--------- ---------
467,391 806,519
Less accumulated depreciation...................... (188,386) (426,931)
--------- ---------
Property and equipment -- net...................... $ 279,005 $ 379,588
========= =========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- USEFUL LIFE
DESCRIPTION 1997 1998 (IN YEARS)
<S> <C> <C> <C>
Trademarks........................................... $ 50,000 $ 55,383 15
Organization costs................................... 22,632 22,632 5
-------- --------
72,632 78,015
Less accumulated amortization........................ (12,801) (31,871)
-------- --------
Intangible assets -- net............................. $ 59,831 $ 46,144
======== ========
</TABLE>
In 1997, Medscape changed the useful life of intangible assets from 40
years for Trademarks and 15 years for Organization costs to 15 and 5 years,
respectively, to more properly reflect their expected useful lives in the
current business environment. The impact of the change was not material to
Medscape's financial statements.
F-10
<PAGE> 87
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GOODWILL
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, USEFUL LIFE
DESCRIPTION 1998 (IN YEARS)
<S> <C> <C>
Goodwill.................................................... $2,439,493 15
Less accumulated amortization............................... (29,702)
----------
Goodwill -- net............................................. $2,409,791
==========
</TABLE>
6. INCOME TAXES
No provision for income taxes has been made because Medscape has sustained
cumulative losses since the commencement of its operations.
At December 31, 1998, Medscape had net operating loss carryforwards
("NOLs") of approximately $8,550,000 which will be available to reduce future
taxable income. The NOLs are scheduled to expire in the following years:
<TABLE>
<S> <C>
2011..................................................... $1,344,000
2012..................................................... 3,306,000
2018..................................................... 3,900,000
</TABLE>
In accordance with SFAS No. 109, Medscape has computed the components of
deferred income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
<S> <C> <C>
Deferred tax assets........................................ $ 1,961,000 $ 3,419,911
Less valuation allowance................................... (1,961,000) (3,419,911)
----------- -----------
Net deferred tax assets.................................... $ -- $ --
=========== ===========
</TABLE>
Medscape's net operating losses primarily generated the deferred tax
assets. At December 31, 1998 and 1997, a valuation allowance is provided as the
realization of the deferred tax benefits is not likely.
7. RETIREMENT PLAN
Medscape has a 401(k) Retirement/Savings Plan (the "Plan") for all eligible
employees. Employees are eligible to participate after they have completed three
months of service. Medscape is not required to, but may match employee
contributions. In addition, Medscape may make a discretionary contribution to
the Plan. Medscape did not make any voluntary contributions to the Plan for the
year ended December 31, 1997 or December 31, 1998.
8. SHAREHOLDERS' EQUITY (DEFICIENCY)
The authorized capital stock of Medscape consists of Class A Common Stock,
Class B Common Stock (collectively the "Common Stock") and Series A, Series B
and Series C Preferred Stock (collectively the "Preferred Stock"). Class A and
Class B Common Stock have identical powers except that Class B Common Stock does
not have any voting power, including voting for the election of directors or for
any other purpose except as required by law.
The Series A Preferred Stock has a liquidation preference equivalent to
$0.02686 per share. The Series C Preferred Stock has a liquidation preference
equivalent to $4.60 per share, except that the first
F-11
<PAGE> 88
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2,517,586 shares of the Preferred Stock issued shall have a liquidation
preference of $10,800,446 plus cumulative dividends thereon at the rate of 6%
per annum. If upon liquidation, Medscape's assets are insufficient to permit the
payment of this amount, the entire assets shall be distributed ratably among the
holders of the Preferred Stock. After payment of the liquidation preference,
Medscape's remaining assets shall be distributed among the holders of the Common
and Preferred Stock according to the number of shares held by each shareholder.
The Preferred Stock is convertible at the option of the shareholder at any
time into one share of Class A Common Stock for each share of the Preferred
Stock. In the event of any stock dividend, stock split, recapitalization or like
occurrence not affecting the Common and Preferred Stock in a like manner, the
conversion ratio shall be adjusted ratably.
In January 1997, Medscape issued 123,974 shares of Series B Preferred Stock
at $12.10 per share for $1,500,000. In October 1997, Medscape issued 1,152,272
shares of Series C Preferred Stock at $4.60 per share for $5,300,447. As part of
this offering, Medscape converted all of the Series B Preferred Stock
outstanding for 326,087 shares of Series C Preferred stock at $4.60 per share.
The total capital raised in 1997 from these offerings was $6,800,447, of which
$800,000 was used to pay the principal and interest on the loan payable to SCP
Communications, Inc. ("SCP"), a related party, with the remainder used to fund
Medscape's ongoing operations.
During 1997, SCP contributed to capital $642,364 which Medscape owed to it
under an administrative services agreement (note 12).
In March 1998, Medscape issued 932,401 shares of Series C Preferred Stock
at $4.29 per share for $3,999,999. In October 1998, Medscape issued 1,825,435
shares of Class B Common Stock in connection with the acquisition of Healthcare
Communications Group. Medscape also received a note for $627,950 from the
majority shareholder in lieu of payment for an additional 1,825,435 shares of
Class B Common Stock. The note is presented in the Equity section as a contra to
shareholders' equity. Such shares vest over 3 years. The fair value in excess of
$627,950 has been included in the charge to deferred stock compensation as an
offset in the equity section of the balance sheet and is being amortized over
three years.
