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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-26883
MEDSCAPE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7375
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD 13-3879679
OF INCORPORATION CLASSIFICATION (I.R.S. EMPLOYER INDUSTRIAL
OR ORGANIZATION) CODE NUMBER) IDENTIFICATION NO.)
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134 WEST 29TH STREET
NEW YORK, NEW YORK 10001-5399
(212) 760-3100
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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PAUL T. SHEILS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEDSCAPE, INC.
134 WEST 29TH STREET
NEW YORK, NEW YORK 10001-5399
(212) 760-3100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |_| No |X|
As of October 31, 1999, there were 44,843,533 shares of the Registrant's
common stock outstanding.
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations - three
months and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - nine months
ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDSCAPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED) (AS RESTATED)
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 60,878 $ 1,595
Accounts receivable.................................. 4,588 1,350
Prepaid expenses and other assets.................... 12,256 93
-------- -------
Total current assets......................... 77,722 3,038
Fixed Assets - net..................................... 5,536 380
Intangible Assets - net................................ 10,909 46
Goodwill - net......................................... 2,300 2,410
Investment in Softwatch................................ 3,154 --
-------- -------
Total assets................................. $ 99,621 $ 5,874
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities............. $ 8,286 $ 870
Deferred revenue..................................... 2,790 800
-------- -------
Total current liabilities.................... 11,076 1,670
-------- -------
Stockholders' Equity:
Common stock, par value $.01; 100,000,000 shares
authorized, 44,843,533 issued and outstanding at 448 --
September 30, 1999..................................
Common stock, Class A -- par value $.01; 15,000,000
shares authorized and 1,079,000 issued and
outstanding at December 31, 1998.................... -- 11
Common stock, Class B -- par value $.01; 15,000,000
shares authorized and 5,792,318 issued and
outstanding at December 31, 1998.................. -- 58
Preferred stock, Series A -- par value $.01;
1,000,000 shares authorized and 788,200 shares
issued and outstanding at December 31, 1998.......... -- 8
Preferred stock, Series C -- par value $.01;
4,000,000 shares authorized and 2,410,760 issued
and outstanding at December 31, 1998................ -- 24
Warrants............................................. 5,145 --
Additional paid-in-capital........................... 266,180 14,158
Treasury stock....................................... (3) (3)
Notes receivable..................................... (628) (628)
Deferred Stock Compensation.......................... (7,073) (715)
Contribution of Services............................. (153,361) --
Accumulated deficit.................................. (22,163) (8,709)
-------- -------
Total stockholders' equity................... 88,545 4,204
-------- -------
Total liabilities and stockholders' equity. $ 99,621 $ 5,874
======== =======
See notes to condensed consolidated financial statements.
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MEDSCAPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues....................................... $ 2,209 $ 479 $ 7,138 $ 1,556
----------- ----------- ----------- -----------
Operating expenses:
Editorial, production, content and technology 3,229 528 7,067 1,381
Sales and marketing.......................... 4,527 613 8,004 1,424
General and administrative................... 2,286 431 4,273 1,224
Deferred stock compensation.................. 537 -- 1,317 --
Depreciation and amortization................ 193 50 418 146
----------- ----------- ----------- -----------
Total operating expenses............. 10,772 1,622 21,079 4,175
----------- ----------- ----------- -----------
Loss from operations........................... (8,563) (1,143) (13,941) (2,619)
Interest income.............................. 191 72 487 221
----------- ----------- ----------- -----------
Net loss....................................... $ (8,372) $ (1,071) $ (13,454) $ (2,398)
=========== =========== =========== ===========
Basic net loss per share....................... $ (0.43) $ (0.35) $ (1.19) $ (0.83)
Weighted average number of shares of common
stock outstanding............................ 19,256,621 3,029,567 11,287,450 2,900,228
</TABLE>
See notes to condensed consolidated financial statements.
