<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1999
REGISTRATION NO. 333-77665
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDSCAPE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 13-3879679
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
134 WEST 29TH STREET
NEW YORK, NEW YORK 10001-5399
(212) 760-3100
------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
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)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN P. SCHMITT, ESQ. STEVEN A. MUSELES, ESQ.
PATTERSON, BELKNAP, WEBB & TYLER LLP HOGAN & HARTSON L.L.P.
1133 AVENUE OF THE AMERICAS 555 13TH STREET, N.W.
NEW YORK, NEW YORK 10036-6710 WASHINGTON, D.C. 20004-1109
(212) 336-2000 (202) 637-5600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01 par
value..................... 6,150,000 $13.00 $79,950,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
- ---------------------------- ------------------------
<S> <C>
Common Stock, $.01 par
value..................... $22,226(2)
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Includes $15,985 previously paid with the initial filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION -- JULY 26, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
MEDSCAPE LOGO
5,400,000 SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
MARKET & PROPOSED SYMBOL:
- - We have applied for listing on the
Nasdaq National Market under the
symbol MSCP.
THE OFFERING:
- - We are offering 5,400,000 shares of our common stock.
- - The underwriters have an option to purchase an additional 750,000 shares from
us to cover over-allotments.
- - We anticipate that the initial public
offering price will be between $11 and $13 per share.
- - CBS Corporation has indicated an
interest in purchasing 400,000 of the shares we are offering.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Per Share Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Medscape:
- -------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
WIT CAPITAL CORPORATION
DLJDIRECT INC.
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN
DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THAT WOULD NOT BE PERMITTED.
<PAGE> 3
------------------------
[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.]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 5
Forward-Looking Statements........ 18
Use of Proceeds................... 19
Dividend Policy................... 19
Capitalization.................... 20
Dilution.......................... 22
Pro Forma Consolidated Statements
of Operations................... 23
Selected Consolidated Financial
Data............................ 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 25
Business.......................... 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management........................ 47
Transactions with Related
Parties......................... 55
Principal Stockholders............ 60
Description of Capital Stock...... 63
Shares Eligible for Future Sale... 65
Underwriting...................... 67
Validity of the Shares............ 69
Experts........................... 69
Where You Can Find More
Information..................... 69
Index to Consolidated Financial
Statements...................... F-1
</TABLE>
<PAGE> 5
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. 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 become 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 a separate consumer site. We have agreed to enter 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 will be promoted on CBS media properties. We are designing
our CBS.Medscape.com consumer site to help consumers make better informed
healthcare decisions and to simplify management of their healthcare needs. Our
consumer site 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.
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
1
<PAGE> 6
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 site, CBS.Medscape.com. 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 or entered into agreements to consummate
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.
On July 7, 1999, we agreed to enter 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
2
<PAGE> 7
our Class B Common Stock, which will represent approximately 33% of our
outstanding capital stock upon completion of this offering. Additionally, CBS
has indicated an interest in purchasing 400,000 shares from us in the offering
at the initial offering price less underwriting fees. Under our agreements with
CBS, they have rights to maintain their then current capital stock interest by
purchasing shares in our future stock issuances and have the right to designate
three of our directors.
On July 7, 1999, we agreed to enter 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 will invest $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.
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 consummation of each of the CBS transaction
and the NDC transaction is subject to closing conditions, including, in the case
of the CBS transaction, our obtaining regulatory clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Medscape............ 5,400,000 shares
Common stock to be outstanding after this
offering.................................. 42,071,643 shares
Use of proceeds............................. We intend to use the net proceeds of this
offering 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.
Proposed Nasdaq National Market Symbol...... MSCP
</TABLE>
The outstanding share information is based on our shares outstanding as of
June 30, 1999. This information excludes:
- 5,082,975 shares of common stock underlying options granted under our
1996 Stock Option Plan and outstanding as of June 30, 1999 at a weighted
average exercise price of $1.36 per share; and
- 14,887.5 shares of common stock reserved for exercise of outstanding
warrants at an exercise price of $0.004 per share.
ASSUMPTIONS WHICH APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus reflects
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, Series D Preferred Stock, and Series E Preferred Stock all on a
2.5-for-one basis, and our Series C Preferred Stock, on a 2.68-for-one
basis, into Class A Common Stock, and the redesignation of our Class A
Common Stock as 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 750,000 additional shares of common stock.
3
<PAGE> 8
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.
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
YEAR ENDED PRO FORMA SIX MONTHS ENDED
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------- DECEMBER 31, ---------------------
1996 1997 1998(1) 1998 1998(1)
(AS RESTATED) 1999(1)
<S> <C> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- --------- ---------
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
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------------------
PRO FORMA FOR
CBS AND NDC PRO FORMA
ACTUAL TRANSACTIONS AS ADJUSTED(2)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets.......................................... $16,764 $26,903 85,303
Working capital......................................... 13,018 23,157 81,557
Total assets............................................ 23,213 46,852 105,252
Stockholders' equity.................................... 19,467 43,106 101,507
</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 adjusted on a pro forma basis to give effect to this offering, assuming
net proceeds of $58.4 million.
4
<PAGE> 9
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 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 site. 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 LAUNCH OF OUR CONSUMER SITE IS 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. If the launch is delayed or is 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.
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
5
<PAGE> 10
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
would result in a loss of revenues. Medical professionals or consumers may not
accept Medscape.com and CBS.Medscape.com, or even the Internet, as a replacement
for traditional sources of healthcare information. Market acceptance of
Medscape.com and CBS.Medscape.com 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.
WE RELY UPON OUR CBS AGREEMENTS, 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 will 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 site. Our license agreement with CBS will expire on July 7,
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 SITE 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 site which it determines conflicts with, interferes
with or is detrimental to its reputation or business or for
6
<PAGE> 11
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 July 7,
1999 through July 4, 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 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.
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.
7
<PAGE> 12
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 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. Furthermore, even if the number of new users increases, those users
may not become registered members or use Medscape.com or CBS.Medscape.com
regularly.
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
8
<PAGE> 13
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.
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.
9
<PAGE> 14
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 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.
Any significant interruption in our operations would negatively affect our
business and 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
10
<PAGE> 15
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. In addition, possible changes in state or
federal confidentiality laws 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 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. Medscape may be affected by Year 2000 issues related to non-compliant
information technology systems or non-information technology systems operated by
Medscape or by third parties.
11
<PAGE> 16
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 site, which would lead to a
decline in our revenues.
WE MAY FAIL TO EFFECTIVELY INTEGRATE AND MANAGE OUR RECENT ACQUISITIONS.
We have recently acquired two medical Web sites. 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.
The process of integrating the acquisitions is complex and will place
significant demands on our management, technical, financial and other resources.
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 and the $10 million cash
investment to be made by National Data Corporation, 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. Except for the investment to be made by NDC, 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
12
<PAGE> 17
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. 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 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
financial and marketing relationships with our sponsors and advertisers and with
physicians, including any physicians who perform
13
<PAGE> 18
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 GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
THAT MAY AFFECT OUR ABILITY TO CONDUCT BUSINESS.
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
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
14
<PAGE> 19
- 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 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 HAVE AN ADVERSE IMPACT ON OUR
FINANCIAL RESULTS.
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. 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 provide existing or future application 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."
POTENTIAL FDA REGULATION OF OUR SOFTWARE COULD NEGATIVELY AFFECT OUR FINANCIAL
RESULTS.
We face potential FDA regulation of software that we develop for use on our
Web sites. Changes in existing regulatory requirements, our failure to comply
with current or future requirements or adoption of new requirements could
increase our expenses and negatively affect our financial results.
15
<PAGE> 20
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.
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.
16
<PAGE> 21
RISKS RELATED TO THIS OFFERING
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, assuming CBS purchases 400,000 shares in this offering. 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. Upon the completion of
this offering, our board will be comprised of three members designated by CBS
and seven members elected by other pre-existing stockholders 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. 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. This provision 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.
17
<PAGE> 22
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 $9.11 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."
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.
18
<PAGE> 23
USE OF PROCEEDS
Assuming an initial public offering price of $12.00 per share and after
deducting estimated underwriting discounts and commissions and our estimated
offering expenses, the net proceeds from the sale of the 5,400,000 shares of
common stock in this offering are estimated to be approximately $58,514,000. The
net proceeds will be approximately $66,884,000 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 currently expect to use 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.
19
<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 to NDC,
and (3) as adjusted on a pro forma basis to give effect to the sale of 5,400,000
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 $ 81,493
======== ========= =========
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); 1,079,000 shares issued and
outstanding and redesignated as common stock (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>
20
<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, 42,071,643 issued or outstanding (pro
forma as adjusted).................................... -- -- 420
Warrants................................................ 85 85 85
Additional paid-in capital.............................. 36,223 213,069 271,333
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 43,106 101,507
-------- --------- ---------
Total capitalization............................... $ 19,467 $ 43,106 $ 101,507
======== ========= =========
</TABLE>
The outstanding share information is based on our shares outstanding as of June
30, 1999. This information excludes:
- 5,082,975 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 $1.36 per share; and
- 14,887.5 shares of common stock reserved for outstanding warrants at an
exercise price of $0.004 per share.
21
<PAGE> 26
DILUTION
Our net tangible book value as of June 30, 1999 was approximately $17
million, or $0.82 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. Assuming an initial public offering price of $12.00 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, and the application of the estimated
net proceeds from this offering, Medscape's net tangible book value as of June
30, 1999 would have been $75.4 million, or $2.89 per share. This represents an
immediate increase in pro forma net tangible book value to existing stockholders
of $2.07 per share and an immediate dilution to purchasers in this offering of
$9.11 per share. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.00
Pro forma net tangible book value per share prior to this
offering............................................... $0.82
Increase per share attributable to this offering.......... 2.07
-----
Adjusted pro forma net tangible book value per share after
this offering............................................. 2.89
------
Dilution per share to new investors(1)...................... $ 9.11
======
</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 $3.12 per share, representing an immediate
increase in net tangible book value of $2.30 per share to our existing
stockholders and an immediate dilution in net tangible book value of $8.88
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 parties
with whom we have entered stock purchase agreements and (2) by the purchasers in
this offering at an assumed initial public offering price of $12.00 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.............. 20,733,275 44% $ 31,602,119 11% $ 1.52
Existing optionholders and warrant
holders.......................... 5,082,975 11 6,974,953 3 1.36
Proforma for CBS and NDC
Transactions..................... 15,938,368 34 177,000,000 63 11.11
Purchasers in this offering........ 5,400,000 11 64,800,000 23 12.00
---------- --- ------------ --- ------
Total.................... 47,154,618 100% $280,377,072 100% $ 5.95
========== === ============ ===
</TABLE>
The discussion and table assumes exercise of options outstanding under our
1996 Stock Option Plan. As of June 30, 1999, there were options outstanding to
purchase a total of 5,082,975 shares of common stock at a weighted average price
of $1.36 per share and 14,887.5 shares issuable upon exercise of outstanding
warrants with a weighted average exercise price of $0.004 per share. The
discussion and table assumes that the average price per share for purchasers in
this offering will be $12.00. If CBS purchases 400,000 shares of the 5,400,000
shares for which it has expressed an interest, the per share price to CBS would
be $12.00 less the underwriting fee, or $11.16 per share.
22
<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.
23
<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.
24
<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, 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. 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
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
25
<PAGE> 30
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 financial information. This information should be
read together with the financial statements and their notes
26
<PAGE> 31
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
27
<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
28
<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
29
<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. CBS.Medscape.com 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 both CBS.Medscape.com and Medscape.com 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 July 7, 1999, we agreed to enter 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 will invest $10 million cash in Medscape, and has agreed to
provide $10 million in licensing and promotional value and credits against
future commission and product purchase amounts 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.
On July 7, 1999, we agreed to enter 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 33% of our
outstanding capital stock upon completion of this offering.
The consummation of each of the CBS transaction and the NDC transaction
remains subject to closing conditions, including, in the case of the CBS
transaction, our obtaining necessary regulatory clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
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
30
<PAGE> 35
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 complete remediation
for the one outstanding element by end of the third quarter of 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 end of the third 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
31
<PAGE> 36
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 expect to identify and resolve by September 30, 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.
32
<PAGE> 37
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. 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 become 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 a separate consumer site. We have agreed to enter into a
strategic relationship with CBS Corporation under which our consumer site will
be branded CBS.Medscape.com, which will be the exclusive Internet healthcare
site integrated into CBS News programming and will be promoted on CBS media
properties. We will design our CBS.Medscape.com consumer site to help consumers
make better informed healthcare decisions and to simplify management of their
healthcare needs. Our consumer site 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 CBS.Medscape.com 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 CBS.Medscape.com.
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.
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
33
<PAGE> 38
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.
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.
34
<PAGE> 39
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 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.
35
<PAGE> 40
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 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, 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 CBS.Medscape.com 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, as
a preeminent branded source 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 33% 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.
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 as the leading single brand 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 media 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
36
<PAGE> 41
CBS.Medscape.com members by offering a superior consumer experience with
compelling content, community features and interactive programs that we believe
will increase member 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 become 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.
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.
37
<PAGE> 42
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 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.
38
<PAGE> 43
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.
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 become 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
39
<PAGE> 44
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 SITE
We plan to launch CBS.Medscape.com in the third quarter of 1999. We are
designing our CBS.Medscape.com consumer site to help consumers make better
informed healthcare decisions and to simplify management of their healthcare
needs. Our consumer site 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
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 Medscape.com's and CBS.Medscape.com's features, users
must register as members. This 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.
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, CBS.Medscape.com 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 CBS.Medscape.com,
including the interactive programs such as health diaries.
Registration information also enables us to deliver targeted advertising
messages to the specific audience profile our clients seek to reach either
through Medscape.com or CBS.Medscape.com, 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, 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 June 30, 1999, our editorial, design and production staff consisted of 39
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
40
<PAGE> 45
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 June 30, 1999, we had a direct sales organization consisting of ten
sales professionals, with an average of 16 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. We believe our brand visibility
will significantly benefit from promotion on CBS media properties. In addition,
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 agreed to enter into a License and Product
Development Agreement with National Data Corporation under which we will be the
preferred content supplier to NDC's LYTEC physician practice management product
and become an online distributor of some of NDC's other clinical information
products.
41
<PAGE> 46
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 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 CBS.Medscape.com 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 Genetech
Incorporated, 14% from Roche Laboratories and 7% from Johnson & Johnson.
42
<PAGE> 47
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.
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.
43
<PAGE> 48
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 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, 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 is subject to the full array of the FDA and
FTC requirements and enforcement actions. Areas of our Web site 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.
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
44
<PAGE> 49
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;
- 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
45
<PAGE> 50
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 June 30, 1999, we had 110 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 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, where some of our employees
work. Other of our employees work remotely, frequently in home offices, in
Potomac, Maryland; Aurora, Colorado; Chicago, Illinois; London, England; and
Milford, Massachusetts. We currently anticipate that we will require additional
space as we hire more personnel.
46
<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............................. 44 President, Chief Executive Officer and
Director
Peter M. Frishauf.......................... 50 Executive Committee Chairman, Founder and
Director
Jeffrey L. Drezner, M.D., Ph.D............. 51 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.......................... 37 Chief Technology Officer
Mark E. Boulding........................... 38 General Counsel and Vice President of
Regulatory Affairs
Marc Butlein............................... 60 Director
Esther Dyson............................... 47 Director
Alan J. Patricof........................... 64 Director, Chairman of the Board
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.
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.
47
<PAGE> 52
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.
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.
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
48
<PAGE> 53
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 eight 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 and Carlo A. von Schroeter. 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. Upon the consummation
of the CBS transaction, the size of our board will be increased to ten directors
and CBS will be entitled to designate three of the directors. CBS intends to
designate Fredric Reynolds, its Executive Vice President and Chief Financial
Officer, Andrew Heyward, the President of CBS News, and one of our current
directors, yet to be determined, as its designees.
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;
49
<PAGE> 54
- 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 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 $35,000 to which he would have otherwise been entitled.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows grants of stock options to Medscape's Chief
Executive Officer and to the Executive Committee Chairman for the year ended
December 31, 1998. We have never granted any stock appreciation rights. The
percentages in the table below are based on options to purchase an aggregate of
1,990,117.5 shares of common stock granted under our stock option plan in the
year ended December 31, 1998 to our employees, consultants and directors. The
exercise price per share of each option was equal to the fair market value of
the common stock on the date of grant as determined by the board of directors.
Potential
50
<PAGE> 55
realizable values are net of exercise price before taxes, and are based on the
assumption that our common stock appreciates at the annual rate shown,
compounded annually, from the date of grant until the expiration of the ten-year
term. These numbers are calculated based on the requirements of the SEC and do
not reflect our estimate of future stock price growth.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
---------------------------------------------------------- RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED FISCAL YEAR(%) SHARE($/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 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.
51
<PAGE> 56
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.
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
52
<PAGE> 57
- 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.
As of June 30, 1999, there were options to purchase 5,082,975 shares
outstanding and 1,426,792.5 shares available for future grant. As of June 30,
1999, 1,740,232.5 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
53
<PAGE> 58
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.
54
<PAGE> 59
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 principle 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.
55
<PAGE> 60
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.
TRANSACTIONS WITH CBS
On July 7, 1999, we entered into a common stock purchase agreement and
agreed to enter 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 will
issue 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
56
<PAGE> 61
price of $139,383.68, to be 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 July 4,
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
- our consumer Web site ceases to operate for specified periods of time.
In addition, in the event of a breach by CBS of the advertising and
promotion agreement, Medscape 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 will grant us a non-exclusive license to use on our consumer Web
site the "CBS" trademark and "Eye" design and selected health-related news
content contained in CBS network television news programs. Under the agreement,
CBS will retain 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
57
<PAGE> 62
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 July 4, 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
will be entitled to designate up to three members to our board of directors so
long as it holds at least 30% of our outstanding voting securities; two, so long
as it holds at least 20% but less than 30% of our outstanding voting securities;
or one, so 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, the
number of individuals that CBS is entitled to designate will be adjusted 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 are required to 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 of 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.
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.
58
<PAGE> 63
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 will have "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.
59
<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table shows information with respect to beneficial ownership
of our common stock, as of June 30, 1999, after giving pro forma effect to the
preferred stock conversion 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 June 30, 1999 but excludes shares of common stock underlying options
held by any other person. Percentage of beneficial ownership is based on
20,733,275 shares of common stock outstanding as of June 30, 1999, after giving
effect to the conversion of the convertible preferred stock, and 42,071,643
shares of common stock outstanding after completion of this offering and 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 to NDC..
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
SHARES OF ------------------------------
COMMON STOCK BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
<S> <C> <C> <C>
Entities associated with Patricof & Co. Ventures,
Inc.(1)............................................ 3,506,062.5 16.9% 8.3%
Entities associated with CSK Venture Capital Co.,
Ltd.(2)............................................ 1,378,812.5 6.7 3.3
Entities associated with Highland Capital Partners,
Inc.(3)............................................ 1,706,485.0 8.2 4.1
Entities associated with Media Technology
Ventures(4)........................................ 1,961,825.0 9.5 4.7
TBG Information Investors, LLC(5).................... 1,748,252.5 8.4 4.2
Entities associated with Weston Presidio Capital
Funds(6)........................................... 1,706,485.0 8.2 4.1
Paul T. Sheils(7).................................... 375,000.0 1.8 0.9
Jeffrey L. Drezner, M.D., Ph.D.(8)................... 3,431,817.5 16.6 8.2
Peter M. Frishauf(9)................................. 1,790,742.5 8.6 4.3
Marc Butlein(10)..................................... 25,000.0 * *
Esther Dyson(11)..................................... 67,262.5 * *
Alan J. Patricof(12)................................. 3,610,082.5 17.4 8.6
Carlo A. von Schroeter(13)........................... 1,706,485.0 8.2 4.1
Oakleigh Thorne(14).................................. 1,768,252.5 8.5 4.2
All executive officers and directors as a group
(13 persons)(15)................................... 12,774,642.5 61.6% 30.4%
</TABLE>
- ---------------
* Less than one percent.
(1) 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
60
<PAGE> 65
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.
(2) 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. The address for the CSK Venture Capital Co., Ltd. is CSK
Corporation, Kenchikukaikan, 7F, 5-26-20 Shiba, Minato-Ku, Tokyo 108-0014,
Japan.
(3) 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.
Highland Capital Partners, Inc. manages, and each of Messrs. Daniel Nova,
Robert Higgins, Paul Maeder and Wycliffe Gronsbeck 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 Gronsbeck 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.
(4) 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.
(5) 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.
(6) 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. 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.
Boro, 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.
(7) Includes 62,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 30, 1999.
(8) Includes 1,825,435 shares of restricted stock issued pursuant to the terms
of Dr. Drezner's employment agreement.
(9) Includes 2,500 shares of common stock issuable upon exercise of options
exercisable within 60 days of June 30, 1999.
61
<PAGE> 66
(10) Includes 25,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of June 30, 1999.
(11) Includes 2,500 shares of common stock issuable upon exercise of options
exercisable within 60 days of June 30, 1999.
(12) 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
89,020 shares of common stock issuable upon exercise of options exercisable
within 60 days of June 30, 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.
(13) 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.
(14) Includes 20,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of June 30, 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.
(15) Includes 251,076 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1999.
62
<PAGE> 67
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 June 30, 1999, 8,074,602.5
shares of common stock were outstanding and 4,956,643 shares of convertible
preferred stock convertible into 12,658,672.5 shares of common stock upon the
completion of this offering were issued and outstanding. As of June 30, 1999, we
had 88 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 outstanding warrants to
purchase 14,887.5 shares of common stock at a weighted average exercise price of
$0.004 per share. These warrants will become exercisable on March 5, 2000 and
expire on March 5, 2002.
REGISTRATION RIGHTS
After the offering, the holders of 33,107,858 shares of our common stock
will be entitled to registration rights. These rights include demand
registration rights and rights to require us to include their common stock in
future registration statements we file with the SEC. The 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.
63
<PAGE> 68
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.
64
<PAGE> 69
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
42,071,643 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. As of
June 30, 1999, we had approximately 88 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 36,671,643 shares eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
<S> <C>
61,225.0................................ After 90 days from the date of this
prospectus.
16,277,842.5................................ After 180 days from the date of this
prospectus (subject, in some cases, to
volume limitations).
20,332,575.5................................ 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 will agree 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, during a period of 12 months
from the date of its purchase of those shares.
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 420,716 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.
65
<PAGE> 70
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 33,107,858 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. 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.
66
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated as
of August , 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.........
Credit Suisse First Boston Corporation......................
Bear, Stearns & Co. Inc.....................................
Wit Capital Corporation.....................................
DLJdirect Inc...............................................
---------
Total............................................. 5,400,000
=========
</TABLE>
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 of legal
matters and other conditions. The underwriters must purchase and accept delivery
of all the shares of common stock offered through this prospectus, other than
those shares covered by the over-allotment option described below and that may
be purchased by CBS, if any are purchased.
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
$ per share. The underwriters may allow, and these dealers may
re-allow, to other dealers a concession not in excess of $ 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............................................
Total................................................
</TABLE>
We will pay the offering expenses, estimated to be $1,750,000.
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 transaction
with CBS Corporation and the transaction with National Data
67
<PAGE> 72
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 750,000 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.
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
68
<PAGE> 73
- 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 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 up to ten percent of the 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 400,000 shares of common stock to be offered for sale to
CBS Corporation at the initial public offering price, less underwriting fees
applicable to shares sold to the public. CBS Corporation has expressed to us
their interest in purchasing these shares, but is under no obligation to do so.
We have assumed in this prospectus that we will sell these shares to CBS
Corporation. CBS Corporation has agreed with us that it will not dispose of
these shares of Medscape for 12 months following the initial date that it
purchases shares from us. If, and to the extent that, CBS does not purchase
these shares, the underwriters have agreed to purchase them and offer them to
the public at the initial public offering price on the same terms and conditions
as set forth in the underwriting agreement.
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
69
<PAGE> 74
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.
70
<PAGE> 75
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-17
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 1998 and June 30, 1999
(unaudited)............................................... F-18
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and June 30, 1999
(unaudited)............................................... F-19
Notes to the Condensed Consolidated Financial Statements.... F-20
HEALTHCARE COMMUNICATIONS GROUP, LLC
Independent Auditors' Report................................ F-23
Balance Sheets as of December 31, 1997 and October 27,
1998...................................................... F-24
Statements of Operations for the Year Ended December 31,
1997 and the Ten Months Ended October 27, 1998............ F-25
Statements of Member's Capital for the Year Ended December
31, 1997 and the Ten Months Ended October 27, 1998........ F-26
Statements of Cash Flows for the Year Ended December 31,
1997 and the Ten Months Ended October 27, 1998............ F-27
Notes to Financial Statements............................... F-28
</TABLE>
F-1
<PAGE> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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 agreed to enter into an Advertising and Promotional Agreement, and a
Trademark and Content Agreement with CBS Corporation (CBS). Under the Stock
Purchase Agreement, Medscape will sell 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, $139,384 to be paid in cash, and $149,860,616 to be paid
through the advertising services to be provided by CBS in accordance with the
Advertising and Promotion Agreement and $7,000,000 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 will grant Medscape a
license to the "CBS" trademark and "Eye" design and health-related news content
for a seven year period. Under the agreement CBS will retain significant control
over the use and presentation of the CBS health content and CBS trademarks.
TRANSACTIONS WITH NDC HEALTH INFORMATION SERVICES
On July 7, 1999, Medscape entered into an agreement with National Data
Corporation under which NDC will make a $10,000,000 cash investment in Medscape
in exchange for 400,000 shares of Series E Preferred Stock. An additional
1,000,000 shares of Class A Common Stock will be issued to NDC in exchange for
$10,000,000 value attributed to licensing and promotional value, product
purchase amounts and credits against future commission due by Medscape to NDC.
F-16
<PAGE> 91
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-17
<PAGE> 92
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-18
<PAGE> 93
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-19
<PAGE> 94
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-20
<PAGE> 95
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 agreed to enter into an Advertising and Promotional Agreement, and a
Trademark and Content Agreement with CBS Corporation (CBS). Under the Stock
Purchase Agreement, Medscape will sell 7,397,208 shares of Class A
F-21
<PAGE> 96
MEDSCAPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Common Stock and 6,541,160 shares of Class B Common Stock to CBS for an
aggregate purchase price of $157,000,000, $139,384 to be paid in cash, and
$149,860,616 to be paid through the advertising services to be provided by CBS
in accordance with the Advertising and Promotion Agreement and $7,000,000 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 will grant 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 will retain significant
control over the use and presentation of the CBS health content and CBS
trademarks.
TRANSACTIONS WITH NDC HEALTH INFORMATION SERVICES
On July 7, 1999, Medscape entered into an agreement with National Data
Corporation under which NDC will make a $10,000,000 cash investment in Medscape
in exchange for 400,000 shares of Medscape's Series E Preferred Stock. An
additional 1,000,000 shares of Class A Common Stock will be issued to NDC in
exchange for $10,000,000 value attributed to licensing and promotional value,
product purchase amounts and credits against future commission due by Medscape
to NDC.
F-22
<PAGE> 97
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-23
<PAGE> 98
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-24
<PAGE> 99
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-25
<PAGE> 100
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-26
<PAGE> 101
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-27
<PAGE> 102
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-28
<PAGE> 103
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-29
<PAGE> 104
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-30
<PAGE> 105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[MEDSCAPE LOGO]
5,400,000 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 , 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.
- --------------------------------------------------------------------------------
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
The following table sets forth the expenses payable by Medscape in
connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
<S> <C>
SEC Registration Fee...................................... $ 22,226
NASD Filing Fee........................................... 8,495
Nasdaq National Market Listing Fee........................ 95,000
Accounting Fees and Expenses.............................. 350,000
Legal Fees and Expenses................................... 550,000
Printing Expenses......................................... 400,000
Blue Sky Qualification Fees and Expenses.................. 2,500
Transfer Agent's Fee...................................... 7,500
Miscellaneous............................................. 314,779
----------
Total............................................. $1,750,000
==========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article V of our certificate of incorporation provides that no director of
Medscape shall be personally liable to Medscape or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1) for
any breach of the director's duty of loyalty to Medscape or its stockholders,
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) in respect of certain unlawful
dividend payments or stock redemptions or repurchases, or (4) for any
transaction from which the director derived an improper personal benefit. In
addition, our certificate of incorporation provides that if the Delaware General
Corporation Law is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article VII of our bylaws provides that we shall, to the full extent
permitted by the laws of the State of Delaware, as amended from time to time,
indemnify all directors and officers.
Medscape maintains directors and officers liability insurance that covers
its officers and directors against certain losses that may arise out of their
positions with Medscape and covers Medscape for liabilities it may incur to
indemnify its officers and directors.
Under Section Seven of the underwriting agreement filed as Exhibit 1.1 to
this registration statement, the underwriters have agreed to indemnify, under
certain conditions, Medscape, its directors, certain officers and persons who
control Medscape within the meaning of the Securities Act against certain
liabilities.
II-1
<PAGE> 107
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of the sale of unregistered common stock for
the last three years:
(1) On January 17, 1997, we sold 123,974 shares of Series B Preferred
Stock to CSK Venture Capital Co., Ltd. at a purchase price of $12.099
per share, which was paid in cash.
(2) On October 31, 1997, we sold 1,152,523 shares of Series C Preferred
Stock to 18 sophisticated, accredited investors at a purchase price of
$4.60 per share, which was paid in cash. In addition, we also issued
349,650 shares of Series C Preferred Stock to CSK Venture Capital Co.,
Ltd. in exchange for its 123,974 shares of Series B Preferred Stock.
(3) On February 19 and March 9, 1998, we sold 932,401 additional shares of
Series C Preferred Stock to three sophisticated, accredited investors
at a purchase price of $4.29 per share, which was paid in cash. This
purchase caused an adjustment of the purchase price of the previously
purchased Series C Preferred Stock in section (2) above from $4.60 to
$4.29. On March 5, 1999, the 932,401 shares of Series C Preferred
Stock from the February 19 and March 9, 1998 closing were redesignated
as Series C-1 Preferred Stock.
(4) On October 27, 1999, we issued 1,825,435 shares of Class B Common
Stock in exchange for the outstanding membership interests held by the
then four members of Healthcare Communications Group, LLC.
(5) On October 27, 1998, as part of an Employment and Restricted Stock
Purchase Agreement, we sold 1,825,435 restricted shares of non-voting
Class B Common Stock to Jeffrey L. Drezner, M.D., Ph.D. at a purchase
price of $.344 per share, which was paid with a promissory note
secured by a pledge of the shares.
(6) On March 5, 1999, we sold 1,757,683 shares of Series D Preferred Stock
to 15 accredited investors at a purchase price of $11.72 per share,
which was paid in cash.
(7) On March 5, 1999 we issued warrants to purchase a total of 14,667.5
shares of Class B Common Stock to Credit Suisse First Boston
Corporation with an exercise price of $.004 as part of their placement
fee in connection with the Series D financing.
(8) Since April 1996 we have granted options to purchase 6,770,702.5
shares of Class B Common Stock to a total of 134 employees,
consultants and non-employee directors at exercise prices ranging from
$.008 to $3.40 per share.
(9) Since July 1996 we have sold 943,872.5 shares of Class B Common Stock,
pursuant to the exercise of some of the options described in section
(8) above, to a total of 36 employees, consultants and non-employee
directors exercise prices ranging from $.008 to $.344 per share.
(10) On July 7, 1999 we agreed to sell 7,397,208 shares of Class A Common
Stock and 6,541,160 shares of Class B Common Stock to CBS Corporation,
a large institutional accredited investor, for an aggregate purchase
price of $157,000,000, $139,383.68 to be paid in cash, $149,860,616.32
to be paid through the provision by CBS of advertising and promotion
services and $7,000,000 attributed to the license by CBS to us of the
"CBS" trademark and "Eye" design and selected health-related news
content.
(11) On July 7, 1999 we agreed to sell 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, a large institutional accredited investor, 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 us to NDC.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated under Section 4(2) of the Securities
Act, or, with respect to issuances to employees, Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions by an issuer not involving a
public offering or transactions pursuant to
II-2
<PAGE> 108
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution of the Securities and
appropriate legends were affixed to the instruments representing the securities
issued in these transactions. All recipients had adequate access, through their
relationships with the Company, to information about Medscape, Inc.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1.1** Form of Underwriting Agreement.
2.1** Asset Purchase Agreement between Medscape, Inc. and SCP
Communications, Inc., dated April 1, 1996.
2.2** Administrative Services Agreement between Medscape, Inc. and
SCP Communications, Inc., dated April 1, 1996.
2.3** Financing Agreement between Medscape, Inc. and SCP
Communications, Inc., dated April 1, 1996.
2.4** Purchase Agreement between Medscape, Inc. and the holders of
all of the membership interests of Healthcare Communications
Group, L.L.C. dated October 27, 1998.
2.5** Letter Agreement between Medscape, Inc. and Ira Kirshenbaum,
M.D., dated February 2, 1999 regarding the sale of assets of
bonehome.com.
2.6** Bill of Sale between Medscape, Inc. and CompuRx and, dated
March 25, 1999.
3.1** Amended and Restated Certificate of Incorporation.
3.1.1** Amendment to the Amended and Restated Certificate of
Incorporation filed May 17, 1999.
3.1.2 Form of Amendment to the Amended and Restated Certificate of
Incorporation to be filed in connection with the NDC and CBS
transactions.
3.2 Form of Amended and Restated Certificate of Incorporation,
to be filed prior to the closing of the offering made under
this Registration Statement.
3.3** Bylaws.
4.1* Form of Specimen Common Stock Certificate.
4.2 Form of Warrant, dated as of March 5, 1999, entitling Credit
Suisse First Boston Corporation to purchase up to 14,667.5
shares of Medscape's Common Stock.
5.1* Opinion of Patterson, Belknap, Webb & Tyler LLP as to the
validity of the securities being offered.
10.1** Agreement of Lease between Medscape, Inc. and R.A.A. Realty
Company LP dated February 1999.
10.2** Lease Assignment made by SCP Communications, Inc. made in
favor of Medscape, Inc.
10.3** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated October 7, 1996.
10.4** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated August 29, 1995.
10.5** Agreement of Lease between Surgical Care Publishing, Inc.,
and Satyanman, Inc., dated March 17, 1994.
10.6** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated August 18, 1993.
10.7** Employment Agreement between Medscape, Inc. and Paul T.
Sheils, dated January 26, 1998.
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.8** Employment Agreement between Medscape, Inc. and Steven
Kalin, dated September 30, 1998.
10.9** Employment and Restricted Stock Purchase Agreement between
Medscape, Inc. and Jeffrey L. Drezner, M.D., Ph.D., dated
October 27, 1998.
10.10** Promissory Note dated October 27, 1998, in the principal
amount of $627,949.64 made by Jeffrey L. Drezner, M.D.,
Ph.D. in favor of Medscape, Inc.
10.11** Employment Agreement between Medscape, Inc. and Peter M.
Frishauf, dated February 16, 1998.
10.12** Employment Agreement between Medscape, Inc. and George D.
Lundberg, M.D., dated February 15, 1999.
10.13** Employment Agreement between Medscape, Inc. and David
Yakimischak, dated March 15, 1999.
10.14** Employment Agreement between Medscape, Inc. and Meg Walsh,
dated March 4, 1999.
10.15** 1996 Stock Option Plan.
10.16** Form of Incentive Stock Option Agreement.
10.17** Form of Non-Qualified Stock Option Agreement.
10.18** Nonemployee Director Stock Option Plan.
10.19** Stock Purchase Agreement between Medscape, Inc. and
investors, dated October 31, 1997 in respect of the Series C
Preferred Stock.
10.20** First Amendment to Stock Purchase Agreement between
Medscape, Inc. and investors, dated February 19, 1998.
10.21** Supplemental Agreement to Amendment to Stock Purchase
Agreement and First Amendment to, and Waiver of Certain
Terms of, Stockholders' Agreement between Medscape, Inc. and
investors, dated March 9, 1998 in respect of the Series C
Preferred Stock.
10.22** Series D Preferred Stock Purchase Agreement between
Medscape, Inc. and investors, dated March 5, 1999.
10.23** Amended and Restated Stockholders' Agreement, dated March 5,
1999.
10.23.1** Amendment dated May 24, 1999, to the Amended and Restated
Stockholders' Agreement.
10.24** Form of Copyright Assignment.
10.25** Form of Letter to Authors.
10.26** Content Distribution Agreement between Medscape, Inc. and
Dow Jones & Company, Inc., dated January 22, 1999.
10.27** Interactive Publications Library Internet Gateway Agreement
between Medscape, Inc. and Dow Jones & Company, Inc., dated
July 14, 1998.
10.28** Preferred Share Purchase Agreement among Softwatch Ltd.,
Medscape, Inc. (as a purchaser) and certain other
purchasers, dated June 15, 1999.
10.29** License and Web Site Development Agreement between Medscape,
Inc. and Softwatch, Inc., dated June 15, 1999.
10.30** Employment Agreement between Medscape, Inc. and Mark
Boulding, dated June 28, 1999.
10.31** Common Stock Purchase Agreement between Medscape, Inc. and
CBS Corporation, dated July 4, 1999.
</TABLE>
II-4
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.32** Form of Stockholders Agreement between Medscape, Inc. and
CBS Corporation, dated July , 1999.
10.33** Form of Joinder Agreement among certain Medscape, Inc.
shareholders, dated July , 1999, in connection with the
Stockholder Agreement dated July , 1999.
10.34** Form of Advertising and Promotion Agreement between
Medscape, Inc. and CBS Corporation, dated July , 1999.
10.35** Form of Trademark and Content Agreement between Medscape,
Inc. and CBS Corporation, dated July , 1999.
10.36** Form of Registration Rights Agreement between Medscape, Inc.
and CBS Corporation, dated July , 1999.
10.37 Stock Purchase Agreement between Medscape, Inc. and National
Data Corporation, dated July 7, 1999.
10.38+ Form of License and Product Development Agreement between
Medscape, Inc. and National Data Corporation, dated July ,
1999.
10.39** Agreement of Lease between Medscape, Inc. and 224 W 30 LLC,
dated May 26, 1999.
10.40 License Agreement between First Databank, Inc. and Medscape,
Inc., dated April 1997.
21.1** Subsidiaries of Medscape, Inc.
23.1* Consent of Patterson, Belknap, Webb & Tyler LLP (included in
Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Fredric G. Reynolds, Executive Vice President and
Chief Financial Officer of CBS Corporation, to Act as a
Director of Medscape, Inc., dated July 7, 1999.
23.4 Consent of Andrew Heyward, President of CBS News, to Act as
a Director of Medscape, Inc., dated July 7, 1999.
24.1** Powers of Attorney.
</TABLE>
- ---------------
* To be filed by further Amendment to this Registration Statement.
** Previously filed.
+ Confidential Treatment requested.
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Medscape, Inc. pursuant to the foregoing provisions, or otherwise, Medscape,
Inc. has been advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Medscape, Inc. of expenses incurred or
paid by a director, officer, or a controlling person of Medscape, Inc. in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Medscape, Inc. will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 111
3. The undersigned registrant hereby undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Medscape, Inc. pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Medscape, Inc.
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York on July 26, 1999.
MEDSCAPE, INC.
By: /s/ PAUL T. SHEILS
---------------------------------------
Name: Paul T. Sheils
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
* President, Chief Executive Officer and July 26, 1999
- --------------------------------------------- Director (Principal Executive Officer)
Paul T. Sheils
* Chief Operating Officer and Chief July 26, 1999
- --------------------------------------------- Financial Officer (Principal Financial
Steven R. Kalin Accounting Officer)
* Chairman of the Board of Directors July 26, 1999
- ---------------------------------------------
Alan J. Patricof
* Executive Vice President and Director July 26, 1999
- ---------------------------------------------
Jeffrey L. Drezner,
M.D., Ph.D.