9. STOCK OPTION PLAN
During 1996, the Board of Directors adopted the Medscape, Inc. 1996 Stock
Option Plan (the "Plan"). Pursuant to the Plan, the Board of Directors granted
incentive stock options to certain key employees and non-qualified stock options
to certain key non-employees all at fair value. Under the Plan approved by the
Board of Directors, the total number of shares of Class B Common Stock that may
be granted is 5,500,000.
The incentive stock options granted permit the key employees the right and
option to purchase shares of Class B Common Stock. Except for a change of
control, as defined, an option may not be exercised within one year from the
date of the grant and no option will be exercisable after 10 years from the date
granted. Stock options vest over a three or four-year period, with one-third or
one-quarter of the options becoming exercisable one year from date of grant. For
options issued below fair market value, amounts for which fair market value
exceeds the amounts for which options have been granted, have been charged to
deferred stock compensation expense and are being amortized over four years, the
vesting period of the options.
The non-qualified stock options also permit certain non-employees the right
and option to purchase shares of Class B Common Stock. Except for a change of
control, as defined, an option may not be exercised within one year from the
date of the grant and no option will be exercisable after 10 years from the date
granted. Stock options vest over a four-year period, with one-quarter of the
options becoming exercisable one year from date of grant. For options issued
below fair market value, amounts for which fair market value exceeds the amounts
for which options have been granted, have been charged to deferred stock
compensation expense and are being amortized over four years, the vesting period
of the options.
F-12
<PAGE> 89
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the non-qualified stock options granted permit other
non-employees the option to purchase shares of Class B Common Stock. One-quarter
of the options are exercisable one year from date of grant. For options issued
below fair market value, amounts for which fair market value exceeds the amounts
for which options have been granted, have been charged to deferred stock
compensation expense and are being amortized over four years, the vesting period
of the options.
Transactions involving the incentive stock options granted to key employees
are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options outstanding April 1, 1996........................... -- $ --
Granted................................................... 312,110 .011
Exercised................................................. -- --
Canceled.................................................. (27,433) --
--------- ------------
Options outstanding December 31, 1996....................... 284,677 .011
Granted................................................... 557,500 .144 & .172
Exercised................................................. (7,978) .011
Canceled.................................................. (109,977) --
--------- ------------
Options outstanding December 31, 1997....................... 724,222 .011 - .172
Granted................................................... 1,650,118 .172 & .344
Exercised................................................. (7,797) .011 & .144
Canceled.................................................. (48,125) .144 & .0172
--------- ------------
Options outstanding December 31, 1998....................... 2,318,418 .011-.344
========= ============
</TABLE>
Employee Options exercisable at December 31, 1997 and 1998 were 63,325 and
344,873, respectively. No options were exercisable at December 31, 1996.
Transactions involving non-qualified stock options granted to non-employees
are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options outstanding April 1, 1996.......................... -- --
Granted.................................................. 1,974,918 $ .011
Exercised................................................ (22,500) .011
Canceled................................................. -- --
--------- ------------
Options outstanding December 31, 1996...................... 1,952,418 .011
Granted.................................................. 175,000 .144
Exercised................................................ (91,668) .011
Canceled................................................. (6,018) .011
--------- ------------
Options outstanding December 31, 1997...................... 2,029,732 .011 & .144
Granted.................................................. 340,000 .172 & .344
Exercised................................................ (407,005) .011 & .144
Canceled................................................. (89,678) .011 & .172
--------- ------------
Options outstanding December 31, 1998...................... 1,873,049 $.011 - .344
========= ============
</TABLE>
Non-employee options exercisable at December 31, 1997 and 1998 were
625,742.5 and 998,330, respectively. No options were exercisable at December 31,
1996.
F-13
<PAGE> 90
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 123 provides for a fair value based method of accounting for
employee options and options granted to non-employees and measures compensation
expense using an option valuation model that takes into account, as of the grant
date, the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the
stock, and the risk-free interest rate for the expected term of the options. For
the years ended December 31, 1996 and 1997 the fair value of options granted to
non-employees were nominal as determined using the Black Scholes option pricing
model. For options granted to non-employees in 1998, an amount equal to the fair
value of the services provided aggregating $65,000 is included as a charge to
general and administrative expenses in the 1998 statement of operations.
Medscape has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options. Medscape has issued its options at
fair value at the date of grant. Under APB 25, because the exercise price of
Medscape's employee stock options equals the fair value of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma disclosures as if Medscape adopted the cost recognition
requirement under SFAS 123 is presented below.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net loss as reported............................. $1,344,490 $3,463,914 $3,900,619
Net loss pro forma............................... 1,344,970 3,482,361 3,975,655
</TABLE>
The fair value of options granted under the Plan for the years ended
December 31, 1997 and 1998, in complying with SFAS No. 123 was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used: no dividend yield, no expected volatility,
risk free interest rate of 5.66% as of December 31, 1997 and 4.60% as of
December 31, 1998, and expected lives of 3.25 years. Pro forma compensation cost
of options granted under the Plan is measured based on the discount from fair
value.