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MEDSCAPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ......................................................... $(13,454) $ (2,398)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred stock compensation expense ........................... 1,317 --
Amortization of license fees .................................. 184 --
Non-cash advertising and promotion expense .................... 375 --
Depreciation and amortization ................................. 418 146
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .................... (3,238) 481
(Increase) decrease in prepaid expenses and other assets .... (3,342) (50)
Increase (decrease) in accounts payable and accrued liabilities 7,415 (211)
Increase (decrease) in deferred revenue ....................... 1,991 (463)
-------- --------
Net cash used in operating activities .................... (8,334) (2,495)
-------- --------
INVESTING ACTIVITIES
Investment in Softwatch .......................................... (3,154) --
Purchases of fixed assets ........................................ (5,462) (202)
Acquisition of intangible assets ................................. (50) --
-------- --------
Net cash used in investing activities .................... (8,666) (202)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ........................... 53,908 --
Receivable from underwriter ...................................... (6,696) --
Proceeds from issuance of preferred stock ........................ 28,870 4,000
Proceeds from exercise of stock options .......................... 201 9
Payment of loan .................................................. -- (359)
Purchase of treasury stock ....................................... -- (3)
-------- --------
Cash provided by financing activities .................... 76,283 3,647
-------- --------
Increase in cash and cash equivalents .............................. 59,283 950
Cash and cash equivalents, beginning of period ..................... 1,595 3,628
-------- --------
Cash and cash equivalents, end of period ........................... $ 60,878 $ 4,578
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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MEDSCAPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Medscape, Inc. ("Medscape") 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 and
CBS.Healthwatch.com, a separate Web site to enhance and personalize the consumer
experience. The Medscape Web sites are 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.
2. BASIS OF PRESENTATION
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 nine months ended September 30,
1999.
These Condensed Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements and notes thereto included in the
Registration Statement filed with the Commission on Form S-1 on September 27,
1999.
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 and warrants would
have been anti-dilutive.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
3. STOCKHOLDERS' 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 into 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.
On September 27, 1999, Medscape completed an initial public offering that
ultimately, after inclusion of the exercise on September 30, 1999 of the 900,000
share underwriter's over-allotment, resulted in the issuance of 7,650,000 shares
of common stock.
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Net proceeds received, after deducting offering costs, totaled approximately
$54.4 million, including approximately $6.7 million received on October 5, 1999
from the exercise of the over-allotment. Simultaneous with the offering, each
outstanding share of Class B Common Stock was converted into Class A Common
Stock on a one-for-one basis and Class A Common Stock was concurrently
redesignated as common stock. Additionally, each outstanding share of Series A,
Series C-1, and Series D Preferred Stock was converted into 2.5 shares of common
stock, Series C Preferred Stock was converted into 2.68 shares of common stock,
and Series E Preferred Stock was converted into 3.125 shares of common stock.
The conversions of preferred stock resulted in the issuance of 13,908,685 shares
of common stock. An increase in the number of authorized shares of common stock
to 100,000,000 was also effected simultaneous with this offering and a new class
of 5,000,000 shares of undesignated preferred stock was also authorized.
4. INCOME TAXES
No provision for income taxes has been made because Medscape has sustained
cumulative losses since the commencement of its operations.
At September 30, 1999, Medscape had net operating loss carryforwards ("NOLs") of
approximately $28,872,000 which will be available to reduce future taxable
income. The NOLs are scheduled to expire in the following years:
2011. $ 663,000
2012. 3,306,000
2018. 3,583,000
2019. 21,320,000
In accordance with SFAS No. 109, Medscape has computed the components of
deferred income taxes as follows:
DECEMBER 31, SEPTEMBER 30,
1998 1999
Deferred tax assets... $ 3,419,911 $13,276,000
Less valuation allowance (3,419,911) (13,276,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
Medscape's deferred tax assets are primarily generated by net operating losses.
At December 31, 1998 and September 30, 1999, a valuation allowance is provided
as the realization of the deferred tax benefits is not likely due to the lack of
an earnings history.
5. SIGNIFICANT TRANSACTIONS
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, $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. Subsequent to the execution of the agreement, the Class B
Common Stock was converted on a one-for-one basis into Class A Common Stock that
was concurrently redesignated as common stock (Note 3). Over the seven-year term
of the Advertising and Promotion Agreement, CBS will arrange for the placement
of approximately $150 million 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.
The $149,860,616 of advertising services to be provided by CBS will be expensed
as used over the life of the agreement. In addition, the trademark license fee
of $7,000,000 will be amortized on a straight-line basis over the life of the
agreement.