* Chairman-Executive Committee and Director July 26, 1999
- ---------------------------------------------
Peter M. Frishauf
* Director July 26, 1999
- ---------------------------------------------
Marc Butlein
* Director July 26, 1999
- ---------------------------------------------
Esther Dyson
* Director July 26, 1999
- ---------------------------------------------
Carlo A. von Schroeter
* Director July 26, 1999
- ---------------------------------------------
Oakleigh Thorne
*By: /s/ PAUL T. SHEILS
---------------------------------------
Paul T. Sheils
Attorney-in-fact
</TABLE>
II-7
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
<S> <C> <C>
1.1** Form of Underwriting Agreement.
2.1** Asset Purchase Agreement between Medscape, Inc. and SCP
Communications, Inc., dated April 1, 1996.
2.2** Administrative Services Agreement between Medscape, Inc. and
SCP Communications, Inc., dated April 1, 1996.
2.3** Financing Agreement between Medscape, Inc. and SCP
Communications, Inc., dated April 1, 1996.
2.4** Purchase Agreement between Medscape, Inc. and the holders of
all of the membership interests of Healthcare Communications
Group, L.L.C. dated October 27, 1998.
2.5** Letter Agreement between Medscape, Inc. and Ira Kirshenbaum,
M.D., dated February 2, 1999 regarding the sale of assets of
bonehome.com.
2.6** Bill of Sale between Medscape, Inc. and CompuRx, dated March
25, 1999.
3.1** Amended and Restated Certificate of Incorporation.
3.1.1** Amendment to the Amended and Restated Certificate of
Incorporation filed May 17, 1999.
3.1.2 Form of Amendment to the Amended and Restated Certificate of
Incorporation to be filed in connection with the NDC and CBS
transactions.
3.2 Form of Amended and Restated Certificate of Incorporation,
to be filed prior to the closing of the offering made under
this Registration Statement.
3.3** Bylaws.
4.1* Form of Specimen Common Stock Certificate.
4.2 Form of Warrant, dated as of March 5, 1999, entitling Credit
Suisse First Boston Corporation to purchase up to 14,667.5
shares of Medscape's Common Stock.
5.1* Opinion of Patterson, Belknap, Webb & Tyler LLP as to the
validity of the securities being offered.
10.1** Agreement of Lease between Medscape, Inc. and R.A.A. Realty
Company LP dated February 1999.
10.2** Lease Assignment made by SCP Communications, Inc. made in
favor of Medscape, Inc.
10.3** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated October 7, 1996.
10.4** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated August 29, 1995.
10.5** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated March 17, 1994.
10.6** Agreement of Lease between Surgical Care Publishing, Inc.
and Satyanman, Inc., dated August 18, 1993.
10.7** Employment Agreement between Medscape, Inc. and Paul T.
Sheils, dated January 26, 1998.
10.8** Employment Agreement between Medscape, Inc. and Steven
Kalin, dated September 30, 1998.
10.9** Employment and Restricted Stock Purchase Agreement between
Medscape, Inc. and Jeffrey L. Drezner, M.D., Ph.D., dated
October 27, 1998.
10.10** Promissory Note dated October 27, 1998, in the principal
amount of $627,949.64 made by Jeffrey L. Drezner, M.D.,
Ph.D. in favor of Medscape, Inc.
10.11** Employment Agreement between Medscape, Inc. and Peter M.
Frishauf, dated February 16, 1998.
10.12** Employment Agreement between Medscape, Inc. and George D.
Lundberg, M.D., dated February 15, 1999.
10.13** Employment Agreement between Medscape, Inc. and David
Yakimischak, dated March 15, 1999.
10.14** Employment Agreement between Medscape, Inc. and Meg Walsh,
dated March 4, 1999.
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
<S> <C> <C>
10.15** 1996 Stock Option Plan.
10.16** Form of Incentive Stock Option Agreement.
10.17** Form of Non-Qualified Stock Option Agreement.
10.18** Nonemployee Director Stock Option Plan.
10.19** Stock Purchase Agreement, between Medscape, Inc. and
investors dated October 31, 1997 in respect of the Series C
Preferred Stock.
10.20** First Amendment to Stock Purchase Agreement between
Medscape, Inc. and investors, dated February 19, 1998.
10.21** Supplemental Agreement to Amendment to Stock Purchase
Agreement and First Amendment to, and Waiver of Certain
Terms of, Stockholders' Agreement between Medscape, Inc. and
investors, dated March 9, 1998 in respect of the Series C
Preferred Stock.
10.22** Series D Preferred Stock Purchase Agreement between
Medscape, Inc. and investors, dated March 5, 1999.
10.23** Amended and Restated Stockholders' Agreement, dated March 5,
1999.
10.23.1** Amendment, dated May 24, 1999, to the Amended and Restated
Stockholders' Agreement.
10.24** Form of Copyright Assignment.
10.25** Form of Letter to Authors.
10.26** Content Distribution Agreement between Medscape, Inc. and
Dow Jones & Company, Inc., dated January 22, 1999.
10.27** Interactive Publications Library Internet Gateway Agreement
between Medscape, Inc. and Dow Jones & Company, Inc., dated
July 14, 1998.
10.28** Preferred Share Purchase Agreement among Softwatch Ltd.,
Medscape, Inc. (as a purchaser) and certain other
purchasers, dated June 15, 1999.
10.29** License and Web Site Development Agreement between Medscape,
Inc. and Softwatch, Inc., dated June 15, 1999.
10.30** Employment Agreement between Medscape, Inc. and Mark
Boulding, dated June 28, 1999.
10.31** Common Stock Purchase Agreement between Medscape, Inc. and
CBS Corporation, dated July 4, 1999.
10.32** Form of Stockholders Agreement between Medscape, Inc. and
CBS Corporation, dated July , 1999.
10.33** Form of Joinder Agreement among certain Medscape, Inc.
shareholders, dated July , 1999, in connection with the
Stockholder Agreement dated July , 1999.
10.34** Form of Advertising and Promotion Agreement between
Medscape, Inc. and CBS Corporation, dated July , 1999.
10.35** Form of Trademark and Content Agreement between Medscape,
Inc. and CBS Corporation, dated July , 1999.
10.36** Form of Registration Rights Agreement between Medscape, Inc.
and CBS Corporation, dated July , 1999.
10.37 Stock Purchase Agreement between Medscape, Inc. and National
Data Corporation, dated July 7, 1999.
10.38+ Form of License and Product Development Agreement between
Medscape, Inc. and National Data Corporation, dated July ,
1999.
10.39** Agreement of Lease between Medscape, Inc. and 224 W 30 LLC,
dated May 26, 1999.
10.40 License Agreement between First Databank, Inc. and Medscape,
Inc., dated April 1, 1997.
21.1** Subsidiaries of Medscape, Inc.
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
<S> <C> <C>
23.1* Consent of Patterson, Belknap, Webb & Tyler LLP (included in
Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Fredric G. Reynolds, Executive Vice President and
Chief Financial Officer of CBS Corporation, to Act as a
Director of Medscape, Inc., dated July 7, 1999.
24.4 Consent of Andrew Heyward, President of CBS News, to Act as
a Director of Medscape, Inc., dated July 7, 1999.
24.1** Powers of Attorney.
</TABLE>
- ---------------
* To be filed by further Amendment to this Registration Statement.
** Previously filed.
+ Confidential Treatment requested.
<PAGE> 1
Exhibit 3.1.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF MEDSCAPE, INC.
Paul T. Sheils hereby certifies that:
1. The present name of this corporation is Medscape, Inc. (the
"Corporation"). The Corporation was originally incorporated under the name
Medscape (DEL.), Inc., and the date of filing the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware is August 25, 1998, as amended on December 23, 1998, March 5, 1999, May
17, 1999 and July __, 1999.
2. He is the duly elected President of the Corporation.
3. The Certificate of Incorporation of the Corporation, as amended, is
hereby amended and restated to read as follows:
FIRST: The name of the Corporation is Medscape, Inc.
SECOND: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware.
THIRD: The address of the registered office in the State of Delaware is
1209 Orange Street, Wilmington, DE 19801, and the name of the registered agent
of the Corporation in the State of Delaware is The Corporation Trust Company in
the County of New Castle.
FOURTH: (A) The total number of shares of all classes of stock which
the Corporation is authorized to issue is sixty-two million seven hundred
ninety-five thousand eleven (62,795,011), of which thirty-five million eight
hundred ninety-seven thousand two hundred eight (35,897,208) shares shall be
Class A Common Stock with a par value of one cent ($.01) per share, twenty-one
million, five hundred forty-one thousand, one hundred sixty (21,541,160) shares
shall be Class B (NonVoting) Common Stock with a par value of one cent ($.01)
per share, and five million three hundred fifty-six thousand six hundred
forty-three (5,356,643) shares shall be Preferred Stock with a par value of one
cent ($.01) per share.
(B) The Class A Common Stock and the Class B (NonVoting) Common Stock
(collectively the "Common Stock") shall have identical powers, rights,
preferences, limitations and other characteristics, share for share, except that
as otherwise required by law, the holders of shares of the Class B (NonVoting)
Common Stock shall not have any voting power or vote for the election of
directors or vote for any other purpose. Upon consummation of a firm commitment
underwritten public offering of any class of common stock of the Corporation
filed pursuant to a registration statement under the Securities Act of 1933, as
amended (a "Public Offering") or immediately prior to the consummation of a
"Corporate Change" (as hereafter defined), all shares of Class B Common Stock
shall automatically convert on a one-for-one basis
<PAGE> 2
2
into Class A Common Stock, which shall be redesignated as Common Stock, $.01 par
value, of the Corporation. A "Corporate Change" shall mean any event or
transaction where: (i) the Corporation shall not be the surviving entity in any
merger, consolidation or other reorganization (or survives only as a subsidiary
of an entity other than a previously wholly owned subsidiary of the
Corporation), (ii) the Corporation sells, leases or exchanges or agrees to sell,
lease or exchange all or substantially all of its assets to any other person or
entity (other than a wholly owned subsidiary of the Corporation), (iii) the
Corporation is to be dissolved and liquidated (including pursuant to Section
4(b) hereof), (iv) any person or entity, including a "group" as contemplated by
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or
gains ownership or control (including, without limitation, power to vote) of
more than 50% of the outstanding shares of the Corporation's voting stock (based
upon voting power), provided, that the fact that a stockholder is a party to the
Amended and Restated Stockholders Agreement dated March 5, 1999 among the
Corporation and the other parties thereto, as amended, or any successor
agreement thereto and the Stockholders Agreement dated July __, 1999 between the
Corporation and CBS Corporation, as amended or any successor agreement thereto
(collectively, the "Stockholders Agreement"), shall not be deemed to constitute
the formation of a group, or (v) as a result of or in connection with a
contested election of directors, the persons who were directors of the
Corporation before such election shall cease to constitute a majority of the
Board of Directors of the Corporation.
(C) The rights, preferences and privileges and qualifications,
limitations and restrictions granted to and imposed on the capital stock of the
Corporation shall be as set forth below in this Article Fourth. References
hereinafter made to Sections shall mean the Sections contained in this Article
Fourth (C).
1. Definitions. As used herein, the following terms shall have the
following definitions:
(a) "Additional Stock" shall have the meaning set forth in
Section 5(c)(ii) hereof.
(b) "Bylaws" shall mean the Bylaws of the Corporation.
(c) "Common Stock" shall mean (a) the Corporation's Class A
Common Stock and Class B Common stock, par value $.01 per share, as authorized
on the date hereof, and (b) any other capital stock of any class or classes
(however designated) of the Corporation, authorized on or after the date hereof,
the holders of which shall have the right, without limitation as to amount,
either to all or to a share of the balance of current dividends and
<PAGE> 3
3
liquidating distributions after the payment of dividends and distributions on
any shares entitled to preference under this Certificate of Incorporation (as
the same may be further amended from time to time).
(d) "Common Stock Equivalents" shall have the meaning set
forth in Section 5(c)(iii) hereof.
(e) "Conversion Price" shall have the meaning set forth in
Section 5(a)(i) hereof.
(f) "Conversion Rights" shall have the meaning set forth in
Section 5 hereof.
(g) "Convertible Securities" means any indebtedness or shares
of stock convertible into or exchangeable for Common Stock.
(h) "Effective Price" of shares of Additional Stock means the
quotient determined by dividing (i) the total number of such shares of
Additional Stock issued or sold, or deemed to have been issued or sold, by the
Corporation under Section 5 hereof, into (ii) the consideration received by the
Corporation under Section 5 hereof for the issuance of such shares of Additional
Stock.
(i) "Initial Redemption Date" shall have the meaning set forth
in Section 8(c) hereof.
(j) "Option" means rights, options or warrants to subscribe
for, purchase or otherwise acquire Common Stock or Convertible Securities.
(k) "Option Holders" shall have the meaning set forth in
Section 8(a) hereof.
(l) "Optional Redemption Notice" shall have the meaning set
forth in Section 8(c) hereof.
(m) "Optional Series C Redemption" shall have the meaning set
forth in Section 8(a) hereof.
<PAGE> 4
4
(n) "Original Series A Issue Price" means $0.0269 per share of
Series A Preferred Stock (appropriately adjusted for stock splits, reverse stock
splits and similar type transactions or occurrences with respect to the Series A
Preferred Stock).
(o) "Original Series C Issue Price" means $4.60 per share of
Series C Preferred Stock and Series C-1 Preferred Stock (appropriately adjusted
for stock splits, reverse stock splits and similar type transactions or
occurrences with respect to the Series C Preferred Stock or Series C-1 Preferred
Stock).
(p) "Original Series D Issue Price" means $11.72 per share of
Series D Preferred Stock (appropriately adjusted for stock splits, reverse stock
splits and similar type transactions or occurrences with respect to the Series D
Preferred Stock).
(q) "Original Series E Issue Price" means $25.00 per share of
Series E Preferred Stock (appropriately adjusted for stock splits, reverse stock
splits and similar type transactions or occurrences with respect to the Series E
Preferred Stock).
(r) "Public Offering" means the consummation of an offering of
equity securities of the Corporation pursuant to an effective registration
statement under the Securities Act under which the aggregate gross proceeds
received by the Corporation equals or exceed $20 million.
(s) "Qualified Public Offering" means the consummation of an
offering of equity securities of the Corporation pursuant to an effective
registration statement under the Securities Act under which the public offering
price per share is not less than $7.03 per share (as adjusted for any stock
split, stock dividend or recapitalization after July __, 1999) and the aggregate
gross proceeds received by the Corporation equals or exceed $20 million.
(t) "Series A Liquidation Preference" means, as to each share
of Series A Preferred Stock, the greater of (i) $.0269 per share, plus all
declared but unpaid dividends thereon, if any, as adjusted for stock splits,
reverse stock splits and similar type transactions or occurrences with respect
to the Series A Preferred Stock or (ii) the amount per share the holders would
be entitled to receive if the holders had converted such shares of Series A
Preferred Stock into Class A Common Stock immediately prior to the effectiveness
of the event constituting the liquidation, dissolution or winding up of the
Corporation.
(u) "Series C Liquidation Preference" means, as to each share
of Series C Preferred Stock and Series C-1 Preferred Stock, the greater of (i)
the Original Series C Issue
<PAGE> 5
5
Price plus cumulative dividends thereon at the rate of six percent (6%) per
annum, as adjusted for stock splits, reverse stock splits and similar
transactions or occurrences with respect to the Series C Preferred Stock or
Series C-1 Preferred Stock or (ii) the amount per share the holders would be
entitled to receive if the holders had converted such shares of Series C
Preferred Stock or Series C-1 Preferred Stock into Class A Common Stock
immediately prior to the effectiveness of the event constituting the
liquidation, dissolution or winding up of the Corporation.
(v) "Series D Liquidation Preference" means, as to each share
of Series D Preferred Stock, the greater of (i) the Original Series D Issue
Price plus cumulative dividends thereon at the rate of six percent (6%) per
annum, as adjusted for stock splits, reverse stock splits and similar
transactions or occurrences with respect to the Series D Preferred Stock or (ii)
the amount per share the holders would be entitled to receive if the holders had
converted such shares of Series D Preferred Stock into Class A Common Stock
immediately prior to the effectiveness of the event constituting the
liquidation, dissolution or winding up of the Corporation.
(w) "Series E Liquidation Preference" means, as to each share
of Series E Preferred Stock, the greater of (i) the Original Series E Issue
Price plus cumulative dividends thereon at the rate of six percent (6%) per
annum, as adjusted for stock splits, reverse stock splits and similar
transactions or occurrences with respect to the Series E Preferred Stock or (ii)
the amount per share the holders would be entitled to receive if the holders had
converted such shares of Series E Preferred Stock into Class A Common Stock
immediately prior to the effectiveness of the event constituting the
liquidation, dissolution or winding up of the Corporation.
(x) "Series C Issuance Date" means October 31, 1997.
(y) "Series D Issuance Date" means March 5, 1999.
(z) "Series E Issuance Date" means July __, 1999.
2. Series and Number of Shares. The authorized number of shares of
Series A Preferred Stock shall be 788,200, the authorized number of shares of
Series C Preferred Stock shall be 1,478,359, the authorized number of shares of
Series C-1 Preferred Stock shall be 932,401, the authorized number of shares of
Series D Preferred Stock shall be 1,757,683 and the authorized number of shares
of Series E Preferred Stock shall be 400,000. Shares of Series A, Series C,
Series C-1, Series D and Series E Preferred Stock retired, redeemed, purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
canceled and shall not be reissued, sold or transferred.
<PAGE> 6
6
3. Dividend Rights.
(a) The holders of Series D Preferred Stock shall be entitled
to receive cumulative compound annual dividends per share at the rate of six
percent (6%) of the Original Series D Issue Price (as adjusted for any stock
dividends, combinations, or splits with respect to such shares), prior and in
preference to any dividends on any other capital stock of the Corporation other
than the Series E Preferred Stock. Such dividends shall begin accruing on March
5, 1999, shall be cumulative and shall be payable on the earlier of a Corporate
Change or a Public Offering. Notwithstanding the foregoing, in the event that
the Corporation files, prior to March 5, 2000, a registration statement under
the Securities Act covering the sale of its Common Stock which results in the
consummation of the sale of such securities before the later of March 5, 2000 or
four months after the date of filing of such registration statement at a public
offering price of not less than $7.03 per share (as adjusted for any stock
split, stock dividend or recapitalization after July __, 1999), then the
cumulative dividend described in this Section 3(a) shall not be due and payable.
(b) The holders of Series E Preferred Stock shall be entitled
to receive cumulative compound annual dividends per share at the rate of six
percent (6%) of the Original Series E Issue Price (as adjusted for any stock
dividends, combinations or splits with respect to such shares), prior and in
preference to any dividends on any other capital stock of the Corporation other
than the Series D Preferred Stock. Such dividends shall begin accruing on the
Series E Issuance Date, shall be cumulative and shall be payable on the earlier
of a Corporate Change or a Public Offering. Notwithstanding the foregoing, in
the event that the Corporation files, prior to the first anniversary of the
Series E Issuance Date, a registration statement under the Securities Act
covering the sale of its Common Stock which results in the consummation of the
sale of such securities before the later of the first anniversary of the Series
E Issuance Date or four months after the date of filing of such registration
statement, then the cumulative dividend described in this Section 3(b) shall not
be due and payable.
(c) No dividends shall be declared, paid or set apart on any
capital stock of the Corporation until the cumulative dividends set forth in
Section 3(a) and Section 3(b) have been paid on all outstanding shares of Series
D Preferred Stock and Series E Preferred Stock (such payments to be made on a
pari passu basis). After such payment, any additional dividends declared by the
Board of Directors shall be payable (i) first to the holders of shares of Series
C Preferred Stock and Series C-1 Preferred Stock on the basis of the shares of
Class A Common Stock into which such shares are then convertible at a rate of
six percent (6%) of the Original Series C Issue Price per annum (but in no event
more than the amount per share paid to the Series D Preferred holders pursuant
to Section 3(a) and the Series E Preferred holders
<PAGE> 7
7
pursuant to Section 3(b)) and (ii) then ratably among the holders of shares of
Series E Preferred Stock, Series D Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Class A Common Stock and Class B Common Stock (on
the basis of the shares of Class A Common Stock into which such shares are then
convertible); provided, that dividends on outstanding shares of Series E
Preferred Stock, Series D Preferred Stock, Series C Preferred Stock and Series
C-1 Preferred Stock shall be paid or declared and set apart for payment before
any dividends shall be paid or declared and set apart for payment on any other
capital stock of the Corporation with respect to the same dividend period. No
dividends shall be payable on the shares of Series A Preferred Stock.
(d) With respect to any dividends declared in accordance with
Section 3(c) above, no right shall accrue to holders of Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock by reason of the fact that dividends on said shares are not
declared in any prior year, nor shall any undeclared or unpaid dividend bear or
accrue any interest. In addition, except for the dividends set forth in Section
3(a) hereof and Section 3(b) hereof, no dividends shall be paid on the Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock if such payment would violate the terms of any instrument
governing indebtedness of the Corporation or any directly or indirectly owned
subsidiary of the Corporation.
4. Liquidation Preference.
(a) Priority. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the assets of
the Corporation legally available for distribution to its shareholders, shall be
distributed in the following order of priority:
(i) The holders of shares of Series D Preferred Stock and
Series E Preferred Stock shall be entitled to receive, prior and in
preference to any distribution in such liquidation, dissolution or
winding up of any of the assets of the Corporation to the holders of
shares of Class A and Class B Common Stock and Series A Preferred
Stock, Series C Preferred Stock and Series C-1 Preferred Stock by
reason of their ownership thereof, an amount per share on a pari passu
basis equal to the Series D Liquidation Preference for each outstanding
share of Series D Preferred Stock then held by them and an amount per
share equal to the Series E Liquidation Preference for each outstanding
share of Series E Preferred Stock then held by them; the holders of
shares of Series C Preferred Stock and Series C-1 Preferred Stock shall
be entitled to receive, prior and in preference to any distribution in
such liquidation, dissolution or winding up of any
<PAGE> 8
8
assets of the Corporation to the holders of shares of Class A and Class
B Common Stock and Series A Preferred Stock by reason of their
ownership thereof, an amount per share equal to the Series C
Liquidation Preference for each outstanding share of Series C Preferred
Stock or Series C-1 Preferred Stock held by them; and the holders of
shares of Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution in such liquidation, dissolution
or winding up of any assets of the Corporation to the holders of shares
of Class A and Class B Common Stock by reason of their ownership
thereof, an amount per share equal to the Series A Liquidation
Preference for each outstanding share of Series A Preferred Stock held
by them. If upon the occurrence of any such distribution, the assets of
the Corporation thus distributed among the holders of shares of Series
A, Series C, Series C-1, Series D and Series E Preferred Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets of the
Corporation legally available for distribution shall be distributed
first to the holders of shares of Series D Preferred Stock and the
shares of Series E Preferred Stock pro rata in proportion to the full
preferential amounts to which such holders are entitled, second to the
holders of shares of Series C Preferred Stock and Series C-1 Preferred
Stock and third to the holders of shares of Series A Preferred Stock
all payable to the extent that such holders are satisfied in full in
accordance with the foregoing priority of distributions.
(ii) After the distributions described in Section 4(a)(i)
hereof have been made, then, to the extent available, the remaining
assets of the Corporation shall be distributed among the holders of
shares of Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Class A and Class B
Common Stock pro rata based on the number of shares of Class A Common
Stock held (or deemed to be held, on an as-converted basis, for the
holders of the Series C, Series C-1, Series D and Series E Preferred
Stock) by each.
(b) Consolidation, Merger, Etc. For purposes of this Section
4, (i) any transaction or series of related transactions involving a
consolidation or merger or other corporate reorganization of the Corporation in
which the stockholders of the Corporation who were stockholders immediately
prior to such consolidation, merger or reorganization own less than 50% of the
voting power of the Corporation immediately after such consolidation, merger or
reorganization or in which outstanding shares of the Corporation are exchanged
for securities or other consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary (other than a mere reincorporation
transaction) and in which stockholders of the Corporation who were stockholders
immediately prior to such transaction receive less than 50% of the voting power
of the surviving corporation, or (ii) a sale, lease or other disposition of all
or substantially
<PAGE> 9
9
all of the assets of the Corporation shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 4.
5. Conversion. The holders of shares of Series A Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) Right to Convert.
(i) Each share of Series A, Series C, Series C-1, Series D and
Series E Preferred Stock shall be convertible, at the option of the
holder thereof, at any time or from time to time after the date of
issuance of such share, at the office of the Corporation or any
transfer agent for the Preferred Stock, into such number of fully paid
and nonassessable shares of Class A Common Stock as is determined by
(A) dividing the Original Issue Price for such share by the conversion
price (the "Conversion Price") at the time in effect for such share and
(B) multiplying the quotient obtained by 2.5. The Original Issue Price
and the initial Conversion Price per share for shares of Series A
Preferred Stock shall be the Original Series A Issue Price; the
Original Issue Price per share for shares of Series C Preferred Stock
shall be the Original Series C Issue Price and the Conversion Price per
share for the Series C Preferred Stock shall be $4.29; the Original
Issue Price and the initial Conversion Price per share for shares of
Series C-1 Preferred Stock shall be $4.29; and the Original Issue Price
and the initial Conversion Price per share for shares of Series D
Preferred Stock shall be the Original Series D Issue Price and the
Original Issue Price and the initial Conversion Price per share for
shares of Series E Preferred Stock shall be the Original Series E Issue
Price; provided, however, that the Conversion Price for the Preferred
Stock shall be subject to adjustment as set forth in Section 5(c)
hereof .
(ii) Each share of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock and Series D Preferred
Stock shall automatically be converted into fully paid and
nonassessable shares of Class A Common Stock at the Conversion Price at
the time in effect for such series, immediately prior to the
consummation of the Corporation's sale of its Common Stock in a
Qualified Public Offering and each share of Series E Preferred Stock
shall automatically be converted into fully paid and nonassessable
shares of Class A Common Stock at the Conversion Price at the time in
effect for such shares, immediately prior to the consummation of the
Corporation's sale of its Common Stock in a Public Offering; provided,
however, that the Conversion Price for the Series E Preferred Stock
shall be subject to adjustment in
<PAGE> 10
10
connection with the consummation of a Public Offering as provided in
clause (c) of this Section 5 in the event that the public offering
price in such Public Offering is less than the Conversion Price for the
Series E Preferred Stock as in effect immediately prior thereto. In
addition, (1) each share of Series A Preferred Stock shall
automatically be converted into fully paid and nonassessable shares of
Class A Common Stock at the Conversion Price at the time in effect for
such series in the event that the holders of at least 70% of the Series
A Preferred Stock then outstanding consent in writing to such
conversion; and (2) each share of Series C Preferred Stock and Series
C-1 Preferred Stock shall automatically be converted into fully paid
and nonassessable shares of Class A Common Stock at the Conversion
Price at the time in effect for such series in the event that the
holders of at least 70% of the Series C Preferred Stock and Series C-1
Preferred Stock then outstanding consent in writing to such conversion.
(b) Mechanics of Conversion. Before any holder of shares of
Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock shall be entitled to
convert any of such shares into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Preferred Stock and shall
give written notice by mail, postage prepaid, or hand delivery, to the
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Class A Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holders of shares of Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, as the case may be, or to the nominee or nominees of such
holders, a certificate or certificates for the number of shares of Class A
Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Class A Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Class A Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act of 1933, as amended, the conversion may, at the option of any
holder tendering the Series A Preferred Stock, Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred Stock for
conversion, be conditioned upon the closing with the underwriter of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive Class A Common Stock issuable upon such conversion of the Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
<PAGE> 11
11
Preferred Stock or Series E Preferred Stock, as the case may be, shall not be
deemed to have converted such Preferred Stock until immediately prior to the
closing of such sale of securities.
(c) Conversion Price Adjustments of Series A Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock. The Conversion Price of the Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall be subject to adjustment from time to
time as follows:
(i) (A) Upon each issuance (or deemed issuance
pursuant to the provisions hereof) by the Corporation of any
Additional Stock after the Series D Issuance Date, without
consideration or for an Effective Price per share less than
the Conversion Price with respect to any series of Preferred
Stock in effect immediately prior to the issuance (or deemed
issuance) of such Additional Stock, then (1) the Conversion
Price for the Series E Preferred Stock in effect immediately
prior to each issuance (or deemed issuance) shall be adjusted
to reflect two hundred and fifty percent (250%) of the
Effective Price of the Additional Stock so issued until the
Conversion Price for the Series E Preferred Stock has been
adjusted downward to $17.58 per share, (2) the Conversion
Price for the Series D Preferred Stock in effect immediately
prior to each issuance (or deemed issuance) shall be adjusted
to reflect the Effective Price of the Additional Stock so
issued until the Conversion Price for the Series D Preferred
Stock has been adjusted downward to $8.68 per share and (3)
the Conversion Prices for the Series A Preferred Stock, the
Series C Preferred Stock and the Series C-1 Preferred Stock,
the Conversion Price of the Series E Preferred Stock once it
has been adjusted downward to $17.58 in accordance with
subparagraph (1) above and the Conversion Price of the Series
D Preferred Stock once it has been adjusted downward to $8.68
in accordance with subparagraph (2) above, in effect
immediately prior to each issuance (or deemed issuance) shall
be adjusted to a price determined by multiplying such
Conversion Price by a fraction, (i) the numerator of which
shall be the number of outstanding shares of Common Stock and
shares of Common Stock then issuable upon exercise or
conversion of outstanding securities of the Corporation
immediately prior to such issuance plus the number of shares
of Common Stock which the aggregate consideration received (or
deemed received) by the Corporation for such issuance would
purchase at such Conversion Price; and (ii) the denominator of
which shall be the number of outstanding shares of Common
Stock and shares of Common Stock then issuable upon exercise
or conversion of outstanding securities of the Corporation
immediately after such issuance including the Additional Stock
so issued.
<PAGE> 12
12
(B) No adjustment of the Conversion Price for the Preferred Stock
shall be made in an amount less than one-half of one cent ($0.005) per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be taken into account in any
subsequent adjustment to the Conversion Price. No adjustment of the Conversion
Price for any series of Preferred Stock pursuant to this Section 5(c)(i) shall
have the effect of increasing such Conversion Price for such series above the
Conversion Price for such series in effect immediately prior to such adjustment.
(C) In the case of the issuance of securities of the Corporation
for cash, the amount of consideration received by the Corporation for such
securities shall be deemed to be the amount of cash paid therefor before
deducting any discounts, commissions or other expenses allowed, paid or incurred
by the Corporation for any underwriting or otherwise in connection with the
issuance and sale thereof.
(D) In the case of the issuance of securities of the Corporation
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to have a dollar value equal to the fair market value
of such noncash consideration, irrespective of any accounting treatment thereof,
as determined by the Board of Directors.
(E) In the case of the issuance (whether before, on or after the
Series D Issuance Date) of Options or Convertible Securities, the following
provisions shall apply for all purposes of this Section 5(c)(i) and Section
5(c)(ii) hereof:
(1) With respect to Options to purchase Class A or Class B
Common Stock, the aggregate maximum number of shares of Common Stock deliverable
upon exercise of such Options shall be deemed to have been issued at the time
such options were issued and for a consideration equal to the consideration
(determined in the manner provided in Section 5(c)(i)(C) and Section 5(c)(i)(D)
hereof), if any, received by the Corporation for such Options plus the minimum
exercise price provided in such Options for Common Stock covered thereby.
(2) With respect to Convertible Securities and Options to
purchase Convertible Securities, the aggregate maximum number of shares of
Common Stock deliverable upon the conversion or exchange of any such Convertible
Securities and the aggregate maximum number of shares of Common Stock issuable
upon the exercise of such Options to purchase Convertible Securities and the
subsequent conversion or exchange of such Convertible Securities shall be deemed
to have been issued at the time such Convertible
<PAGE> 13
13
Securities or such Options were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any such Convertible
Securities and Options (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation upon the conversion or exchange of such
Convertible Securities or the exercise of such Options and the conversion or
exchange of the Convertible Securities issuable upon exercise of such Options
(the consideration in each case to be determined in the manner provided in
Section 5(c)(i)(C) and 5(c)(i)(D) hereof).
(3) In the event of any change in the number of shares of
Common Stock deliverable, or in the consideration payable to the Corporation,
upon exercise of such Options or upon conversion or exchange of such Convertible
Securities, including, but not limited to, a change resulting from the
antidilution provisions thereof, the applicable Conversion Prices of the Series
A, C, C-1, D and E Preferred Stock, to the extent in any way affected by or
computed using such Options or Convertible Securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such Options or the conversion or exchange of such Convertible
Securities.
(4) Upon the expiration or termination of any such Options or
any such rights to convert or exchange Convertible Securities, the applicable
Conversion Prices of the Series A, C, C-1, D and E Preferred Stock, to the
extent in any way affected by or computed using such Options or Convertible
Securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and Options and Convertible Securities which remain in
effect) that were actually issued upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to Section 5(c)(i)(E)(1) and (2)
hereof shall be appropriately adjusted to reflect any change, termination or
expiration of the type described in either Section 5(c)(i)(E)(3) or (4) hereof.
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to Section
5(c)(i)(E) hereof) by the Corporation after the Series D Issuance
Date other than:
(a) Common Stock issued pursuant to a transaction
described in Section 5(c)(iii) hereof;
<PAGE> 14
14
(b) shares of Common Stock or options to purchase
such Common Stock issued or to be issued to officers, employees
or directors of, or consultants to, the Corporation, pursuant to
any agreement, plan or arrangement approved by the Board of
Directors of the Corporation;
(c) Common Stock issued or issuable upon
conversion of shares of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock;
(d) Common Stock issued or to be issued by the
Corporation pursuant to equipment lease financing arrangements
with equipment lessors, or Common Stock reissued after the
repurchase thereof by the Corporation as a result of any
termination of a restricted stock purchase agreement or other
employee equity plan or arrangement to which the Corporation is a
party, which are approved by the Board of Directors; and
(e) warrants to purchase up to 22,500 shares of
Class A Common Stock (and the Common Stock issuable upon exercise
thereof).
(iii) In the event the Corporation at any time or from
time to time after the Series E Issuance Date fixes a record date
for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of shares of
Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive
directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without
payment of any consideration by such holder for the additional
shares of Common Stock or Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such
dividend, distribution, split or subdivision if no record date is
fixed), the applicable Conversion Prices of the Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock and Series E Preferred Stock shall be
appropriately decreased so that the number of shares of Class A
Common Stock issuable on conversion of each share of Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall
be increased in proportion to such increase in the aggregate number
of shares issuable with respect to Common Stock Equivalents, with
the number of shares issuable with respect to Common
<PAGE> 15
15
Stock Equivalents determined from time to time in the manner
provided for deemed issuances in Section 5(c)(i)(E) hereof.
(iv) If the number of shares of Common Stock outstanding
at any time after the Series E Issuance Date is decreased by a
combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the applicable
Conversion Prices for the Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall be appropriately increased
so that the number of shares of Class A Common Stock issuable on
conversion of each share of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall be decreased in proportion
to such decrease in the outstanding shares of Common Stock.
(d) Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 5(c)(iii) hereof,
then, in each such case for the purpose of this Section 5(d), the holders of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
entitled to a proportionate share of any such distribution as though they were
holders of the number of shares of Class A Common Stock into which their shares
of Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock are convertible as
of the record date fixed for the determination of the holders of shares of
Common Stock entitled to receive such distribution.
(e) Recapitalization. If at any time or from time to time
there shall be a recapitalization of Common Stock (other than a subdivision,
combination or consolidation, merger or sale of assets or stock transaction
otherwise provided for herein), provision shall be made so that each holder of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall
thereafter be entitled to receive, upon conversion of the Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, the number of shares of stock or other
securities or property of the Corporation or otherwise, receivable upon such
recapitalization by a holder of the number of shares of Common Stock into which
such shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock could
have been converted immediately prior to such recapitalization. In any such
case, appropriate adjustment shall be made in the application
<PAGE> 16
16
of the provisions of this Section 5 with respect to the rights of the holders of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock after the
recapitalization to the end that the provisions of this Section 5 (including
adjustments of the applicable Conversion Prices then in effect and the number of
shares purchasable upon conversion of the Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(f) No Impairment. The Corporation will not, by amendment of
this Certificate of Incorporation or through any reorganization,
recapitalization or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of shares of the Series A Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock against impairment.
(g) No Fractional Shares. No fractional shares shall be
issued upon conversion of the Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, and the number of shares of Class A Common Stock to be issued
shall be rounded down to the nearest whole share, and there shall be no payment
to a holder of shares of Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
for any such rounded fractional share. Whether or not fractional shares result
from such conversion shall be determined on the basis of the total number of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock the holder
is at the time converting into Class A Common Stock and the number of shares of
Class A Common Stock issuable upon such aggregate conversion.
(h) Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the applicable Conversion Prices of the
Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock pursuant to this Section
5, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of shares of Series A Preferred Stock, Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock and Series E Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder
<PAGE> 17
17
of shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (i)
such adjustment and readjustment, (ii) the applicable Conversion Prices at the
time in effect and (iii) the number of shares of Class A Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of a share of Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock.
(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of shares of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock, at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Class A Common Stock, solely for the purpose of effecting
the conversion of the shares of Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, such number of its shares of Class A Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock, and if at any time the
number of authorized but unissued shares of Class A Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, then in addition to such other
remedies as shall be available to the holder of such shares of Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Class A Common Stock to such number of
shares as shall be sufficient for such purposes.
(k) Notices. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series A Preferred Stock,
Series C Preferred Stock, Series
<PAGE> 18
18
C-1 Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall
be deemed given when received if delivered via courier or sent by facsimile, by
telex, or by United States mail, postage prepaid, and addressed to each holder
of record at his, her or its address appearing on the books of the Corporation.
6. Status of Converted Stock. In the event any shares of Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock are converted pursuant to Section 5
hereof, the shares so converted shall be canceled, retired and eliminated and
shall not be reissued by the Corporation.
7. Voting Rights.
(a) Each holder of a share of Series A Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock shall have the right to one vote for each share of
Class A Common Stock into which such Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock could then be converted (with any fractional share determined
on an aggregate conversion basis being rounded down to the nearest whole share).
(b) The Board of Directors of the Corporation shall be
determined and shall be elected in accordance with the provisions of the
Stockholders Agreement.
(c) At any meeting called for the purpose of electing
directors, the presence in person or by proxy of the holders of record of a
majority in interest of the Corporation's voting securities shall constitute a
quorum for the election of directors to be elected by such holders.
(d) Any action required to be taken at any meeting of
stockholders, or any action which may be taken at any meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote if a consent in writing, setting forth the action as taken, shall be signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Prompt notice
of the taking of the corporate action without a meeting by less than unanimous
consent shall be given to those stockholders who have not consented in writing.
(e) Except as otherwise provided in this Certificate of
Incorporation of the Corporation or by applicable law, the holders of shares of
Series A Preferred Stock, Series C
<PAGE> 19
19
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Corporation and applicable law, and shall
vote, together with the holders of shares of Class A Common Stock (and any other
class or series of stock entitled to vote together as one class with the Class A
Common Stock), with respect to any question upon which holders of shares of
Class A Common Stock have the right to vote, as a single class.
8. Optional Redemption of Series E Preferred Stock, Series D
Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock.