10. EMPLOYMENT AGREEMENTS
Medscape has employment agreements with four employees ranging from one to
five years, with commitments aggregating in each of the years, ending December
31; $571,000 in 1999, $470,000 in 2000, $211,000 in 2001, $195,000 in 2002 and
$163,000 in 2003.
11. MAJOR CUSTOMERS
Sales to two major customers for the nine months ended December 31, 1996
represent 73% and 22%. For the year ended December 31, 1997, sales to three
major customers represented 15%, 14% and 13%. For the year ended December 31,
1998, sales to two major customers represent 27% and 14%.
12. ADMINISTRATIVE SERVICES AGREEMENT
On April 1, 1996, Medscape and SCP, a company controlled by the same
stockholders, entered into a administrative services agreement under which SCP
provided Medscape with administrative, support services, and sufficient space
for Medscape to conduct its business. This agreement had been extended through
April 30, 1999.
At December 31, 1998, Medscape owed SCP an aggregate of $50,862 under this
agreement as compared to $465,916 at December 31, 1997. SCP provided services
aggregating, $740,739, $1,074,307 and $749,415
F-14
<PAGE> 91
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for the years ended December 31, 1998, December 31, 1997 and the period ended
December 31, 1996, respectively. In management's opinion, all of these services
were provided and paid for at a fair market value.
Medscape and SCP have entered into a ten-year "Publishers' Circle
Agreement" whereby SCP grants Medscape the right to distribute its content on
the Web and to provide the content for worldwide on-line search and retrieval.
Additionally, SCP agrees to promote Medscape in its publications, and run
advertising in every issue of its journals. In return, SCP can sell all Medscape
products including banner advertising for which SCP will receive a commission.
13. SUBSEQUENT EVENTS
On May 17, 1999, Medscape effected a 2.5-for-one stock split for each
outstanding share of each class of common shares. In connection with the stock
split, the number of authorized shares of Class A Common Stock was increased to
an aggregate of 1,079,000, the number of authorized shares of Class B Common
Stock to an aggregate of 6,701,363 shares and the preferred stock became
convertible into 2.5 times as many shares of the Class A Common Stock and each
outstanding warrant and option became exercisable for 2.5 times as many shares
of the Class B Common Stock. The 2.5-for-one stock split described above has
been applied retrospectively for all periods presented.
14. RESTATEMENT
Subsequent to the issuance of Medscape's 1998 Consolidated Financial
Statements, Medscape's management determined that the valuation of Class B
Common Stock and related options should be revised for Class B Common Stock and
options issued after August 1, 1998. As a result, the 1998 Consolidated
Financial Statements have been restated from the amounts previously reported to
recognize additional stock based compensation expense of $257,109, deferred
compensation of $715,436 and additional goodwill of $459,523 based upon the
revised fair value of Class B Common Stock and options. Additional paid-in
capital has also been increased by $1,432,068.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
AT DECEMBER 31, 1998: REPORTED AS RESTATED
<S> <C> <C>
Goodwill -- Net........................................... $ 1,950,268 $ 2,409,791
Additional Paid-In Capital................................ 12,726,241 14,158,309
Accumulated Deficit....................................... 8,451,914 8,709,023
Deferred Stock Compensation............................... -- 715,436
</TABLE>
<TABLE>
<CAPTION>
AS PREVIOUSLY
FOR THE YEAR ENDED DECEMBER 31, 1998: REPORTED AS RESTATED
<S> <C> <C>
Editorial, Production, Content & Technology............... $ 2,563,419 $ 2,588,353
Sales and Marketing....................................... 2,343,962 2,356,432
General and Administrative................................ 1,774,649 1,987,183
Depreciation and Amortization............................. 279,528 286,699
Net Loss.................................................. 3,643,510 3,900,619
Basic net loss per share.................................. $1.00 $1.07
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
SHAREHOLDERS' EQUITY
In March 1999, Medscape issued 1,757,683 shares of Series D Preferred Stock
at $11.72 per share for gross proceeds of $20,600,019.
F-15
<PAGE> 92
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1999, 932,401 shares of Series C Preferred Stock were redesignated
as Series C-1 Preferred Stock.
In March 1999, the Board of Directors increased the authorized shares of
Class A Common Stock that can be issued to 27,500,000 and lowered the authorized
shares of Preferred Stock to 4,956,560.
The Board of Directors of Medscape has approved an increase in the total
number of Class B Common Stock that may be granted under the Medscape, Inc.,
1996 Stock Option Plan, to 8,250,000.
TRANSACTIONS WITH SOFTWATCH LTD.