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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 (NDC), 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. The Series E Preferred Stock was
subsequently converted into 1,250,000 shares of common stock and the Class A
Common Stock was redesignated as common stock (Note 3). $6,000,000 will be
expensed as used over the three-year life of the agreement. 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 a 3 year agreement with America
Online, Inc. (AOL), 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 at contract closing, $10 million in October
1999, and will pay an additional $20 million over the next two years. These
amounts will be charged to earnings over 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 common stock. One of the warrants is fully vested 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 life of
the contract and the warrant that vests over three years will be charged to
earnings adjusted variably over the vesting period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
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 report. This report 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. The cautionary statements made in this
document should be read as being applicable to all related forward-looking
statements wherever they appear in this document. 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.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed in our Prospectus dated September
27, 1999. Medscape's actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors.
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.
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 launched a separate consumer site,
CBS.Medscape.com, in the third quarter of 1999. On November 1, 1999,
CBS.Medscape.com was relaunched as CBS.Healthwatch.com. We intend 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
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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
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 invested in money market funds.
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues and operating expenses for the three and nine months ended September
30, 1999 include Healthcare Communications Group, which we acquired in October
1998.
REVENUES. Revenues increased 361% to $2.2 million for the three months
ended September 30, 1999 from $479,000 for the comparable period in 1998.
Revenues increased 359% to $7.1 million for the nine months ended September 30,
1999 from $1.6 million for the comparable period in 1998. The increase in
revenues was driven by an increased advertiser and sponsor base and an expansion
of product lines resulting from the acquisition of Healthcare Communications
Group in October 1998.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development and
content expenses increased 512% to $3.2 million for the three months ended
September 30, 1999 from $528,000 for the comparable period in 1998. Product
development and content expenses increased 412% to $7.1 million for the nine
months ended September 30, 1999 from $1.4 million for the comparable period in
1998. The increase in costs was primarily due to increased variable costs
related to the development of sponsored content and costs associated with
expanding and enhancing editorial content, an increase in the number of
employees in our Editorial and Information Technology groups and the associated
recruitment costs, and costs incurred in upgrading the functionality of our Web
site and our internal networks.
SALES AND MARKETING. Sales and marketing expenses increased 638% to $4.5
million for the three months ended
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September 30, 1999 from $613,000 for the comparable period in 1998. Sales and
marketing expenses increased 462% to $8.0 million for the nine months ended
September 30, 1999 from $1.4 million for the comparable period in 1998. The
increase in costs was primarily due to increased costs related to the continued
development and implementation of our marketing and branding campaigns, the
commencement of marketing activities associated with our agreement with NDC, as
well as additional sales and marketing personnel.
GENERAL AND ADMINISTRATION. General and administration expenses increased
430% to $2.3 million for the three months ended September 30, 1999 from $431,000
for the comparable period in 1998. General and administration expenses increased
249% to $4.3 million for the nine months ended September 30, 1999 from $1.2
million for the comparable period in 1998. 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 286% to $193,000 for the three months ended September 30, 1999 from
$50,000 for the comparable period in 1998. Depreciation and amortization
expenses increased 186% to $418,000 for the nine months ended September 30, 1999
from $146,000 for the comparable period in 1998. 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.
DEFERRED STOCK COMPENSATION. In connection with the issuance of stock
options during the second half of fiscal 1998 and the first half of fiscal 1999,
our management determined that the valuation of such issuances should be
revised. As a result, an amount equal to the excess of the fair market value of
our common stock over the option exercise prices is being amortized over four
years, the vesting period of the options. The amortization commenced in the
fiscal 1998 fourth quarter. Additionally, deferred stock compensation includes
the amortization of the fair value of the warrants issued to AOL.
INTEREST EXPENSE/INCOME. Net interest income for the three months ended
September 30, 1999 was $191,000 compared to $72,000 for the same period in 1998.
Net interest income for the nine months ended September 30, 1999 was $487,000
compared to $221,000 for the same period in 1998. The higher interest income was
due to a higher average of net cash and cash equivalents balance as a result of
our financing activities in 1999.
INCOME TAXES. As of September 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.
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.
On August 4, 1999, we entered into a strategic development and marketing
agreement with NDC (see Note 5). 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. On
September 27, 1999, we completed an initial public offering that ultimately,
after inclusion of the exercise on September 30, 1999 of the 900,000 share
underwriter's over-allotment, resulted in the issuance of 7,650,000 shares of
common stock. Net proceeds received, after deducting offering costs, totaled
approximately $54.4 million, including approximately $6.7 million received on
October 5, 1999 from the exercise of the over-allotment.
Net cash used in operating activities was $8.3 million for the nine months
ended September 30, 1999 compared to $2.8 million for the same period in 1998.