(a) Series C Preferred Stock. Subject to the provisions of
Section 8(b) and Section 8(c) below, at any time after five (5) years from the
Series C Issuance Date, but in no event more frequently than once per year, the
holders of at least sixty percent (60%) (the "Option Holders") of the then
outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock,
voting together as a class, may notify the Corporation that all or some of the
shares of Series C Preferred Stock and Series C-1 Preferred Stock held by such
holders shall be redeemed (an "Optional Series C Redemption"). Upon its receipt
of such notice, the Corporation shall (to the extent it is then lawfully able to
do so), but subject to the provisions of Section 8(b) and Section 8(c) below,
redeem from the holders requesting such redemption (including those holders who
later request redemption on a timely basis as hereinafter provided) the
outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock
specified in said request by payment in cash in respect of each share redeemed
of an amount equal to the Series C Liquidation Preference. Upon receipt of any
such request as to an Optional Series C Redemption, the Corporation shall
promptly give written notice of the redemption request to each nonrequesting
holder of record of the shares of Series C Preferred Stock and Series C-1
Preferred Stock and to each holder of shares of Series E Preferred Stock and
Series D Preferred Stock, postage prepaid, at the post office address last shown
on the records of the Corporation. With respect to an Optional Series C
Redemption, nonrequesting holders of shares of Series C Preferred Stock and
Series C-1 Preferred Stock shall have thirty (30) days from the date such notice
is mailed to request in writing redemption of their Series C Preferred Stock and
Series C-1 Preferred Stock on the terms contained herein and on the date of
redemption set forth in Section 8(c), and all such requests shall be deemed to
have been received by the Corporation on the date of the initial request by the
Option Holders. Notwithstanding the foregoing, if the Series D Preferred Stock
has elected to be redeemed pursuant to Section 8(b) below and/or if the Series E
Preferred Stock has elected to be redeemed pursuant to Section 8(c) below, no
payments shall be made with respect to this Section 8(a) until the Series D
Liquidation Preference (including any principal, interest or other amounts
represented by a promissory note) with respect to each share of Series D
Preferred Stock then outstanding shall have been paid in full and/or the Series
E
<PAGE> 20
20
Liquidation Preference (including any principal, interest or other amounts
represented by a promissory note) with respect to each share of Series E
Preferred Stock then outstanding shall have been paid in full.
(b) Series D Preferred Stock. If (i) the Series D Preferred
Stock has not been converted to Common Stock pursuant to Section 5(a) (ii) on or
before March 5, 2004 or (ii) in the event that any other capital stock of the
Corporation (or any securities convertible into or exercisable or exchangeable
into capital stock of the Corporation) is to be redeemed for any reason, upon
the election (the "Series D Election") by the holders of sixty-six and
two-thirds of the then outstanding shares of Series D Preferred Stock, the
Corporation shall redeem all of the shares of Series D Preferred Stock by paying
a per share sum equal to the Series D Liquidation Preference. The Series D
Liquidation Preference shall be paid on a pari passu basis with the Series E
Liquidation Preference (if the Series E Preferred Stock has elected to be
redeemed pursuant to Section 8(c) below) and before any redemption payment is
made in respect of any other capital stock of the Corporation (or any securities
convertible into or exercisable or exchangeable into capital stock of the
Corporation). The Corporation shall pay to each holder of Series D Preferred
Stock (who has not converted pursuant to Section 5 prior to the date of such
redemption) on the 90th day after the date of the Series D Election the Series D
Liquidation Preference in cash in an amount equal to one-third of the Series D
Liquidation Preference and in the form of a promissory note in an aggregate
amount equal to two-thirds of the Series D Liquidation Preference. The note
shall bear interest, compounded quarterly, through the date of payment, at the
Defined Rate (as defined herein) on the Initial Redemption Date (as defined
below), such rate to be computed on the basis of a 360-day year. Payments on the
promissory note shall be payable in two annual installments on each of the first
and second anniversaries of the Initial Redemption Date (each a "Redemption
Date") for such Series D Preferred Stock unless such anniversary falls on a day
which is not a business day in San Francisco, California, in which case the
applicable redemption installment shall be due and payable on the next business
day.
(c) Series E Preferred Stock. If (i) the Series E Preferred
Stock has not been converted into Common Stock pursuant to Section 5(a)(ii) on
or before the fifth anniversary of the Series E Issuance Date or (ii) in the
event that any other capital stock of the Corporation (or any securities
convertible into or exercisable or exchangeable into capital stock of the
Corporation) is to be redeemed for any reason upon the election (the "Series E
Election") by the holders of sixty-six and two-thirds of the then outstanding
shares of Series E Preferred Stock, the Corporation shall redeem all of the
shares of Series E Preferred Stock by paying a per share sum equal to the Series
E Liquidation Preference. The Series E Liquidation Preference shall be paid on a
pari passu basis with the Series D Liquidation Preference (if the Series D
Preferred Stock
<PAGE> 21
21
has elected to be redeemed pursuant to Section 8(b) above) and before any
redemption payment is made in respect to any other capital stock of the
Corporation (or any securities convertible into or exercisable or exchangeable
into capital stock of the Corporation). The Corporation shall pay to each holder
of Series E Preferred Stock (who has not converted pursuant to Section 5 prior
to the date of such redemption) on the 90th day after the date of the Series E
Election, the Series E Liquidation Preference in cash in an amount equal to
one-third of the Series E Liquidation Preference and in the form of a promissory
note in an aggregate amount equal to two-thirds of the Series E Liquidation
Preference. The note shall bear interest, compounded quarterly, through the date
of payment, at the Defined Rate (as defined below) on the Initial Redemption
Date (as defined below), such rate to be computed on the basis of a 360-day
year. Payments on the promissory note shall be payable in two annual
installments on each of the first and second anniversaries of the Initial
Redemption Date for such Series E Preferred Stock unless such anniversary falls
on a day which is not a business day in Atlanta, Georgia, in which case the
applicable redemption installment shall be due and payable on the next business
day.
(d) Redemption Date. Subject to Section 8(b) and Section
8(c), the Corporation shall redeem the shares of Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
to be redeemed hereunder no later than ninety (90) days after the date of the
request by the initially requesting holders of shares of Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, as the case may be. Such date shall be the "Initial Redemption
Date" as described herein.
(e) Procedure. At least thirty (30) days prior to the Initial
Redemption Date, written notice shall be mailed, postage prepaid, to the holder
of record of shares of Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock to be redeemed, at such
holder's post office address last shown on the records of the Corporation,
notifying such holder of the redemption of such shares to be redeemed at that
time, specifying the Initial Redemption Date, the applicable redemption price,
and calling upon such holder to surrender to the Corporation, in the manner and
at the place designated, such holder's certificate or certificates representing
the shares to be redeemed (such notice is hereinafter referred to as the
"Optional Redemption Notice"). On or after the Initial Redemption Date, each
holder of shares of Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock or Series E Preferred Stock to be redeemed shall surrender
such holder's certificate or certificates representing shares to the
Corporation, in the manner and at the place designated in the Optional
Redemption Notice, and thereupon the applicable redemption price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner of such shares and each surrendered
certificate shall be canceled. In the event less than all
<PAGE> 22
22
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(f) Insufficient Funds. If the funds of the Corporation
legally available for redemption of shares of Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of Series
C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock to be redeemed on such date, those funds that are
legally available shall be used to redeem the maximum number of shares of Series
D Preferred Stock and Series E Preferred Stock first ratably among the holders
of such shares to be redeemed. To the extent that funds remain after payment of
the full Series D Liquidation Preference (including any and all principal,
interest and other amounts represented by any promissory notes issued to the
holders upon redemption and the full Series E Liquidation Preference (including
any and all principal, interest and other amounts represented by any promissory
notes issued to the holders upon redemption)), those funds will be used to
redeem the maximum number of shares of Series C Preferred Stock and Series C-1
Preferred Stock ratably. The shares of Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein. At
any time thereafter when additional funds of the Corporation are legally
available for redemption of shares of Preferred Stock such funds shall
immediately be used to redeem the balance of the shares which the Corporation
has become obligated to redeem on any Redemption Date but which it has not
redeemed, at a price per share equal to the applicable redemption price (as
previously determined), plus interest, compounded quarterly and calculated on
the basis of a 360 day year, on the Initial Redemption Price at the Defined Rate
(as defined hereinafter) accrued from and after the Initial Redemption Date to
the date of actual redemption. As used herein, the "Defined Rate" shall mean a
rate per annum equal to (i) the highest rate then paid by the Corporation for
indebtedness for borrowed money, plus one hundred (100) basis points, or (ii) if
the Corporation has no indebtedness for borrowed money then outstanding, then
ten percent (10%), but in no event more than the maximum amount permissible by
law.
(g) Limitation on Optional Redemption of Series C and C-1
Preferred Stock. If the aggregate Series C Liquidation Preference payable on a
Redemption Date exceeds fifty percent (50%) of the Corporation's cumulative
retained earnings (as adjusted to reflect previous repurchases), calculated in
accordance with generally accepted accounting principles consistently applied,
on such date, then the Corporation only need redeem the maximum number of shares
of Series C Preferred Stock and Series C-1 Preferred Stock ratably among the
holders of such shares to be redeemed, such that the aggregate Series C
Liquidation Preference does not exceed fifty percent of cumulative retained
earnings. The shares of Series C Preferred Stock and
<PAGE> 23
23
Series C-1 Preferred Stock not redeemed shall remain outstanding and entitled to
all the rights and preferences provided herein. At the end of each fiscal
quarter thereafter when the Corporation has generated additional retained
earnings, fifty percent of such additional retained earnings shall immediately
be used to redeem the balance of the shares which the Corporation has become
obligated to redeem on any Redemption Date but which it has not redeemed, at a
price per share equal to the Series C Liquidation Preference (as previously
determined), plus interest, compounded quarterly and calculated on the basis of
a 360 day year, on the Series C Liquidation Preference at the Defined Rate
accrued from and after the Redemption Date to the date of actual redemption.
(h) Deposit of Optional Redemption Price. On or prior to the
Initial Redemption Date, the Corporation shall deposit the redemption price with
respect to all shares of Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock designated for redemption
in the Optional Redemption Notice, the Series D Election or the Series E
Election and not yet redeemed with a bank or trust company having aggregate
capital and surplus in excess of $50,000,000.00 as a trust fund for the benefit
of the respective holders of the shares designated for the redemption and not
yet redeemed, with irrevocable instructions and authority to the bank or trust
company to pay the redemption price for such shares to their respective holders
on or after the Initial Redemption Date upon receipt of notification from the
Corporation that such holder has surrendered his shares certificate to the
Corporation pursuant to Section 8(d) hereof, subject to the priority provision
contained in Section 8(b) and Section 8(c) providing for payment of the Series D
Liquidation Preference and/or the Series E Liquidation Preference in absolute
priority to the redemption payments to other shareholders. Such instructions
shall also provide that any funds deposited by the Corporation pursuant to this
Section 8(h) for the redemption of shares subsequently converted into shares of
Common Stock no later than the third (3rd) day preceding the Initial Redemption
Date shall be returned to the Corporation forthwith upon such conversion. The
balance of any funds deposited by the Corporation pursuant to this Section 8(h)
remaining unclaimed at the expiration of two (2) years following the Initial
Redemption Date shall be returned to the Corporation upon its request expressed
in a resolution of its Board of Directors; provided, however, that the
Corporation's obligation to pay the applicable redemption price shall continue.
(i) Notwithstanding any provision of this Section 8 to the
contrary, the Corporation shall not make any redemption payments in respect of
its capital stock (or any securities convertible into or exercisable or
exchangeable into capital stock of the Corporation), from and after any election
by the holders of the Series D Preferred Stock and/or the holders of the Series
E Preferred Stock to cause such shares to be redeemed hereunder unless and until
the aggregate Series D Liquidation Preference in respect of the shares of Series
D Preferred Stock
<PAGE> 24
24
(including, without limitation, any principal, interest and any other amounts
due on any promissory notes issued to such holders upon redemption) and/or the
aggregate Series E Liquidation Preference in respect of the shares of Series E
Preferred Stock (including, without limitation, any principal, interest and any
other amounts due on any promissory notes issued to such holders upon
redemption) shall have been paid in full.
(j) The Corporation will not, by amendment of its Certificate
if Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by this Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 8 and in taking all action as may be necessary or appropriate to
protect the redemption rights of the holders of the Series E Preferred Stock,
Series D Preferred Stock, Series C Preferred Stock and Series C-1 Preferred
Stock against impairment.
9. Common Stock.
(a) Dividend Rights. The holders of shares of Class A Common
Stock and Class B Common Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of any asset of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors, subject to the preference, liquidation and participation
rights of the Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, more
fully set forth in Sections 3 and 4 hereof.
(b) Liquidation Rights. Upon the liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation shall be
distributed as provided in Section 4 hereof.
(c) Redemption. Common Stock is not redeemable without the
consent of the holder thereof.
(d) Voting Rights. The holder of each share of Class A Common
Stock shall have the right to one vote, and shall be entitled to notice of any
meeting in accordance with the Bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law. Class B
Common Stock shall have no voting rights.
<PAGE> 25
25
10. Restrictions and Limitations. (a) So long as shares of Series C
Preferred Stock, Series C-1 Preferred Stock or Series D Preferred Stock remain
outstanding, the Corporation shall not, without the consent of the holders of a
majority of the Series C Preferred Stock and Series C-1 Preferred Stock then
outstanding, voting together as a separate class, and the consent of the holders
of sixty-six and two-thirds of the Series D Preferred Stock then outstanding,
voting as a separate class.
(i) Authorize or issue, or obligate itself to issue, any
other equity security (including any security convertible into or exercisable
for any equity security) senior to or on a parity with the Series D Preferred
Stock as to dividend rights or redemption rights or liquidation preferences;
(ii) Pay, declare or set aside any dividend on any equity
security not in accordance with Sections 3 and 4 hereof;
(iii) Authorize or enter into any merger, consolidation,
recapitalization or reorganization, or sale of substantially all of its assets
unless in such merger, consolidation, recapitalization, reorganization or sale
the holders of the Series D Preferred receive at least $17.58 (as adjusted for
stock splits, reverse stock splits and similar type transactions or occurrences
after March 5, 1999) per share of Series D Preferred Stock; or
(iv) Repurchase or acquire its own shares other than pursuant
to this Certificate of Incorporation or in connection with shares held by
employees upon the termination of such employee's employment with the
Corporation pursuant to the terms and conditions of an employment agreement
previously approved by the Corporation's Board of Directors.
(b) So long as shares of Series E Preferred Stock remain
outstanding, the Corporation shall not, without the consent of the holders of
sixty-six and two-thirds of the Series E Preferred Stock then outstanding,
voting as a separate class, effect any of the transactions described in
subclauses (i), (ii) or (iv) of clause (a) of this Section 10.
(c) So long as shares of Series C Preferred Stock or Series C-1
Preferred Stock remain outstanding, the Corporation shall not, without the
consent of the holders of a majority of the Series C Preferred Stock and Series
C-1 Preferred Stock then outstanding, voting together as a separate class, amend
or repeal any provision of the Certificate of Incorporation or Bylaws of the
Corporation if such amendment would change any of the rights,
<PAGE> 26
26
preferences or privileges provided herein for the benefit of, or adversely
affect, the Series C Preferred Stock or Series C-1 Preferred Stock.
(d) So long as shares of Series D Preferred Stock remain
outstanding, the Corporation shall not, without the consent of the holders of
sixty-six and two-thirds of the Series D Preferred Stock then outstanding,
voting as a separate class, amend or repeal any provision of the Certificate of
Incorporation or Bylaws of the Corporation if such amendment would change any of
the rights, preferences or privileges provided herein for the benefit of, or
adversely affect, the Series D Preferred Stock.
(e) So long as shares of Series E Preferred Stock remain
outstanding, the Corporation shall not, without the consent of the holders of
sixty-six and two-thirds of the Series E Preferred Stock then outstanding,
voting as a separate class, amend or repeal any provision of the Certificate of
Incorporation or Bylaws of the Corporation if such amendment would change any of
the rights, preferences or privileges provided herein for the benefit of, or
adversely affect, the Series E Preferred Stock.
FIFTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for (i) any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) any matter in respect of which such director shall be liable under
Section 174 of the Delaware General Corporation Law or any amendment thereto or
successor provision thereof, or (iv) any transaction from which the director
derived an improper personal benefit. If the General Corporation Law of the
State of Delaware is amended hereafter to authorize further elimination or
limitation of liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware. Neither the amendment nor
repeal of this Article FIFTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article FIFTH, shall
eliminate or reduce the effect of this Article FIFTH in respect of any matter
occurring, or any cause of action, suit, or claim that, but for this Article
FIFTH, would accrue or arise, prior to such amendment, repeal, or adoption of an
inconsistent provision. The Corporation shall, to the full extent permitted by
Section 145 of the Delaware General Corporation Law, as amended from time to
time, indemnify all persons whom it has the power to indemnify pursuant thereto.
<PAGE> 27
27
***
4. The foregoing Amended and Restated Certificate of Incorporation
has been duly adopted by the Corporation's Board of Directors and stockholders
in accordance with the provisions of Section 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has duly executed this Amended
and Restated Certificate of Incorporation this __ day of July, 1999 and declares
under the penalty of perjury that the matters set forth in the foregoing
Certificate are true of his own knowledge.
---------------------
Paul T. Sheils
President and Chief Executive Officer
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDSCAPE, INC.
Medscape, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Medscape, Inc. The Corporation was
originally incorporated under the name Medscape (DEL.), Inc., and the date of
filing of its original Certificate of Incorporation with the Secretary of State
of the State of Delaware is August 25, 1998, as amended on December 23, 1998,
amended and restated on March 5, 1999, further amended on May 17, 1999, and
further amended and restated on _____________, 1999.
2. This Amended and Restated Certificate of Incorporation amends and
restates the Amended and Restated Certificate of Incorporation of the
Corporation, as now in effect. This Amended and Restated Certificate of
Incorporation was duly adopted by the Board of Directors and stockholders of the
Corporation entitled to vote in respect thereof in the manner and by the vote
prescribed by Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware (the "DGCL").
3. The text of the Amended and Restated Certificate of Incorporation is
hereby amended and restated in its entirety to provide as herein set forth in
full.
ARTICLE I
NAME
----
The name of the Corporation is Medscape, Inc.
ARTICLE II
REGISTERED OFFICE
-----------------
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, Wilmington, DE 19801. The name of its registered
agent at such address is The Corporation Trust Company in the County of New
Castle.
<PAGE> 2
ARTICLE III
PURPOSES
--------
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
-------------
Section 1. Number of Shares.
----------------------------
The total number of shares of capital stock which the Corporation shall
have the authority to issue is One Hundred and Five Million (105,000,000)
shares, of which (i) One Hundred Million (100,000,000) shares shall be Common
Stock, par value $.01 per share (the "Common Stock") and (ii) Five Million
(5,000,000) shares shall be Undesignated Preferred Stock, par value $.01 per
share (the "Undesignated Preferred Stock"). As set forth in this Article IV, the
Board of Directors or any authorized committee thereof is authorized from time
to time to establish and designate one or more series of Undesignated Preferred
Stock, to fix and determine the variations in the relative rights and
preferences as between the different series of Undesignated Preferred Stock in
the manner hereinafter set forth in this Article IV, and to fix or alter the
number of shares comprising any such series and the designation thereof to the
extent permitted by law.
The number of authorized shares of the class of Undesignated Preferred
Stock may be increased or decreased (but not below the number of shares
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Undesignated Preferred Stock,
pursuant to the resolution or resolutions establishing the class of Undesignated
Preferred Stock or this Amended and Restated Certificate of Incorporation, as it
may be amended from time to time.
Section 2. General.
-------------------
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, Sections 3 and
4 of this Article IV.
Section 3. Common Stock.
------------------------
Subject to all of the rights, powers and preferences of the
Undesignated Preferred Stock, and except as provided by law or in this Article
IV (or in any certificate
2
<PAGE> 3
of designation of any series of Undesignated Preferred Stock) or by the Board of
Directors or any authorized committee thereof pursuant to this Article IV:
(a) the holders of the Common Stock shall have the exclusive
right to vote for the election of Directors and on all other matters requiring
stockholder action, each share being entitled to one vote;
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as declared by
the Board of Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock in accordance with their
respective rights and interests.
Section 4. Undesignated Preferred Stock.
----------------------------------------
Subject to any limitations prescribed by law, the Board of Directors or
any authorized committee thereof is expressly authorized to provide for the
issuance of the shares of Undesignated Preferred Stock in one or more series of
such stock, and by filing a certificate pursuant to applicable law of the State
of Delaware, to establish or change from time to time the number of shares to be
included in each such series, and to fix the designations, powers and
preferences and the relative, participating, optional or other special rights of
the shares of each series and any qualifications, limitations and restrictions
thereof. Any action by the Board of Directors or any authorized committee
thereof under this Article IV.4 shall require the affirmative vote of a majority
of the Directors then in office or a majority of the members of such committee.
The Board of Directors or any authorized committee thereof shall have the right
to determine or fix one or more of the following with respect to each series of
Undesignated Preferred Stock to the extent permitted by law:
(a) The distinctive serial designation and the number of
shares constituting such series;
(b) The dividend rates or the amount of dividends to be paid
on the shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares
of such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions on which, such
shares may be redeemed;
3
<PAGE> 4
(e) The amount or amounts payable upon the shares of such
series and any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation
and, if so convertible or exchangeable, the conversion price or prices, or the
rate or rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
(h) The price or other consideration for which the shares of
such series shall be issued;
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
Undesignated Preferred Stock (or series thereof) and whether such shares may be
reissued as shares of the same or any other class or series of stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any authorized
committee thereof may deem advisable.
ARTICLE V
DIRECTORS
---------
Section 1. General.
--------------------
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors except as otherwise provided
herein or required by law.
Section 2. Election of Directors.
----------------------------------
Election of Directors need not be by written ballot unless the By-laws
of the Corporation shall so provide.
4
<PAGE> 5
Section 3. Terms of Directors.
-------------------------------
The number of Directors of the Corporation shall be fixed by resolution
duly adopted from time to time by the Board of Directors. The Directors, other
than those who may be elected by the holders of any series of Undesignated
Preferred Stock of the Corporation, shall be classified, with respect to the
term for which they severally hold office, into three classes, as nearly equal
in number as possible. The initial Class I Directors shall serve for a term
expiring at the annual meeting of stockholders to be held in 2000, the initial
Class II Directors shall serve for a term expiring at the annual meeting of
stockholders to be held in 2001, and the initial Class III Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 2002. At
each annual meeting of stockholders, the successor or successors of the class of
Directors whose term expires at that meeting shall be elected by a plurality of
the votes cast at such meeting and shall hold office for a term expiring at the
annual meeting of stockholders held in the third year following the year of
their election. The Directors elected to each class shall hold office until
their successors are duly elected and qualified or until their earlier
resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Amended and Restated Certificate of Incorporation, the
holders of any one or more series of Undesignated Preferred Stock shall have the
right, voting separately as a series or together with holders of other such
series, to elect Directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Amended and Restated
Certificate of Incorporation and any certificate of designations applicable
thereto, and such Directors so elected shall not be divided into classes
pursuant to this Article V.3.
During any period when the holders of any series of Undesignated
Preferred Stock have the right to elect additional Directors as provided for or
fixed pursuant to the provisions of Article IV hereof, then upon commencement
and for the duration of the period during which such right continues: (i) the
then otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Undesignated Preferred Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions, and
(ii) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification, resignation
or removal. Except as otherwise provided by the Board of Directors in the
resolution or resolutions establishing such series, whenever the holders of any
series of Undesignated Preferred Stock having such right to elect additional
Directors are divested of such right pursuant to the provisions of such stock,
the terms of office of all such additional Directors elected by the holders of
such stock, or elected to fill any vacancies resulting from the death,
resignation, disqualification or removal of such additional Directors, shall
5
<PAGE> 6
forthwith terminate and the total and authorized number of Directors of the
Corporation shall be reduced accordingly.
Section 4. Vacancies.
----------------------
Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
ARTICLE VI
LIMITATION OF LIABILITY
-----------------------
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the Director derived an improper personal benefit. If the
DGCL is amended after the effective date of this Amended and Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of Directors, then the liability of a
Director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
6
<PAGE> 7
ARTICLE VII
AMENDMENT OF BY-LAWS
--------------------
Except as otherwise provided by law, the By-laws of the Corporation may
be amended or repealed by the Board of Directors.
ARTICLE VIII
AMENDMENT OF CERTIFICATE OF INCORPORATION
-----------------------------------------
The Corporation reserves the right to amend or repeal this Amended and
Restated Certificate of Incorporation in the manner now or hereafter prescribed
by statute and this Amended and Restated Certificate of Incorporation, and all
rights conferred upon stockholders herein are granted subject to this
reservation. No amendment or repeal of this Amended and Restated Certificate of
Incorporation shall be made unless the same is first approved by the Board of
Directors pursuant to a resolution adopted by the Board of Directors in
accordance with Section 242 of the DGCL, and, except as otherwise provided by
law, thereafter approved by the stockholders. Whenever any vote of the holders
of voting stock is required, and in addition to any other vote of holders of
voting stock that is required by this Restated Certificate of Incorporation or
by law, the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal, voting
together as a single class, at a duly constituted meeting of stockholders called
expressly for such purpose shall be required to amend or repeal any provisions
of this Amended and Restated Certificate of Incorporation.
I, Paul T. Sheils, President and Chief Executive Officer of the
Corporation, for the purpose of amending and restating the Corporation's Amended
and Restated Certificate of Incorporation pursuant to the General Corporation
Law of the State of Delaware, do make this certificate, hereby declaring and
certifying that this is my act and deed on behalf of the Corporation this ____
day of ________, 1999.
------------------
Paul T. Sheils
President and Chief Executive Officer
7
<PAGE> 1
Exhibit 4.2
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.
WARRANT TO PURCHASE
CLASS B COMMON STOCK
OF
MEDSCAPE, INC.
VOID AFTER MARCH 5, 2002
WARRANT NO. 1
This Warrant is issued to Merchant Capital Inc., a wholly-owned
subsidiary of Credit Suisse First Boston Inc. or his registered assigns
("Holder") by Medscape, Inc., a Delaware corporation (the "Company"), on March
5, 1999 (the "Warrant Issue Date").
1. Purchase Shares. Subject to the terms and conditions hereinafter set
forth, the Holder is entitled, upon surrender of this Warrant at the principal
office of the Company (or at such other place as the Company shall notify the
holder hereof in writing), to purchase from the Company up to 5,955 fully paid
and nonassessable shares of Class B Common Stock, par value $.01 per share, of
the Company, as constituted on the Warrant Issue Date (the "Class B Common
Stock"). The number of shares of Class B Common Stock issuable pursuant to this
Section 1 (The "Shares") shall be subject to adjustment pursuant to Section 9
hereof.
2. Exercise Price. The purchase price for the Shares shall be $0.01, as
adjusted from time to time pursuant to Section 9 hereof (the "Exercise Price").
3. Exercise Period. This Warrant shall be exercisable, in whole or in
part, during the term commencing on the Warrant Issue Date and ending at 5:00
p.m. New York time on March 5, 2002; provided, however, that in the event of (a)
the closing of the Company's sale or transfer of all or substantially all of its
assets, or (b) the closing of the acquisition of the Company by another entity
by means of merger, consolidation or other transaction or series of related
transactions, resulting in the exchange of the outstanding shares of the
Company's capital stock such that the stockholders of the Company prior to such
transaction own, directly or indirectly, less than 50% of the voting power of
the surviving entity, this Warrant shall, on the date of such event, no longer
be exercisable and become null and void. In the event of a proposed transaction
of the kind described above, the Company shall notify the holder of the Warrant
at least fifteen (15) days prior to the consummation of such event or
transaction.
<PAGE> 2
4. Method of Exercise. While this Warrant remains outstanding and
exercisable in accordance with Section 3 above, the Holder may exercise, in
whole or in part, the purchase rights evidenced hereby. Such exercise shall be
effected by:
(a) the surrender of the Warrant, together with a duly executed copy
of the form of Notice of Election attached hereto, to the Secretary of the
Company at its principal offices; and
(b) the payment to the Company of an amount equal to the aggregate
Exercise Price for the number of Shares being purchased.
5. Net Exercise. In lieu of exercising this Warrant pursuant to Section
4, the Holder may elect to receive, without the payment by the Holder of any
additional consideration, shares of Class B Common Stock equal to the value of
this Warrant (or the portion thereof being canceled) by surrender of this
Warrant at the principal office of the company together with notice of such
election, in which event the Company shall issue to the Holder hereof a number
of shares of Class B Common Stock computed using the following formula:
Y(A - B)
---------
X = A
Where: X = The number of shares of Class B Common Stock to be
issued to the Holder pursuant to this net exercise;
Y = The number of Shares in respect of which the net
issue election is made; A = The fair market value of one
share of the Class B Common Stock at the time the net
issue election is made;
B = The Exercise Price (as adjusted to the date of the
net issuance).
For purposes of this Section 5, the fair market value of one share of Class B
Common Stock (or, to the extent all such Class B Common Stock has been
redesignated into the Company's Common Stock) as of a particular date shall be
determined as follows: (i) if traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty (30) day
period ending three (3) days prior to the net exercise election; (ii) if traded
over-the-counter, the value shall be deemed to be the average of the closing bid
or sale prices (whichever is applicable) over the thirty (30) day period ending
three (3) days prior to the net exercise; and (iii) if there is no active public
market, the value shall be the fair market value thereof, as determined in good
faith by the Board of Directors of the Company; provided, that, if the Warrant
is being exercised upon the closing of the issuance and sale of shares of Common
Stock of the Company in the Company's first underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "IPO"), the value will be the initial "Price to Public" of
one share of such Class B Common Stock (or Common Stock issuable upon conversion
of such Class B Common Stock) specified in the final prospectus with respect to
such offering.
6. Representations and Warranties of Holder. The Holder hereby
represents and warrants that:
(a) Authorization. The Holder has full power and authority to enter
into this Warrant, and this Warrant constitutes its valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and
<PAGE> 3
other laws of general application affecting enforcement of creditors' rights
generally and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
(b) Purchase Entirely for Own Account. This Warrant is being issued
to such Holder in reliance upon such Holder's representation to the Company,
which by such Holder's execution of this Warrant such Holder hereby confirms,
that this Warrant, the Class B Common Stock to be received by such Holder upon
exercise of this Warrant and the Common Stock issuable upon redesignation
thereof (collectively, the "Securities") will be acquired for investment for
such Holder's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Holder has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Warrant, such Holder further represents that such
Holder does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Securities.
(c) Disclosure of Information. Such Holder further represents that
it has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Securities and the
business, properties, prospects and financial condition of the Company.
(d) Investment Experience. Such Holder is an investor in securities
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Securities. If other than an
individual, Holder also represents it has not been organized for the purpose of
acquiring the Securities.
(e) Accredited Investor. Such Holder is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
(f) Restricted Securities. Such Holder understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, such Holder
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
(g) Further Limitations on Disposition. Without in any way limiting
the representations set forth above, such Holder further agrees not to make any
disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 6, provided and to the extent this Section is then applicable, and:
(i) There is then in effect a Registration Statement
under the Act covering such proposed disposition and such disposition is made in
accordance with such Registration statement; or
(ii) (A) Such Holder shall have notified the Company of
the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (B) if
reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company that
such disposition will not require registration of such securities under the Act.
It is agreed that the
<PAGE> 4
Company will not require opinions or counsel for transactions made pursuant to
Rule 144 except in unusual circumstances.
(iii) Notwithstanding the provisions of Paragraphs (i) and
(ii) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder (A) that is a partnership to a partner of
such partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner or the
transfer by gift, will or intestate succession of any partner to his or her
spouse or to the siblings, lineal descendants or ancestors of such partner or
his or her spouse, or (B) to any entity that is controlled by, controls or is
under common control with the Holder, if the transferee agrees in writing to be
subject to the terms hereof to the same extent as if he or she were an original
Holder hereunder.
(h) Legends. It is understood that the certificates evidencing the
Securities will bear a legend in substantially the following form:
"These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
7. Certificates for Shares. Upon the exercise of the purchase rights
evidenced by this Warrant, one or more certificates for the number of Shares so
purchased shall be issued as soon as practicable thereafter (with appropriate
restrictive legends, if applicable), and in any event within thirty (30) days of
the delivery of the subscription notice.
8. Issuance of Shares. The Company covenants that the Shares, when
issued pursuant to the exercise of this Warrant, will be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens, and charges
with respect to the issuance thereof.
9. Adjustment of Exercise Price and Number of Shares. The number of and
kind of securities purchasable upon exercise of this Warrant and the Exercise
Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company
shall at any time prior to the expiration of this Warrant subdivide its Class B
Common Stock, by split-up or otherwise, or combine its Class B Common Stock, or
issue additional shares of its Class B Common Stock or Common Stock as a
dividend with respect to any shares of its Class B Common Stock, the number of
Shares issuable on the exercise of this Warrant shall forthwith be
proportionately increased in the case of a subdivision or stock dividend, or
proportionately decreased in the case of a combination. Appropriate adjustments
shall also be made to the purchase price payable per share, but the aggregate
purchase price payable for the total number of Shares purchasable under this
Warrant (as adjusted) shall remain the same. Any adjustment under this Section
9(a) shall become effective at the close of business on the date the subdivision
or combination becomes effective, or as of the record date of such dividend, or
in the event that no record date is fixed, upon the making of such dividend.
(b) Reclassification, Reorganization and Consolidation. In case of
any reclassification, capital reorganization, or change in the Class B Common
Stock of the Company (other than as a result of a subdivision, combination, or
stock dividend provided for in Section 9(a) above), then as a condition of such
reclassification, reorganization, or change, lawful provision shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the
<PAGE> 5
Holder, so that the Holder shall have the right at any time prior to the
expiration of this Warrant to purchase, at a total price equal to that payable
upon the exercise of this Warrant, the kind and amount of shares of stock and
other securities and property receivable in connection with such
reclassification, reorganization, or change by a holder of the same number of
shares of Class B Common Stock as were purchasable by the Holder immediately
prior to such reclassification, reorganization, or change. In any such case
appropriate provisions shall be made with respect to the rights and interest of
the Holder so that the provisions hereof shall thereafter be applicable with
respect to any shares of stock or other securities and property deliverable upon
exercise hereof, and appropriate adjustments shall be made to the purchase price
per share payable hereunder, provided the aggregate purchase price shall remain
the same.
(c) Notice of Adjustment. When any adjustment is required to be made
in the number or kind of shares purchasable upon exercise of the Warrant, or in
the Warrant Price, the Company shall promptly notify the holder of such event
and of the number of shares of Class B Common Stock or other securities or
property thereafter purchasable upon exercise of this Warrant.
10. No Fractional Shares of Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares the Company shall make a cash
payment therefor on the basis of the Exercise Price then in effect.
11. No Stockholder Rights. Prior to exercise of this Warrant, the
Holder shall not be entitled to any rights of a stockholder with respect to the
Shares, including (without limitation) the right to vote such Shares, receive
dividends or other distributions thereon, exercise preemptive rights or be
notified of stockholder meetings, and such holder shall not be entitled to any
notice or other communication concerning the business or affairs of the Company.
However, nothing in this Section 11 shall limit the right of the Holder to be
provided the Notices required under this Warrant.
12. Transfers of Warrant. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable in whole or in part by the Holder to any person or entity upon
written notice to the Company. The transfer shall be recorded on the books of
the Company upon the surrender of this Warrant, properly endorsed, to the
Company at its principal offices, and the payment to the Company of all transfer
taxes and other governmental charges imposed on such transfer. In the event of a
partial transfer, the Company shall issue to the holders one or more appropriate
new warrants.
13. Market Standoff. The Holder hereby agrees that it will not, without
the prior written consent of the managing underwriter, during the period
commencing on the date of the final prospectus relating to the Company's initial
public offering and ending on the date specified by the Company and the managing
underwriter (such period not to exceed one hundred eighty (180 days) (i) lend,
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 (whether such shares or any such securities are
then owned by the Holder or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
provisions of this Section 13 shall only be applicable to the Holders if all
non-selling officers and directors of the Company enter into similar agreements.
The underwriters in connection with the Company's initial public offering are
intended third party beneficiaries of this Section 13 and shall have the right,
power and authority to enforce the provisions hereof as though they were a party
hereto.
<PAGE> 6
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the securities of the Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
14. Registration Rights. (a) If the Company proposes to file a
registration statement under the Securities Act of 1933, as amended, with
respect to an offering by the Company for its own account or, to the extent
permitted under applicable registration rights agreements, for the account of
any of its security holders of any class of equity security (other than (i) a
registration statement on a form which would not otherwise permit the sale by
the Holders or any other publicly registered offering pertaining to the issuance
of shares of capital stock under any benefit plan, (ii) a registration statement
in connection with an exchange offer or offering to the Company's existing
security holders or (iii) the Company's IPO), then the Company shall give
written notice of such proposed filing to the Holders of the Securities as soon
as practicable (but in no event less than 15 business days before the
anticipated filing date), and such notice shall offer such Holders the
opportunity to register such number of Registrable Securities (as defined below)
as each such Holder may request. For purposes of this Section 14 "Registrable
Securities" shall mean the Class B Common Stock and any other securities
issuable upon exercise of the Warrants.
(b) The Company shall use its best efforts to cause the managing
underwriter or underwriters (the "Underwriters") of a proposed underwritten
offering to permit the Registrable Securities requested to be included in the
registration statement for such offering to be included on not less favorable
terms and conditions as any similar securities of the Company or of such other
security holders included therein. Notwithstanding the foregoing, if the
managing Underwriter or Underwriters of such offering deliver a written opinion
to the Company that either because of (i) the kind or combination of securities
which the Holders, the Company and any other persons or entities intend to
include in such offering or (ii) the size of the offering which the Holders, the
Company and such other persons intend to make, are such that the success of the
offering would be adversely affected by the requested inclusion of the
Registrable Securities requested to be included, then (a) in the event that the
size of the offering is the basis of such managing Underwriter's opinion, the
amount of securities to be offered for the accounts of Non-Priority Persons (as
defined below) shall be reduced pro rata (according to the Registrable
Securities and other securities proposed for registration by Persons
("Non-Priority Persons") other than (x) the Company (if such registration was
initially to be filed for the account of the Company), (y) the other Persons for
whose account such registration was initially to be filed or (z) other
stockholders of the Company which have exercised registration rights pursuant to
that certain Amended and Restated Stockholders' Agreement dated March 5, 1999 by
and between the Company and the Stockholders (as defined therein), as the same
may be amended from time to time, or registration rights originally granted to
CBS Corporation) to the extent necessary to reduce the total amount of
securities to be included in such offering to the amount recommended by such
managing Underwriter or Underwriters; provided that if securities are being
offered for the account of Non-Priority Persons other than holders of
Registrable Securities, then with respect to the Registrable Securities intended
to be offered by Holders, the proportion by which the amount of such class of
securities intended to be offered by Holders is reduced shall not exceed the
proportion by which the amount of such class of securities intended to be
offered by Non-Priority Persons other than holders of Registrable Securities is
reduced; and (b) in the event that the kind (or combination) of securities to be
offered is the basis of such managing Underwriter's opinion, (x) the Registrable
Securities to be included in such offering shall be reduced as described in
clause (a) above (subject to the proviso in clause (a)) or (y) if the actions
described in clause (x) would, in the judgment of the managing Underwriter, be
insufficient to substantially eliminate the adverse effect that the requested
inclusion of the Registrable Securities would have on such offering, such
Registrable Securities will be excluded from such offering.
<PAGE> 7
(c) Indemnification and Contribution.