On June 15, 1999, Medscape purchased 1,040,170 Series A Preferred Shares of
Softwatch Ltd. (Softwatch), an Israeli company, for $2,999,954. At the same
time, Medscape and Softwatch entered into a License and Web Site Development
Agreement pursuant to which Medscape licensed software from Softwatch to support
its consumer site and for Softwatch to provide ongoing support services for the
consumer site. On the date of the Agreement, Medscape paid $500,000 in cash of a
total $1,500,000 licensing fee. $500,000 of the remaining balance will be paid
upon delivery of the software and $500,000 upon acceptance by Medscape. Medscape
will also pay royalties under the Agreement.
TRANSACTIONS WITH CBS CORPORATION
On July 7, 1999, Medscape entered into a Common Stock Purchase agreement,
and on August 3, 1999, in related transactions, we entered into an Advertising
and Promotional Agreement, and a Trademark and Content Agreement with CBS
Corporation (CBS). Under the Stock Purchase Agreement, Medscape sold 7,397,208
shares of Class A Common Stock and 6,541,160 shares of Class B Common Stock to
CBS for an aggregate purchase price of $157,000,000, of which $139,384 was paid
in cash, and $149,860,616 is to be paid through the advertising services to be
provided by CBS in accordance with the Advertising and Promotion Agreement and
$7,000,000 is to be paid through the grant of rights under the Trademark and
Content Agreement. Over the seven year term of the Advertising and Promotion
Agreement, CBS will arrange for the placement of approximately $150 million
worth of advertising and promotion in the United States for Medscape's consumer
and professional Web sites and their other products and services.
Under the Trademark and Content Agreement, CBS granted Medscape a license
to the "CBS" trademark and "Eye" design and health-related news content for a
seven year period. Under the agreement CBS retains significant control over the
use and presentation of the CBS health content and CBS trademarks.
TRANSACTIONS WITH NATIONAL DATA CORPORATION
On August 4, 1999, Medscape sold 400,000 shares of Series E Preferred Stock
at a purchase price of $25 per share and 1,000,000 shares of Class A Common
Stock at a purchase price of $10 per share to National Data Corporation, which
included a $10,000,000 cash investment and an additional $10,000,000 attributed
to licensing and promotion to be provided by NDC and credits against future
commission amounts due by Medscape to NDC. $6,000,000 will be expensed as used
over the three-year life of the agreement, commencing August 4, 1999 and
terminating August 31, 2002. In addition, the license fee of $4,000,000 will be
amortized on a straight line basis over the life of the agreement. In accordance
with instructions by NDC, 25,000 of the 1,000,000 shares of Class A Common Stock
and 10,000 of the 400,000 shares of Series E Preferred Stock were delivered to
NDC's financial advisor in the transaction, Lazard Freres & Co., LLC.
TRANSACTION WITH AMERICA ONLINE, INC.
On September 3, 1999, Medscape entered into an agreement with America
Online, Inc., under which AOL has agreed to promote Medscape's co-branded Web
sites, through contextual links and banners, on AOL, AOL.com, CompuServe
Service, Netscape Netcenter and Digital City, which are all AOL
F-16
<PAGE> 93
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
properties.Medscape has paid AOL $3 million and will pay an additional $30
million over the next two years. These amounts will be charged to earnings over
the next three years, the life of the contract. In addition, Medscape granted
AOL two seven-year warrants, each to purchase up to 1,352,158 shares of
Medscape's Class A Common Stock. One of the Warrants is fully vested now and has
an exercise price of $10 per share. The other Warrant will vest over a
three-year period based on AOL meeting specified performance requirements and
will have exercise prices equal to the fair market value of Medscape's common
stock at the time of vesting. Each warrant has a value of approximately
$2,530,000, as determined using the Black Scholes option pricing model. The
value of the fully vested warrant will be charged to earnings over the
three-year AOL contract period and the warrant that vests over three years will
be charged to earnings adjusted variably over the vesting period.