Cash used in operating activities for both periods was attributable to funding
net operating losses and, for the 1999 period, also reflected increases in
deferred revenues and accounts payable and accrued liabilities, partially offset
by increases in accounts receivable and prepaid expenses.
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Net cash used in investing activities was $8.7 million for the nine months
ended September 30, 1999 compared to $277,000 for the same period in 1998. Cash
used in investing activities for the nine months ended September 30, 1999
related primarily to the investment in Softwatch and investments in our
technology infrastructure including the development of our consumer Web site
launched in September 1999.
Cash provided by financing activities was $76.3 million for the nine months
ended September 30, 1999 compared to $4.0 million for the same period in 1998.
Cash provided by financing activities for the nine months ended September 30,
1999 reflects net proceeds received from the initial public offering of our
common stock as well as the issuance of Series D and Series E Preferred Stock
and Class A and Class B Common Stock. Cash provided by financing activities for
the nine months ended September 30, 1998 reflects net proceeds received from the
issuance of Series C Preferred Stock.
As of September 30, 1999, the primary source of liquidity for Medscape was $60.9
million of cash and cash equivalents. As of this date, we had no bank credit
facilities.
We expect to incur significantly higher costs, particularly content creation
costs and sales and marketing costs to grow our business and pursue our branding
and marketing campaign. We launched CBS.Medscape.com (subsequently relaunched as
CBS.Healthwatch.com), our separate consumer site, in the third quarter of 1999,
and we plan to launch our AOL co-branded consumer sites in the fourth quarter of
1999 and first quarter of 2000. CBS.Healthwatch.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 over the 7 year term of the agreement and the $33 million
contract with AOL of which $3 million was paid at contract closing in September
1999, $10 million was paid in October 1999, and an additional $20 million will
be paid over the next two years.
We believe that our 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. 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.
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:
o conducting a comprehensive inventory of our internal systems and the
systems acquired or to be acquired by us;
o assessing and prioritizing any required remediation;
o remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems; and
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o testing all remediated systems for Year 2000 compliance.
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 additional costs 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 expect to resolve all Year 2000 problems that could materially adversely
affect our business, financial condition or operating results and expect to
certify by year-end all elements of our information technology systems as Year
2000 compliant. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY. The primary objective of our investment activities is
to preserve principal while at the same time maximizing the income we receive
from our investments without significantly increasing risk. Accordingly, we do
not enter into financial instrument transactions for trading purposes. Some of
our investments may be subject to market risk which means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. To minimize this risk, we invest our cash in money market funds. In
general, money market funds are not subject to market risk as the interest paid
on these funds fluctuates with the prevailing interest rate. As of September 30,
1999, all of our investments mature in less than one year.
EXCHANGE RATE SENSITIVITY. We consider our exposure to foreign currency exchange
rate fluctuations to be minimal as we currently do not derive any revenue
denominated in a foreign currency and have minimal expenses paid in a foreign
currency.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings to which we are a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of our registration statement, filed on Form S-1
under the Securities Act of 1933 (File No. 333-77665) relating to our
initial public offering of 7,650,000 shares of common stock, was
September 27, 1999. A total of 6,900,000 shares of common stock were
sold in this offering to an underwriting syndicate, 6,000,000 of which
were issued on September 30, 1999 and 900,000 additional shares were
issued on October 5, 1999 in connection with the September 30, 1999
exercise of the underwriter's over-allotment. The managing
underwriters were Donaldson, Lufkin & Jenrette, Credit Suisse First
Boston, Bear, Stearns & Co. Inc., Wit Capital Corporation, and
DLJDIRECT Inc. Additionally, 750,000 shares of common stock in this
offering were sold directly to three purchasers. The offering
commenced immediately following the effective date and terminated
following the exercise of the over-allotment.
Net proceeds from the offering were $54.4 million which reflects $3.9
million for the underwriting discount and $2.6 million of offering
costs applied to the gross proceeds of $60.9 million. The net proceeds
will be used to finance the remaining $30 million of payments under
our agreement with AOL, for general corporate purposes, including
funding operating losses, working capital and capital needs. We also
may use a portion of the net proceeds to invest in complementary
businesses or technologies, although we have no present commitments or
agreements with respect to any material acquisition or investment.