(i) Indemnification by the Company. The Company agrees to indemnify
and hold harmless each Holder of Registrable Securities, its officers,
directors, employees and agents and each Person who controls such Holder within
the meaning of either Section 15 of the Securities Act of 1933, as amended, or
Section 20(a) of the Securities Exchange Act of 1934, as amended (each such
Person being sometimes hereinafter referred to as an "Indemnified Holder") from
and against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and reasonable legal expenses) arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any registration statement or prospectus or in any amendment
or supplement thereto or in any preliminary prospectus, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(collectively, a "Violation"), except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or allegation thereof (x) based upon information relating to such
Indemnified Holder and furnished in writing to the Company by such Indemnified
Holder expressly for use therein or (y) that is corrected in any amendment or
supplement to the prospectus that was made available prior to the subject sale.
This indemnity will be in addition to any liability which the Company may
otherwise have. The Company shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if settled with
its written consent, or if there be a final judgment for the plaintiff in any
such action or proceeding, the Company agrees to indemnify and hold harmless
such Indemnified Holders from and against any loss or liability by reason of
such settlement or judgment to the extent set forth herein.
(ii) Indemnification by the Holders. Each Holder of Registrable
Securities agrees to indemnify and hold harmless the Company, its officers,
directors, employees and agents and each Person who controls the Company (the
"Related Persons") within the meaning of either Section 15 of the Securities Act
of 1933, as amended, or Section 20(a) of the Securities Exchange Act of 1934, as
amended, (and any underwriter and any other selling security holder under the
registration statement and their respective Related Persons) from and against
all losses, claims, damages, liabilities and expenses (including reasonable
costs of investigation and reasonable legal expenses) arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or based
upon any Violation, in each case to the extent that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; provided, that,
in no event shall any indemnity under this Section 14(c)(ii) exceed the gross
proceeds from the offering received by such Holder. This indemnity will be in
addition to any liability which the Holder may otherwise have. Any Holder shall
not be liable for any settlement of any such action or proceeding effected
without its written consent, but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the Holder agrees to indemnify and hold harmless the Company (and any
underwriter, other selling security holder or Related Person) from and against
any loss or liability by reason of such settlement or judgment to the extent set
forth herein.
(iii) Procedure. If any action or proceeding (including any
governmental investigation or inquiry) shall be brought or asserted against an
indemnified party in respect of which indemnity may be sought from an
indemnifying party, such indemnified party shall promptly notify the
indemnifying party in writing, and the indemnifying party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such indemnified party and the payment of all reasonable expenses. Such
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall be at the
<PAGE> 8
expense of such indemnified party except that the indemnifying party shall be
responsible for the reasonable fees and expenses of such counsel if (but only
if) (a) the indemnifying party has agreed to pay such fees and expenses or (b)
the indemnifying party shall have failed to assume the defense of such action or
proceeding and has failed to employ counsel reasonably satisfactory to such
indemnified party in any such action or proceeding or (c) the named parties to
any such action or proceeding (including any impleaded parties) include both
such indemnified party and the indemnifying party, and there are one or more
legal defenses available to such indemnified party which are different from or
additional to those available to the indemnifying party (in which case, if such
indemnified party notifies the indemnifying party in writing that it elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
or proceeding on behalf of such indemnified party, it being understood, however,
that the indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys at any time for such indemnified party and any other
indemnified party, which firm shall be designated in writing by such indemnified
party). In any case where an indemnified party shall be entitled to employ
separate counsel, such indemnified party and their counsel shall cooperate with
the indemnifying party and its counsel in the defense of any such action or
proceeding.
(iv) Contribution. If the indemnification provided for in paragraph
(c)(i) or (ii) is unavailable to an indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of the indemnifying party on the one hand and of the
indemnified party on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim. The Company and each Holder of Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this paragraph (iv)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
paragraph (iv) an Indemnified Holder shall not be required to contribute any
amount in excess of the amount by which the total net proceeds received by such
Indemnified Holder or its affiliated Indemnified Holders from the sale to the
public of Registrable Securities exceeds the amount of any damages which such
Indemnified Holder, or its affiliated Indemnified Holders, have otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act of 1933, as amended) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
15. Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required to include any Holder's Registrable Securities in such
underwriting unless such Holder accepts the terms of the underwriting as agreed
upon between the Company and the underwriters. To the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in
<PAGE> 9
connection with an underwritten public offering are in conflict with Section 14,
the provisions of the underwriting agreement shall control.
16. Termination of Registration Rights. The Company's obligation to
effect a registration of Securities shall terminate with respect to any Holder
at such time that all the Registrable Securities held by such Holder may be sold
under Rule 144 during any 90-day period.
17. Successors and Assigns. The terms and provisions of this Warrant
shall inure to the benefit of, and be binding upon, the Company and the Holders
hereof and their respective successors and assigns.
18. Amendments and Waivers. Any term of this Warrant may be amended and
the observance of any term of this Warrant may be waived (either generally or in
a particular instance and either retroactively or prospectively), with the
written consent of the Company and the Holder. Any waiver or amendment effected
in accordance with this Section shall be binding upon each holder of any Shares
purchased under this Warrant at the time outstanding (including securities into
which such Shares have been converted), each future holder of all such Shares,
and the Company.
19. Notices. All notices required under this Warrant and shall be
deemed to have been given or made for all purposes (i) upon personal delivery,
(ii) upon confirmation receipt that the communication was successfully sent to
the applicable number if sent by facsimile; (iii) one day after being sent, when
sent by professional overnight courier service, or (iv) five days after posting
when sent by registered or certified mail. Notices to the Company shall be sent
to the principal office of the Company (or at such other place as the Company
shall notify the Holder hereof in writing). Notices to the Holder shall be sent
to the address of the Holder on the books of the Company (or at such other place
as the Holder shall notify the Company hereof in writing).
20. Attorneys' Fees. If any action of law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in addition
to any other relief to which it may be entitled.
21. Captions. The section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
22. Governing Law. This Warrant shall be governed by the laws of the
State of New York as applied to agreements among New York residents made and to
be performed entirely within the State of York.
<PAGE> 10
NOTICE OF EXERCISE
To: COMPANY, INC.
The undersigned hereby elects to [check applicable subsection]:
________ (a) Purchase ________________ shares of Class B Common Stock
of Company, Inc., pursuant to the terms of the attached
Warrant and payment of the Exercise Price per share
required under such Warrant accompanies this notice;
OR
________ (b) Exercise the attached Warrant for [all of the shares]
[_________ of the shares] [cross out inapplicable
phrase] purchasable under the Warrant pursuant to the
net exercise provisions of Section 5 of such Warrant.
The undersigned hereby represents and warrants that the undersigned is
acquiring such shares for its own account for investment purposes only, and not
for resale or with a view to distribution of such shares or any part thereof.
WARRANTHOLDER:
________________________________________
By:
__________________________________
[NAME]
Address:
__________________________________
__________________________________
Date:__________________
Name in which shares should be registered:
_______________________________________
<PAGE> 1
STOCK PURCHASE AGREEMENT Exhibit 10.37
This Stock Purchase Agreement ("Agreement") is made and entered into as
of the 7th day of July, 1999, by and between NATIONAL DATA CORPORATION, a
Delaware corporation ("Purchaser"), and MEDSCAPE, INC., a Delaware corporation
("Seller").
In consideration of the mutual promises and covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. BASIC TRANSACTION
1.1 Authorization of Shares. Seller has authorized the issuance and
sale to Purchaser of 400,000 shares (the "PS Shares") of its Series E Preferred
Stock, par value $.01 per share, having all of the powers, designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such preferences and rights set
forth in the Amended and Restated Certificate of Incorporation of Seller (the
"Amended and Restated Certificate"), substantially in the form of Exhibit A
attached hereto, and 1,000,000 shares (the "CS Shares") of Class A Common Stock,
par value $.01 per share (the CS Shares, together with the PS Shares,
collectively referred to herein as the "Shares"), for the aggregate
consideration of Twenty Million Dollars ($20,000,000.00) ($25.00 per PS Share
and $10.00 per CS Share) to be paid as follows: (i) Ten Million Dollars
($10,000,000.00) in cash (the "Cash Equity Amount") and (ii) Ten Million Dollars
($10,000,000.00) as the non-cash equity amount of consideration provided by
Purchaser to Seller (the "Non-Cash Equity Amount") pursuant to the License and
Product Development Agreement (as hereinafter defined), the Non-Cash Equity
Amount to be attributed as set forth in Exhibit 11.1 to the License and Product
Development Agreement.
1.2 Issuance of the Shares. Subject to the terms and conditions hereof
and in reliance upon the representations, warranties, covenants and agreements
contained herein, Seller will issue, sell and deliver the Shares to Purchaser,
and Purchaser will purchase the Shares from Seller, in each case at the Closing
(as hereinafter defined).
1.3 Use of Proceeds. Seller, as determined by the Board of Directors
thereof, will use the Cash Equity Amount from the sale of the Shares for general
working capital.
2. CLOSING
2.1 Time and Place. Subject to the satisfaction (or waiver) of the
conditions set forth in Section 7 below, the closing of the transaction provided
for in Section 1.2 above (the "Closing") shall take place on the third business
day after the satisfaction (or
<PAGE> 2
waiver) of the last to be satisfied (or waived) of such conditions (the "Closing
Date") at the offices of Patterson, Belknap, Webb & Tyler LLP, 1133 Avenue of
the Americas, New York, New York 10036, or at such other location and time as
the parties hereto may otherwise mutually agree, unless this Agreement is sooner
terminated pursuant to the provisions of Section 8 below and provided that in no
event shall the Closing Date occur after the Outside Termination Date (as
hereinafter defined).
2.2 Closing Deliveries.
(a) Seller shall deliver the following to Purchaser at
the Closing:
(i) A copy of the Amended and Restated
Certificate, duly certified by the Secretary
of State of Delaware;
(ii) A copy of the Bylaws of Seller, as amended,
duly certified by the Secretary of Seller;
(iii) Certificates representing the Shares to be
purchased at the Closing duly executed on
behalf of Seller and registered in the name
of Purchaser for the number of shares set
forth in Section 1.1 above;
(iv) A counterpart copy of the Amended and
Restated Stockholders Agreement, by and
among Seller, Purchaser and the other
stockholders of Seller set forth therein
(the "Stockholders Agreement"), attached
hereto as Exhibit B, duly executed on behalf
of Seller and the other parties thereto
other than Purchaser;
(v) A counterpart copy of the License and
Product Development Agreement, by and
between Purchaser and Seller (the "License
and Product Development Agreement"),
attached hereto as Exhibit C, duly executed
on behalf of Seller;
(vi) An opinion from the legal counsel to Seller
addressed to Purchaser, dated the Closing
Date, in the form of Exhibit D attached
hereto;
(vii) A waiver executed and delivered by each of
the parties to the Existing Stockholders
Agreement (as hereinafter defined) waiving
each of their preemptive rights to purchase
the Shares;
2
<PAGE> 3
(viii) The certificate described in Section
7.1(b)(vii) below; and
(ix) Any other information, documents or
certificates reasonably requested by
Purchaser.
(b) Purchaser shall deliver the following to Seller at
the Closing:
(i) The Cash Equity Amount set forth in Section
1.1 above by wire transfer in immediately
available funds to an account specified by
Seller at least two business days prior to
the date of the Closing;
(ii) A counterpart copy of the Stockholders
Agreement duly executed on behalf of
Purchaser (for purposes of the Stockholders
Agreement, Purchaser and Seller hereby
acknowledge and agree that upon its
execution and delivery by Purchaser,
Purchaser shall be deemed an Investor
Stockholder (as such term is defined
therein));
(iii) A counterpart copy of the License and
Product Development Agreement duly executed
on behalf of Purchaser;
(iv) The certificate described in Section
7.1(c)(vi) below; and
(v) Any other item, documents or certificates
reasonably requested by Seller.
(c) The deliveries referred to in clauses (a) and (b) of
this Section 2.2 shall be deemed to take place
simultaneously with one another, and no proceedings
shall be deemed taken and no documents executed and
delivered until all have been taken, executed and
delivered.
3. REPRESENTATIONS AND WARRANTIES OF SELLER.
In order to induce Purchaser to enter into this Agreement and
purchase the Shares, Seller represents and warrants to Purchaser as follows:
3.1 Organization, Good Standing and Corporate Power. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with all requisite corporate power and authority to own
its properties and to conduct its business as presently conducted. Seller is
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified would
3
<PAGE> 4
have a Material Adverse Effect (as hereinafter defined), Seller has all
requisite corporate power and authority to enter into this Agreement, the
Stockholders Agreement and the License and Product Development Agreement
(collectively, the "Documents") and to perform its obligations hereunder and
thereunder, including, without limitation, the issuance and sale of the Shares.
3.2 Due Authorization; Enforceability; No Conflicts. Seller has taken
all corporate and stockholder action necessary (i) to authorize the execution,
delivery and performance by it of each of the Documents, (ii) for the
authorization, issuance and delivery by it of the Shares and (iii) for the
authorization and reservation of the shares of the Common Stock (as hereinafter
defined) issuable upon conversion of the PS Shares (the "Conversion Shares").
Assuming the due execution and delivery of this Agreement by Purchaser, this
Agreement constitutes a valid and binding obligation of Seller, enforceable
against Seller in accordance with its terms and assuming the due execution and
delivery by Purchaser of each of the other Documents at the Closing, upon
execution and delivery thereof by Seller each of the other Documents will
constitute a valid and binding obligation of Seller, enforceable against Seller
in accordance with its terms. Except as set forth on Schedule 3.2, the
execution, delivery and performance by Seller of each of the Documents and
compliance by Seller with the terms hereof and thereof will not violate,
conflict with or cause an event of default under (i) Seller's Amended and
Restated Certificate, Seller's Bylaws, the existing stockholders agreement,
dated as of October 31, 1997, as amended on February 19, 1998, October 23, 1998,
March 5, 1999 and May 24, 1999 (as so amended, the "Existing Stockholders
Agreement"), the stockholders agreement to be entered into between Seller and
CBS Corporation pursuant to the terms of the Stock Purchase Agreement, dated as
of the date hereof, between Seller and CBS Corporation or any resolutions of
Seller's Board of Directors or stockholders, or (ii) any agreement, instrument,
judgment, order, law, rule or regulation by which Seller is bound or to which
any of Seller's properties are subject, except where a violation, conflict or
event of default under this subsection (ii) would not result in a material
adverse effect on Seller's business, financial condition, results of operations
or properties (a "Material Adverse Effect"). The Shares, upon
4
<PAGE> 5
issuance in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable, free of any liens,
claims or encumbrances ("Encumbrances") other than the terms and provisions of
the Amended and Restated Certificate, the Stockholders Agreement and
restrictions imposed by applicable United States and state securities laws and
will not be subject to any preemptive rights, rights of first refusal or
redemption rights, other than as provided in the Amended and Restated
Certificate or the Stockholders Agreement. The Conversion Shares have been duly
and validly reserved, and neither they nor the issuance thereof are subject to
any preemptive rights or rights of first refusal or redemption rights, and upon
issuance, they will be validly issued, fully paid and nonassessable, free of any
Encumbrances other than the terms and provisions of the Amended and Restated
Certificate, the Stockholders Agreement and restrictions imposed by applicable
United States and state securities laws and will not be subject to any
preemptive rights, rights of first refusal or redemption rights, other than as
provided in the Amended and Restated Certificate or the Stockholders Agreement.
3.3 Capitalization. The authorized capital stock of Seller consists of
(a) 42,500,000 shares of common stock, par value $.01 per share (the "Common
Stock"), of which 27,500,000 shares have been designated Class A Common Stock
and 15,000,000 shares have been designated Class B (Non-Voting) Common Stock,
and of which 1,079,000 shares of Class A Common Stock and 6,995,602.5 shares of
Class B (Non-Voting) Common Stock shares are issued and outstanding as of the
date hereof, and (b) 4,956,643 shares of preferred stock (the "Preferred
Stock"), of which 788,200 shares have been designated Series A Preferred Stock,
1,478,359 shares have been designated Series C Preferred Stock, 932,401 shares
have been designated Series C-1 Preferred Stock and 1,757,683 shares have been
designated Series D Preferred Stock, all of which are issued and outstanding as
of the date hereof. All of the issued and outstanding shares of capital stock of
Seller have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially and of record by the shareholders and
in the amounts set forth on the stock ledger of Seller. All outstanding shares
of capital stock of Seller were offered, issued, sold and delivered by Seller in
compliance with all applicable federal and state securities laws. Except for
this Agreement or as set forth on Schedule 3.3, there are no outstanding
subscriptions, rights, options, warrants, conversion rights, agreements or other
claims for the purchase or acquisition from Seller of any shares of its capital
stock or obligating Seller to issue, repurchase or otherwise acquire, any shares
of its capital stock or any securities convertible into, exercisable or
exchangeable for, or otherwise entitling the holder to acquire, any shares of
capital stock of Seller. Except as set forth in the Existing Stockholders
Agreement, no person is entitled to any preemptive or similar rights with
respect to the issuance of any capital stock of Seller. Except as set forth on
Schedule 3.3 or as contemplated by the Existing Stockholders Agreement, no
person has the right to nominate or elect one or more directors of Seller.
Seller's registration statement on Form S-1, filed with the Securities and
Exchange Commission on May 4,
5
<PAGE> 6
1999, as amended in the form to be filed with the Securities and Exchange
Commission on July 8, 1999 and previously delivered to Purchaser (as so amended,
the "Registration Statement") sets forth the names of the stockholders of Seller
who beneficially own 5.0% or more of any class of the capital stock of Seller.
3.4 Certificate of Incorporation and Bylaws. The copies of the Amended
and Restated Certificate of Incorporation of Seller and Seller's Bylaws provided
to Purchaser prior to the date hereof are true, correct and complete copies
thereof as currently in effect, and prior to the Closing Date the Amended and
Restated Certificate will have been filed with the Secretary of State of the
State of Delaware.
3.5 Subsidiaries. As of the date hereof, Seller has no subsidiaries,
and does not own of record or beneficially, and has no commitment or obligation
to acquire any capital stock or equity interest or investment in any
corporation, partnership, limited liability company, joint venture, association,
trust or other business entity except as set forth on Schedule 3.5.
3.6 Taxes. All tax returns that were required to be filed by Seller
prior to the date hereof have been filed on a timely basis; all tax returns
filed by Seller prior to the date hereof were complete and accurate except where
any inaccuracy would not result in a Material Adverse Effect; and all taxes
shown as due and owing on such tax returns have been paid by Seller, except
where the payment of such taxes is the subject of a current bona fide dispute
being contested by appropriate proceedings and for which appropriate reserves
have been established on Seller's books. Seller is not a party to any pending
action, proceeding or investigation by any governmental authority for the
assessment or collection of taxes nor does Seller have knowledge of any such
threatened action, proceeding or investigation. No deficiency assessment or
proposed adjustment of Seller's federal or state or municipal taxes, if any, is
pending, and Seller has no knowledge of any proposed liability for any tax to be
imposed on Seller's properties or assets for which there is not an adequate
reserve reflected in the Seller Financial Statements (as hereinafter defined).
Seller has withheld and paid all taxes required to be withheld in connection
with any amounts paid or owing to any employee, creditor, independent contractor
or other third party with respect to the business of Seller.
3.7 Consents. No consent of, order or approval by, or filing with any
governmental agency or authority or other third party is required in connection
with Seller's execution, delivery and performance of each of the Documents,
including the issuance of the Shares to Purchaser hereunder, other than the
filing of the Amended and Restated Certificate with the Secretary of State of
the State of Delaware, the waiver of the provisions of the Existing Stockholders
Agreement by the parties thereto contemplated under Section 2(a)(vii) above, and
the termination or expiration of the
6
<PAGE> 7
required waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended (the "HSR Waiting Period").
3.8 Offering. Based on the representations, warranties and covenants of
Purchaser set forth herein, and assuming due compliance by Purchaser with the
terms of this Agreement and the other Documents in all relevant respects, the
offer, sale and issuance of the Shares to Purchaser as contemplated by this
Agreement are exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), and applicable blue sky laws.
3.9 Certain Agreements. As of the date hereof, other than the Documents
and as set forth on Schedule 3.9, there are no agreements to which Seller is a
party pursuant to which Seller is under any obligation to any person to register
for sale under the Securities Act any of its currently outstanding securities or
any of its securities that may hereafter be issued, and, except for the Existing
Stockholders Agreement, Seller is not a party to, and has no knowledge of, any
agreements relating to the voting of Seller's capital stock.
3.10 Litigation. There is neither pending nor, to Seller's knowledge,
threatened, any action, suit, proceeding or claim, to which Seller is named as a
party, or to which the properties of Seller may be subject, which, if determined
adversely to Seller, could reasonably be expected to have a Material Adverse
Effect.
3.11 Properties. Except for its properties which are leased as to which
Seller has a valid leasehold interest, Seller has good and marketable title to
its properties, in each case free from all mortgages, pledges, conditional sale
agreements or Encumbrances except (a) tax or like liens for obligations not yet
due or payable or being contested in good faith by appropriate proceedings and
for which appropriate reserves have been established on Seller's books and (b)
other imperfections of title or Encumbrances that do not impair in any material
respect the current or proposed use or marketability of the properties subject
thereto ((a) and (b) are referred to collectively as "Permitted Liens"). All
such properties that are necessary for Seller's business as presently conducted
are maintained and kept in good condition, repair and working order, subject to
normal wear and tear. Seller owns, leases or licenses all properties necessary
for the conduct of its business as presently conducted. With respect to real and
personal property that it leases, Seller is not in violation in any material
respect of the terms of the applicable leases and holds valid and enforceable
leasehold interests free from all mortgages, pledges and Encumbrances except (i)
Permitted Liens and (ii) easements, covenants, rights of way and other
Encumbrances and restrictions arising as a matter of law that do not impair in
any material respect the current use of the property subject thereto.
7
<PAGE> 8
3.12 Intellectual Property. (a) Schedule 3.12 sets forth a true,
correct and complete list or description of all registered and unregistered
trademarks, trademark registrations, service marks, service mark registrations,
domain names, trade names, company names, patents, design patents, copyright
registrations and copyrights and pending applications therefor, in each case
which are used in or required for the business of Seller as currently being
conducted or which is distributed by Seller to third parties (together with all
inventions, processes, computer software, know-how, formulas, pattern designs
and trade secrets of Seller, the "Intellectual Property Rights"). Except as
disclosed on Schedule 3.12, Seller is the sole and exclusive owner of, with all
right, title and interest in and to (free and clear of any lien except for
Permitted Liens) the Intellectual Property Rights and has sole and exclusive
rights, without being contractually obligated to pay any compensation to any
third party in respect thereof, for which they are being used as of the date of
this Agreement and as otherwise stated in the description of goods and services
contained in the relevant materials relating to any Intellectual Property Rights
filed with the United States Copyright Office or the United States Patent and
Trademark Office.
(b) Seller has not violated or infringed any patent,
copyright, trade secret, trademark, service mark or other intellectual property
right of any other person or entity. Except as set forth on Schedule 3.12, (i)
Seller has not been sued or charged or been a defendant in any claim, suit,
action or proceeding which involves a claim of infringement of any Intellectual
Property Rights, (ii) to the knowledge of Seller, there are no other claims that
Seller is infringing any existing patent, trademark or copyright and (iii) to
the knowledge of Seller, the use of the Intellectual Property Rights in
connection with the business of Seller as currently being conducted does not
infringe the patent, trademark, copyright or any other right of any third party.
(c) Seller has not made or asserted any claim of violation or
infringement of any Intellectual Property Rights against any other person or
entity, and Seller does not have any knowledge of any such violation or
infringement.
3.13 Financial Statements. Seller has heretofore delivered to Purchaser
the following financial statements of Seller: (i) the audited balance sheets as
of December 31, 1998 and 1997, (ii) the audited statements of income and of cash
flows for the fiscal years ended December 31, 1998 and 1997 and (iii) the
unaudited balance sheet as of March 31, 1999 and statements of income and of
cash flows for the fiscal quarter ended March 31, 1999 (collectively, the
"Seller Financial Statements"). Except as set forth on Schedule 3.13, the Seller
Financial Statements have been prepared from the books and records of Seller and
fairly present in all material respects the financial condition of Seller as of
the dates indicated therein and the results of operations and cash flows of
Seller for the periods covered thereby in accordance with generally accepted
accounting principles consistently applied throughout the periods presented.
8
<PAGE> 9
3.14 No Material Adverse Change. Except as set forth on Schedule 3.14,
since March 31, 1999, Seller has conducted its business in the ordinary course
consistent with past practice, and there has not been any material adverse
change in the business, assets, condition (financial or otherwise) or results of
operations of Seller since such date.
3.15 No Defaults. There is no existing default, or any event, act or
circumstance which, with the passage of time, the giving of notice or both,
would become a default, by Seller under any contract or agreement to which
Seller is a party or by which any part of its assets or properties is bound, the
result of which could reasonably be expected to have a Material Adverse Effect.
To the knowledge of Seller, there is no existing default by any other party
under any such contract or any event, act or circumstance which, with the
passage of time, the giving of notice or both, would reasonably be expected to
become a default by such other party under any such contract, the result of
which could reasonably be expected to have a Material Adverse Effect.
3.16 Compliance With Laws. The conduct of the business of Seller
currently complies and at all times has complied with all statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable thereto,
except where the failure to comply therewith could not reasonably be expected to
have a Material Adverse Effect. Seller has not received notice of any alleged
material violation of any statute, law, regulation, ordinance, rule, judgment,
order or decree from any governmental authority applicable to Seller or any of
its assets or properties which has not been satisfactorily disposed of.
3.17 Insurance. All of the businesses and assets of Seller that are of
insurable character are covered by insurance with reputable insurers against
risk of liability, casualty and fire and other losses and liabilities
customarily obtained to cover comparable businesses and assets in amounts, scope
and coverage which are consistent with prudent industry practice.
3.18 Contracts. Except for contracts listed on Schedule 3.18 (the
"Contracts"), Seller is not a party to or bound by, or derives any benefit from,
any material contract which is a:
(a) contract not made in the ordinary course of business;
(b) covenant not to compete;
(c) contract for the sale of any of the material assets of
Seller (other than sales of inventory to customers in the ordinary course of
business) or the grant of
9
<PAGE> 10
any preferential rights to purchase any material assets of Seller or requiring
the consent of any party to the transfer thereof;
(d) any loan agreement, indenture, promissory note or
conditional sales agreement or any pledge, security agreement, deed of trust,
financing statement or other document granting any lien on any asset or property
of Seller;
(e) any revocable or irrevocable power of attorney to any
person for any reason;
(f) contract with or permit by or from any governmental entity
(except those as to which the failure to possess could not reasonably be
expected to have a Material Adverse Effect); or
(g) contract which involves or is reasonably expected to
involve aggregate future payments, obligations or revenues in excess of One
Hundred Thousand Dollars ($100,000.00) (whether in payment of a debt, as a
result of any guarantee or indemnification, for services or goods or otherwise
and including any barter arrangements) or which, as of the Closing Date, will
have a remaining term exceeding one year, in each case other than orders to
purchase or sell goods or services in the ordinary course of business consistent
with past practice.
3.19 Employees. All material employment agreements Seller has entered
into with its named executive officers (as defined in Section 402 of Regulation
S-K promulgated by the Securities and Exchange Commission) are accurately
described in the Registration Statement. Seller is not a party to any agreements
with labor unions or associations representing employees of Seller. No work
stoppage against Seller is pending or, to the knowledge of Seller, threatened.
Seller is not involved in or, to the knowledge of Seller, threatened with any
labor dispute, arbitration, lawsuit or administrative proceeding (other than
immaterial grievances) relating to labor matters involving the employees of
Seller (excluding workers compensation and unemployment compensation claims). No
union or association organizing or election activities involving any employees
of Seller, to the knowledge of Seller, are in progress or have been threatened.
3.20 Employee Benefits. The Registration Statement accurately describes
all of the material bonus, stock option, stock purchase, restricted stock,
incentive, deferred compensation, retiree medical or life insurance,
supplemental retirement, severance or other benefit plans, programs or
arrangements to which Seller is a party or which are maintained, contributed to
or sponsored by Seller for the benefit of any current or former employee,
officer or director of Seller.
10
<PAGE> 11
3.21 Interested Party Transactions. The Registration Statement
accurately describes all material transactions required to be described therein
pursuant to Section 404 of Regulation S-K promulgated by the Securities and
Exchange Commission between Seller and any current or past officer, director,
employee or shareholder of Seller (or any affiliate of any such individual)
other than for current employment services.
3.22 Disclosure. No representation or warranty of Seller made to
Purchaser in this Agreement contains any untrue statement of a material fact or
omits to state a material fact necessary to make such statement made not
misleading in light of the circumstances under which it was made.
3.23 No Negotiations. Except as set forth on Schedule 3.23, Seller is
not engaged in any substantive discussions or negotiations relating to (i) the
sale of shares of capital stock of Seller which would enable the purchaser, upon
consummation of such sale, to exercise voting control of the business and
affairs of Seller, (ii) the sale of all or substantially all of the assets of
Seller or (iii) any merger or consolidation involving Seller in which the
stockholders of Seller immediately prior to the consummation thereof would cease
to be entitled to exercise voting control of the surviving or resulting entity
immediately following the consummation thereof.
3.24 Dilutive Events. Since March 5, 1999, as of the date hereof no
event has occurred which would result in a decrease in the conversion price of
any series of the outstanding Preferred Stock other than the 2.5 to 1.0 stock
split effected with respect to the Common Stock.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
In order to induce Seller to enter into this Agreement and
issue and sell the Shares, Purchaser represents and warrants to Seller as
follows:
4.1 Organization, Good Standing and Corporate Power. Purchaser is a
corporation, validly existing and in good standing under the laws of the State
of Delaware with all requisite corporate power and authority to own its
properties, conduct its business, enter into this Agreement and the other
Documents and perform its obligations hereunder and thereunder.
4.2 Due Authorization; Enforceability; No Conflicts. Purchaser has
taken all corporate action necessary to authorize the execution, delivery and
performance by it of each of the Documents. Assuming the due execution and
delivery of this Agreement by Seller, the Agreement constitutes a valid and
binding obligation of Purchaser, enforceable against Purchaser in accordance
with its terms and assuming the due execution and delivery by Seller of each of
the other Documents at the Closing, upon
11
<PAGE> 12
execution and deliver thereof by Purchaser each of the other Documents will
constitute a valid and binding obligation of Purchaser, enforceable against
Purchaser in accordance with its terms. The execution, delivery and performance
by Purchaser of each of the Documents and compliance by Purchaser with the terms
hereof and thereof will not violate, conflict with or cause an event of default
under (i) Purchaser's Certificate of Incorporation, or (ii) any other agreement,
instrument, judgment, order, law, rule or regulation by which Purchaser is bound
or to which any properties of Purchaser are subject, except where a violation,
conflict or event of default under this subsection (ii) would not result in a
material adverse effect on Purchaser's business, financial condition, results of
operations or properties.
4.3 Consents. No consent of, order or approval by, or filing with any
governmental authority or other third party is required in connection with
Purchaser's execution, delivery and performance of each of the Documents,
including the purchase of the Shares by Purchaser hereunder, other than the
termination or expiration of the HSR Waiting Period.
4.4 Suitability as an Investor. Purchaser represents that it can bear
the economic risk of its investment in the Shares and is investing in its own
name and for its own account. Purchaser hereby represents and warrants that it
is a sophisticated investor with knowledge and experience in business and
financial matters and is able to bear the economic risk of purchasing the Shares
and the Conversion Shares issuable upon conversion of the PS Shares, including
the loss of the economic benefits of its entire investment.
4.5 Investment Intent. Purchaser is acquiring the Shares and the
Conversion Shares issuable upon the conversion of the PS Shares for investment
for its own account and not with view to, or for resale in connection with, any
distribution thereof. Purchaser understands that the Shares and the Conversion
Shares issuable upon the conversion of the PS Shares have not been registered
under the Securities Act or applicable state securities laws by reason of
certain exemptions from the registration provisions thereof that depend upon,
among other things, the truth and accuracy of Purchaser's representations and
warranties herein.
4.6 Restricted Transferability. Purchaser acknowledges that the Shares
and the Conversion Shares issuable upon the conversion of the PS Shares must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. It is understood that
the certificates evidencing the Shares and the Conversion Shares issuable upon
the conversion of the PS Shares may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933 or any applicable state securities laws. They may not be
sold, offered for sale,
12
<PAGE> 13
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Securities Act or an opinion of
counsel reasonably satisfactory to the Company that such registration is not
required or unless sold pursuant to an exemption to such Securities Act."
(b) "A statement of all the designations, preferences, rights
and qualifications, limitations or restrictions granted to or imposed upon the
respective classes and/or series of shares of stock of the Company and upon the
holders thereof may be obtained by any shareholder upon request and without
charge, at the principal office of the Company."
(c) "The shares evidenced by this certificate are subject to
the terms and conditions of a certain Stockholders Agreement which includes a
voting agreement. Copies of the Stockholders Agreement may be obtained upon
written request to the Company's secretary."
(d) Any legend required by any applicable securities laws of
any state.
5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
5.1 Survival of Representations, Warranties and Covenants. The
representations and warranties of Seller set forth in Section 3 above shall
survive the Closing until the eighteen month anniversary of the Closing Date.
The representations and warranties of Purchaser set forth in Section 4 above
shall survive the Closing until the eighteen month anniversary of the Closing
Date. The covenants of Seller set forth in this Agreement which relate to
periods following the Closing shall survive the Closing in accordance with the
provisions of Section 6 below.
5.2 Indemnification by Seller. Seller agrees to indemnify and hold
harmless Purchaser from and against any and all assessments, judgments, debts,
obligations, liabilities, losses, costs, damages or expenses (collectively,
"Damages"), suffered, paid or incurred by Purchaser resulting from or caused by
or arising out of: (i) any breach of any representation or warranty made by
Seller to Purchaser in this Agreement or (ii) any failure by Seller to perform
any covenant or agreement of Seller contained in this Agreement; provided,
however, that Seller shall not have any obligation to indemnify Purchaser from
and against any Damages resulting from, arising out of, relating to, in the
nature of, or caused by the breach (or alleged breach) of any representation or
warranty of Seller contained herein until Purchaser has suffered Damages in
excess of a Two Hundred Fifty Thousand Dollars ($250,000.00) threshold (at which
point Seller will be obligated to indemnify Purchaser from and against all such
Damages above such dollar figure); and provided, further, that in the absence of
fraud the aggregate amount of Damages for which Seller may be liable under this
Section 5.2 shall not exceed Twenty Million Dollars ($20,000,000.00) in the
aggregate.
13
<PAGE> 14
5.3 Indemnification by Purchaser. Purchaser agrees to indemnify and
hold harmless Seller from and against any and all Damages suffered, paid or
incurred by Seller resulting from or caused by or arising out of: (i) any breach
of any representation or warranty made by Purchaser to Seller in this Agreement
or (ii) any failure by Purchaser to perform any covenant or agreement of
Purchaser contained in this Agreement; provided, however, that Purchaser shall
not have any obligation to indemnify Seller from and against any Damages
resulting from, arising out of, relating to, in the nature of, or caused by the
breach (or alleged breach) of any representation or warranty of Purchaser
contained herein until Seller has suffered Damages in excess of a Two Hundred
Fifty Thousand Dollars ($250,000.00) threshold (at which point Purchaser will be
obligated to indemnify Seller from and against all such Damages above such
dollar figure); and provided, further, that in the absence of fraud the
aggregate amount of Damages for which Purchaser may be liable under this Section
5.3 shall not exceed Twenty Million Dollars ($20,000,000.00) in the aggregate.
5.4 Exclusive Remedy. Purchaser and Seller acknowledge and agree that
in the absence of fraud or other intentional malfeasance the foregoing
indemnification provisions in this Section 5 shall be the exclusive remedy of
Purchaser and Seller with respect to the transactions contemplated by this
Agreement; provided, however, that the foregoing indemnification provisions are
in addition to, and not in derogation of, any non-monetary equitable remedies
available to the parties and any statutory, equitable or common law remedy any
party hereto may have for fraud or other intentional malfeasance.
6. COVENANTS
6.1 Covenants. For so long as Seller is not subject to the periodic
reporting requirements of Section 12 of the Securities Exchange Act of 1934, as
amended:
(a) Seller will permit Purchaser or any representative of
Purchaser to visit and inspect Seller's premises and properties, including its
books and records of account, from time to time, and to discuss Seller's
business, finances and accounts with Seller's officers at reasonable times
during Seller's regular business hours, upon reasonable advance written notice
to Seller and in a manner that will not unreasonably interfere with the normal
business operations of Seller.
(b) Seller shall deliver to Purchaser annual audited financial
statements and quarterly unaudited financial statements for Seller, including
the balance sheet, the statements of income and of cash flows for the fiscal
quarter ending June 30, 1999, when such statements have been prepared.
(c) The books of account and other financial and corporate
records of Seller shall be maintained in accordance with good business and
accounting practices.
14
<PAGE> 15
(d) Seller shall maintain in full force and effect its
corporate existence, rights, governmental approvals and franchises and all
licenses and other rights to use patents, processes, licenses, trademarks, trade
names or copyrights owned or possessed by it and deemed by Seller to be material
to the conduct of its business.
(e) Seller shall comply with all applicable laws, rules,
regulations and orders in all material respects.
(f) Seller shall keep its properties in good repair, working
order and condition, reasonable wear and tear excepted, and from time to time
make all needful and proper, or legally required, repairs, renewals,
replacements, additions or improvements thereto; and Seller shall at all times
comply in all material respects with each provision of all leases pursuant to
which it occupies, or has possession of, property necessary in the conduct of
its business.
(g) Seller shall keep its business and assets which are of an
insurable character insured by reputable insurers against risk of liability,
casualty and fire and other losses and liabilities customarily obtained to cover
comparable businesses and assets in amounts, scope and coverage which are
consistent with prudent industry practices.
(h) Seller shall cause all Intellectual Property Rights,
including, without limitation, technological developments, inventions,
discoveries or improvements made by employees or agents of Seller to be fully
documented in appropriate engineering form in accordance with the prevailing
industrial professional standards, and where possible and appropriate, file and
prosecute United States and foreign patent applications relating to and
protecting such developments. In addition, Seller shall use its commercially
reasonable efforts to cause all Intellectual Property Rights, including, without
limitation, all technological developments, inventions, discoveries or
improvements made by any employee of Seller to be owned by Seller and, where
possible and appropriate, obtain legal protection for the benefit of Seller with
respect to such property.
7. CONDITIONS PRECEDENT.
7.1 Conditions Precedent.
(a) Conditions to Each Party's Obligations. The obligations of
the parties hereto to consummate the transactions contemplated hereby shall be
subject to the satisfaction on or prior to the Closing Date of the following
conditions:
(i) No temporary restraining order, preliminary
or permanent injunction or other legal
restraint or prohibition preventing
15
<PAGE> 16
the consummation of the transactions
contemplated by this Agreement shall be in
effect and no application therefor shall be
pending.
(ii) The HSR Waiting Period shall have expired or
been terminated.
(b) Conditions to the Obligations of Purchaser. The obligation
of Purchaser to purchase the Shares is subject to the satisfaction on or prior
to the Closing Date of each of the following conditions:
(i) The Amended and Restated Certificate shall
have been duly executed and filed with the
Secretary of State of the State of Delaware.
(ii) The waiver contemplated under Section
2.2(a)(vii) above shall have been duly
executed and delivered by each of the
parties to the Existing Stockholders
Agreement.
(iii) Seller shall have executed and delivered the
License and Product Development Agreement.
(iv) Seller shall have executed and delivered the
Stockholders Agreement.