F-17
<PAGE> 94
MEDSCAPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 JUNE 30,
(AS RESTATED) 1999
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents................................. $ 1,595 $ 12,954
Accounts receivable....................................... 1,350 2,698
Prepaid expenses and other assets......................... 93 1,112
------- --------
Total current assets.............................. 3,038 16,764
Investment in Softwatch..................................... -- 3,067
Property and equipment -- net............................... 380 960
Intangible assets -- net.................................... 46 94
Goodwill -- net............................................. 2,410 2,328
------- --------
Total assets...................................... $ 5,874 $ 23,213
======= ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.......................................... $ 330 $ 58
Accrued expenses.......................................... 489 1,615
Due to related party...................................... 51 25
Deferred revenue.......................................... 800 2,048
------- --------
Total current liabilities......................... 1,670 3,746
------- --------
Shareholders' equity:
Common stock, Class A -- par value $.01; 15,000,000 and
27,500,000 at December 31, 1998 and June 30, 1999
shares authorized, 1,079,000 issued and outstanding.... 11 11
Common stock, Class B -- par value $.01; 15,000,000 shares
authorized, 6,995,602.5 issued and outstanding......... 58 70
Preferred stock, Series A -- par value $.01; 1,000,000 and
788,200 shares authorized at December 31, 1998 and June
30, 1999, 788,200 shares issued and outstanding........ 8 8
Preferred stock, Series C -- par value $.01; 4,000,000 and
1,478,359 shares authorized at December 31, 1998 and
June 30, 1999, 2,410,760 and 1,478,359 issued and
outstanding............................................ 24 15
Preferred stock, Series C-1 -- par value $.01; 932,401
shares at June 30, 1999, 932,401 issued and outstanding
and authorized......................................... -- 9
Preferred stock, Series D -- par value $.01; 1,757,683
shares at June 30, 1999, 1,757,683 issued and
outstanding and authorized............................. -- 17
Warrants.................................................. -- 85
Additional paid-in-capital................................ 14,158 36,223
Treasury stock............................................ (3) (3)
Notes receivable.......................................... (628) (628)
Deferred Stock Compensation............................... (715) (2,550)
Accumulated deficit....................................... (8,709) (13,790)
------- --------
Total shareholders' equity........................ 4,204 19,467
------- --------
Total liabilities and shareholders' equity........ $ 5,874 $ 23,213
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
F-18
<PAGE> 95
MEDSCAPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
1998 1999
<S> <C> <C>
Revenues.................................................... $ 1,078 $ 4,930
--------- ---------
Operating expenses:
Editorial, production, content and technology............. 853 3,916
Sales and marketing....................................... 811 3,502
General and administration................................ 793 2,664
Depreciation and amortization............................. 96 225
--------- ---------
Total operating expenses.......................... 2,553 10,307
--------- ---------
Loss from operations........................................ (1,475) (5,377)
Interest income -- net.................................... (149) (296)
--------- ---------
Net loss.................................................... $ (1,326) $ (5,081)
========= =========
Basic net loss per share.................................... $ (0.47) $ (0.71)
Weighted average number of shares of common stock
outstanding............................................... 2,834,172 7,164,127
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE> 96
MEDSCAPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1998 1999
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(1,326) $(5,081)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred stock compensation expense.................... -- 779
Depreciation and amortization.......................... 96 225
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............. 473 (1,348)
Increase in prepaid expenses........................... (222) (1,019)
Increase in accounts payable and accruals.............. 58 854
Decrease in due to related party....................... (733) (26)
(Decrease) increase in deferred revenue................ (378) 1,248
------- -------
Net cash used in operating activities............. (2,032) (4,368)
------- -------
INVESTING ACTIVITIES
Investment in Softwatch................................... -- (3,067)
Purchase of property and equipment........................ (125) (721)
Acquisition of intangible assets.......................... -- (50)
------- -------
Net cash used in investing activities............. (125) (3,838)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock................. 4,000 19,565
------- -------
Cash provided by financing activities............. 4,000 19,565
------- -------
Increase in cash and cash equivalents....................... 1,843 11,359
Cash and cash equivalents, beginning of period.............. 3,628 1,595
------- -------
Cash and cash equivalents, end of period.................... $ 5,471 $12,954
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE> 97
MEDSCAPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1. BASIS OF PRESENTATION
Medscape, Inc. ("Medscape") has prepared the condensed consolidated
financial statements of which these notes are part, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations; however, in the opinion of Medscape's management, the Condensed
Consolidated Financial statements include all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial information
for the six months ended June 30, 1999. These Condensed Consolidated Financial
Statements should be read in conjunction with the consolidated Financial
Statements of Medscape for the year ended December 31, 1998.
2. PRIVATE PLACEMENT OF PREFERRED STOCK
On March 5, 1999, Medscape completed a private placement of its Series D
Preferred Stock (1,757,683 shares) for which it received $19,414,547 (gross
proceeds of $20,600,019 less expenses of the private placement of $1,185,472).
In connection with this private placement, Medscape issued 14,887 warrants of
Class B Common Stock to its investment bank. Each warrant entitles the
warrantholder to purchase 1 share of common stock for $0.01 with a warrant. The
value of the warrants was determined using the Black Scholes pricing model and
was recorded in the balance sheet at June 30, 1999 at a value of $85,000.
3. SERIES C AND C-1 PREFERRED STOCK
On March 5, 1999, 932,401 shares of Series C Preferred Stock that had been
issued on February 19 and March 9, 1998 were redesignated as Series C-1
Preferred Stock.
4. INCOME TAXES
No provision for income taxes has been made because Medscape has sustained
cumulative losses since the commencement of its operations.
At June 30, 1999, Medscape had net operating loss carryforwards ("NOLs") of
approximately $13,789,000 which will be available to reduce future taxable
income. The NOLs are scheduled to expire in the following years:
<TABLE>
<S> <C>
2011..................................................... $1,344,000
2012..................................................... 3,464,000
2018..................................................... 3,900,000
2019..................................................... 5,081,000
</TABLE>
In accordance with SFAS No. 109, Medscape has computed the components of
deferred income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
<S> <C> <C>
Deferred tax assets........................................ $ 3,419,911 $ 5,646,481
Less valuation allowance................................... (3,419,911) (5,646,481)
----------- -----------
Net deferred tax assets.................................... $ -- $ --
=========== ===========
</TABLE>
F-21
<PAGE> 98
MEDSCAPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Medscape's net operating losses primarily generated the deferred tax
assets. At December 31, 1998 and June 30, 1999, a valuation allowance is
provided as the realization of the deferred tax benefits is not likely.