None of the net proceeds from the offering was paid directly or
indirectly to any director, officer, general partner or their
associates, or to any persons owning 10% or more of any class of
equity securities. Pending application of the net proceeds towards one
of the above uses, the net proceeds have been invested in short-term,
interest-bearing, investment-grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Pursuant to an Action by Written Consent of the Stockholders in
Lieu of a Meeting which was first sent to stockholders on July 1,
1999, our stockholders entitled to vote approved an amendment to our
Amended and Restated Certificate of Incorporation to increase the
authorized shares of Class A Common Stock and Class B Common Stock.
The amendment was unanimously approved by the holders of 1,079,000
shares of our Class A Common Stock, 788,200 shares of our Series A
Preferred Stock, 1,478,359 shares of our Series C Preferred Stock,
932,401 shares of our Series C-1 Preferred Stock and 1,757,683 shares
of our Series D Preferred Stock, representing all voting shares then
outstanding. This amendment was incorporated into an Amended and
Restated Certificate of Incorporation that was approved by the
Stockholders in a later action and filed on July 30, 1999.
(b) Pursuant to an Action by Written Consent of the Stockholders in
Lieu of a Meeting which was first sent to stockholders on July 16,
1999, our stockholders entitled to vote approved (i) an Amended and
Restated Certificate of Incorporation to increase the authorized
shares of Class A Common Stock (and to reflect the prior stockholder
approval of the increase to the authorized shares of Class B Common
Stock) and to authorize a new Series E Preferred Stock and (ii) a
separate form of Amended and Restated Certificate of Incorporation
which became effective on September 30, 1999 upon the completion of
our initial public offering and which Amended and Restated Certificate
of Incorporation reflects (A) the automatic conversion of all shares
of Class B Common Stock into Class A Common Stock and the Class A
Common
15
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Stock's redesignation as Common Stock, and the conversion of
outstanding Preferred Stock into Common Stock, which events occurred
upon the consummation of our initial public offering, (B) the increase
of our authorized Common Stock to one hundred million shares, (C) the
authorization of five million shares of Undesignated Preferred Stock
and (D) the creation of a three class staggered Board of Directors.
The amendments were unanimously approved by the holders of 1,079,000
shares of our Class A Common Stock, 788,200 shares of our Series A
Preferred Stock, 1,478,359 shares of our Series C Preferred Stock,
932,401 shares of our Series C-1 Preferred Stock and 1,757,683 shares
of our Series D Preferred Stock, representing all voting shares then
outstanding. The Amended and Restated Certificate of Incorporation
increasing the authorized shares of Class A Common Stock and
authorizing a new Series, Series E, of Preferred Stock was filed on
July 30, 1999 and the Amended and Restated Certificate of
Incorporation approved to be effective upon the consummation of our
initial public offering was filed on September 30, 1999.
(c) Pursuant to an Action by Written Consent of the Stockholders in
Lieu of a Meeting which was first sent to stockholders on August 26,
1999, our stockholders entitled to vote approved an amendment to our
Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of Class A Common Stock. The amendment was
unanimously approved by the holders of 9,476,208 shares of our Class A
Common Stock, 788,200 shares of our Series A Preferred Stock,
1,478,359 shares of our Series C Preferred Stock, 932,401 shares of
our Series C-1 Preferred Stock, 1,757,683 shares of our Series D
Preferred Stock and 400,000 shares of our Series E Preferred Stock,
representing all voting shares then outstanding. This amendment to our
Amended and Restated Certificate of Incorporation was filed on
September 3, 1999.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not applicable
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Medscape, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDSCAPE, INC.
Date: November 15, 1999 By: /s/ PAUL T. SHEILS
-----------------------------------------
Name: Paul T. Sheils
Title: President and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ STEVEN R. KALIN
-----------------------------------------
Name: Steven R. Kalin
Title: Chief Operating Officer and Chief
Financial Officer (Principal Financial and
Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM MEDSCAPE'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 60,878,195
<SECURITIES> 0
<RECEIVABLES> 4,587,629
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,721,858
<PP&E> 6,268,366
<DEPRECIATION> (732,417)
<TOTAL-ASSETS> 99,621,223
<CURRENT-LIABILITIES> 11,076,211
<BONDS> 0
0
0
<COMMON> 448,435
<OTHER-SE> 88,096,577
<TOTAL-LIABILITY-AND-EQUITY> 99,621,223
<SALES> 0
<TOTAL-REVENUES> 2,208,590
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,771,815
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,760
<INCOME-PRETAX> (8,372,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,372,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,372,465)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