(v) The representations and warranties of Seller
contained in Section 3 above which are
qualified as to materiality shall be true
and correct and all other representations
and warranties of Seller shall be true and
correct in all material respects, in each
case on and as of the Closing Date with the
same force and effect as though such
representations and warranties had been made
on and as of the Closing Date, except for
representations that speak as of a
particular date which shall be true and
correct as of that date.
(vi) Seller shall have performed and complied in
all material respects with all agreements,
obligations and covenants contained in this
Agreement that are required to be performed
or complied with by it on or before the
Closing.
(vii) The Chief Executive Officer of Seller shall
have delivered to Purchaser a certificate
dated as of the Closing Date
16
<PAGE> 17
certifying that the conditions set forth in
Section 7.1(b)(v) and 7.1(b)(vi) above have
been fulfilled.
(viii) Purchaser shall have received from legal
counsel to Seller an opinion addressed to
Purchaser dated the Closing Date in the form
of Exhibit D attached hereto.
(ix) Purchaser shall have received evidence of
the third party consents required to be
obtained by Seller pursuant to Section 3.7
above.
(c) Conditions to the Obligations of Seller. The obligations
of Seller to issue and sell the Shares to Purchaser is subject to the
satisfaction on or prior to the Closing Date of each of the following
conditions:
(i) The waiver contemplated under Section
2.2(a)(vii) above shall have been duly
executed and delivered by each of the
parties to the Existing Stockholders
Agreement.
(ii) Purchaser shall have executed and delivered
the License and Product Development
Agreement.
(iii) Purchaser shall have executed and delivered
the Stockholders Agreement.
(iv) The representations and warranties of
Purchaser contained in Section 4 above which
are qualified as to materiality shall be
true and correct and all other
representations and warranties of Purchaser
shall be true and correct in all material
respects, in each case on and as of the
Closing Date with the same force and effect
as though such representations and
warranties had been made on and as of the
Closing Date, except for representations
that speak as of a particular date which
shall be true and correct as of that date.
(v) Purchaser shall have performed and complied
in all material respects with all
agreements, obligations and covenants
contained in this Agreement that are
required to be performed or complied with by
it on or before the Closing.
(vi) An authorized officer of Purchaser shall
have delivered to Seller a certificate dated
as of the Closing Date certifying
17
<PAGE> 18
that the conditions set forth in Section
7.1(c)(iv) and 7.1(c)(v) above have been
fulfilled.
8. TERMINATION
8.1 Termination. Notwithstanding anything to the contrary in this
Agreement, this Agreement may be terminated and the transactions contemplated
hereby abandoned at any time prior to the Closing:
(a) by written consent of Seller and Purchaser;
(b) by Purchaser, if Purchaser is prepared to close and all
conditions to Seller's obligations to close pursuant to Section 7(c) above have
been satisfied and Seller fails to close in accordance with Section 2 above;
(c) by Purchaser, if Seller fails to cure any material breach
of this Agreement by Seller within ten (10) days after receiving written notice
thereof from Purchaser;
(d) by Seller, if Seller is prepared to close and all
conditions to Purchaser's obligations to close pursuant to Section 7(b) above
have been satisfied and Purchaser fails to close in accordance with Section 2
above;
(e) by Seller, if Purchaser fails to cure any material breach
of this Agreement by Purchaser within ten (10) days after receiving written
notice thereof from Seller; or
(f) by Seller or Purchaser, if the Closing does not occur on
or prior to August 31, 1999 (the "Outside Termination Date");
provided, however, that the party seeking termination pursuant to clauses (b)
through (e) is not in material breach of any of its representations, warranties,
covenants or agreements contained in this Agreement.
8.2 Notice of Termination. In the event of termination by Seller or
Purchaser pursuant to Section 8.1 above, written notice thereof shall forthwith
be given to the other party and the transactions contemplated by this Agreement
shall be terminated, without further action by the other party upon receipt of
such notice.
8.3 Effects of Termination. Each party's right of termination under
Section 8.1 above is in addition to any other rights it may have under this
Agreement and the exercise of such right of termination shall not be deemed to
be an election of remedies. If this Agreement is terminated and the transactions
contemplated hereby are
18
<PAGE> 19
abandoned as described in Section 8.1 above, this Agreement shall become null
and void and of no further force and effect except that the respective
obligations of the parties in Sections 9.1 and 9.10 below shall survive such
termination; provided, however, that nothing in this Section 8.3 shall be deemed
to release either party from any liability for any breach by such party of any
of its covenants set forth in this Agreement which occurs on or before the date
of the termination of this Agreement.
9. MISCELLANEOUS
9.1 Expenses. Each party will pay all of its own expenses in connection
with the negotiation of this Agreement, the performance of its obligations
hereunder and the consummation of the transactions contemplated hereby.
9.2 Further Assurance. Purchaser and Seller covenant and agree to take
any and all such further action and to execute, acknowledge and deliver such
instruments, documents and agreements as the other party hereto may reasonably
request to effectuate, consummate or confirm the transactions contemplated
hereby.
9.3 Amendment and Waiver. This Agreement may be amended only in a
writing signed by both parties hereto. Any provision of this Agreement may be
waived by the party entitled to the benefit thereof only in a writing executed
by the party against whom such waiver is sought to be enforced. No waiver shall
be deemed a waiver of any other provision of this Agreement, and no waiver of a
breach hereunder shall be deemed a waiver of any other or subsequent breach of
this Agreement.
9.4 Notice. All notices, demands and other communications to be given
or delivered hereunder shall be in writing and will be deemed to have been given
if personally delivered, sent by overnight courier or telecopied (in each such
case delivery will be effective upon receipt) or mailed by certified mail,
postage prepaid, return receipt requested (delivery will be effective three days
after the date of mailing) to the addresses indicated below or to such other
addresses as the parties may specify on notice as herein provided:
If to Seller:
Medscape, Inc.
134 West 29th Street
New York, New York 10001-5399
Attention: Mr. Paul Sheils
Chief Executive Officer
Telecopier: (212) 760-3140
With a copy to:
19
<PAGE> 20
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036
Attention: Jeffrey E. LaGueux, Esq.
Telecopier: (212) 336-2222
If to Purchaser:
National Data Corporation
National Data Plaza
Atlanta, Georgia 30329
Attention: Mr. Walter M. Hoff
President & Chief Executive Officer
NDC Health Information Services
Telecopier: (404) 728-2892
With a copy to:
National Data Corporation
National Data Plaza
Atlanta, Georgia 30329
Attention: Corporate Secretary
Telecopier: (404) 728-2892
and:
Troutman Sanders LLP
600 Peachtree Street, NE
Suite 5200
Atlanta, Georgia 30308
Attention: Stephen E. Lewis, Esq.
Telecopier: (404) 962-6616
9.5 Binding Agreement; Assignment. This Agreement and all of the
provisions hereof will be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Purchaser will not
be entitled to assign any of its rights and obligations hereunder to any third
party without the prior written consent of Seller which may be granted or
withheld in the sole and absolute discretion of Seller.
9.6 Severability. Whenever possible, each provision of this Agreement
will be interpreted in such a manner as to be effective and valid under
applicable
20
<PAGE> 21
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
9.7 Captions. The captions used in this Agreement are for convenience
of reference only and do not constitute a part of this Agreement and will not be
deemed to limit, characterize or in any way affect any provision of this
Agreement and all provisions of this Agreement will be enforced and construed as
if no captions had been used in this Agreement.
9.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which need not contain signatures of more than one party,
but all such counterparts taken together will constitute one and the same
instrument. Signatures may be exchanged by telecopy, with original signatures to
follow. Each party to this Agreement agrees that it will be bound by its own
telecopied signature and that it accepts the telecopied signatures of the other
party to this Agreement.
9.9 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York, without reference
to the choice of law provisions thereof.
9.10 Confidentiality. Unless and until the Closing has been
consummated, each party hereto shall hold, and shall be responsible to cause its
respective counsel, accountants, appraisers, investors and investment bankers to
hold, in confidence any and all confidential data or information made available
to such party by the other party hereto using the same standard of care to
protect such confidential data or information as is used to protect the
recipient's own confidential information. If the transactions contemplated by
this Agreement are not consummated, each party hereto agrees that it shall
return or cause to be returned to the providing party all written materials and
all copies thereof that were supplied to the recipient and that contain any such
confidential data or information.
9.11 Best Efforts to Consummate Transaction. Seller and Purchaser shall
each use its commercially reasonable best efforts to cause the Closing to take
place as promptly as practicable, including taking such action as is reasonably
required to satisfy all conditions to the Closing within the reasonable control
or direction of each such party and to comply promptly with all legal
requirements which may be imposed on it with respect to the Closing.
9.12 Notification of Changes.
(a) Seller shall promptly notify Purchaser by written updates
to each of its representations and warranties contained herein of any matters
occurring after the
21
<PAGE> 22
date hereof which, if existing or occurring on the date hereof, would have been
required to be set forth on a schedule to this Agreement or which would render
inaccurate any of the representations or warranties made by Seller in this
Agreement (each, a "Supplement"). Upon Purchaser's receipt of a Supplement, such
representation or warranty shall be deemed to be automatically updated as set
forth therein; provided, however, that no Supplement provided pursuant to this
Section 9.12(a) shall be deemed to cure any breach of any representation or
warranty existing as of the execution and delivery of this Agreement; provided,
further, that if Purchaser does not reject any Supplement in writing within
three business days following Purchaser's receipt thereof, or if Purchaser
elects to close despite such Supplement, the Supplement shall be deemed accepted
by Purchaser and the representations and warranties of Seller shall be deemed
modified and supplemented as indicated in such Supplement for all purposes
hereof.
(b) Between the date hereof and the Closing Date each party
will promptly notify the other party of the occurrence of any breach of any
representation, warranty or covenant of such party set forth in this Agreement
or of the occurrence of any event that may make satisfaction of the conditions
set forth in Section 7 above impossible or unlikely.
9.13 "Market Stand-Off" Agreement. Purchaser hereby agrees that it
shall not sell or otherwise transfer or dispose of any Shares or Conversion
Shares during the period of one hundred eighty (180) days after the Registration
Statement has been declared effective; provided, however, that all officers,
directors and ten percent (10%) or greater stockholders of Seller then holding
Common Stock of Seller shall enter into similar agreements and; provided,
further, that Purchaser may transfer a portion of the Shares to its investment
advisor, Lazard Freres & Co. LLC in partial payment of its fees in connection
with the transactions contemplated hereby if Lazard Freres & Co. LLC executes
and delivers a counterpart copy of the Stockholders Agreement.
22
<PAGE> 23
IN WITNESS WHEREOF, each of the parties hereto have caused
this Preferred Stock Purchase Agreement to be executed and delivered on its
behalf as of the day and year first above written.
NATIONAL DATA CORPORATION
By: /s/ James F. Campbell
-----------------------------------------
Name: James F. Campbell
Title: Vice President
MEDSCAPE, INC.
By: /s/ Paul T. Sheils
-----------------------------------------
Name: Paul T. Sheils
Title: President and CEO
23
<PAGE> 24
Exhibits and Schedules
<TABLE>
<CAPTION>
<S> <C>
Exhibit A Amended and Restated Certificate of Incorporation
Exhibit B Stockholders Agreement
Exhibit C License and Product Development Agreement
Exhibit D Opinion of Counsel
Schedule 3.2 Conflicts
Schedule 3.3 Capitalization
Schedule 3.5 Subsidiaries
Schedule 3.9 Agreements
Schedule 3.12 Intellectual Property
Schedule 3.13 Financial Statements
Schedule 3.14 Changes
Schedule 3.18 Contracts
Schedule 3.23 Negotiations
</TABLE>
24
<PAGE> 25
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF MEDSCAPE, INC.
Paul T. Sheils hereby certifies that:
1. The present name of this corporation is Medscape, Inc. (the
"Corporation"). The Corporation was originally incorporated under the name
Medscape (DEL.), Inc., and the date of filing the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware is August 25, 1998, as amended on December 23, 1998, March 5, 1999, May
17, 1999 and July __, 1999.
2. He is the duly elected President of the Corporation.
3. The Certificate of Incorporation of the Corporation, as
amended, is hereby amended and restated to read as follows:
FIRST: The name of the Corporation is Medscape, Inc.
SECOND: The purpose of the Corporation is to engage
in any lawful act or activity for which a corporation may be
organized under the General Corporation Law of the State of
Delaware.
THIRD: The address of the registered office in the State of
Delaware is 1209 Orange Street, Wilmington, DE 19801, and the name of the
registered agent of the Corporation in the State of Delaware is The Corporation
Trust Company in the County of New Castle.
FOURTH: (A) The total number of shares of all classes of stock
which the Corporation is authorized to issue is sixty- two million seven hundred
ninety-five thousand eleven (62,795,011), of which thirty-five million eight
hundred ninety- seven thousand two hundred eight (35,897,208) shares shall be
Class A Common Stock with a par value of one cent ($.01) per share, twenty-one
million, five hundred forty-one thousand, one hundred sixty (21,541,160) shares
shall be Class B (NonVoting) Common Stock with a par value of one cent ($.01)
per share, and five million three hundred fifty-six thousand six hundred
forty-three (5,356,643) shares shall be Preferred Stock with a par value of one
cent ($.01) per share.
(B) The Class A Common Stock and the Class B (NonVoting)
Common Stock (collectively the "Common Stock") shall have identical powers,
rights, preferences, limitations and other characteristics, share for share,
except that as otherwise required by law, the holders of shares of the Class B
(NonVoting) Common Stock shall not have any voting power or vote for the
election of directors or vote for any other purpose. Upon consummation of a firm
commitment underwritten public offering of any class of common stock of the
Corporation filed pursuant to a registration statement under the Securities Act
of 1933, as amended (a "Public Offering") or immediately prior to the
consummation of a "Corporate Change" (as hereafter defined), all shares of Class
B Common Stock shall automatically convert on a one-for-one basis
<PAGE> 26
2
into Class A Common Stock, which shall be redesignated as Common Stock, $.01 par
value, of the Corporation. A "Corporate Change" shall mean any event or
transaction where: (i) the Corporation shall not be the surviving entity in any
merger, consolidation or other reorganization (or survives only as a subsidiary
of an entity other than a previously wholly owned subsidiary of the
Corporation), (ii) the Corporation sells, leases or exchanges or agrees to sell,
lease or exchange all or substantially all of its assets to any other person or
entity (other than a wholly owned subsidiary of the Corporation), (iii) the
Corporation is to be dissolved and liquidated (including pursuant to Section
4(b) hereof), (iv) any person or entity, including a "group" as contemplated by
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or
gains ownership or control (including, without limitation, power to vote) of
more than 50% of the outstanding shares of the Corporation's voting stock (based
upon voting power), provided, that the fact that a stockholder is a party to the
Amended and Restated Stockholders Agreement dated March 5, 1999 among the
Corporation and the other parties thereto, as amended, or any successor
agreement thereto and the Stockholders Agreement dated July __, 1999 between the
Corporation and CBS Corporation, as amended or any successor agreement thereto
(collectively, the "Stockholders Agreement"), shall not be deemed to constitute
the formation of a group, or (v) as a result of or in connection with a
contested election of directors, the persons who were directors of the
Corporation before such election shall cease to constitute a majority of the
Board of Directors of the Corporation.
(C) The rights, preferences and privileges and qualifications,
limitations and restrictions granted to and imposed on the capital stock of the
Corporation shall be as set forth below in this Article Fourth. References
hereinafter made to Sections shall mean the Sections contained in this Article
Fourth (C).
1. Definitions. As used herein, the following terms shall have
the following definitions:
(a) "Additional Stock" shall have the meaning set
forth in Section 5(c)(ii) hereof.
(b) "Bylaws" shall mean the Bylaws of the
Corporation.
(c) "Common Stock" shall mean (a) the Corporation's
Class A Common Stock and Class B Common stock, par value $.01 per share, as
authorized on the date hereof, and (b) any other capital stock of any class or
classes (however designated) of the Corporation, authorized on or after the date
hereof, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating distributions after the payment of dividends and distributions on
any shares entitled to
<PAGE> 27
3
preference under this Certificate of Incorporation (as the same may be further
amended from time to time).
(d) "Common Stock Equivalents" shall have the meaning
set forth in Section 5(c)(iii) hereof.
(e) "Conversion Price" shall have the meaning set
forth in Section 5(a)(i) hereof.
(f) "Conversion Rights" shall have the meaning set
forth in Section 5 hereof.
(g) "Convertible Securities" means any indebtedness
or shares of stock convertible into or exchangeable for Common Stock.
(h) "Effective Price" of shares of Additional Stock
means the quotient determined by dividing (i) the total number of such shares of
Additional Stock issued or sold, or deemed to have been issued or sold, by the
Corporation under Section 5 hereof, into (ii) the consideration received by the
Corporation under Section 5 hereof for the issuance of such shares of Additional
Stock.
(i) "Initial Redemption Date" shall have the meaning
set forth in Section 8(c) hereof.
(j) "Option" means rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(k) "Option Holders" shall have the meaning set forth
in Section 8(a) hereof.
(l) "Optional Redemption Notice" shall have the
meaning set forth in Section 8(c) hereof.
(m) "Optional Series C Redemption" shall have the
meaning set forth in Section 8(a) hereof.
(n) "Original Series A Issue Price" means $0.0269 per
share of Series A Preferred Stock (appropriately adjusted for stock splits,
reverse stock splits and similar type transactions or occurrences with respect
to the Series A Preferred Stock).
<PAGE> 28
4
(o) "Original Series C Issue Price" means $4.60 per
share of Series C Preferred Stock and Series C-1 Preferred Stock (appropriately
adjusted for stock splits, reverse stock splits and similar type transactions or
occurrences with respect to the Series C Preferred Stock or Series C-1 Preferred
Stock).
(p) "Original Series D Issue Price" means $11.72 per
share of Series D Preferred Stock (appropriately adjusted for stock splits,
reverse stock splits and similar type transactions or occurrences with respect
to the Series D Preferred Stock).
(q) "Original Series E Issue Price" means $25.00 per
share of Series E Preferred Stock (appropriately adjusted for stock splits,
reverse stock splits and similar type transactions or occurrences with respect
to the Series E Preferred Stock).
(r) "Public Offering" means the consummation of an
offering of equity securities of the Corporation pursuant to an effective
registration statement under the Securities Act under which the aggregate gross
proceeds received by the Corporation equals or exceed $20 million.
(s) "Qualified Public Offering" means the
consummation of an offering of equity securities of the Corporation pursuant to
an effective registration statement under the Securities Act under which the
public offering price per share is not less than $7.03 per share (as adjusted
for any stock split, stock dividend or recapitalization after July __, 1999) and
the aggregate gross proceeds received by the Corporation equals or exceed $20
million.
(t) "Series A Liquidation Preference" means, as to
each share of Series A Preferred Stock, the greater of (i) $.0269 per share,
plus all declared but unpaid dividends thereon, if any, as adjusted for stock
splits, reverse stock splits and similar type transactions or occurrences with
respect to the Series A Preferred Stock or (ii) the amount per share the holders
would be entitled to receive if the holders had converted such shares of Series
A Preferred Stock into Class A Common Stock immediately prior to the
effectiveness of the event constituting the liquidation, dissolution or winding
up of the Corporation.
(u) "Series C Liquidation Preference" means, as to
each share of Series C Preferred Stock and Series C-1 Preferred Stock, the
greater of (i) the Original Series C Issue Price plus cumulative dividends
thereon at the rate of six percent (6%) per annum, as adjusted for stock splits,
reverse stock splits and similar transactions or occurrences with respect to the
Series C Preferred Stock or Series C-1 Preferred Stock or (ii) the amount per
share the holders would be entitled to receive if the holders had converted such
shares of Series C Preferred Stock or Series
<PAGE> 29
5
C-1 Preferred Stock into Class A Common Stock immediately prior to the
effectiveness of the event constituting the liquidation, dissolution or winding
up of the Corporation.
(v) "Series D Liquidation Preference" means, as to
each share of Series D Preferred Stock, the greater of (i) the Original Series D
Issue Price plus cumulative dividends thereon at the rate of six percent (6%)
per annum, as adjusted for stock splits, reverse stock splits and similar
transactions or occurrences with respect to the Series D Preferred Stock or (ii)
the amount per share the holders would be entitled to receive if the holders had
converted such shares of Series D Preferred Stock into Class A Common Stock
immediately prior to the effectiveness of the event constituting the
liquidation, dissolution or winding up of the Corporation.
(w) "Series E Liquidation Preference" means, as to
each share of Series E Preferred Stock, the greater of (i) the Original Series E
Issue Price plus cumulative dividends thereon at the rate of six percent (6%)
per annum, as adjusted for stock splits, reverse stock splits and similar
transactions or occurrences with respect to the Series E Preferred Stock or (ii)
the amount per share the holders would be entitled to receive if the holders had
converted such shares of Series E Preferred Stock into Class A Common Stock
immediately prior to the effectiveness of the event constituting the
liquidation, dissolution or winding up of the Corporation.
(x) "Series C Issuance Date" means October 31, 1997.
(y) "Series D Issuance Date" means March 5, 1999.
(z) "Series E Issuance Date" means July __, 1999.
2. Series and Number of Shares. The authorized number of
shares of Series A Preferred Stock shall be 788,200, the authorized number of
shares of Series C Preferred Stock shall be 1,478,359, the authorized number of
shares of Series C-1 Preferred Stock shall be 932,401, the authorized number of
shares of Series D Preferred Stock shall be 1,757,683 and the authorized number
of shares of Series E Preferred Stock shall be 400,000. Shares of Series A,
Series C, Series C-1, Series D and Series E Preferred Stock retired, redeemed,
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be canceled and shall not be reissued, sold or transferred.
3. Dividend Rights.
(a) The holders of Series D Preferred Stock shall be
entitled to receive cumulative compound annual dividends per share at the rate
of six percent (6%) of the Original Series D Issue Price (as adjusted for any
stock dividends, combinations, or splits with respect to such shares), prior and
in preference to any dividends on any other capital stock of the Corporation
other than the Series E Preferred Stock. Such dividends shall begin accruing on
<PAGE> 30
6
March 5, 1999, shall be cumulative and shall be payable on the earlier of a
Corporate Change or a Public Offering. Notwithstanding the foregoing, in the
event that the Corporation files, prior to March 5, 2000, a registration
statement under the Securities Act covering the sale of its Common Stock which
results in the consummation of the sale of such securities before the later of
March 5, 2000 or four months after the date of filing of such registration
statement at a public offering price of not less than $7.03 per share (as
adjusted for any stock split, stock dividend or recapitalization after July __,
1999), then the cumulative dividend described in this Section 3(a) shall not be
due and payable.
(b) The holders of Series E Preferred Stock shall be
entitled to receive cumulative compound annual dividends per share at the rate
of six percent (6%) of the Original Series E Issue Price (as adjusted for any
stock dividends, combinations or splits with respect to such shares), prior and
in preference to any dividends on any other capital stock of the Corporation
other than the Series D Preferred Stock. Such dividends shall begin accruing on
the Series E Issuance Date, shall be cumulative and shall be payable on the
earlier of a Corporate Change or a Public Offering. Notwithstanding the
foregoing, in the event that the Corporation files, prior to the first
anniversary of the Series E Issuance Date, a registration statement under the
Securities Act covering the sale of its Common Stock which results in the
consummation of the sale of such securities before the later of the first
anniversary of the Series E Issuance Date or four months after the date of
filing of such registration statement, then the cumulative dividend described in
this Section 3(b) shall not be due and payable.
(c) No dividends shall be declared, paid or set apart
on any capital stock of the Corporation until the cumulative dividends set forth
in Section 3(a) and Section 3(b) have been paid on all outstanding shares of
Series D Preferred Stock and Series E Preferred Stock (such payments to be made
on a pari passu basis). After such payment, any additional dividends declared by
the Board of Directors shall be payable (i) first to the holders of shares of
Series C Preferred Stock and Series C-1 Preferred Stock on the basis of the
shares of Class A Common Stock into which such shares are then convertible at a
rate of six percent (6%) of the Original Series C Issue Price per annum (but in
no event more than the amount per share paid to the Series D Preferred holders
pursuant to Section 3(a) and the Series E Preferred holders pursuant to Section
3(b)) and (ii) then ratably among the holders of shares of Series E Preferred
Stock, Series D Preferred Stock, Series C Preferred Stock, Series C-1 Preferred
Stock, Class A Common Stock and Class B Common Stock (on the basis of the shares
of Class A Common Stock into which such shares are then convertible); provided,
that dividends on outstanding shares of Series E Preferred Stock, Series D
Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock shall
be paid or declared and set apart for payment before any dividends shall be paid
or declared and set apart for payment on any other capital stock of the
Corporation with respect to
<PAGE> 31
7
the same dividend period. No dividends shall be payable on the shares of Series
A Preferred Stock.
(d) With respect to any dividends declared in
accordance with Section 3(c) above, no right shall accrue to holders of Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock by reason of the fact that dividends on said shares are not
declared in any prior year, nor shall any undeclared or unpaid dividend bear or
accrue any interest. In addition, except for the dividends set forth in Section
3(a) hereof and Section 3(b) hereof, no dividends shall be paid on the Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock if such payment would violate the terms of any instrument
governing indebtedness of the Corporation or any directly or indirectly owned
subsidiary of the Corporation.
4. Liquidation Preference.
(a) Priority. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the assets of the Corporation legally available for distribution to its
shareholders, shall be distributed in the following order of priority:
(i) The holders of shares of Series D
Preferred Stock and Series E Preferred Stock shall be entitled to
receive, prior and in preference to any distribution in such
liquidation, dissolution or winding up of any of the assets of the
Corporation to the holders of shares of Class A and Class B Common
Stock and Series A Preferred Stock, Series C Preferred Stock and Series
C-1 Preferred Stock by reason of their ownership thereof, an amount per
share on a pari passu basis equal to the Series D Liquidation
Preference for each outstanding share of Series D Preferred Stock then
held by them and an amount per share equal to the Series E Liquidation
Preference for each outstanding share of Series E Preferred Stock then
held by them; the holders of shares of Series C Preferred Stock and
Series C-1 Preferred Stock shall be entitled to receive, prior and in
preference to any distribution in such liquidation, dissolution or
winding up of any assets of the Corporation to the holders of shares of
Class A and Class B Common Stock and Series A Preferred Stock by reason
of their ownership thereof, an amount per share equal to the Series C
Liquidation Preference for each outstanding share of Series C Preferred
Stock or Series C-1 Preferred Stock held by them; and the holders of
shares of Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution in such liquidation, dissolution
or winding up of any assets of the Corporation to the holders of shares
of Class A and Class B Common Stock by reason of their ownership
thereof, an amount per share equal to the Series A Liquidation
Preference for each outstanding share of Series A Preferred Stock held
by them. If upon the occurrence
<PAGE> 32
8
of any such distribution, the assets of the Corporation thus
distributed among the holders of shares of Series A, Series C, Series
C-1, Series D and Series E Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amounts, then the entire assets of the Corporation legally available
for distribution shall be distributed first to the holders of shares of
Series D Preferred Stock and the shares of Series E Preferred Stock pro
rata in proportion to the full preferential amounts to which such
holders are entitled, second to the holders of shares of Series C
Preferred Stock and Series C-1 Preferred Stock and third to the holders
of shares of Series A Preferred Stock all payable to the extent that
such holders are satisfied in full in accordance with the foregoing
priority of distributions.
(ii) After the distributions described in
Section 4(a)(i) hereof have been made, then, to the extent available,
the remaining assets of the Corporation shall be distributed among the
holders of shares of Series C Preferred Stock, Series C-1 Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Class A
and Class B Common Stock pro rata based on the number of shares of
Class A Common Stock held (or deemed to be held, on an as-converted
basis, for the holders of the Series C, Series C-1, Series D and Series
E Preferred Stock) by each.
(b) Consolidation, Merger, Etc. For purposes of this
Section 4, (i) any transaction or series of related transactions involving a
consolidation or merger or other corporate reorganization of the Corporation in
which the stockholders of the Corporation who were stockholders immediately
prior to such consolidation, merger or reorganization own less than 50% of the
voting power of the Corporation immediately after such consolidation, merger or
reorganization or in which outstanding shares of the Corporation are exchanged
for securities or other consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary (other than a mere reincorporation
transaction) and in which stockholders of the Corporation who were stockholders
immediately prior to such transaction receive less than 50% of the voting power
of the surviving corporation, or (ii) a sale, lease or other disposition of all
or substantially all of the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section 4.
5. Conversion. The holders of shares of Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall have conversion rights as follows (the
"Conversion
Rights"):
<PAGE> 33
9
(a) Right to Convert.
(i) Each share of Series A, Series C, Series
C-1, Series D and Series E Preferred Stock shall be convertible, at the
option of the holder thereof, at any time or from time to time after
the date of issuance of such share, at the office of the Corporation or
any transfer agent for the Preferred Stock, into such number of fully
paid and nonassessable shares of Class A Common Stock as is determined
by (A) dividing the Original Issue Price for such share by the
conversion price (the "Conversion Price") at the time in effect for
such share and (B) multiplying the quotient obtained by 2.5. The
Original Issue Price and the initial Conversion Price per share for
shares of Series A Preferred Stock shall be the Original Series A Issue
Price; the Original Issue Price per share for shares of Series C
Preferred Stock shall be the Original Series C Issue Price and the
Conversion Price per share for the Series C Preferred Stock shall be
$4.29; the Original Issue Price and the initial Conversion Price per
share for shares of Series C-1 Preferred Stock shall be $4.29; and the
Original Issue Price and the initial Conversion Price per share for
shares of Series D Preferred Stock shall be the Original Series D Issue
Price and the Original Issue Price and the initial Conversion Price per
share for shares of Series E Preferred Stock shall be the Original
Series E Issue Price; provided, however, that the Conversion Price for
the Preferred Stock shall be subject to adjustment as set forth in
Section 5(c) hereof .
(ii) Each share of Series A Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock and Series D
Preferred Stock shall automatically be converted into fully paid and
nonassessable shares of Class A Common Stock at the Conversion Price at
the time in effect for such series, immediately prior to the
consummation of the Corporation's sale of its Common Stock in a
Qualified Public Offering and each share of Series E Preferred Stock
shall automatically be converted into fully paid and nonassessable
shares of Class A Common Stock at the Conversion Price at the time in
effect for such shares, immediately prior to the consummation of the
Corporation's sale of its Common Stock in a Public Offering; provided,
however, that the Conversion Price for the Series E Preferred Stock
shall be subject to adjustment in connection with the consummation of a
Public Offering as provided in clause (c) of this Section 5 in the
event that the public offering price in such Public Offering is less
than the Conversion Price for the Series E Preferred Stock as in effect
immediately prior thereto. In addition, (1) each share of Series A
Preferred Stock shall automatically be converted into fully paid and
nonassessable shares of Class A Common Stock at the Conversion Price at
the time in effect for such series in the event that the holders of at
least 70% of the Series A Preferred Stock then outstanding consent in
writing to such conversion; and (2) each share of Series C Preferred
Stock and Series C-1 Preferred Stock shall automatically
<PAGE> 34
10
be converted into fully paid and nonassessable shares of Class A Common
Stock at the Conversion Price at the time in effect for such series in
the event that the holders of at least 70% of the Series C Preferred
Stock and Series C-1 Preferred Stock then outstanding consent in
writing to such conversion.
(b) Mechanics of Conversion. Before any holder of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock shall be
entitled to convert any of such shares into shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Preferred Stock and
shall give written notice by mail, postage prepaid, or hand delivery, to the
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Class A Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holders of shares of Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, as the case may be, or to the nominee or nominees of such
holders, a certificate or certificates for the number of shares of Class A
Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Class A Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Class A Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act of 1933, as amended, the conversion may, at the option of any
holder tendering the Series A Preferred Stock, Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred Stock for
conversion, be conditioned upon the closing with the underwriter of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive Class A Common Stock issuable upon such conversion of the Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock, as the case may be, shall not be
deemed to have converted such Preferred Stock until immediately prior to the
closing of such sale of securities.
(c) Conversion Price Adjustments of Series A
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock. The Conversion Price of the Series
A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock and Series E Preferred Stock shall be subject to adjustment
from time to time as follows:
<PAGE> 35
11
(i) (A) Upon each issuance (or deemed
issuance pursuant to the provisions hereof) by the Corporation of any
Additional Stock after the Series D Issuance Date, without
consideration or for an Effective Price per share less than the
Conversion Price with respect to any series of Preferred Stock in
effect immediately prior to the issuance (or deemed issuance) of such
Additional Stock, then (1) the Conversion Price for the Series E
Preferred Stock in effect immediately prior to each issuance (or deemed
issuance) shall be adjusted to reflect two hundred and fifty percent
(250%) of the Effective Price of the Additional Stock so issued until
the Conversion Price for the Series E Preferred Stock has been adjusted
downward to $17.58 per share, (2) the Conversion Price for the Series D
Preferred Stock in effect immediately prior to each issuance (or deemed
issuance) shall be adjusted to reflect the Effective Price of the
Additional Stock so issued until the Conversion Price for the Series D
Preferred Stock has been adjusted downward to $8.68 per share and (3)
the Conversion Prices for the Series A Preferred Stock, the Series C
Preferred Stock and the Series C-1 Preferred Stock, the Conversion
Price of the Series E Preferred Stock once it has been adjusted
downward to $17.58 in accordance with subparagraph (1) above and the
Conversion Price of the Series D Preferred Stock once it has been
adjusted downward to $8.68 in accordance with subparagraph (2) above,
in effect immediately prior to each issuance (or deemed issuance) shall
be adjusted to a price determined by multiplying such Conversion Price
by a fraction, (i) the numerator of which shall be the number of
outstanding shares of Common Stock and shares of Common Stock then
issuable upon exercise or conversion of outstanding securities of the
Corporation immediately prior to such issuance plus the number of
shares of Common Stock which the aggregate consideration received (or
deemed received) by the Corporation for such issuance would purchase at
such Conversion Price; and (ii) the denominator of which shall be the
number of outstanding shares of Common Stock and shares of Common Stock
then issuable upon exercise or conversion of outstanding securities of
the Corporation immediately after such issuance including the
Additional Stock so issued.
(B) No adjustment of the Conversion
Price for the Preferred Stock shall be made in an amount less than one-half of
one cent ($0.005) per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried forward and
shall be taken into account in any subsequent adjustment to the Conversion
Price. No adjustment of the Conversion Price for any series of Preferred Stock
pursuant to this Section 5(c)(i) shall have the effect of increasing such
Conversion Price for such series above the Conversion Price for such series in
effect immediately prior to such adjustment.
(C) In the case of the issuance of
securities of the Corporation for cash, the amount of consideration received by
the Corporation for such securities
<PAGE> 36
12
shall be deemed to be the amount of cash paid therefor before deducting any
discounts, commissions or other expenses allowed, paid or incurred by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(D) In the case of the issuance of
securities of the Corporation for a consideration in whole or in part other than
cash, the consideration other than cash shall be deemed to have a dollar value
equal to the fair market value of such noncash consideration, irrespective of
any accounting treatment thereof, as determined by the Board of Directors.
(E) In the case of the issuance
(whether before, on or after the Series D Issuance Date) of Options or
Convertible Securities, the following provisions shall apply for all purposes of
this Section 5(c)(i) and Section 5(c)(ii) hereof:
(1) With respect to Options
to purchase Class A or Class B Common Stock, the aggregate maximum number of
shares of Common Stock deliverable upon exercise of such Options shall be deemed
to have been issued at the time such options were issued and for a consideration
equal to the consideration (determined in the manner provided in Section
5(c)(i)(C) and Section 5(c)(i)(D) hereof), if any, received by the Corporation
for such Options plus the minimum exercise price provided in such Options for
Common Stock covered thereby.
(2) With respect to
Convertible Securities and Options to purchase Convertible Securities, the
aggregate maximum number of shares of Common Stock deliverable upon the
conversion or exchange of any such Convertible Securities and the aggregate
maximum number of shares of Common Stock issuable upon the exercise of such
Options to purchase Convertible Securities and the subsequent conversion or
exchange of such Convertible Securities shall be deemed to have been issued at
the time such Convertible Securities or such Options were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such Convertible Securities and Options (excluding any cash received on
account of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Corporation upon the conversion or
exchange of such Convertible Securities or the exercise of such Options and the
conversion or exchange of the Convertible Securities issuable upon exercise of
such Options (the consideration in each case to be determined in the manner
provided in Section 5(c)(i)(C) and 5(c)(i)(D) hereof).
(3) In the event of any
change in the number of shares of Common Stock deliverable, or in the
consideration payable to the Corporation, upon exercise of such Options or upon
conversion or exchange of such Convertible Securities,
<PAGE> 37
13
including, but not limited to, a change resulting from the antidilution
provisions thereof, the applicable Conversion Prices of the Series A, C, C-1, D
and E Preferred Stock, to the extent in any way affected by or computed using
such Options or Convertible Securities, shall be recomputed to reflect such
change, but no further adjustment shall be made for the actual issuance of
Common Stock or any payment of such consideration upon the exercise of any such
Options or the conversion or exchange of such Convertible Securities.
(4) Upon the expiration or
termination of any such Options or any such rights to convert or exchange
Convertible Securities, the applicable Conversion Prices of the Series A, C,
C-1, D and E Preferred Stock, to the extent in any way affected by or computed
using such Options or Convertible Securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and Options and
Convertible Securities which remain in effect) that were actually issued upon
the exercise of such Options or upon the conversion or exchange of such
Convertible Securities.
(5) The number of shares of
Common Stock deemed issued and the consideration deemed paid therefor pursuant
to Section 5(c)(i)(E)(1) and (2) hereof shall be appropriately adjusted to
reflect any change, termination or expiration of the type described in either
Section 5(c)(i)(E)(3) or (4) hereof.
(ii) "Additional Stock" shall mean any
shares of Common Stock issued (or deemed to have been issued pursuant
to Section 5(c)(i)(E) hereof) by the Corporation after the Series D
Issuance Date other than:
(a) Common Stock issued pursuant to
a transaction described in Section 5(c)(iii) hereof;
(b) shares of Common Stock or
options to purchase such Common Stock issued or to be issued to
officers, employees or directors of, or consultants to, the
Corporation, pursuant to any agreement, plan or arrangement approved by
the Board of Directors of the Corporation;
(c) Common Stock issued or issuable
upon conversion of shares of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock;
(d) Common Stock issued or to be
issued by the Corporation pursuant to equipment lease financing
arrangements with equipment lessors, or Common Stock reissued after the
repurchase thereof by the Corporation as a result of
<PAGE> 38
14
any termination of a restricted stock purchase agreement or other
employee equity plan or arrangement to which the Corporation is a
party, which are approved by the Board of Directors; and
(e) warrants to purchase up to
22,500 shares of Class A Common Stock (and the Common Stock issuable
upon exercise thereof).
(iii) In the event the Corporation at any
time or from time to time after the Series E Issuance Date fixes a
record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of
shares of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment
of any consideration by such holder for the additional shares of Common
Stock or Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of
such record date (or the date of such dividend, distribution, split or
subdivision if no record date is fixed), the applicable Conversion
Prices of the Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be appropriately decreased so that the number of
shares of Class A Common Stock issuable on conversion of each share of
Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall be increased in proportion to such increase in the aggregate
number of shares issuable with respect to Common Stock Equivalents,
with the number of shares issuable with respect to Common Stock
Equivalents determined from time to time in the manner provided for
deemed issuances in Section 5(c)(i)(E) hereof.
(iv) If the number of shares of Common Stock
outstanding at any time after the Series E Issuance Date is decreased
by a combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the applicable
Conversion Prices for the Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock shall be appropriately increased so that the number
of shares of Class A Common Stock issuable on conversion of each share
of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall be decreased in proportion to such decrease in the outstanding
shares of Common Stock.