5. SUBSEQUENT EVENTS
The Board of Directors of Medscape has approved an increase in the total
number of Class B Common Stock that may be granted under the Medscape, Inc. 1996
Stock Option Plan, to 8,250,000.
Medscape is in the process of filing an initial public offering with the
Commission. On consummation of the offering, all Preferred Shares will convert
to Common Shares.
SHAREHOLDERS' EQUITY
On May 17, 1999, Medscape effected a 2.5-for-one stock split for each
outstanding share of each class of common shares. In connection with the stock
split, the number of authorized shares of Class A Common Stock was increased to
an aggregate of 1,079,000 shares, the number of authorized shares of Class B
common Stock was increased to an aggregate of 6,701,363 shares and the preferred
stock became convertible into 2.5 times as many shares of the Class A Common
Stock and each outstanding warrant and option became exercisable for 2.5 times
as many shares of the Class B Common Stock. The 2.5-for-one stock split
described above has been applied retrospectively for all periods presented.
In March 1999, Medscape issued 1,757,683 shares of Series D Preferred Stock
at $11.72 per share for gross proceeds of $20,600,019.
In March 1999, 932,401 shares of Series C Preferred Stock were redesignated
as Series C-1 Preferred Stock.
In March 1999, the Board of Directors increased the authorized shares of
Class A Common Stock that can be issued to 27,500,000 and lowered the authorized
shares of Preferred Stock to 4,956,560.
The Board of Directors of Medscape has approved an increase in the total
number of Class B Common Stock that may be granted under the Medscape, Inc.,
1996 Stock Option Plan, to 8,250,000.
In connection with options issued during the six months ended June 30,
1999, Medscape has charged deferred stock compensation approximately of $2.6
million (included in the offset in the equity section of the balance sheet) for
the amount that fair market value exceeds the amount the options were granted.
Such amount is being amortized over four years, the vesting period of the
options.
TRANSACTIONS WITH SOFTWATCH LTD
On June 15, 1999, Medscape purchased 1,040,170 Series A Preferred Shares of
Softwatch Ltd. (Softwatch), an Israeli company, for $2,999,954 (which is
accounted for at cost). In addition, Medscape incurred $66,701 of expenses
relating to the investment. At the same time, Medscape and Softwatch entered
into a License and Web Site Development Agreement pursuant to which Medscape
licensed software from Softwatch to support its consumer site and for Softwatch
to provide ongoing support services for the consumer site. On the date of the
Agreement, Medscape paid $500,000 in cash of a total licensing fee of
$1,500,000. The remaining $1,000,000 will be paid $500,000 upon delivery of the
software and $500,000 upon acceptance by Medscape. Medscape will also pay
royalties under the Agreement.
TRANSACTIONS WITH CBS CORPORATION
On July 7, 1999, Medscape entered into a Common Stock Purchase agreement,
and on August 3, 1999, in related transactions, entered into an Advertising and
Promotional Agreement, and a Trademark and Content Agreement with CBS
Corporation (CBS). Under the Stock Purchase Agreement, Medscape sold
F-22
<PAGE> 99
MEDSCAPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
7,397,208 shares of Class A Common Stock and 6,541,160 shares of Class B Common
Stock to CBS for an aggregate purchase price of $157,000,000, of which $139,384
was paid in cash, and $149,860,616 is to be paid through the advertising
services to be provided by CBS in accordance with the Advertising and Promotion
Agreement and $7,000,000 is to be paid through the grant of rights under the
Trademark and Content Agreement. Over the seven year term of the Advertising and
Promotion Agreement, CBS will arrange for the placement of approximately $150
million worth of advertising and promotion in the United States for Medscape's
consumer and professional Web sites and their other products and services.
Under the Trademark and Content Agreement, CBS granted Medscape a license
to the "CBS" trademark and "Eye" design and to health related news content for a
seven year period. Under the agreement CBS retains significant control over the
use and presentation of the CBS health content and CBS trademarks.
TRANSACTIONS WITH NATIONAL DATA CORPORATION
On August 4, 1999 Medscape sold 400,000 shares of Series E Preferred Stock
at a purchase price of $25 per share and 1,000,000 shares of Class A Common
Stock at a purchase price of $10 per share to National Data Corporation, which
included a $10,000,000 cash investment and an additional $10,000,000 attributed
to licensing and promotion to be provided by NDC and credits against future
commission amounts due by Medscape to NDC. $6,000,000 will be expensed as used
over the three-year life of the agreement, commencing August 4, 1999 and
terminating August 31, 2002. In addition, the license fee of $4,000,000 will be
amortized on a straight line basis over the life of the agreement. In accordance
with instructions by NDC, 25,000 of the 1,000,000 shares of Class A Common Stock
and 10,000 of the 400,000 shares of Series E Preferred Stock were delivered to
NDC's financial advisor in the transaction, Lazard Freres & Co., LLC.
TRANSACTION WITH AMERICA ONLINE, INC.
On September 3, 1999, Medscape entered into an agreement with America
Online, Inc., under which AOL has agreed to promote Medscape's co-branded Web
sites, through contextual links and banners, on AOL, AOL.com, CompuServe
Service, Netscape Netcenter and Digital City, which are all AOL properties.
Medscape has paid AOL $3 million and will pay an additional $30 million over the
next two years. These amounts will be charged to earnings over the next three
years, the life of the contract. In addition, Medscape granted AOL two
seven-year warrants, each to purchase up to 1,352,158 shares of Medscape's Class
A Common Stock. One of the warrants is fully vested now and has an exercise
price of $10 per share. The other warrant will vest over a three-year period
based on AOL meeting specified performance requirements and will have exercise
prices equal to the fair market value of Medscape's common stock at the time of
vesting. Each warrant has a value of approximately $2,530,000, as determined
using the Black Scholes option pricing model. The value of the fully vested
warrant will be charged to earnings over the three-year AOL contract and the
warrant that vests over three years will be charged to earnings adjusted
variably over the vesting period.
F-23
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
Healthcare Communications Group, LLC
Potomac, Maryland
We have audited the accompanying balance sheets of Healthcare
Communications Group, LLC ("HCG") as of December 31, 1997 and October 27, 1998,
and the related statements of operations, members' capital, and cash flows for
the year ended December 31, 1997 and the ten months ended October 27, 1998.
These financial statements are the responsibility of HCG's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of HCG at December 31, 1997 and October 27,
1998, and the results of its operations and its cash flows for the year ended
December 31, 1997 and the ten months ended October 27, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 9, 1999
F-24
<PAGE> 101
HEALTHCARE COMMUNICATIONS GROUP, LLC
BALANCE SHEETS
DECEMBER 31, 1997 AND OCTOBER 27, 1998
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27,
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)........................ $ 54,286 $ 14,081
Accounts receivable....................................... 520,388 1,190,359
Prepaid expenses and other assets......................... 116,063 54,730
-------- ----------
Total current assets.............................. 690,737 1,259,170
Property and equipment -- net (Note 3)...................... 29,875 76,777
Intangible assets -- net.................................... 6,800 5,383
-------- ----------
Total assets...................................... $727,412 $1,341,330
======== ==========
LIABILITIES AND MEMBERS' CAPITAL (DEFICIENCY IN CAPITAL)
Liabilities:
Accounts payable.......................................... $121,306 $ 23,012
Accrued expenses.......................................... 47,243 56,946
Demand note due to Medscape, Inc. (Note 4)................ -- 275,000
Deferred revenue (Note 2)................................. 190,000 1,121,193
-------- ----------
Total liabilities................................. 358,549 1,476,151
Commitments (Note 4)
Members' capital (deficiency in capital).................... 368,863 (134,821)
-------- ----------
Total liabilities and members' capital............ $727,412 $1,341,330
======== ==========
</TABLE>
See notes to financial statements.
F-25
<PAGE> 102
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
TEN MONTHS ENDED OCTOBER 27, 1998
<TABLE>
<CAPTION>
TEN
YEAR MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 27,
1997 1998
<S> <C> <C>
Revenues.................................................... $3,155,504 $2,584,615
---------- ----------
Operating expenses:
Editorial, production, content and technology............. 1,853,118 1,736,351
General and administration................................ 923,547 867,970
Depreciation and amortization............................. 4,231 9,419
---------- ----------
Total operating expenses.......................... 2,780,896 2,613,740
---------- ----------
Income (loss) from operations............................... 374,608 (29,125)
Interest income........................................... (2,965) (1,542)
---------- ----------
Net income (loss)........................................... $ 377,573 $ (27,583)
========== ==========
</TABLE>
See notes to financial statements.
F-26
<PAGE> 103
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF MEMBERS' CAPITAL (DEFICIENCY IN CAPITAL)
FOR THE TEN MONTHS ENDED OCTOBER 27, 1998 AND
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Members' capital, January 1, 1997........................... $ 148,636
Net income for the year ended December 31, 1997........... 377,573
Distribution to members during 1997....................... (157,346)
---------
Members' capital, December 31, 1997......................... 368,863
Net loss for the ten months ended October 27, 1998........ (27,583)
Distribution to members during 1998....................... (476,101)
---------
Members' deficiency in capital, October 27, 1998............ $(134,821)
=========
</TABLE>
See notes to financial statements.
F-27
<PAGE> 104
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED OCTOBER 27, 1998
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27,
1997 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 377,573 $ (27,583)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 4,231 9,419
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............. 1,148,237 (669,971)
Decrease in prepaid expenses........................... 2,873 61,333
Increase (decrease) in accounts payable and accruals... 120,613 (88,591)
(Decrease) increase in deferred revenue................ (1,474,979) 931,193
----------- ---------
Net cash provided by operating activities......... 178,548 215,800
----------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment........................ (27,412) (54,904)
----------- ---------
Net cash used in investing activities............. (27,412) (54,904)
----------- ---------
FINANCING ACTIVITIES
Distributions to members.................................. (157,346) (476,101)
Demand note due to Medscape, Inc.......................... -- 275,000
----------- ---------
Net cash used in financing activities............. (157,346) (201,101)
----------- ---------
Decrease in cash and cash equivalents....................... (6,210) (40,205)
Cash and cash equivalents, beginning of period.............. 60,496 54,286
----------- ---------
Cash and cash equivalents, end of period.................... $ 54,286 $ 14,081
=========== =========
</TABLE>
See notes to financial statements.