<PAGE> 39
15
(d) Other Distributions. In the event the Corporation
shall declare a distribution payable in securities of other persons, evidences
of indebtedness issued by the Corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in Section 5(c)(iii)
hereof, then, in each such case for the purpose of this Section 5(d), the
holders of shares of Series A Preferred Stock, Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall
be entitled to a proportionate share of any such distribution as though they
were holders of the number of shares of Class A Common Stock into which their
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
shares of Common Stock entitled to receive such distribution.
(e) Recapitalization. If at any time or from time to
time there shall be a recapitalization of Common Stock (other than a
subdivision, combination or consolidation, merger or sale of assets or stock
transaction otherwise provided for herein), provision shall be made so that each
holder of shares of Series A Preferred Stock, Series C Preferred Stock, Series
C-1 Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall
thereafter be entitled to receive, upon conversion of the Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, the number of shares of stock or other
securities or property of the Corporation or otherwise, receivable upon such
recapitalization by a holder of the number of shares of Common Stock into which
such shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock could
have been converted immediately prior to such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 5 with respect to the rights of the holders of shares of Series
A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock and Series E Preferred Stock after the recapitalization to the
end that the provisions of this Section 5 (including adjustments of the
applicable Conversion Prices then in effect and the number of shares purchasable
upon conversion of the Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock) shall be applicable after that event as nearly equivalent as may be
practicable.
(f) No Impairment. The Corporation will not, by
amendment of this Certificate of Incorporation or through any reorganization,
recapitalization or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of shares of the Series A
<PAGE> 40
16
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock against impairment.
(g) No Fractional Shares. No fractional shares shall
be issued upon conversion of the Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, and the number of shares of Class A Common Stock to be issued
shall be rounded down to the nearest whole share, and there shall be no payment
to a holder of shares of Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
for any such rounded fractional share. Whether or not fractional shares result
from such conversion shall be determined on the basis of the total number of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock the holder
is at the time converting into Class A Common Stock and the number of shares of
Class A Common Stock issuable upon such aggregate conversion.
(h) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the applicable Conversion
Prices of the Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock pursuant
to this Section 5, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of shares of Series A Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (i)
such adjustment and readjustment, (ii) the applicable Conversion Prices at the
time in effect and (iii) the number of shares of Class A Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of a share of Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock.
(i) Notices of Record Date. In the event of any
taking by the Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of shares of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock, at least twenty (20) days
<PAGE> 41
17
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Class A Common Stock, solely for the purpose
of effecting the conversion of the shares of Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock, such number of its shares of Class A Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of Series A Preferred Stock, Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, and if
at any time the number of authorized but unissued shares of Class A Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock, then in addition
to such other remedies as shall be available to the holder of such shares of
Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Class A Common Stock to such
number of shares as shall be sufficient for such purposes.
(k) Notices. Any notice required by the provisions of
this Section 5 to be given to the holders of shares of Series A Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock shall be deemed given when received if delivered
via courier or sent by facsimile, by telex, or by United States mail, postage
prepaid, and addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
6. Status of Converted Stock. In the event any shares of
Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock are converted pursuant to
Section 5 hereof, the shares so converted shall be canceled, retired and
eliminated and shall not be reissued by the Corporation.
7. Voting Rights.
(a) Each holder of a share of Series A Preferred
Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall have the right to one vote for each
share of Class A Common Stock into which such Series A Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D
<PAGE> 42
18
Preferred Stock and Series E Preferred Stock could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded down
to the nearest whole share).
(b) The Board of Directors of the Corporation shall
be determined and shall be elected in accordance with the provisions of the
Stockholders Agreement.
(c) At any meeting called for the purpose of electing
directors, the presence in person or by proxy of the holders of record of a
majority in interest of the Corporation's voting securities shall constitute a
quorum for the election of directors to be elected by such holders.
(d) Any action required to be taken at any meeting of
stockholders, or any action which may be taken at any meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote if a consent in writing, setting forth the action as taken, shall be signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Prompt notice
of the taking of the corporate action without a meeting by less than unanimous
consent shall be given to those stockholders who have not consented in writing.
(e) Except as otherwise provided in this Certificate
of Incorporation of the Corporation or by applicable law, the holders of shares
of Series A Preferred Stock, Series C Preferred Stock, Series C-1 Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall be entitled
to notice of any shareholders' meeting in accordance with the Bylaws of the
Corporation and applicable law, and shall vote, together with the holders of
shares of Class A Common Stock (and any other class or series of stock entitled
to vote together as one class with the Class A Common Stock), with respect to
any question upon which holders of shares of Class A Common Stock have the right
to vote, as a single class.
8. Optional Redemption of Series E Preferred Stock, Series D
Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock.
(a) Series C Preferred Stock. Subject to the
provisions of Section 8(b) and Section 8(c) below, at any time after five (5)
years from the Series C Issuance Date, but in no event more frequently than once
per year, the holders of at least sixty percent (60%) (the "Option Holders") of
the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred
Stock, voting together as a class, may notify the Corporation that all or some
of the shares of Series C Preferred Stock and Series C-1 Preferred Stock held by
such holders shall be redeemed (an "Optional Series C Redemption"). Upon its
receipt of such notice, the Corporation shall (to
<PAGE> 43
19
the extent it is then lawfully able to do so), but subject to the provisions of
Section 8(b) and Section 8(c) below, redeem from the holders requesting such
redemption (including those holders who later request redemption on a timely
basis as hereinafter provided) the outstanding shares of Series C Preferred
Stock and Series C-1 Preferred Stock specified in said request by payment in
cash in respect of each share redeemed of an amount equal to the Series C
Liquidation Preference. Upon receipt of any such request as to an Optional
Series C Redemption, the Corporation shall promptly give written notice of the
redemption request to each nonrequesting holder of record of the shares of
Series C Preferred Stock and Series C-1 Preferred Stock and to each holder of
shares of Series E Preferred Stock and Series D Preferred Stock, postage
prepaid, at the post office address last shown on the records of the
Corporation. With respect to an Optional Series C Redemption, nonrequesting
holders of shares of Series C Preferred Stock and Series C-1 Preferred Stock
shall have thirty (30) days from the date such notice is mailed to request in
writing redemption of their Series C Preferred Stock and Series C-1 Preferred
Stock on the terms contained herein and on the date of redemption set forth in
Section 8(c), and all such requests shall be deemed to have been received by the
Corporation on the date of the initial request by the Option Holders.
Notwithstanding the foregoing, if the Series D Preferred Stock has elected to be
redeemed pursuant to Section 8(b) below and/or if the Series E Preferred Stock
has elected to be redeemed pursuant to Section 8(c) below, no payments shall be
made with respect to this Section 8(a) until the Series D Liquidation Preference
(including any principal, interest or other amounts represented by a promissory
note) with respect to each share of Series D Preferred Stock then outstanding
shall have been paid in full and/or the Series E Liquidation Preference
(including any principal, interest or other amounts represented by a promissory
note) with respect to each share of Series E Preferred Stock then outstanding
shall have been paid in full.
(b) Series D Preferred Stock. If (i) the Series D
Preferred Stock has not been converted to Common Stock pursuant to Section 5(a)
(ii) on or before March 5, 2004 or (ii) in the event that any other capital
stock of the Corporation (or any securities convertible into or exercisable or
exchangeable into capital stock of the Corporation) is to be redeemed for any
reason, upon the election (the "Series D Election") by the holders of sixty-six
and two-thirds of the then outstanding shares of Series D Preferred Stock, the
Corporation shall redeem all of the shares of Series D Preferred Stock by paying
a per share sum equal to the Series D Liquidation Preference. The Series D
Liquidation Preference shall be paid on a pari passu basis with the Series E
Liquidation Preference (if the Series E Preferred Stock has elected to be
redeemed pursuant to Section 8(c) below) and before any redemption payment is
made in respect of any other capital stock of the Corporation (or any securities
convertible into or exercisable or exchangeable into capital stock of the
Corporation). The Corporation shall pay to each holder of Series D Preferred
Stock (who has not converted pursuant to Section 5 prior to the date of such
redemption) on the 90th day after the date of the Series D Election the Series D
Liquidation Preference in cash in an amount equal to one-third of the Series D
Liquidation Preference and in
<PAGE> 44
20
the form of a promissory note in an aggregate amount equal to two-thirds of the
Series D Liquidation Preference. The note shall bear interest, compounded
quarterly, through the date of payment, at the Defined Rate (as defined herein)
on the Initial Redemption Date (as defined below), such rate to be computed on
the basis of a 360-day year. Payments on the promissory note shall be payable in
two annual installments on each of the first and second anniversaries of the
Initial Redemption Date (each a "Redemption Date") for such Series D Preferred
Stock unless such anniversary falls on a day which is not a business day in San
Francisco, California, in which case the applicable redemption installment shall
be due and payable on the next business day.
(c) Series E Preferred Stock. If (i) the Series E
Preferred Stock has not been converted into Common Stock pursuant to Section
5(a)(ii) on or before the fifth anniversary of the Series E Issuance Date or
(ii) in the event that any other capital stock of the Corporation (or any
securities convertible into or exercisable or exchangeable into capital stock of
the Corporation) is to be redeemed for any reason upon the election (the "Series
E Election") by the holders of sixty-six and two-thirds of the then outstanding
shares of Series E Preferred Stock, the Corporation shall redeem all of the
shares of Series E Preferred Stock by paying a per share sum equal to the Series
E Liquidation Preference. The Series E Liquidation Preference shall be paid on a
pari passu basis with the Series D Liquidation Preference (if the Series D
Preferred Stock has elected to be redeemed pursuant to Section 8(b) above) and
before any redemption payment is made in respect to any other capital stock of
the Corporation (or any securities convertible into or exercisable or
exchangeable into capital stock of the Corporation). The Corporation shall pay
to each holder of Series E Preferred Stock (who has not converted pursuant to
Section 5 prior to the date of such redemption) on the 90th day after the date
of the Series E Election, the Series E Liquidation Preference in cash in an
amount equal to one-third of the Series E Liquidation Preference and in the form
of a promissory note in an aggregate amount equal to two-thirds of the Series E
Liquidation Preference. The note shall bear interest, compounded quarterly,
through the date of payment, at the Defined Rate (as defined below) on the
Initial Redemption Date (as defined below), such rate to be computed on the
basis of a 360-day year. Payments on the promissory note shall be payable in two
annual installments on each of the first and second anniversaries of the Initial
Redemption Date for such Series E Preferred Stock unless such anniversary falls
on a day which is not a business day in Atlanta, Georgia, in which case the
applicable redemption installment shall be due and payable on the next business
day.
(d) Redemption Date. Subject to Section 8(b) and
Section 8(c), the Corporation shall redeem the shares of Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock to be redeemed hereunder no later than ninety (90) days after
the date of the request by the initially requesting holders of shares of Series
C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock, as the case may be. Such date shall be the "Initial
Redemption Date" as described herein.
<PAGE> 45
(e) Procedure. At least thirty (30) days prior to the
Initial Redemption Date, written notice shall be mailed, postage prepaid, to the
holder of record of shares of Series C Preferred Stock, Series C-1 Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock to be redeemed, at
such holder's post office address last shown on the records of the Corporation,
notifying such holder of the redemption of such shares to be redeemed at that
time, specifying the Initial Redemption Date, the applicable redemption price,
and calling upon such holder to surrender to the Corporation, in the manner and
at the place designated, such holder's certificate or certificates representing
the shares to be redeemed (such notice is hereinafter referred to as the
"Optional Redemption Notice"). On or after the Initial Redemption Date, each
holder of shares of Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock or Series E Preferred Stock to be redeemed shall surrender
such holder's certificate or certificates representing shares to the
Corporation, in the manner and at the place designated in the Optional
Redemption Notice, and thereupon the applicable redemption price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner of such shares and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(f) Insufficient Funds. If the funds of the
Corporation legally available for redemption of shares of Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock on any Redemption Date are insufficient to redeem the total
number of shares of Series C Preferred Stock, Series C-1 Preferred Stock, Series
D Preferred Stock or Series E Preferred Stock to be redeemed on such date, those
funds that are legally available shall be used to redeem the maximum number of
shares of Series D Preferred Stock and Series E Preferred Stock first ratably
among the holders of such shares to be redeemed. To the extent that funds remain
after payment of the full Series D Liquidation Preference (including any and all
principal, interest and other amounts represented by any promissory notes issued
to the holders upon redemption and the full Series E Liquidation Preference
(including any and all principal, interest and other amounts represented by any
promissory notes issued to the holders upon redemption)), those funds will be
used to redeem the maximum number of shares of Series C Preferred Stock and
Series C-1 Preferred Stock ratably. The shares of Preferred Stock not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for redemption of shares of Preferred Stock such funds shall
immediately be used to redeem the balance of the shares which the Corporation
has become obligated to redeem on any Redemption Date but which it has not
redeemed, at a price per share equal to the applicable redemption price (as
previously determined), plus interest, compounded quarterly and calculated on
the basis of a 360 day year, on the Initial Redemption Price at the Defined Rate
(as defined hereinafter) accrued from and after the Initial Redemption Date to
the date of actual redemption. As used herein, the
<PAGE> 46
22
"Defined Rate" shall mean a rate per annum equal to (i) the highest rate then
paid by the Corporation for indebtedness for borrowed money, plus one hundred
(100) basis points, or (ii) if the Corporation has no indebtedness for borrowed
money then outstanding, then ten percent (10%), but in no event more than the
maximum amount permissible by law.
(g) Limitation on Optional Redemption of Series C and
C-1 Preferred Stock. If the aggregate Series C Liquidation Preference payable on
a Redemption Date exceeds fifty percent (50%) of the Corporation's cumulative
retained earnings (as adjusted to reflect previous repurchases), calculated in
accordance with generally accepted accounting principles consistently applied,
on such date, then the Corporation only need redeem the maximum number of shares
of Series C Preferred Stock and Series C-1 Preferred Stock ratably among the
holders of such shares to be redeemed, such that the aggregate Series C
Liquidation Preference does not exceed fifty percent of cumulative retained
earnings. The shares of Series C Preferred Stock and Series C-1 Preferred Stock
not redeemed shall remain outstanding and entitled to all the rights and
preferences provided herein. At the end of each fiscal quarter thereafter when
the Corporation has generated additional retained earnings, fifty percent of
such additional retained earnings shall immediately be used to redeem the
balance of the shares which the Corporation has become obligated to redeem on
any Redemption Date but which it has not redeemed, at a price per share equal to
the Series C Liquidation Preference (as previously determined), plus interest,
compounded quarterly and calculated on the basis of a 360 day year, on the
Series C Liquidation Preference at the Defined Rate accrued from and after the
Redemption Date to the date of actual redemption.
(h) Deposit of Optional Redemption Price. On or prior
to the Initial Redemption Date, the Corporation shall deposit the redemption
price with respect to all shares of Series C Preferred Stock, Series C-1
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
designated for redemption in the Optional Redemption Notice, the Series D
Election or the Series E Election and not yet redeemed with a bank or trust
company having aggregate capital and surplus in excess of $50,000,000.00 as a
trust fund for the benefit of the respective holders of the shares designated
for the redemption and not yet redeemed, with irrevocable instructions and
authority to the bank or trust company to pay the redemption price for such
shares to their respective holders on or after the Initial Redemption Date upon
receipt of notification from the Corporation that such holder has surrendered
his shares certificate to the Corporation pursuant to Section 8(d) hereof,
subject to the priority provision contained in Section 8(b) and Section 8(c)
providing for payment of the Series D Liquidation Preference and/or the Series E
Liquidation Preference in absolute priority to the redemption payments to other
shareholders. Such instructions shall also provide that any funds deposited by
the Corporation pursuant to this Section 8(h) for the redemption of shares
subsequently converted into shares of Common Stock no later than the third (3rd)
day preceding the Initial Redemption Date shall be
<PAGE> 47
23
returned to the Corporation forthwith upon such conversion. The balance of any
funds deposited by the Corporation pursuant to this Section 8(h) remaining
unclaimed at the expiration of two (2) years following the Initial Redemption
Date shall be returned to the Corporation upon its request expressed in a
resolution of its Board of Directors; provided, however, that the Corporation's
obligation to pay the applicable redemption price shall continue.
(i) Notwithstanding any provision of this Section 8
to the contrary, the Corporation shall not make any redemption payments in
respect of its capital stock (or any securities convertible into or exercisable
or exchangeable into capital stock of the Corporation), from and after any
election by the holders of the Series D Preferred Stock and/or the holders of
the Series E Preferred Stock to cause such shares to be redeemed hereunder
unless and until the aggregate Series D Liquidation Preference in respect of the
shares of Series D Preferred Stock (including, without limitation, any
principal, interest and any other amounts due on any promissory notes issued to
such holders upon redemption) and/or the aggregate Series E Liquidation
Preference in respect of the shares of Series E Preferred Stock (including,
without limitation, any principal, interest and any other amounts due on any
promissory notes issued to such holders upon redemption) shall have been paid in
full.
(j) The Corporation will not, by amendment of its
Certificate if Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 8 and in taking all action as may be
necessary or appropriate to protect the redemption rights of the holders of the
Series E Preferred Stock, Series D Preferred Stock, Series C Preferred Stock and
Series C-1 Preferred Stock against impairment.
9. Common Stock.
(a) Dividend Rights. The holders of shares of Class A
Common Stock and Class B Common Stock shall be entitled to receive, when, as and
if declared by the Board of Directors, out of any asset of the Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors, subject to the preference, liquidation and
participation rights of the Series A Preferred Stock, Series C Preferred Stock,
Series C-1 Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, more fully set forth in Sections 3 and 4 hereof.
<PAGE> 48
24
(b) Liquidation Rights. Upon the liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation
shall be distributed as provided in Section 4 hereof.
(c) Redemption. Common Stock is not redeemable
without the consent of the holder thereof.
(d) Voting Rights. The holder of each share of Class
A Common Stock shall have the right to one vote, and shall be entitled to notice
of any meeting in accordance with the Bylaws of the Corporation, and shall be
entitled to vote upon such matters and in such manner as may be provided by law.
Class B Common Stock shall have no voting rights.
10. Restrictions and Limitations. (a) So long as shares of
Series C Preferred Stock, Series C-1 Preferred Stock or Series D Preferred Stock
remain outstanding, the Corporation shall not, without the consent of the
holders of a majority of the Series C Preferred Stock and Series C-1 Preferred
Stock then outstanding, voting together as a separate class, and the consent of
the holders of sixty-six and two-thirds of the Series D Preferred Stock then
outstanding, voting as a separate class.
(i) Authorize or issue, or obligate itself
to issue, any other equity security (including any security convertible
into or exercisable for any equity security) senior to or on a parity
with the Series D Preferred Stock as to dividend rights or redemption
rights or liquidation preferences;
(ii) Pay, declare or set aside any dividend
on any equity security not in accordance with Sections 3 and 4 hereof;
(iii) Authorize or enter into any merger,
consolidation, recapitalization or reorganization, or sale of
substantially all of its assets unless in such merger, consolidation,
recapitalization, reorganization or sale the holders of the Series D
Preferred receive at least $17.58 (as adjusted for stock splits,
reverse stock splits and similar type transactions or occurrences after
March 5, 1999) per share of Series D Preferred Stock; or
(iv) Repurchase or acquire its own shares
other than pursuant to this Certificate of Incorporation or in
connection with shares held by employees upon the termination of such
employee's employment with the Corporation pursuant to the terms and
conditions of an employment agreement previously approved by the
Corporation's Board of Directors.
<PAGE> 49
25
(b) So long as shares of Series E Preferred Stock
remain outstanding, the Corporation shall not, without the consent of the
holders of sixty-six and two-thirds of the Series E Preferred Stock then
outstanding, voting as a separate class, effect any of the transactions
described in subclauses (i), (ii) or (iv) of clause (a) of this Section 10.
(c) So long as shares of Series C Preferred Stock or
Series C-1 Preferred Stock remain outstanding, the Corporation shall not,
without the consent of the holders of a majority of the Series C Preferred Stock
and Series C-1 Preferred Stock then outstanding, voting together as a separate
class, amend or repeal any provision of the Certificate of Incorporation or
Bylaws of the Corporation if such amendment would change any of the rights,
preferences or privileges provided herein for the benefit of, or adversely
affect, the Series C Preferred Stock or Series C-1 Preferred Stock.
(d) So long as shares of Series D Preferred Stock
remain outstanding, the Corporation shall not, without the consent of the
holders of sixty-six and two-thirds of the Series D Preferred Stock then
outstanding, voting as a separate class, amend or repeal any provision of the
Certificate of Incorporation or Bylaws of the Corporation if such amendment
would change any of the rights, preferences or privileges provided herein for
the benefit of, or adversely affect, the Series D Preferred Stock.
(e) So long as shares of Series E Preferred Stock
remain outstanding, the Corporation shall not, without the consent of the
holders of sixty-six and two-thirds of the Series E Preferred Stock then
outstanding, voting as a separate class, amend or repeal any provision of the
Certificate of Incorporation or Bylaws of the Corporation if such amendment
would change any of the rights, preferences or privileges provided herein for
the benefit of, or adversely affect, the Series E Preferred Stock.
FIFTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for (i) any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) any matter in respect of which such director shall be liable under
Section 174 of the Delaware General Corporation Law or any amendment thereto or
successor provision thereof, or (iv) any transaction from which the director
derived an improper personal benefit. If the General Corporation Law of the
State of Delaware is amended hereafter to authorize further elimination or
limitation of liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware. Neither the amendment nor
repeal of this Article FIFTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article FIFTH, shall
eliminate or reduce the effect of this Article FIFTH in respect of any matter
occurring, or any
<PAGE> 50
26
cause of action, suit, or claim that, but for this Article FIFTH, would accrue
or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision. The Corporation shall, to the full extent permitted by Section 145 of
the Delaware General Corporation Law, as amended from time to time, indemnify
all persons whom it has the power to indemnify pursuant thereto.
<PAGE> 51
27
* * *
4. The foregoing Amended and Restated Certificate of
Incorporation has been duly adopted by the Corporation's Board of Directors and
stockholders in accordance with the provisions of Section 228, 242 and 245 of
the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has duly executed this
Amended and Restated Certificate of Incorporation this __ day of July, 1999 and
declares under the penalty of perjury that the matters set forth in the
foregoing Certificate are true of his own knowledge.
--------------------------------
Paul T. Sheils
President
<PAGE> 52
Exhibit B
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this
"Agreement") made as of this day of July, 1999, by and among MEDSCAPE, INC., a
Delaware corporation (the "Corporation"), having its principal office at 134 W.
29th Street, New York, New York 10001-5399, certain existing stockholders of the
Corporation listed on Schedule I attached hereto under "Existing Stockholders,"
each having an address as indicated thereon (the "Existing Stockholders"), the
persons listed on Schedule I under "Investor Stockholders," each having an
address as indicated on Schedule I (collectively, the "Investor Stockholders"),
and any subsequent stockholder of the Corporation who becomes a party to this
Agreement pursuant to the terms and conditions hereof (the "Additional
Stockholders", and collectively, with the Existing Stockholders and the Investor
Stockholders, the "Stockholders"). This Agreement amends and restates in its
entirety the Stockholders Agreement, dated as of October 31, 1997, as amended on
February 19, 1998, October 23, 1998, March 5, 1999 and May 24, 1999, by and
among the Corporation and the Existing Stockholders (the "Antecedent
Agreement").
BACKGROUND
The Corporation is a corporation duly organized and existing
under the laws of the State of Delaware with a total authorized capitalization
of shares of which (a) shares are designated as Series A Preferred
Stock, par value $.01 per share, of which shares are issued and
outstanding as of this date; (b) shares are designated as Series C
Preferred Stock, par value $.01 per share, of which shares are issued and
outstanding as of this date, (c) shares are designated as Series C-1
Preferred Stock, par value $.01 per share, of which shares are issued and
outstanding as of this date, (d) shares are designated as Series D
Preferred Stock, par value $.01 per share, of which shares are issued and
outstanding as of this date, (e) 1,000,000 shares are designated as Series E
Preferred Stock, par value $.01 per share, of which 1,000,000 shares shall be
issued effective upon the Closing, (f) shares are designated as Class A
Common Stock, par value $.01 per share, of which shares are issued and
outstanding as of this date, shares are duly reserved for issuance in
connection with the conversion of Series C Preferred Stock, shares are
duly reserved for issuance in connection with the conversion of the Series C-1
Preferred Stock, shares are duly reserved for issuance in connection with
conversion of Series D Preferred Stock and 1,000,000 shares are duly reserved
for issuance in connection with conversion of Series E Preferred Stock and (g)
shares are designated as Class B Common Stock, par value $.01 per share,
of which (i) shares are issued and outstanding as of this date and (ii)
shares are duly reserved for issuance to officers, directors and
<PAGE> 53
employees of the Corporation pursuant to the Corporation's stock option plan or
other arrangements approved by the Corporation's Board of Directors. This
Agreement is being entered into in connection with the Closing to amend and
restate the Antecedent Agreement in accordance with Section 12 thereof.
Each of the Stockholders owns that number of shares of
Preferred Stock and Common Stock (together with any other shares of capital
stock of the Corporation now owned or hereafter acquired by the Stockholders and
their successors or assigns from any Person by any means, including without
limitation, any acquisition by gift, purchase, dividend, conversion, stock
split, recapitalization or otherwise, collectively, the "Shares") set forth
opposite the name of each such Stockholder on Schedule II attached hereto. It is
deemed to be in the best interest of the Corporation and the Stockholders that
provision be made for the continuity and stability of the business and policies
of the Corporation and, to that end, the Corporation and the Stockholders hereby
set forth their agreement with respect to the Shares.
NOW, THEREFORE, in consideration of the premises and of the
mutual consents and obligations hereinafter set forth, the parties hereto hereby
further agree as follows:
SECTION Definitions. All capitalized terms used in this
Agreement shall have the meanings assigned to them elsewhere in this Agreement
or as specified below:
"Affiliate" of any Person shall mean any Person directly or
indirectly controlling, controlled by or under common control with such Person.
"Closing" shall mean the closing of the transactions
contemplated under the Purchase Agreement which shall take place effective as of
the first date set forth above.
"Commission" shall mean the United States Securities and
Exchange Commission.
"Common Directors" shall have the meaning set forth in Section
2(b)(vii) hereof.
"Common Stock" shall mean (a) the Corporation's Class A
Common Stock, par value $.01 per share, as authorized on the date of this
Agreement, (b) the Corporation's Class B Common Stock, par value $.01 per share,
as authorized on the date of this Agreement, (c) any other capital stock of any
class or classes (however designated) of the Corporation, authorized on or after
the date hereof, the holders of which shall have the right, without limitation
as to amount, either to all or to a share of
-2-
<PAGE> 54
the balance of current dividends and liquidating distributions after the payment
of dividends and distributions on any shares entitled to preference under the
Restated Certificate of Incorporation (as the same may be further amended from
time to time after the Closing), and (d) any other securities into which or for
which any of the securities described in clause (a), (b) or (c) of this
definition may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Corporation Notice" shall have the meaning set forth in
Section 4(b) hereof.
"Designated Offering" shall mean a firmly underwritten public
offering registered under the Securities Act with an aggregate minimum gross
offering price to the public of $20,000,000 with a per share price equal to no
less than $7.03 per share (as adjusted for any stock split, stock dividend or
recapitalization after July , 1999).
"Equity Securities" shall have the meaning set forth in
Section 3(a) hereof.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission promulgated
thereunder, all as the same shall be in effect at the time.
"Exchange Act Registration Statement" shall mean a
registration statement filed pursuant to the Exchange Act, relating to any class
of equity securities of the Corporation.
"Excluded Form" shall mean a registration statement filed
pursuant to the Securities Act on Form S-8, S-4 or any similar or successor
forms.
"Excluded Securities" shall mean those securities described
in Section 3(g) hereof.
"Existing Registrable Securities" shall mean: (a) all the
shares of Common Stock of the Corporation, other than Investor Registrable
Securities, that are now owned or may hereafter be acquired by any Holder or its
permitted successors and assigns, and any other shares of Common Stock acquired
by such Holder pursuant to Sections 3 or 4 of this Agreement; and (b) any shares
of Common Stock of the Corporation issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of
all such shares of Common Stock described in clause (a) of this definition;
excluding in all cases, however, (i) any Existing Registrable Securities sold
pursuant to registration under the Securities Act or (ii) any
-3-
<PAGE> 55
Existing Registrable Securities sold, subsequent to the Corporation's initial
public offering of securities registered under the Securities Act, pursuant to
Rule 144 (or similar or successor rule) promulgated under the Securities Act.
"Form S-3" shall mean the form under the Securities Act as is
in effect on the date hereof or any successor registration form under the
Securities Act subsequently adopted by the Commission which permit inclusion or
incorporation of substantial information by reference to other documents filed
by the Corporation with the Commission.
"Holder" shall mean any holder of Common Stock owning of
record Registrable Securities that have not been sold to the public and, for
purposes of this Agreement, a record holder of the Series C Stock, Series D
Preferred Stock or Series E Preferred Stock convertible into such Registrable
Securities shall be deemed to be the Holder of such Registrable Securities;
provided, however, that the Corporation shall in no event be obligated to
register the Series C Stock, Series D Preferred Stock or Series E Preferred
Stock, and that Holders of Registrable Securities shall not be required to
convert their shares of Series C Stock, Series D Preferred Stock or Series E
Preferred Stock into Common Stock in order to exercise the registration rights
granted under Section 6 hereof, until immediately before the closing of the
offering to which the registration relates.
"Initiating Holders" shall have the meaning set forth in
Section 6(d)(ii) hereof.
"Investor Notice" shall have the meaning set forth in Section
4(c) hereof.
"Investor Registrable Securities" shall mean: (a) all the
shares of Common Stock of the Corporation issued or issuable upon the conversion
of the shares of Series C Stock, Series D Preferred Stock or Series E Preferred
Stock that are now owned or may hereafter be acquired by any Holder or its
permitted successors and assigns, all the shares of Common Stock issued pursuant
to the Purchase Agreement and any other shares of Common Stock acquired by such
Holder pursuant to Sections 3 or 4 of this Agreement; and (b) any shares of
Common Stock of the Corporation issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of
all such shares of Common Stock described in clause (a) of this definition;
excluding in all cases, however, (i) any Investor Registrable Securities sold
pursuant to registration under the Securities Act or (ii) any Investor
Registrable Securities sold, subsequent to the Corporation's initial public
offering of securities registered under the Securities Act, pursuant to Rule 144
(or similar or successor rule) promulgated under the Securities Act.
-4-
<PAGE> 56
"Investor Registrable Securities then outstanding" shall mean
the number of shares of Investor Registrable Securities that are then issued and
outstanding or are then issuable pursuant to the exercise or conversion of then
outstanding and then exercisable options, warrants or convertible securities.
"Limited Sales" shall mean, for the period of one year after
the date hereof, (a) aggregate sales of no more than 5% of the outstanding
Series A Preferred Stock and (b) aggregate sales of no more than 5% of the
outstanding Series C Stock.
"MTV Director" shall have the meaning set forth in Section
2(b)(i) hereof.
"Notice of Acceptance" shall have the meaning set forth in
Section 3(c) hereof.
"Offer" shall have the meaning set forth in Section 3(a)
hereof.
"Permitted Transfer" and "Permitted Transferee" shall have the
meanings set forth in Section 4(d) hereof.
"Person" shall mean and include an individual, a corporation,
a partnership, a trust, an unincorporated organization and a government or any
department, agency or political subdivision thereof.
"Preferred Stock" shall mean (a) the Corporation's Series A
Preferred Stock, par value $.01 per share, as authorized on the date of this
Agreement, (b) the Corporation's Series C Preferred Stock, par value $.01 per
share, as authorized on the date of this Agreement, (c) the Corporation's Series
C-1 Preferred Stock, par value $.01 per share, as authorized on the date of this
Agreement, (d) the Corporation's Series D Preferred Stock, par value $.01 per
share, as authorized on the date of this Agreement, (e) Series E Preferred
Stock, par value $.01 per share, as authorized on the date of this Agreement,
and (f) any other securities into which or for which any of the securities
described in clause (a), (b), (c), (d) or (e) of this definition may be
converted or exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.
"Purchase Agreement" shall mean the Stock Purchase Agreement,
dated as of July , 1999, between the Corporation and National Data Corporation,
as the same may be amended from time to time.
"registered" and "registration" shall refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement.
-5-
<PAGE> 57
"Registrable Securities" shall mean, collectively, Existing
Registrable Securities and Investor Registrable Securities.
"Registration Expenses" shall have the meaning set forth in
Section 6(d) hereof.
"Remaining Securities" shall have the meaning set forth in
Section 3(d) hereof.
"Restated Certificate of Incorporation" shall mean the
Corporation's Restated and Amended Certificate of Incorporation, filed in the
Office of the Secretary of State of Delaware on July , 1999, a copy of which is
attached hereto as Exhibit A.
"Sale Shares" shall have the meaning set forth in Section
4(a) hereof.
"Section 4 Shares" shall mean any shares of Common Stock or
Preferred Stock issued to the Section 4 Stockholders.
"Section 4 Shares Transfer" shall have the meaning set forth
in Section 4(a) hereof.
"Section 4 Stockholders" shall mean Jeffrey L. Drezner,
Excelsior Fund 1, Peter Frishauf, Steven Kalin and Paul Sheils.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the Commission promulgated thereunder,
all as the same shall be in effect at the time.
"Series C Director" shall have the meaning set forth in
Section 2(b)(ii) hereof.
"Series D Director" shall have the meaning set forth in
Section 2(b)(iii) hereof.
"Series A Preferred Stock" shall mean the Corporation's
authorized and outstanding shares of Series A Convertible Preferred Stock, par
value $.01 per share, having the designations, rights, preferences and
privileges and qualifications, limitations and restrictions set forth in the
Restated Certificate of Incorporation, of which 788,200 shares are outstanding
as of the date hereof.
"Series C Preferred Stock" shall mean the Corporation's
authorized and outstanding shares of Series C Convertible Preferred Stock, par
value $.01 per share,
-6-
<PAGE> 58
having the designations, rights, preferences and privileges and qualifications,
limitations and restrictions set forth in the Restated Certificate of
Incorporation.
"Series C-1 Preferred Stock" shall mean the Corporation's
authorized and outstanding shares of Series C-1 Convertible Preferred Stock, par
value $.01 per share, having the designations, rights, preferences and
privileges and qualifications, limitations and restrictions set forth in the
Restated Certificate of Incorporation.
"Series C Stock" shall mean the Series C Preferred Stock and
the Series C-1 Preferred Stock taken together.
"Series D Preferred Stock" shall mean the Corporation's
authorized and outstanding shares of Series D Convertible Preferred Stock, par
value $.01 per share, having the designations, preferences and privileges and
qualifications, limitations and restrictions set forth in the Restated
Certificate of Incorporation.
"Series E Preferred Stock" shall mean the Corporation's
authorized and outstanding shares of Series E Convertible Preferred Stock, par
value $.01 per share, having the designations, preferences and privileges and
qualifications, limitations and restrictions set forth in the Restated
Certificate of Incorporation.
"transfer" shall mean any sale, assignment, transfer,
disposition, donation, pledge, bequest, hypothecation, gift, conveyance,
encumbrance or any other disposition or transfer of a Share or any interest or
rights (legal or equitable) therein by any means whatsoever, whether direct or
indirect, absolute or conditional, voluntary or involuntary, by operation of law
(including without limitation, by operation of the laws of descent and
distribution) or otherwise.
"Transferring Stockholder" shall have the meaning set forth in
Section 4(a) hereof.
"TS Notice" shall have the meaning set forth in Section 4(a)
hereof.
"Violation" shall have the meaning set forth in Section
6(j)(i) hereof.
SECTION 2. Election of Directors.
(a) The Stockholders shall take all steps necessary, acting
in their respective capacities as stockholders, directors or officers of the
Corporation, as the case may be, to perform their obligations and agreements
hereunder, to cause the Corporation to perform its obligations and agreements
hereunder and under the Purchase Agreement and to implement and cause the
Corporation to implement the provisions of this Agreement and the Purchase
Agreement, including without limitation,
-7-
<PAGE> 59
the calling and holding of stockholders' meetings for the election of directors
or the election of directors by consent in writing.
(b) The Board of Directors of the Corporation shall consist
of a maximum of nine (9) directors. At each annual meeting of the stockholders
of the Corporation, and at each special meeting of the stockholders of the
Corporation called for the purpose of electing directors of the Corporation, and
at any time at which stockholders of the Corporation shall have the right to, or
shall, vote for or consent in writing to the election of directors of the
Corporation, then, and in each such event, the Stockholders agree that they
shall vote all Shares owned by them for the election of the Board of Directors
in the following manner:
(i) Media Technology Ventures, L.P. and Media
Technology Ventures Entrepreneurs Fund, L.P (collectively,
"MTV") shall be entitled, but not obligated, so long as MTV
is the holder of record of at least five percent (5%) of a
class of voting equity securities of the Corporation then
outstanding, to elect one (1) director (the "MTV Director");
(ii) the holders of record of shares of Series C
Stock, excluding MTV, voting together as a separate class,
shall be entitled, but not obligated, so long as such holders
are the holders of record, in the aggregate, of at least five
percent (5%) of the outstanding shares of Series C Stock
constituting at least 200,000 shares, to elect one (1)
director, who shall be nominated by the holders of record of
a majority of the shares of Series C Stock, excluding MTV,
then outstanding (the "Series C Director");
(iii) the holders of record of shares of Series D
Preferred Stock, voting together as a separate class, shall
be entitled, but not obligated, to elect one (1) director,
who shall be nominated
by the holders of record of a majority of the shares of
Series D Preferred Stock then outstanding (the "Series D
Director");
(iv) TBG Information Investors, LLC ("TBG") shall be
entitled, but not obligated, so long as TBG is the holder of
record of at least five percent (5%) of a class of voting
equity securities of the Corporation then outstanding, to
elect one (1) director (the "TBG Director");
(v) upon nomination by the Board of Directors and
for so long as he is employed as Chief Executive Officer of
the Corporation, the Stockholders shall elect Paul T. Sheils
as a director of the Corporation;
-8-
<PAGE> 60
(vi) upon nomination by the Board of Directors and
for so long as he is employed as Executive Vice President of
the Corporation, the Stockholders shall elect Jeffrey L.
Drezner, M.D., Ph.D., as a director of the Corporation; and
(vii) the holders of record of shares of Class A
Common Stock and Series A Preferred Stock, voting together as
a single class, shall elect three (3) directors, two (2) of
whom shall be nominated by the holders of record of a
majority of the shares of Class A Common Stock and Series A
Preferred Stock then outstanding, and one (1) of whom shall
be nominated by a majority of the two directors so nominated
pursuant this Section 2(b)(vii) and the MTV Director
(collectively, the "Common Directors"); provided, however,
that (1) Mr. Peter Frishauf or his designee shall hold and
continue to hold one (1) of the Common Directors seats
provided for in this Section 2(b)(vii) so long as Mr.
Frishauf or his nominee is the holder of record of, in the
aggregate, at least five percent (5%) of a class of voting
equity securities of the Corporation and (2) Mr. Alan
Patricof or his designee shall hold and continue to hold one
(1) of the Common Directors seats provided for in this
Section 2(b)(vii) so long as The Excelsior Fund I, APA
Excelsior IV, L.P., APA Excelsior IV Offshore, L.P. or The
Patricof Private Investment Club, or their nominees, are the
holders of record of, in the aggregate, at least five percent
(5%) of a class of voting equity securities of the
Corporation.
(c) In the event that either MTV or the holders of Series C
Stock is no longer entitled to elect to the Board of Directors the MTV Director
or the Series C Director as provided in Section 2(b)(i) and 2(b)(ii) above,
respectively, then such director(s) shall be nominated by a majority vote of the
Board of Directors.
(d) At any such meeting called for the purpose of electing
directors, the presence in person or by proxy of (i) MTV or its authorized
representative, in the case of the election of the MTV Director, (ii) TBG or its
authorized representative, in the case of the election of the TBG
Director, (iii) the holders of record of a majority of the shares of Series C
Stock (excluding MTV) then outstanding, in the case of the election of the
Series C Director, (iv) the holders of record of a majority of the shares of the
Series D Preferred Stock outstanding in the case of the Series D Director, and
(v) the holders of record of a majority of the shares of the Class A Common
Stock and the Series A Preferred Stock then outstanding, in the case of the
election of the Common Directors, shall constitute a quorum for the election of
directors to be elected by such holders. The Stockholders agree to take any
actions deemed advisable by the Board to amend the Bylaws of the Corporation to
reflect the quorum conditions reflected in this Section 2(e).
-9-
<PAGE> 61
(e) A vacancy in any directorship entitled to be elected by
MTV (including without limitation, a vacancy resulting from the decision during
an earlier election by MTV not to fill the directorship to be held by the MTV
Director) shall be filled only by vote or written consent of MTV, in the manner
set forth herein. A vacancy in any directorship entitled to be elected by TBG
(including without limitation, a vacancy resulting from the decision during an
earlier election by TBG not to fill the directorship to be held by the TBG
Director) shall be filled only by vote or written consent of TBG, in the manner
set forth herein. A vacancy in any directorship entitled to be elected by the
holders of record of shares of Series C Stock (including without limitation, a
vacancy resulting from the decision during an earlier election by the holders of
the Series C Stock not to fill the directorship to be held by the Series C
Director) shall be filled only by vote or written consent of the holders of
record of shares of Series C Stock (excluding MTV), in the manner set forth
herein. A vacancy in any directorship elected by the holders of record of shares
of Class A Common Stock and Series A Preferred Stock shall be filled only by
vote or written consent of the holders of record of shares of Class A Common
Stock and Series A Preferred Stock, in the manner set forth herein. A vacancy in
any directorship elected by the holders of record of shares of Series D
Preferred Stock shall be filled only by vote or written consent of the holders
of record of Series D Preferred Stock.
(f) Except as may otherwise be provided by law, each MTV
Director who shall have been elected as provided in this Section 2 may be
removed during his term of office, whether with or without cause, only by MTV.
Except as may otherwise be provided by law, each TBG Director who shall have
been elected as provided in this Section 2 may be removed during his term of
office, whether with or without cause, only by TBG. Except as may otherwise be
provided by law, each Series C Director who shall have been elected as provided
in this Section 2 may be removed during his term of office, whether with or
without cause, only by the holders of record of a majority of the shares of
Series C Stock (excluding MTV) then outstanding. Except as may otherwise be
provided by law, each Common Director who shall have been elected as provided in
this Section 2 may be removed during his term of office, whether with or without
cause, only by the holders of record of a majority of the shares of Class A
Common Stock and Series A Preferred Stock then outstanding. Except as may
otherwise be provided by law, each Series D Director who shall have been elected
in this Section 2 may be removed during his term of office, whether with or
without cause, only by the holders of record of a majority of the Series D
Preferred Stock then outstanding.
(g) Each MTV Director, Series C Director, Series D Director
and Common Director shall be entitled to one (1) vote on all matters which
directors are entitled to vote on. In addition to the rights granted to all
directors as contained in the Corporation's By-laws, the MTV Director, the
Series C Director and the Series D Director shall each have the right to call
meetings of the Board of Directors and
-10-
<PAGE> 62
management of the Corporation, upon no less than five (5) days' prior written
notice; provided, that any such meetings are called no more frequently than once
per fiscal quarter.
(h) Highland Capital Partners ("Highland") shall be entitled
to have one observer (the "Highland Observer") selected by Highland present at
all meetings of the Board and at all meetings of any committee of the Board and
such observer shall be notified of any such meetings, including such meetings'
time and place, in the same manner as the directors of the Corporation and the
members of the respective committee of the Board, as applicable. The Highland
Observer shall have the same access to information concerning the business and
operations of the Corporation and at the same time as the directors of the
Corporation, and shall be entitled to participate in discussions and consult
with, and make proposals and furnish advice to, the Board and the committees of
the Board, but shall not have the right to vote.
(i) Unless otherwise agreed by the respective Series D
Director or the Highland Observer, the Corporation shall pay all reasonable
travel expenses and other out-of-pocket reasonable disbursements incurred by the
Series D Director and the Highland Observer, as the case may be, in connection
with their attending meetings of the Board or of any committee thereof.
(j) The rights and obligations of the Corporation and the
Stockholders set forth in this Section 2 shall terminate upon the consummation
of a Designated Offering.
SECTION 3. Right of First Offer. So long as a Stockholder is
a holder of at least 50,000 shares of Common Stock (as presently constituted and
subject to subsequent adjustments for stock splits, stock dividends, reverse
stock splits, and the like), or at least 50,000 shares Series C Stock, Series D
Preferred Stock or Series E Preferred Stock convertible into shares of Common
Stock, or any combination thereof (as presently constituted and subject to
subsequent adjustments for stock splits, stock dividends, reverse stock splits,
and the like), such Stockholder shall be entitled to the following right of
first offer:
(a) Except in the case of Excluded Securities, the
Corporation shall not issue, sell or exchange, agree to issue, sell or exchange,
or reserve or set aside for issuance, sale or exchange, (i) any shares of Common
Stock, (ii) any other equity security of the Corporation, (iii) any debt
security of the Corporation which by its terms is convertible into or
exchangeable for, with or without consideration, any equity security of the
Corporation, or (iv) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any equity security of the Corporation
(collectively, the "Equity Securities"), unless in each case the Corporation
shall have first offered to sell to such Stockholder the Equity Securities, at
a price and on such other terms as shall
-11-
<PAGE> 63
have been specified by the Corporation in writing delivered to the Stockholder
(the "Offer"), which Offer by its terms shall remain open and irrevocable for a
period of thirty (30) days from the date the Offer is received by such
Stockholder.
(b) Each such Stockholder shall have the right to purchase up
to its pro rata share of the Equity Securities. As used in this Section 3, each
such Stockholder's "pro rata share" shall be that amount of the Equity
Securities which would result in the Stockholder's owning the same percentage of
the Corporation's issued and outstanding Common Stock after the issuance of
Equity Securities as the Stockholder owned immediately prior to the issuance
(assuming in each case the issuance of all shares issuable upon the conversion
or exercise, as the case may be, of (i) the shares of Series A Preferred Stock,
Series C Stock, Series D Preferred Stock and Series E Preferred Stock held by
such Stockholder, if any, and (ii) the Equity Securities).
(c) Notice of a Stockholder's intention to accept, in whole
or in part, an Offer shall be evidenced by a writing signed by such Stockholder
and delivered to the Corporation at or prior to the end of the 30-day period
commencing with the date the Offer is received by such Stockholder (or, if
later, within 10 days after the giving of any written notice of a material
change in such Offer), setting forth such portion (specifying number of shares,
principal amount or the like) of the Equity Securities as such Stockholder
elects to purchase (the "Notice of Acceptance").
(d) The Corporation shall have 90 days from the expiration of
the foregoing 30-day period to sell all or any part of such Equity Securities as
to which a Notice of Acceptance has not been given by the Stockholders (the
"Remaining Securities") to any other Person or Persons, but only upon terms and
conditions in all material respects, including without limitation, unit price
and interest rates (but excluding payment of legal fees of counsel of the
purchaser), which are no more favorable, in the aggregate, to such other Person
or Persons or less favorable to Corporation than those set forth in the Offer.
Upon the closing of the sale to such other Person or Persons of all the
Remaining Securities, which shall include payment of the purchase price to the
Corporation in accordance with the terms of the Offer, if a Stockholder has
timely submitted a Notice of Acceptance, it shall purchase from the Corporation,
and the Corporation shall sell to such Stockholder, the Equity Securities in
respect of which a Notice of Acceptance was delivered to the Corporation by the
Stockholder at the terms specified in the Offer. The purchase by a Stockholder
of any Equity Securities is subject in all cases to the preparation, execution
and delivery by the Corporation and such Stockholder of a purchase agreement and
other customary documentation relating to such Equity Securities as is
satisfactory in form and substance to such Stockholder and its counsel.
(e) In each case, any Equity Securities not purchased by
eligible Stockholders or by a Person or Persons in accordance with Section 3(d)
may not be
-12-
<PAGE> 64
sold or otherwise disposed of until they are again offered to the
Stockholders under the procedures specified in Sections 3(a), (b), (c) and (d)
hereof.
(f) The Corporation agrees that on or before the issuance to
any Person of any Equity Securities not purchased by the Stockholders, it shall
cause such Person to agree in writing to be bound by the obligations imposed
upon Stockholders under this Agreement as if such Person were originally a
signatory to this Agreement.
(g) The rights of the eligible Stockholders under this
Section 3 shall not apply to the following securities (the "Excluded
Securities"):
(i) up to 8,250,000 shares (or such higher
number of shares as may be approved from time to time by (w) a majority
in interest of the outstanding voting stock of the Corporation, (x) a
majority in interest of the Series C Stock voting separately as a
single class, (y) 66 2/3 in interest of the Series D Preferred Stock
voting separately as a single class and (z) 66 2/3 in interest of the
Series E Preferred Stock voting separately as a single class) of Common
Stock or options to purchase shares of Common Stock, issued or to be
issued to officers, employees or directors of, or consultants to, the
Corporation, pursuant to any agreement, plan or arrangement approved by
the Board of Directors of the Corporation and the Stockholders;
(ii) Common Stock issued as a stock dividend
or upon any stock split or other subdivision or combination of shares
of Common Stock;
(iii) Common Stock issued upon conversion of
any shares of Preferred Stock;
(iv) any securities issued for consideration
other than cash pursuant to a merger, consolidation, acquisition or
similar business combination;
(v) Common Stock issued or to be issued by
the Corporation pursuant to equipment lease financing with equipment
lessors, or Common Stock reissued after the repurchase thereof by the
Corporation as a result of any termination of a restricted stock
purchase agreement or other employee equity plan or arrangement to
which the Corporation is a party, which are approved by the Board of
Directors;
(vi) Common Stock issued pursuant to
transactions or agreements which have been approved by (w) a majority
in interest of the outstanding voting stock of the Corporation, (x) a
majority in interest of the Series C Stock voting separately as a
single class, (y) 66 2/3 in interest of the
-13-
<PAGE> 65
Series D Preferred Stock voting separately as a single class and (z) 66
2/3 in interest of the Series E Preferred Stock voting separately as a
single class; and
(vii) warrants to purchase up to 22,500
shares of Class A Common Stock (and the Common Stock issuable upon
exercise thereof).
(h) Notwithstanding the foregoing provisions of this Section
3, the rights of the Stockholders and the obligations of the Corporation under
this Section 3 shall be inapplicable to a Designated Offering and the provisions
of this Section 3 shall terminate upon the consummation of such Designated
Offering.
SECTION 4. Right of First Refusal. The Corporation and the
Investor Stockholders shall be entitled to the following right of first
refusal:
(a) Transfer of Shares. The Section 4 Stockholders shall not
transfer (each, a "Transferring Stockholder"), either in a single transaction or
in a series of transactions, in the aggregate, in excess of ten percent (10%) of
the Section 4 Shares or any right or interest therein then owned by him or it
except by a transfer that meets the requirements of this Section 4 and of this
Agreement generally. In the event that a Transferring Stockholder proposes to
transfer any portion of the Section 4 Shares in excess of ten percent (10%)
thereof (each, a "Section 4 Shares Transfer"), whether voluntarily or
involuntarily, other than a Permitted Transfer, then at least ninety (90) days
prior to any Section 4 Shares Transfer, such Transferring Stockholder shall give
notice (the "TS Notice") to the Corporation and the Investor Stockholders of his
or its intention to effect the Section 4 Shares Transfer. The TS Notice shall
set forth (i) the class, series and number of Section 4 Shares in excess of ten
percent (10%) thereof to be sold by the Transferring Stockholder (the "Sale
Shares"), (ii) the date or proposed date of the Section 4 Shares Transfer and
the name and address of the proposed transferee, (iii) the principal terms of
the Section 4 Shares Transfer, including the cash or other property or
consideration to be received upon such Section 4 Shares Transfer, and (iv) the
percentage which the number of Sale Shares constitutes with respect to the
aggregate number of Section 4 Shares then held by the Transferring Stockholder.
In the case of a proposed transfer by way of gift or if the nature of the
transfer is such that no readily determinable consideration is to be paid for
the transfer of the Sale Shares, then a bona fide transfer price for purposes of
this Section 4(a) shall be determined by the Board of Directors of the
Corporation promptly upon the Corporation's receipt of, and as of the date of,
the TS Notice.
(b) Corporation's Option. The Corporation shall have the
option, but not the obligation, to purchase any or all of the Sale Shares on the
same terms as specified in the TS Notice. Within thirty (30) days after the
receipt of the TS Notice, the Corporation shall give written notice to the
Transferring Stockholder and the Investor Stockholders (the "Corporation
Notice") stating whether or not it elects to exercise its
-14-
<PAGE> 66
option to purchase, the number of Sales Shares, if any, it elects to purchase,
and a date and time for consummation of the purchase not more than ninety (90)
days after the receipt of the Corporation Notice by the Transferring
Stockholder. The Transferring Stockholder shall not be entitled to vote, either
as a stockholder or a director (if applicable), in connection with the decision
of the Corporation whether to exercise its option to purchase the Sale Shares,
provided, that, if his or its vote is required for valid corporate action, then
he or it shall vote, insofar as legally permissible, in accordance with the
decision of the majority of the other directors or stockholders, as the case may
be. Failure by the Corporation to give such notice within such time period shall
be deemed an election by it not to exercise its option.
(c) Investor Stockholders' Option. If the Corporation fails
to exercise its right to purchase under subparagraph (b) hereof, or exercises
its right to purchase for less than all of the Sale Shares, then the Investor
Stockholders shall have the option, but not the obligation, to purchase, pro
rata to their ownership interest in the shares of Common Stock issued or
issuable to such stockholder upon the conversion of shares of Series C Stock,
Series D Preferred Stock and Series E Preferred Stock, any or all of the
remaining Sale Shares on the same terms as specified in the TS Notice. Not later
than thirty (30) days after the Investor Stockholders receive the Corporation
Notice, each Investor Stockholder shall give written notice to the Transferring
Stockholder and the Corporation (the "Investor Notice") stating whether or not
it elects to exercise its option to purchase, the number of the remaining Sales
Shares, if any, it elects to purchase, and a date and time for consummation of
the purchase not more than sixty (60) days after the receipt of the Investor
Notice by the Transferring Stockholder. Failure by an Investor Stockholder to
give such notice within such time period shall be deemed an election by it not
to exercise its option. If the Corporation and Investor Stockholders exercise
their respective rights to purchase for less than all the Sale Shares, then the
Transferring Stockholder shall thereafter be free to transfer the remaining Sale
Shares on the terms provided in the TS Notice (subject to the provisions of
Section 5); provided, however, that the Sale Shares shall continue to be subject
to the terms of this Agreement and any such transferee shall agree in writing to
be bound by the obligations imposed upon Stockholders under this Agreement as if
such transferee were originally a signatory to this Agreement.
(d) Definitions. For purposes of this Agreement, the term
"Permitted Transfer" shall mean a Section 4 Shares Transfer to a spouse (other
than pursuant to any divorce or separation proceedings or settlement), parents,
children (natural or adopted), stepchildren or grandchildren or a trust for any
of their benefit in the case of a Transferring Stockholder that is an individual
(each recipient being a "Permitted Transferee"); provided, however, that prior
to such Section 4 Shares Transfer, such Permitted Transferee shall agree in
writing to be bound by the obligations imposed upon Stockholders under this
Agreement as if such transferee were originally a signatory to this Agreement.
-15-
<PAGE> 67
(e) Application of Provisions. In each case, any Sale Shares
not purchased by the proposed transferee in accordance with Section 4(c) hereof
may not be sold or otherwise disposed of until they are again offered to the
Corporation and the Investor Stockholders under the procedures specified in
Sections 4(a), (b) and (c) hereof.
(f) Transfers Void. Any attempted Section 4 Shares Transfer
by the Section 4 Stockholders in violation of the terms of this Section 4 shall
be ineffective to vest in any transferee any interest held by the Transferring
Stockholder in the Section 4 Shares. Without limiting the foregoing, any
purported Section 4 Shares Transfer in violation hereof shall be ineffective as
against the Investor Stockholders and the Corporation, and the Corporation and
the Investor Stockholders shall have a continuing right and option (but not an
obligation), until the restrictions contained in this Section 4 terminate, to
purchase the shares purported to be transferred by the Transferring Stockholders
for a price and on terms the same as those at which the purported Section 4
Shares Transfer was effected.
(g) Termination of Restrictions. The restrictions in this
Section 4 shall terminate upon the consummation of a Designated Offering, except
that the restrictions in this Section 4 may terminate earlier with respect to
The Excelsior Fund I in the event that all of the Section 4 Shares owned by The
Excelsior Fund I are distributed to its partners.
SECTION 5. Rights to Participate in Transfer.
(a) Transfers by Transferring Stockholder. In the event the
Transferring Stockholder desires to effect a Section 4 Shares Transfer, other
than a Permitted Transfer, and all the Sale Shares have not been purchased by
the Investor Stockholders or the Corporation in the exercise of their respective
rights of first refusal in accordance with the terms of Section 4, then, upon
receipt of the TS Notice specified in Section 4(a), each Investor Stockholder
shall have the right (by written notice to the Transferring Stockholder and the
Corporation to be sent within sixty (60) days after the Investor Stockholder
receives the TS Notice) to require the Transferring Stockholder to cause to be
purchased from such Investor Stockholder the number of shares of Common Stock
issued or issuable upon conversion of shares of Series C Stock, Series D
Preferred Stock and Series E Preferred Stock then held by such Investor
Stockholder that equals (x) the number of remaining Sale Shares that the
Transferring Stockholder proposes to transfer, multiplied by (y) the percentage
determined by dividing (i) the number of shares of Series C Stock, Series D
Preferred Stock or Series E Preferred Stock (or Class A Common Stock, as the
case may be) then held by the Investor Stockholder by (ii) the sum of the number
of shares of Series C Stock, Series D Preferred Stock and Series E Preferred
Stock (or Class A Common Stock, as the case may be) then held by all of the
Investor Stockholders plus the number of Section 4
-16-
<PAGE> 68
Shares then held by the Transferring Stockholder. For purposes of this Section
5, the Series C Stock, Series D Preferred Stock and Series E Preferred Stock
shall be treated as if it had been converted into the number of shares of Class
A Common Stock then issuable upon such conversion.
(b) Terms of Purchase. The purchase from the Investor
Stockholders pursuant to this Section 5 shall be on the same terms and
conditions, including per Share price (which shall in all events be paid by bank
cashier's or certified check) and date of Section 4 Shares Transfer, as are
received by the Transferring Stockholder and stated in the TS Notice provided to
the Investor Stockholders.
(c) Termination of Restrictions. The restrictions in this
Section 5 shall terminate upon the consummation of a Designated Offering, except
that the restrictions in this Section 5 may terminate earlier with respect to
The Excelsior Fund I in the event that all of the Section 4 Shares owned by The
Excelsior Fund I are distributed to its partners.
SECTION 6. Transfer of Securities; Registration Rights.
(a) Restriction on Transfer. The Shares shall not be
transferable except upon the conditions specified in this Section 6, which
conditions are intended to ensure compliance with the provisions of the
Securities Act and applicable state securities laws in respect of the transfer
thereof.
(b) Restrictive Legend. Each certificate for the Shares
issued after the date hereof and each certificate for any such securities issued
to subsequent transferees of any such certificate or any Shares issued prior to
the date hereof shall (unless otherwise permitted by the provisions of Section
6(c)) be stamped or otherwise imprinted with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAW. ADDITIONALLY, THE TRANSFER OF THESE
SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED JULY ,
1999, AMONG MEDSCAPE, INC. AND CERTAIN OTHER SIGNATORIES
THERETO (AS THE SAME MAY BE AMENDED AND/OR RESTATED FROM TIME
TO TIME), AND NO TRANSFER OF THESE SECURITIES SHALL BE
-17-
<PAGE> 69
VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED.
UPON THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS, MEDSCAPE,
INC. HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW
CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES
REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER
HEREOF. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF MEDSCAPE, INC."
(c) Notice of Transfer. The holder of any Shares, by
acceptance thereof agrees, prior to any transfer thereof, to give written notice
to the Corporation of such holder's intention to effect such transfer and to
comply in all other respects with the provisions of this Section 6(c) and the
other applicable provisions of this Agreement. Each such notice shall describe
the manner and circumstances of the proposed transfer and shall be accompanied
by (i) the written opinion, addressed to the Corporation, of counsel for the
holder of such Shares, as to whether in the opinion of such counsel (which
counsel shall be reasonably satisfactory to counsel to the Corporation) such
proposed transfer involves a transaction requiring registration of such shares
under the Securities Act, and (ii) in the case of Registrable Securities, if in
the opinion of such counsel such registration is required, a written request
addressed to the Corporation by the Holder of Registrable Securities, describing
in detail the proposed method of disposition and requesting the Corporation to
effect the registration of such Registrable Securities pursuant to the terms and
conditions of Sections 6(d), 6(e) or 6(f), as the case may be; provided,
however, that no such opinion shall be required in the case of a transfer by any
Holder of Registrable Securities (A) which is a (1) partnership to a partner of
such Holder, or a retired partner of such Holder who retires after the date
hereof, or the estate of any such partner or retired partner, if the transferee
agrees in writing to be subject to the terms of this Section 6 to the same
extent as if such transferee were originally a signatory to this Agreement, or
(2) corporation to any Affiliate of such corporation, including without
limitation, any officer, director or stockholder of such corporation, or (B) in
connection with a transaction complying with the requirements of Rule 144 (as
amended from time to time) promulgated under the Securities Act (or successor
rule thereto). If in such opinion of counsel the proposed transfer may be
effected without registration under the Securities Act, the holder shall
thereupon be entitled to transfer the Shares in accordance with the terms of the
notice delivered by it to the Corporation, subject to the other requirements of
this Agreement. Each certificate or other instrument evidencing the securities
issued upon the transfer of any Shares (and each certificate or other instrument
evidencing any untransferred balance of such securities) shall bear the legend
set forth in Section 6(b) unless (x) in such opinion of counsel registration of
future transfer is not required by the applicable provisions of the Securities
Act or (y) the Corporation shall have waived the requirement of such legend;
provided, however,
-18-
<PAGE> 70
that such legend shall not be required (1) on any certificate or other
instrument evidencing the securities issued upon such transfer in the event such
transfer shall be made in compliance with the requirements of Rule 144 (as
amended from time to time) promulgated under the Securities Act (or successor
rule thereto) or (2) on any certificate or other instrument which is immediately
resalable (whether or not such resale is proposed) under Rule 144(k) or
successor thereto. The Corporation agrees, upon the request of a Stockholder, to
make available to such Stockholder and to any prospective transferee of its
Shares or Registrable Securities the information concerning the Corporation
described in Rule 144A(d)(4) under the Securities Act.
(d) Demand Registration.
(i) If the Corporation receives at any time
after six (6) months after the closing of the Corporation's first
underwritten public offering of shares pursuant to a registration
statement, a written request from (A) the Holders of at least fifty
percent (50%) of shares of the Investor Registrable Securities then
outstanding excluding Holders described in clause (B) or (C) hereof,
(B) any Holder who purchased more than 650,000 shares of Series D
Preferred Stock (a "Series D Holder") or (C) any Holder who purchased
more than 260,000 shares of Series E Preferred Stock issued pursuant to
the Purchase Agreement (a "Series E Holder"), that the Corporation file
a registration statement on Form S-1 (or similar successor forms) under
the Securities Act covering the registration of the Investor
Registrable Securities having an aggregate offering price, before
deduction of underwriter discounts and commissions, of at least
$5,000,000, then the Corporation shall, within ten (10) business days
after the receipt thereof, give written notice of such request to all
Holders, and use its best efforts to effect, as soon as practicable,
the registration under the Securities Act of all Investor Registrable
Securities which the Holders request to be registered and included in
such registration, subject only to the limitations of this Section
6(d).
(ii) If the Holders initiating the
registration request under this Section 6(d) ("Initiating Holders")
intend to distribute the Investor Registrable Securities covered by
their request by means of an underwriting, they shall so advise the
Corporation as a part of their request made pursuant to this Section
6(d) and the Corporation shall include such information in the written
notice referred to in Section 6(d)(i) hereof. In such event, the right
of any Holder to include such Holder's Investor Registrable Securities
in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Investor Registrable Securities in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and
such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into
an
-19-
<PAGE> 71
underwriting agreement in customary form with the managing underwriter
or underwriters selected for such underwriting by the Investor
Stockholders and reasonably acceptable to the Corporation.
(iii) The Corporation shall not be obligated
to effect, or take any action to effect, any such registration pursuant
to this Section 6(d):
(A) In any particular jurisdiction
in which the Corporation would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance except as may be required by
the Securities Act;
(B) After the Corporation has
initiated five (5) such registrations pursuant to this Section 6(d),
two of which may only be initiated by a Series D Holder, one of which
may only be initiated by a Series E Holder and two of which may only be
initiated by Holders of Registrable Securities who are not Series D
Holders or Series E Holders;
(C) During the period starting with
the date sixty (60) days prior to the Corporation's good faith estimate
of the date of filing of, and ending on a date one hundred eighty (180)
days after the effective date of, a Corporation-initiated registration;
provided that the Corporation is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective;
(D) If the Initiating Holders
propose to dispose of shares of Investor Registrable Securities which
may be immediately registered on Form S-3 pursuant to a request made
under Section 6(f) hereof;
(E) If, (1) in the good faith
judgement of the Board of Directors of the Corporation such
registration would be seriously detrimental to the Corporation and the
Board of Directors of the Corporation concludes, as a result, that it
is essential to defer the filing of such registration statement at such
time, and (2) the Corporation shall furnish to the Holders a
certificate signed by the President of the Corporation stating that in
the good faith judgement of the Board of Directors of the Corporation,
it would be seriously detrimental to the Corporation for such
registration statement to be filed in the near future and that it is,
therefore, essential to defer the filing of such registration
statement, then the Corporation shall have the right to defer such
filing (except as provided in clause (C) above) for a period of not
more than one hundred twenty (120) days after receipt of the request of
the Initiating Holders, and, provided further, that the Corporation
shall not defer its obligation in this manner more than once in any
twelve-month period.
-20-
<PAGE> 72
(iv) All expenses incurred in connection
with any demand registration effected pursuant to this Section 6(d),
including without limitation all federal and "blue sky" registration
and qualification fees, printers' and accounting fees, and fees and
disbursements of counsel for the Corporation (but excluding
underwriters' discounts and commissions and expenses of special counsel
of selling Holders)(the "Registration Expenses") shall be borne by the
Corporation. In addition, each Holder participating in a registration
pursuant to this Section 6(d) shall bear its proportionate share of all
discounts, commissions or other amounts payable to underwriters in
connection with such offering.
(e) Piggyback Registrations.
(i) The Corporation shall notify all Holders
of Existing Registrable Securities and Investor Registrable Securities
in writing at least thirty (30) days prior to filing any registration
statement under the Securities Act for purposes of effecting a public
offering of securities of the Corporation (including, but not limited
to, registration statements initiated upon the request of Holders of
Investor Registrable Securities and registration statements relating to
secondary offerings of securities of the Corporation, but excluding
registration statements on an Excluded Form or relating to any employee
benefit plan or a corporate reorganization) and shall afford each such
Holder an opportunity to include in such registration statement all or
any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or
any part of the Registrable Securities held by such Holder shall,
within twenty (20) days after receipt of the above-described notice
from the Corporation, so notify the Corporation in writing, and in such
notice shall inform the Corporation of the number of Registrable
Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable
Securities in any registration statement thereafter filed by the
Corporation, such Holder shall nevertheless continue to have the right
to include any Registrable Securities in any subsequent registration
statement or registration statements as may be filed by the Corporation
with respect to offerings of its securities, all upon the terms and
conditions set forth herein.
(ii) If the registration statement under
which the Corporation gives notice under this Section 6(e) is for an
underwritten offering, the Corporation shall so advise the Holders of
Registrable Securities. In such event, the right of any such Holder's
Registrable Securities to be included in a registration pursuant to
this Section 6(e) shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through
such
-21-
<PAGE> 73
underwriting shall enter into an underwriting agreement in such
customary form with the managing underwriter or underwriters selected
for such underwriting. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Corporation and the underwriter, delivered at
least five (5) business days prior to the effective date of the
registration statement. Any Registrable Securities withdrawn from such
underwriting shall be withdrawn from the registration.
(iii) Notwithstanding any other provision of
Section 6(e)(ii), if the registration is the first registered offering
of the Corporation's securities to the general public, the Corporation
may limit, to the extent so advised by the underwriters, the amount of
securities (including the Registrable Shares) to be included in the
registration by the Corporation's stockholders (including the Holders),
or may exclude, to the extent so advised by the underwriters, such
underwritten securities entirely from such registration. If the
registration is the second or any subsequent registered offering of the
Corporation's securities to the general public, the Corporation may
limit, to the extent so advised by the underwriters, the amount of
securities to be included in the registration by the Corporation's
stockholders (including the Holders); provided, however, that the
aggregate value of securities (including Registrable Securities) to be
included in such registration by the Holders may not be so reduced to
less than thirty percent (30%) of the total value of all securities
included in such registration. The Corporation shall so advise all
Holders of securities requesting registration, and the number of shares
of securities that are entitled to be included in the registration and
underwriting shall be allocated first to the Corporation for securities
being sold for its own account, second to Holders of Investor
Registrable Securities pro rata based upon the number of Registrable
Securities held by any such Holder, and thereafter as set forth in this
Section 6(e). Any Registrable Securities excluded from such
underwriting shall be excluded from the registration.
(iv) If any shares are withdrawn from the
registration or if the number of shares of Registrable Securities to be
included in such registration was previously reduced as a result of
marketing factors as provided in this Section 6(e), the Corporation
shall then offer to all persons who have retained the right to include
securities in the registration the right to include additional
securities in a subsequent registration in the aggregate amount equal
to the number of shares so withdrawn, with such shares to be allocated
among the persons requested additional inclusion in accordance with
this Section 6(e).
(v) All Registration Expenses incurred in
connection with a registration pursuant to this Section 6(e) shall be
borne by the Corporation.
-22-
<PAGE> 74
(f) Form S-3 Registration. In the event that the Corporation
receives from (A) the Holders of at least thirty percent (30%) of the
Registrable Securities held by all Holders other than Series D Holders or Series
E Holders, (B) a Series D Holder or (C) a Series E Holder, a written request or
requests that the Corporation effect a registration on Form S-3, and any related
qualification or compliance with respect to all or part of the Registrable
Securities owned by such Holders, then the Corporation shall:
(i) Promptly give written notice of the
proposed registration and the Holders' request therefor, and any
related qualification or compliance, to all Holders of Registrable
Securities; and
(ii) As soon as practicable, effect such
registration and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution
of all or such portion of such Holders' Registrable Securities as are
specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in such
request as are specified in a written request given within twenty (20)
days after receipt of such written notice from the Corporation;
provided, however, that the Corporation shall not be obligated to
effect any such registration, qualification or compliance pursuant to
this Section 6(f): (A) if S-3 is not available for such offering by the
Holders; (B) if the Holders propose to sell Registrable Securities at
an aggregate gross offering price to the public of less than
$1,000,000.00; (C) if the Corporation has, within the six (6)-month
period preceding the date of such request, already effected one
registration for the Holders pursuant to Section 6(e) or 6(f); or (D)
in any particular jurisdiction in which the Corporation would be
required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or
compliance.
(iii) The Corporation is obligated to effect
that number of registrations on Form S-3 requested by the Holders
pursuant to this Section 6(f), but shall not be obligated to effect
more than two (2) such registrations per year.
(iv) Subject to the foregoing, the
Corporation shall file a Form S-3 registration statement, as the case
may be, covering the Registrable Securities to be registered pursuant
to this Section 6(f) as soon as practicable after receipt of the
request or requests of the Holders for such registration. The
Corporation shall pay all Registration Expenses in connection with each
demand for registration pursuant to this Section 6(f).
(v) Form S-3 registrations shall not be
deemed registrations as described in Section 6(d) above.
-23-
<PAGE> 75
(g) Additional Registration Rights. If the Corporation grants
registration rights to holders of any security of the Corporation which are more
favorable to such holders than the registration rights granted hereunder, then
such more favorable registration rights shall also be deemed to be granted to
the Holders of the Registrable Securities hereunder, and the Corporation
covenants and agrees to take any and all steps necessary to modify the terms of
this Agreement to so provide.
(h) Obligations of the Corporation. Whenever required to
effect the registration of any Registrable Securities under this Agreement, the
Corporation shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Commission a
registration statement with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become and
remain effective;
(ii) Prepare and file with the Commission
such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may
be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement and to keep such registration statement
effective, in the case of a firm commitment underwriting, until each
underwriter has completed the distribution of all securities purchased
by it and, in the case of any other offering, until the earlier of the
sale of all Registrable Securities covered thereby or one hundred
eighty (180) days after the effective date thereof; provided, however,
that such 180-day period shall be extended for a period of time equal
to the period the Holder refrains from selling any Registrable
Securities included in such registration at the request of an
underwriter of the Common Stock or if the Corporation has provided the
notice described in subparagraph (vii) below;
(iii) Furnish to the Holders such number of
copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents as they may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by them that are
included in such registration;
(iv) Use its best efforts to register and
qualify the securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as shall
be reasonably requested by the Holders, provided, that the Corporation
shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions;
-24-
<PAGE> 76
(v) Use its best efforts to list the
securities covered by such registration statement with any securities
exchange, if any, on which the Common Stock of the Corporation is then
listed;
(vi) In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing
underwriter(s) of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under
such an agreement;
(vii) Notify each Holder of Registrable
Securities and each underwriter under such registration statement at
any time when a prospectus relating thereto is required to be delivered
under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing;
(viii) Furnish, at the request of any Holder
requesting registration of Registrable Securities, on the date that
such Registrable Securities are delivered to the underwriters for sale,
if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that
the registration statement with respect to such securities becomes
effective, a "comfort" letter dated as of such date, from the
independent certified public accountants of the Corporation, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of the Registrable Securities; and
(ix) Make available for inspection by each
seller of Registrable Securities, any underwriter participating in any
distribution pursuant to such registration statement, and any attorney,
accountant or other agent retained by such seller or underwriter, all
financial and other records, pertinent corporate documents and
properties of the Corporation, and cause the Corporation's officers,
directors and employees to supply all information reasonably requested
by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement.
(i) Furnish Information. It shall be a condition precedent to
the obligations of the Corporation to take any action pursuant to Sections 6(d),
6(e) and
-25-
<PAGE> 77
6(f) that the selling Holders shall furnish to the Corporation such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to effect the
registration of their Registrable Securities.
(j) Indemnification. In the event any Registrable Securities
are included in a registration statement under Sections 6(d), 6(e) or 6(f):
(i) To the extent permitted by law, the
Corporation shall indemnify and hold harmless each Holder, the
partners, officers and directors of each Holder, any underwriter (as
defined in the Securities Act) for such Holder and each Person, if any,
who controls such Holder or underwriter within the meaning of the
Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively, a
"Violation"):
(A) any untrue statement or alleged
untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus
or final prospectus contained therein or any amendments or
supplements thereto,
(B) the omission or alleged
omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein
not misleading, or
(C) any violation or alleged
violation by the Corporation of the Securities Act, the
Exchange Act, any federal or state securities law or any rule
or regulation promulgated under the Securities Act, the
Exchange Act or any federal or state securities law in
connection with the offering covered by such registration
statement,
and the Corporation shall reimburse each such Holder, or a partner,
officer or director, underwriter or controlling Person of such Holder
for any legal or other expenses reasonably incurred by them, as
incurred, in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 6(j) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the
Corporation (which consent shall not be unreasonably withheld), nor
shall the Corporation be liable in any case for any such loss, claim,
damage, liability or
-26-
<PAGE> 78
action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by such Holder, or a partner, officer, director,
underwriter or controlling Person of such Holder.
(ii) To the extent permitted by law, each
selling Holder shall indemnify and hold harmless the Corporation, each
of its directors and officers who have signed the registration
statement, each Person, if any, who controls the Corporation within the
meaning of the Securities Act, any underwriter and any other Holder
selling securities under such registration statement or any of such
other Holder's partners, directors or officers or any Person who
controls such Holder within the meaning of the Securities Act or the
Exchange Act, against any losses, claims, damages or liabilities (joint
or several) to which the Corporation or any such director, officer,
controlling Person, underwriter or other such Holder, or a partner,
director, officer or controlling Person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection
with such registration; and each such Holder shall reimburse any legal
or other expenses reasonably incurred by the Corporation or any such
director, officer, controlling Person, underwriter or other Holder,
partner, officer, director or controlling Person of such other Holder
in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 6(j) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; and provided, further, that
the total amounts payable in indemnity by a Holder under this Section
6(j)(ii) in respect of any Violation shall not exceed the net proceeds
received by such Holder in the registered offering out of which such
Violation arises.
(iii) Promptly after receipt by an
indemnified party under this Section 6(j) of notice of the commencement
of any action (including any governmental action), such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 6(j), deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to
-27-
<PAGE> 79
retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due
to actual or potential differing interests between such indemnified
party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action,
if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 6(j), but the omission so to deliver written notice to the
indemnifying party shall not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 6(j).
(iv) In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in
which either (A) any Holder exercising rights under this Agreement, or
any controlling Person of any such Holder, makes a claim for
indemnification pursuant to this Section 6(j) but it is judicially
determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not
be enforced in such case notwithstanding the fact that this Section
6(j) provides for indemnification in such case, or (B) contribution
under the Securities Act may be required on the part of any such
selling Holder or any such controlling Person in circumstances for
which indemnification is provided under this Section 6(j), then, and in
each such case, the Corporation or such Holder shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that
such Holder is responsible for the portion represented by the
percentage that the public offering price of its Registrable Securities
offered by and sold under such registration statement bears to the
public offering price of all securities offered by and sold under such
registration statement, and the Corporation and other selling Holders
are responsible for the remaining portion; provided, however, that, in
any such case, (1) no such Holder shall be required to contribute any
amount in excess of the public offering price of all such Registrable
Securities offered and sold by such Holder pursuant to such
registration statement; and (2) no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who
was not guilty of such fraudulent misrepresentation.
(v) The obligations of the Corporation and Holders
under this Section 6(j) shall survive the completion of any offering of
Registrable Securities in a registration statement, and the termination
of this Agreement.
-28-
<PAGE> 80
(k) "Market Stand-Off" Agreement and Coordination of Certain
Sales. Each Holder hereby agrees that it shall not, to the extent requested by
the Corporation and an underwriter of Common Stock of the Corporation, sell or
otherwise transfer or dispose of any Registrable Securities (other than
Registrable Securities being registered in such offering) for up to that period
of time following the effective date of a registration statement of the
Corporation filed under the Securities Act as is requested by the managing
underwriter(s) of such offering, not to exceed 90 days; provided, however, that
all officers, directors and ten percent (10%) or greater stockholders of
the Corporation then holding Common Stock of the Corporation shall enter into
similar agreements. Each Holder further agrees that, except for the Limited
Sales, it shall not sell or otherwise transfer or dispose of any securities of
the Corporation for a period beginning on the date hereof and ending on March 5,
2000 unless such securities are sold pursuant to an underwritten public offering
in which all Holders of Investor Registrable Securities are offered the
opportunity to participate in the registration pro rata based on the total
number of securities held by them. All Holders agree that they shall be solely
responsible for the coordination of any Limited Sales among themselves.