F-28
<PAGE> 105
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
TEN MONTHS ENDED OCTOBER 27, 1998 AND YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Healthcare Communications Group, ("HCG") is a Maryland limited liability
company, founded on November 17, 1995. HCG is a medical communications/education
company that develops, produces and distributes unique live, print, digital and
Internet-based programs for healthcare professionals that are funded by
pharmaceutical companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, HCG considers all highly
liquid short-term cash investments purchased with maturities of three months or
less as cash and cash equivalents.
CONCENTRATION OF CREDIT RISK
HCG's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents and trade accounts
receivable. HCG maintains its cash and cash equivalents in bank accounts which,
at times, exceeds federally insured limits. HCG has not experienced any losses
in these accounts. HCG believes it is not exposed to any significant credit risk
on cash and cash equivalents. Concentrations of credit risks with respect to
accounts receivable are limited because of HCG's expanding customer base and
credit worthiness of its three major customers (see Note 5), making up the
majority of the accounts receivable balance.
DEPRECIATION AND AMORTIZATION
HCG provides for depreciation of property and equipment based on the
estimated useful lives of the applicable assets and the life of leases, using
the straight-line method.
Expenditures for renewals and improvements which extend the useful lives of
assets are capitalized, while maintenance and repairs are charged to operations
as incurred.
Intangible assets consists of trademarks which are being amortized using
the straight-line method over their estimated useful life.
REVENUE RECOGNITION
Revenue from custom programs, such as on-line conference summaries and
custom modules produced by HCG, are recognized on a percentage of completion
basis. Revenues from conferences and other events produced by HCG are recognized
upon completion of the conference or event. At December 31, 1997 and October 27,
1998, there were no uncompleted projects.
F-29
<PAGE> 106
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents amounts billed in excess of revenues
recognized. Included in accounts receivable are amounts due (under contract)
relating to deferred revenue.
IMPAIRMENT OF ASSETS
HCG's long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur, HCG measures
impairment by comparing the carrying value of the long-lived asset to the
estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows is less than the carrying amount of the assets, HCG would
recognize an impairment loss. HCG determined that, as of December 31, 1997 and
October 27, 1998, there had been no impairment in the carrying value of the
long-lived assets.
INCOME TAXES
Under present income tax regulations, HCG pays no federal, state or local
income taxes. For tax purposes, any income or loss is included in the income tax
returns of the members.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components. HCG has no
elements of comprehensive income. HCG operates in one segment in the United
States.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities for HCG's year ended
December 31, 2000. Generally, it requires that an entity recognize all
derivatives as either an asset or liability and measure those instruments at
fair value, as well as identify the conditions for which a derivative may be
specifically designated as a hedge. Management is currently evaluating the
effect of this statement on HCG's financial statements.
During 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP No. 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use. This
statement is applicable to HCG's 1999 financial statements and will require HCG
to capitalize various payroll and payroll related costs and other costs that are
directly related to the development of some of the systems of HCG. HCG will
amortize these costs over the anticipated life of the systems. Management is
currently evaluating the effect of this statement on HCG's financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27, USEFUL LIFE
DESCRIPTION 1997 1998 (IN YEARS)
<S> <C> <C> <C>
Computers and equipment............................ $26,441 $ 79,507 5
Furnitures and fixtures............................ 6,959 8,797 7
------- --------
33,400 88,304
Less accumulated depreciation...................... (3,525) (11,527)
------- --------
Property and equipment -- net...................... $29,875 $ 76,777
======= ========
</TABLE>
F-30
<PAGE> 107
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEMAND NOTE
As of October 27, 1998, the demand note consists of $215,000 and $60,000,
borrowed on October 26 and October 23, 1998, respectively, from Medscape, Inc.
at an annual interest rate of 8% (Note 6). Under the terms of the demand note,
HCG was required to use the proceeds to pay amounts owed to vendors prior to the
acquisition by Medscape, Inc.
5. MAJOR CUSTOMERS
Sales to three major customers for the year ended December 31, 1997 and the
ten months ended October 27, 1998 represented 53% and 50% of total sales,
respectively. At December 31, 1997 and October 27, 1998, these three customers
represented 34% and 76% accounts receivable, respectively.
6. SUBSEQUENT EVENT
Effective October 27, 1998, the membership interests of HCG were purchased
by Medscape, Inc., a New York corporation.
F-31
<PAGE> 108
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEPTEMBER 27, 1999
[MEDSCAPE LOGO]
6,750,000 SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
WIT CAPITAL CORPORATION
DLJdirect INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in the prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted. The information contained in this prospectus is correct
only as of the date of this prospectus, regardless of the time of the delivery
of this prospectus or any sale of these securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until October 22, 1999, (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