In order to enforce the foregoing covenant, the Corporation may impose stop
transfer instructions with respect to the then-remaining Registrable Securities
of each Holder (and the shares or securities of every other Person subject to
the foregoing restriction) until the end of such period.
(l) Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Corporation, the Corporation agrees to:
(i) Make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities
Act, at all times after the effective date of the first registration
under the Securities Act filed by the Corporation for an offering of
its securities to the general public;
(ii) File with the Commission in a timely manner all
reports and other documents required of the Corporation under the
Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements); and
(iii) So long as a Holder owns any Registrable
Securities, furnish to the Holder forthwith upon request a written
statement by the Corporation as to its compliance with the reporting
requirements of said Rule 144 (at any time after 90 days after the
effective date of the first registration
-29-
<PAGE> 81
statement filed by the Corporation for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at
any time after it has become subject to the requirements of the
Exchange Act), a copy of the most recent annual or quarterly report of
the Corporation, and such other reports and documents of the
Corporation as a Holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing a Holder to sell any
such securities without registration (at any time after the Corporation
has become subject to the reporting requirements of the Exchange Act).
(m) Removal of Legends, Etc. Notwithstanding the foregoing
provisions of this Section 6, the restrictions imposed by this Section 6 upon
the transferability of any Registrable Securities shall cease and terminate when
any such Registrable Securities are sold or otherwise disposed of in
accordance with the intended method of disposition by the seller or sellers
thereof set forth in the registration statement or as otherwise contemplated by
Section 6(c) which does not require that the securities transferred bear the
legend set forth in Section 6(b). Whenever the restrictions imposed by this
Section 6 shall terminate as herein provided, the Holder of any Registrable
Securities as to which such restrictions have terminated shall be entitled to
receive from the Corporation, without expense, one or more new certificates not
bearing the restrictive legend set forth in Section 6(b) and not containing any
other reference to the restrictions imposed by this Section 6.
(n) Filing of Reports Under the Exchange Act. The Corporation
shall give prompt notice to the Stockholders of:
(i) the filing of an Exchange Act
Registration Statement; and
(ii) the effectiveness of such Exchange Act
Registration Statement and the number of shares of such class of equity
securities outstanding as reported in such Exchange Act Registration
Statement, in order to enable the Stockholders to comply with any
reporting requirements under the Exchange Act or the Securities Act.
The Corporation shall, at any time after the Corporation shall register
any shares of Common Stock under the Securities Act and upon the
written request of a Stockholder, file an Exchange Act Registration
Statement relating to any class of Equity Securities of the Corporation
then held by such Stockholder, whether or not the class of equity
securities with respect to which such request is made shall be held by
at least the number of Persons which would require the filing of a
registration statement under Section 12(g)(1) of the Exchange Act. If
the Corporation shall have filed an Exchange Act Registration Statement
or a registration statement (including an offering circular under
Regulation A promulgated under the Securities Act) pursuant to the
requirements of the Securities Act (and in any event, at all times
following the initial public offering of any of the securities of the
Corporation), the Corporation
-30-
<PAGE> 82
shall comply with all the reporting requirements of the Exchange Act
(whether or not it shall be required to do so), and shall comply with
all other public information reporting requirements of the Commission
as a condition to the availability of an exemption from the Securities
Act (under Rule 144 thereof, as amended from time to time, or successor
rule thereto or otherwise) for the sale of Common Stock by the
Stockholders. The Corporation shall cooperate with the Stockholders in
supplying such information as may be necessary for the Stockholders to
complete and file any information reporting forms presently or
hereafter required by the Commission as a condition to the availability
of an exemption from the Securities Act (under Rule 144 thereof or
otherwise) for the sale of Common Stock by the Stockholders.
(o) Transfer or Assignment of Registration Rights. The rights
to cause the Corporation to register securities granted to a Holder by the
Corporation pursuant to this Section 6 may be transferred or assigned by a
Holder only to a transferee or assignee of not less than 50,000 shares of
Registrable Securities (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like), provided that the Corporation is given written notice at the time of or
within a reasonable time after said transfer and assignment, stating the name
and address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned,
and, provided further, that the transferee or assignee of such rights assumes in
writing the obligations of such Holder under this Section 6.
(p) Termination of Registration Rights. The right of any
Holder to request registration or inclusion in any registration pursuant to
Section 6(d), 6(e) or 6(f) shall terminate on the earlier of (i) ten (10) years
after the closing of the first registered public offering of Common Stock of the
Corporation, or (ii) on such date as all shares of Registrable Securities held
or entitled to be held upon conversion or exercise by such Holder may
immediately be sold under Rule 144 during any 90-day period.
(q) Information Rights. Until the closing of the Designated
Offering, the Corporation shall either deliver to each Investor Stockholder who
owns directly or indirectly at least 85,000 shares of Series C Stock, Series D
Preferred Stock or Series E Preferred Stock (or Class A Common Stock issued upon
conversion thereof).
(i) as soon as practicable, but in any event
within one hundred twenty (120) days after the end of each fiscal year of the
Corporation, an income statement for such fiscal year, a balance sheet of the
Corporation and a statement of stockholder's equity as of the end of such year,
and a schedule as to the sources and applications of funds for such year, such
year-end financial reports to be in reasonable detail, prepared in accordance
with generally accepted accounting
-31-
<PAGE> 83
principles, and audited and certified by independent public accountants approved
by the Board of Directors of the Corporation;
(ii) as soon as practicable, but in any
event within thirty (30) days of the end of each month, an unaudited income
statement (showing actual, budget and prior month) and schedule as to the
sources and application of funds and balance sheet for and as of the end of such
month, in reasonable detail;
(iii) as soon as practicable, but in any
event within forty-five (45) days of the end of each fiscal quarter, an
unaudited income statement, schedule as to the sources and applications of funds
and balance sheet for and as of the end of each such quarter, in reasonable
detail; and
(iv) as soon as practicable, but in any
event thirty (30) days prior to the end of each fiscal year, a budget for the
next fiscal year, prepared on a monthly basis, including income statements,
balance sheets and applications of funds statements for such months and, as soon
as practicable after the adoption thereof, any revisions to such annual budget.
SECTION 7. Duration of Agreement. Except for those provisions
that, by their terms, terminate sooner, all rights and obligations of each
Stockholder under this Agreement shall terminate as to such Stockholder upon the
earlier of (a) the transfer in accordance with this Agreement of all Shares held
by such Stockholder, or (b) upon written consent of (i) the Stockholders holding
a majority of the shares of Series C Stock (or the Class A Common Stock issued
upon conversion thereof), (ii) the Stockholders holding at least 66 2/3 of the
shares of Series D Preferred Stock, (iii) the Stockholders holding at least 66
2/3 of the shares of Series E Preferred Stock and (iv) the Stockholders holding
a majority of the shares of Class A Common Stock (other than those shares
specified in subparagraph (i) above).
SECTION 8. Severability; Governing Law. If any provisions of
this Agreement shall be determined to be illegal and unenforceable by any court
of law, the remaining provisions shall be severable and enforceable in
accordance with their terms. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof; provided, however, in the event that
any provision of this Agreement is unenforceable under the laws of the State of
New York and is enforceable under the laws of the State of Delaware, then such
provision shall be construed in accordance with the laws of the State of
Delaware to permit the enforceability of this Agreement to the fullest extent.
-32-
<PAGE> 84
SECTION 9. Conflicting Agreements. This Agreement supersedes
all other existing agreements or understandings between the stockholders of the
Corporation.
SECTION 10. Benefits of Agreement. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns, legal representatives and heirs. Subject to the terms of
this Agreement, the Stockholders may transfer any or all of its rights hereunder
to any purchaser or transferee of all or a portion of its shares of Preferred
Stock or Common Stock, including any right or interest therein, without the
prior written consent of the Corporation or any Stockholder. In the event of
such transfer, such transferee shall be deemed to be the "Stockholder" and a
"Holder", as appropriate, for purposes of this Agreement, and may again transfer
such rights in accordance with, and subject to, the terms of this Agreement.
SECTION 11. Notices. All notices, requests, consents and
other communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or duly sent by first
class registered or certified mail, return receipt requested, postage prepaid,
addressed to such party at the address set forth below or such other address as
may hereafter be designated in writing by the addressee to the addressor listing
all parties:
(a) If to the Corporation, to:
Medscape, Inc.
134 W. 29th Street
New York, NY 10001-5399
Fax (212) 760-3140
Attention: President & CEO
with a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036-6710
Attention: John P. Schmitt, Esq.
-33-
<PAGE> 85
(b) If to the Stockholders, at the addresses specified on
Schedule I attached hereto.
All such notices, advises and communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery and
(b) in the case of mailing, on the third day after the posting thereof.
SECTION 12. Changes. The terms and provisions of this
Agreement may not be modified or amended, or any of the provisions hereof
waived, temporarily or permanently, except pursuant to the written consent of
(a) the Corporation, (b) the Stockholders holding a majority of the shares of
Series C Stock, (c) the Stockholders holding at least 66 2/3 of the shares of
Series D Preferred Stock (or the Class A Common Stock issued upon conversion
thereof), (d) the Stockholders holding at least 66 2/3 of the shares of Series E
Preferred Stock (or the Class A Common Stock issued upon conversion thereof) and
(e) the Stockholders holding a majority of the shares of Class A Common Stock
(other than those shares specified in subparagraph (b) above). Any rights
applicable to a Stockholder may be waived by such Stockholder without the
consent of the Corporation or the other Stockholders. Any modification or
amendment pursuant to this Section may terminate any right or obligation
provided for herein whether or not deemed vested or accrued. Upon approval of
modifications or amendments by the requisite percentages of the Stockholders
hereunder, the Corporation shall not be required to independently give its
consent.
SECTION 13. Rights of Dr. Drezner as a Stockholder. Dr.
Jeffrey L. Drezner ("Dr. Drezner") shall (a) have all the rights of an Investor
Stockholder as are set forth in Sections 4, 5 and Subsection 6(e) of this
Agreement (including under Subsection 6(e) as it relates to the piggyback rights
to be included within a demand registration initiated pursuant to Subsection
6(d), and, for such purposes, it is understood that the last sentence of
Subsection 6(d)(i) shall be read as if it were amended to include at its end:
"and Section 6(e)(iii)"), (b) have the right to vote in connection with a
modification to the Stockholder Agreement in accordance with Section 12 thereof,
(c) have the rights of an Additional Stockholder with respect to all other
provisions of this Agreement, and (d) be bound by the other terms and conditions
of this Stockholders' Agreement. It is understood and agreed that, in regard to
restricted shares issued pursuant to the Employment and Restricted Stock
Purchase Agreement, dated October 27, 1998, by and between the Corporation and
Dr. Drezner, Dr. Drezner shall only have rights under this Agreement for such
restricted shares after they have vested in accordance with the terms thereof
(such vested shares, along with the 642,553 shares issued to Dr. Drezner
pursuant to the Purchase Agreement, dated October 27, 1998, by and among the
Corporation, Dr. Drezner and certain other parties thereto, or to be acquired by
Dr. Drezner upon realization of the pledge of 36,509 shares by Jason Rosenbaum
to Dr. Drezner, the "Vested Shares"). For purposes of effectuating Dr. Drezner's
rights as an Investor Stockholder pursuant to Sections 4 and
-34-
<PAGE> 86
5 of this Agreement, to the extent that Dr. Drezner exercises his rights
pursuant to Subsections 4(c) or 5(a) thereof, (x) the Vested Shares held by Dr.
Drezner shall be counted as shares of Class A Common Stock issuable upon
conversion of the Series C Stock for purposes of the formulas set forth therein;
and (y) each of the Corporation and Dr. Drezner agrees to exchange any Vested
Shares for which Dr. Drezner seeks to require the Transferring Stockholder to
cause to be purchased in accordance with such Subsection 5(a) for a like number
of shares of Class A Common Stock, such exchange to be effective immediately
prior to such purchase (without any additional consideration) with the intent
that the purchaser receive Class A Common Stock pursuant to such transaction. In
connection with any vote pursuant to Section 12 of this Agreement, Dr. Drezner
shall vote with the holders of Series C Stock as a single class, with each
Vested Share held by Dr. Drezner having the rights to the number of votes as
each share of Class A Common Stock has under the Corporation's Amended and
Restated Certificate of Incorporation (the "Certificate"), and each share of
Series C Stock having the rights to the number of votes for such series as is
set forth in the Certificate.
SECTION 14. Captions. The captions herein are inserted for
convenience only and shall not define, limit, extend or describe the scope of
this Agreement or affect the construction hereof.
SECTION 15. Nouns and Pronouns. Whenever the context may
require, any pronouns used herein shall include the corresponding masculine,
feminine or neuter forms and the singular form of names and pronouns shall
include the plural and vice-versa.
SECTION 16. Merger Provision. This Agreement (as the same may
be amended from time to time) and the Purchase Agreement constitute the entire
agreement among the parties pertaining to the subject matter hereof and
supersede all prior and contemporaneous agreements therewith.
SECTION 17. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original, but
all of which taken together shall constitute one and the same instrument.
[The remainder of this page intentionally left blank]
-35-
<PAGE> 87
IN WITNESS WHEREOF, the parties hereto have caused this
Amended and Restated Stockholders Agreement to be executed as of the date and
year first written above.
MEDSCAPE, INC.
By:
-----------------------------------------
Paul T. Sheils
President and Chief Executive Officer
[Signature page to
Stockholders Agreement - 1]
<PAGE> 88
(STOCKHOLDER WITH RIGHTS UNDER SECTION 13)
--------------------------------
Jeffrey L. Drezner, M.D., Ph.D.
--------------------------------
Melanie Moore
--------------------------------
Sandra Sims
--------------------------------
Jason Rosenbaum
[Signature page to
Stockholders Agreement - 2]
<PAGE> 89
INVESTOR STOCKHOLDERS
(EXISTING SERIES C CONVERTIBLE PREFERRED STOCK)
<TABLE>
<S> <C>
CSK VENTURE CAPITAL CO., LTD.,
- ---------------------------------------
ESTHER DYSON as investment manager for CSK-1(B)
Investment Fund
APA EXCELSIOR IV, L.P.
By:
-----------------------------------
Name: Kinya Nakagome
By: Title: Managing Director
-----------------------------------
Name: Alan Patricof
Title:
CSK VENTURE CAPITAL CO., LTD.,
as investment manager for CSK-2
COUTTS & CO. (CAYMAN) LTD., C/F Investment Fund
APA EXCELSIOR IV/OFFSHORE, L.P.
By: By:
----------------------------------- -----------------------------------
Name: Alan Patricof Name: Kinya Nakagome
Title: Title: Managing Director
THE PATRICOF PRIVATE
INVESTMENT CLUB MEDIA TECHNOLOGY VENTURES,
L.P.
By:
-----------------------------------
Name: Alan Patricof By:
-----------------------------------
Title: Name: Barry M. Weinman
Title: Managing Member of the General
Partner
CSK VENTURE CAPITAL CO., LTD.,
as investment manager for CSK-1(A) MEDIA TECHNOLOGY VENTURES
Investment Fund ENTREPRENEURS FUND, L.P.
By: By:
----------------------------------- -----------------------------------
Name: Kinya Nakogome Name: Barry M. Weinman
Title: Managing Director Title: Managing Member of the General
Partner
</TABLE>
[Signature page to
Stockholders Agreement - 3]
<PAGE> 90
<TABLE>
<S> <C>
ROBERT A. BERNHARD, WILLIAM L. RHL VENTURES LLC
BERNHARD, FRANK A. WEIL, AND
LAWRENCE B. BUTTENWEISER,
TRUSTEES U/A DATED 9/3/64 F/B/O By:
-----------------------------------
ROBERT A. BERNHARD FAMILY Name:
Title:
By: TOLEDOT INVESTMENTS, L.P.
-----------------------------------
Name: Robert A. Bernhard
Title: Trustee
By:
-----------------------------------
RICHARD LINHART, GENERAL
PARTNER
ROBERT A. BERNHARD, WILLIAM L.
BERNHARD, JOHN L. LOEB, AND
BENJAMIN J. BUTTENWEISER,
-----------------------------------
TRUSTEES U/W/D DOROTHY L. RICHARD LINHART
BERNHARD F/B/O ROBERT A.
BERNHARD ARTICLE 9TH
-----------------------------------
By: VICTOR SCARAVILLI
-----------------------------------
Name: Robert A. Bernhard
Title: Trustee BE PARTNERS
WORMSER FRERES By:
-----------------------------------
Name: Timothy Sommerfield
By: Title: Partner
-----------------------------------
Name: Marcel Wormser
Title: Administrateur
Wormser Freres, Paris -----------------------------------
MARK BRAUNSTEIN, M.D.
OPPENHEIMER & CO., INC. TBG INFORMATION INVESTORS, L.L.C.
By: By:
----------------------------------- -----------------------------------
Name: Nathan Gantcher Name: Oakleigh Thorne
Title:Vice Chairman Title: Chairman & CEO
- -----------------------------------
ROGER MULVIHILL
- -----------------------------------
MARY MULVIHILL
</TABLE>
[Signature page to
Stockholders Agreement - 4]
<PAGE> 91
EXISTING STOCKHOLDERS
(SERIES A PREFERRED STOCKHOLDER)
THE EXCELSIOR FUND I
By:
-----------------------------
Name: Alan Patricof
Title:
(CLASS A COMMON STOCKHOLDER)
---------------------------------
PETER M. FRISHAUF
[Signature page to
Stockholders Agreement - 5]
<PAGE> 92
INVESTOR STOCKHOLDERS
SERIES D CONVERTIBLE PREFERRED STOCK
<TABLE>
<S> <C>
CSK VENTURE CAPITAL CO., LTD. CSK VENTURE CAPITAL CO., LTD. AS
AS INVESTMENT MANAGER FOR INVESTMENT MANAGER FOR
CSK-1(B) INVESTMENT FUND CSK-1(A) INVESTMENT FUND
By: By:
--------------------------------- ---------------------------------
Name: Kinya Nakagome Name: Kinya Nakagome
Title: Managing Director Title: Managing Director
Address: Kenchikukaikan, 7F Address: Kenchikukaikan, 7F
5-26-20 Shiba, Minato-ku 5-26-20 Shiba, Minato-ku
Tokyo 108-0014 Japan Tokyo 108-0014 Japan
CSK VENTURE CAPITAL CO., LTD.
AS INVESTMENT MANAGER FOR
CSK-2 INVESTMENT FUND
By:
--------------------------------
Name: Kinya Nakagome
Title: Managing Director
Address: Kenchikukaikan, 7F
5-26-20 Shiba, Minato-ku
Tokyo 108-0014 Japan
HEARST COMMUNICATIONS, INC.
By:
---------------------------------
Name: Kenneth A. Bronfin
Title: Senior Vice President
Address: 959 8th Avenue, Suite 331
New York, NY 10019
</TABLE>
[Signature page to
Stockholders Agreement - 6]
<PAGE> 93
WORMSER FRERES
By:
Name: Marcel Wormser
Title: Administrateur, Wormser Freres, Paris
Address: Banque D'Escompte
13 Blvd. Haussmann
75009 Paris France
[Signature page to
Stockholders Agreement - 7]
<PAGE> 94
MEDIA TECHNOLOGY VENTURES,
L.P.
By:
------------------------------------
Name: Barry M. Weinman
Title: Managing Member of the General Partner
MEDIA TECHNOLOGY VENTURES
ENTREPRENEURS FUND, L.P.
By:
-------------------------------------
Name: Barry M. Weinman
Title: Managing Member of the General Partner
[Signature page to
Stockholders Agreement - 8]
<PAGE> 95
APA EXCELSIOR IV, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.,
its General Partner
By: PATRICOF & CO. MANAGERS, INC.,
its General Partner
By:
---------------------------------
Name: Alan J. Patricof
Title: Chairman
APA EXCELSIOR IV/OFFSHORE, L.P.
By: PATRICOF & CO. VENTURES, INC.,
its Investment Advisor
By:
---------------------------------
Name: Alan J. Patricof
Title: Chairman
PATRICOF PRIVATE INVESTMENT CLUB, L.P.
By: APA EXCELSIOR IV PARTNERS, L.P.,
its General Partner
By: PATRICOF & CO. MANAGERS, INC.,
its General Partner
By:
---------------------------------
Name: Alan J. Patricof
Title: Chairman
[Signature page to
Stockholders Agreement - 9]
<PAGE> 96
WESTON PRESIDIO CAPITAL II, L.P.
By: Weston Presidio Capital Management II,
LP, its General Partner
By:
----------------------------
WESTON PRESIDIO CAPITAL III, L.P.
By: Weston Presidio Capital Management
III, LLC, its General Partner
By:
---------------------------------
WPC ENTREPRENEUR FUND, L.P.
By: Weston Presidio Capital Management
III, LLC, its General Partner
By:
---------------------------------
HIGHLAND CAPITAL PARTNERS IV
LIMITED PARTNERSHIP
By: Highland Management Partners IV LLC,
its General Partner
By:
---------------------------------
Member
HIGHLAND ENTREPRENEURS' FUNDS IV,
LIMITED PARTNERSHIP
By: Highland Entrepreneurs' Fund IV LLC,
its General Partner
By:
---------------------------------
Member
[Signature page to
Stockholders Agreement - 10]
<PAGE> 97
[Signature page to
Stockholders Agreement - 11]
<PAGE> 98
(SECTION 4 STOCKHOLDERS NOT
SIGNING IN ANOTHER CAPACITY)
--------------------------------------
Steven Kalin
--------------------------------------
Paul Sheils
[Signature page to
Stockholders Agreement - 12]
<PAGE> 99
INVESTOR STOCKHOLDERS
SERIES E CONVERTIBLE PREFERRED STOCK
AND CLASS A COMMON STOCK
NATIONAL DATA CORPORATION
By:
--------------------------------------
Name:
Title:
[LAZARD FRERES]
By:
--------------------------------------
Name:
Title:
[Signature page to
Stockholders Agreement - 13]
<PAGE> 100
EXHIBIT D
[LETTERHEAD OF PATTERSON, BELKNAP, WEBB & TYLER LLP]
[Date]
National Data Corporation
National Data Plaza
Atlanta, Georgia 30329
Attention: Mr. Walter M. Hoff
President and Chief Executive Officer
NDC Health Information Services
Dear Sirs and Mesdames:
We have acted as counsel to Medscape, Inc., a Delaware
corporation (the "Company"), in connection with the negotiation, execution and
delivery by the Company of (i) the Stock Purchase Agreement, dated as of July 7,
1999 (the "Purchase Agreement"), by and between the Company and National Data
Corporation ("NDC"), (ii) the Stockholders Agreement (as defined in the Purchase
Agreement), (iii) the License and Product Development Agreement (as defined in
the Purchase Agreement) and (iv) the Amended and Restated Certificate (as
defined in the Purchase Agreement). The Purchase Agreement, the Stockholders
Agreement and the License and Product Development Agreement are collectively
referred to in this opinion letter as the "Documents," and the transactions
contemplated by the Documents are collectively referred to in this opinion as
the "Transactions."
This opinion letter is delivered to you pursuant to Section
7.2(b)(viii) of the Purchase Agreement. Capitalized terms used but not defined
herein have the respective meanings assigned to them in the Purchase Agreement.
For purposes of this opinion letter, "Actual Knowledge" means
the conscious awareness of facts or other information by the partner who has
signed this opinion letter, any lawyer in our firm who has been actively
involved in negotiating or preparing the Documents or this opinion letter or any
lawyer in our
<PAGE> 101
[Date]
Page 2
firm who has been primarily responsible for providing the responses in this
opinion letter which are limited to our Actual Knowledge.
For purposes of this opinion letter, we have examined such
documents as we have deemed appropriate, including, without limitation, the
Purchase Agreement, the other Documents, the Certificate of Incorporation, as
amended by the Amended and Restated Certificate, the Bylaws of the Company,
certificates, faxes or other electronically transmitted documents issued by
public officials in the State of Delaware as to the incorporation and good
standing of the Company ("Public Authority Documents"), the documents listed in
any exhibit to this opinion letter, and minutes of the proceedings taken by the
Company for the purpose of authorizing the execution and delivery of the
Documents. As to certain matters of fact material to the opinions expressed in
this opinion letter, we have relied on the representations made by NDC in the
Purchase Agreement, the Public Authority Documents and certificates of officers
of the Company and others. We have not independently established the facts so
relied on.
We have no Actual Knowledge of any indenture, mortgage, deed
of trust, contract or other instrument relating to the borrowing of money or to
the leasing (as lessee) or purchasing of material amounts of property or other
assets by the Company ("Other Agreements"), other than those listed in Exhibit A
to this opinion. Other than receipt of a certificate (the "Officers'
Certificate") from the chief executive officer and chief financial officer of
the Company, however, we have made no special investigation or inquiry with
respect to the existence of any additional Other Agreements for purposes of our
opinion set forth in paragraph 7 below. In addition, for purposes of our
opinions in paragraphs 3 and 7 below, we have relied upon statements in the
Officers' Certificate (i) with respect to the outstanding capital stock of the
Company and related matters and (ii) to the effect that, except as set forth in
Exhibit B to this opinion, the Company is not subject to any court or
administrative order, writ, judgment or decree which names the Company or is
specifically directed to the Company or its property ("Court Order").
We have also made such investigations of law as we have deemed
necessary for purposes of this opinion letter. We express no opinion as to any
laws other than the laws of the State of New York, the General Corporation Law
of the State of Delaware and the federal laws of the United States of America.
The opinions set forth below are also based upon and subject to the assumptions,
exceptions and limitations customary in New York practice for opinion letters of
this type, including, without limitation, the effects of applicable
<PAGE> 102
[Date]
Page 3
bankruptcy, insolvency, reorganization, fraudulent transfer and other similar
laws affecting the enforcement of creditors' rights and remedies in general and
of general principles of equity (regardless of whether considered in a
proceeding in equity or in law), and others described in the Report of the
TriBar Opinion Committee entitled Third Party "Closing" Opinions, 53 Bus. Law.
592 (1998).
On the basis of and subject to the foregoing, it is our
opinion that:
1. The Company is a corporation validly existing and in good
standing under the laws of the State of Delaware and has the corporate power
under Delaware law to own its property and assets and to transact business as
currently being conducted.
2. The Company's authorized capital stock consists of only
_________ shares of common stock, par value $.01 per share, of which _________
shares have been designated Class A Common Stock and 15,000,000 have been
designated Class B (Non-Voting) Common Stock, and 5,356,643 shares of preferred
stock, par value $.01 per share, of which 788,200 shares have been designated
Series A Preferred Stock, 1,478,359 shares have been designated Series C
Preferred Stock, 932,401 shares have been designated Series C-1 Preferred Stock,
1,757,683 shares have been designated Series D Preferred Stock and 400,000
shares have been designated Series E Preferred Stock. The Shares issuable
pursuant to the Purchase Agreement have been duly authorized and, when issued
pursuant thereto, will be validly issued, fully paid, nonassessable and free of
any preemptive rights. The PS Shares have the rights, powers and preferences and
qualifications, limitations and restrictions thereof as are set forth in the
Amended and Restated Certificate. The forms of certificates representing the
Shares are in proper form under the General Corporation Law of the State of
Delaware.
3. Based solely on our review of the minute books and stock
transfer records of the Company, the outstanding shares of capital stock of the
Company as of the date hereof but prior to the consummation of the Transactions
consist only of (i) ______ shares of Class A Common Stock, (ii) ______ shares of
Class B (Non-Voting) Common Stock, (iii) ______ shares of Series A Preferred
Stock, (iv) _____ shares of Series C Preferred Stock, (v) ______ shares of
Series C-1 Preferred Stock and (vi) ______ shares of Series D Preferred Stock.
All of such shares have been duly authorized and are validly issued, fully paid,
nonassessable and free of preemptive rights. Except as set forth in the Amended
and Restated Certificate, to our Actual Knowledge there are no outstanding
securities issued by the Company which are convertible into
<PAGE> 103
[Date]
Page 4
or exchangeable for shares of Common Stock. Except as set forth in the
Stockholders Agreement, to our Actual Knowledge there are no preemptive rights
which would entitle the holders of any shares of capital stock of the Company to
acquire any of the Shares. Except as set forth on the Disclosure Schedules of
Medscape, Inc. which are attached to the Purchase Agreement, to our Actual
Knowledge there are no outstanding warrants or options to acquire any shares of
capital stock of the Company or any other rights or agreements to which the
Company is a party or by which it is bound which entitle or would entitle, with
the passage of time, the giving of notice or otherwise, any person or entity to
purchase or acquire any shares of capital stock of the Company.
4. The Board of Directors of the Company has duly authorized
the reservation of a sufficient number of Conversion Shares for issuance upon
the conversion of the PS Shares in accordance with the terms of the Amended and
Restated Certificate and no further action of the Board of Directors of the
Company is required in connection with the conversion of any of the PS Shares
into Conversion Shares in accordance with the terms thereof. The Conversion
Shares issued upon conversion of the PS Shares in accordance with the terms and
conditions set forth in the Amended and Restated Certificate will, when issued,
be validly issued, fully paid, nonassessable and free of any preemptive rights.
5. The Company has the corporate power to execute and deliver
each of the Documents, to perform its obligations thereunder and to consummate
the Transactions and has taken all requisite corporate action to authorize the
execution, delivery and performance by it of each of the Documents. Each of the
Documents has been duly executed and delivered by the Company.
6. Each of the Documents constitutes a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
7. The execution and delivery by the Company of, and
performance by the Company of its obligations under, the Documents will not (i)
contravene any applicable provision of any New York law, the Delaware General
Corporation Law or federal statutory law or regulation; (ii) violate any
provisions of the Court Orders, if any, listed in Exhibit B to this opinion
letter; (iii) result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, result in the acceleration of (or
entitle any party to accelerate) any obligation of the Company under, or result
in the creation or
<PAGE> 104
[Date]
Page 5
imposition of (or the obligation to create or impose) any lien or encumbrance
upon any of the property or assets of the Company pursuant to the terms of, any
of the Other Agreements listed in Exhibit A to this opinion letter; (iv) violate
any provision of the Certificate of Incorporation or Bylaws of the Company, in
each case as amended to date; or (v) require any approval from or any filings
with any governmental authority that have not been received or made on or prior
to the date hereof under the Delaware General Corporate Law, any federal or New
York State law, or any rule or regulation thereunder. To our Actual Knowledge,
the Company is not subject to any Court Order other than as set forth on Exhibit
B to this opinion letter.
8. It is not necessary in connection with the offering, sale
and delivery of the Shares under the circumstances contemplated by the Purchase
Agreement to register the Shares under the Securities Act of 1933.
9. To our Actual Knowledge, the Company is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
This opinion letter may be relied upon by you only in
connection with the Transactions and may not be used or relied upon by you or
any other person for any other purpose whatsoever, without in each instance our
prior written consent; provided, however, that it may be used without such
consent (i) in connection with a review of the Transactions by any regulatory
agency having supervisory authority over you, for the purpose of confirming the
existence of this opinion letter, (ii) in connection with the enforcement of
your rights and remedies under the Documents or the assertion of a defense as to
which this opinion letter is relevant and necessary or (iii) in response to a
court order.
Very truly yours,
PATTERSON, BELKNAP, WEBB & TYLER LLP
By:________________________________
A Member of the Firm
cc: Mr. Paul T. Sheils
<PAGE> 105
EXHIBIT A
Other Agreements
<PAGE> 106
EXHIBIT B
Court Orders
<PAGE> 107
DISCLOSURE SCHEDULES OF MEDSCAPE, INC.
TO
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
MEDSCAPE, INC. (THE "COMPANY")
AND
NATIONAL DATA CORPORATION
NOTE: CAPITALIZED TERMS NOT DEFINED HEREIN SHALL HAVE THE MEANINGS ASCRIBED
TO THEM IN THE STOCK PURCHASE AGREEMENT.
<PAGE> 108
Schedule 3.2
Conflicts
The execution, delivery and performance by the Company of the Agreement would
trigger the preemptive rights of the parties to the Existing Stockholders
Agreement.
<PAGE> 109
Schedule 3.3
Capitalization
- - The Company's registration statement on Form S-1, filed with the
Securities and Exchange Commission (the "SEC") on May 4, 1999, as
amended in the form to be filed with the SEC on July 8, 1999 and
previously delivered to Purchaser (the "S-1"), describes options
outstanding pursuant to the Company's 1996 Option Plan as of May 31,
1999.
- - All of the Series A, C, C-1 and D Preferred Stock is convertible into
shares of Class A Common Stock.
- - Parties to the Existing Stockholders Agreement are entitled to
preemptive rights with respect to the issuance of capital stock of the
Company.
- - Under the terms of the Common Stock Purchase Agreement, by and between
the Company and CBS Corporation ("CBS"), (the "CBS Stock Purchase
Agreement" and, together with the other agreements executed therewith,
the "CBS Documents") CBS has the right to nominate 3 directors to the
Board of Directors of the Company.
- - Under the terms of the CBS Stock Purchase Agreement, CBS has the right
to acquire shares of Class A Common Stock, including through the
exercise of the warrant referred to in the Shareholders Agreement
referred to therein.
Refer to capitalization table (attached).
<PAGE> 110
MEDSCAPE, INC.
SUMMARY OF EQUITY POSITION
SCHEDULE 3.4
AS OF JUNE 15, 1999
<TABLE>
<CAPTION>
Count PR P/SH Investment Price per share
<S> <C> <C> <C>
Excelsior I Fund $ 28,277 0.01074
Patricof & Co., Ventures, Inc. $ 838 0.01074
1 A. Patricof & designees $ 162 0.01080
2 Peter Frishauf $ 14,886 0.00910
3 Timothy Fallon
4 Robert Bernhard $ 7,090 0.01863
5 Katharine C. Rice $ 1,872 0.00800
Stephen Frishauf $ 865 0.01075
Louis Del Guercio $ 419 0.01074
Janice Beam $ 312 0.01076
Richard Bassin $ 107 0.01070
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
<S> <C> <C> <C>
6 Faustino Galan $ 54
7 Sharon F. Callahan $ 215
8 Marissa S. Seligman $ 269
SCP EMPLOYEE MIRROR
Lydia Cavieux $ 205 0.01074
Don Edwards Treasury Stock $ 205 0.01074
Katharine C. Rice $ 464 0.00811
Marissa S. Seligman $ 409
Sharon F. Callahan $ 79
9 Ken M. Hyams
10 Harry Goldhagen
11 Joe Martino $ 79 0.00716
12 Priscilla Scherer
13 Elaine M. Nichols $ 131
14 William E. Lurie
15 Scott J. Navitsky $ 79
16 Richard D. Purcell, Jr. $ 105
17 Michael Collins
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
<S> <C> <C> <C>
18 Joseph P. Gillis $ 131
19 Coleen Cosgrove
Allison L. Wade
20 Peter G. Collins
21 Judy Leong $ 61
Anne S. Crowder
22 Anne J. Landry $ 61 0.00716
23 Joanna Flager $ 76
24 Joanna McSurdy
25 Kathrina A. Benson $ 52
26 Alvia L. DuCille $ 66
27 Sandra Perez $ 66
Victor Lombardi
28 Florence Huey
29 Margaret Burrell $ 13
30 Victoria Sandvik
31 Jill E. Finn $ 13
32 Sheryl Lefkowitz $ 3
Heidi Murray
33 Cynthia Colter $ 3
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
<S> <C> <C> <C>
34 Stephan Hopkins
Rita Jaskowitz
Marcy Starer
Tito Otiz
Wini Sapong $ 2
Micah A. Kaplan
Johanna Ella
Felicita Cabrera
35 Danny S. Torres
36 Andreas Katsihtis $ 2
37 Lisa Garns
Nichole White
38 Karen C. Pratt.
39 Pat Nixon
Total SCP Employees
----------
TOTAL FOUNDERS $ 57,668.3
----------
INVESTORS
Media Technology Ventures $3M $1.72 $ 3,000,447 1.71600
Thorn Blumenstein Goldman $3M $1.72 $ 3,000,000 1.71600
CSK Venture Capital Co. Ltd - $2M $1.72 $ 2,000,000 1.71600
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Excelsior IV/Patricof $1.0M $1.72 $ 999,999 1.71600
Wormser Freres - Private Investor @$500,000 $1.72 $ 500,000 1.71600
Robert Bernhard - Trust @$300,000 $1.72 $ 300,000 1.71600
Oppenheimer & Co. @ $300,000 $1.72 $ 300,000 1.71600
Robert Lesson Ventures @$250,000 $1.72 $ 250,000 1.71600
Richard Linhart - Private Investor @$100,000 $1.72 $ 100,000 1.71600
Victor Scaraville - Private Investor @$100,000 $1.72 $ 100,000 1.71600
BE Partners - Private Family @$100,000 $1.72 $ 100,000 1.71600
Esther Dyson - Private Investor @$50,000 $1.72 $ 50,000 1.71600
Mulvihill Family - Private Investor @$50,000 $1.72 $ 50,000 1.71600
Mark Braunstein - Private Investor @$50,000 $1.72 $ 50,000 1.71600
Media Technology Ventures $1,000,009 $4.69 1,000,009 4.68800
CSK Venture Capital Co. Ltd - $1,000,009 $4.69 1,000,009 4.68800
Hearst Communications, Inc. $4.69 1,000,000 4.68796
Wormser Freres - Private Investor $4.69 600,000 4.68796
Weston Presidio Capital - Boston VC - $8,002,000 $4.69 8,000,002 4.68800
Highland Capital - $8,002,000 $4.69 8,000,002 4.68800
</TABLE>
<PAGE> 115
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Excelsior IV/Patricof $1.0M 4.69 999,997 4.68795
--------------
TOTAL INVESTORS $ 31,400,464.6
Ramsey/Beirne
Credit Suisse/First Boston
Sub Total Investors, R/B & CS/FB $ 31,400,464.6
--------------
NON FOUNDING DIRECTORS & FORMER DIRECTORS
40 M. Butlein
41 O. Thorne
42 E. Dyson $ 81 0.00227
43 A. Bushkin $ 3,402 0.07560
TOTAL NON FOUNDING DIRECTORS & FORMER DIRECTORS $ 3,483.0
--------------
MANAGEMENT
44 Paul Sheils
Jeff Drezner restricted 10% shares (A) $ 1,569,874
Jeff Drezner 88% of 10% @ closing $ 1,381,489
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
<S> <C> <C>
45 Steve Kalin
46 Stephen E. Smith $ 3,803
47 Alex Martin $ 7,000
48 William T. Seitz
49 Marnie LaVigne
50 George Lundberg
51 Ira Kirschenbaum
52 Meg Walsh
53 Judy Blackwell
3/14/95 54 David Yakimischak
3/25/95 55 Bill Silberg
3/30/95 56 Tony Plesner
Peter Frishauf * $52,500
3/24/95 57 Tom Luciani
Total Management $3,014,666.7
------------
Medscape Employees
58 MaryBeth Dougherty
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
<C> <S> <C>
59 Vincent J. Keane
60 Leah Wang
61 Don Eckert $ 2,399
62 Jeff Hannisian
63 Mike Squires
64 Claude Chaouloff
65 Floss O'Sullivan
66 Carla Cantor
Donald Goodwin $ 205
67 Theodore A. Singer
Gregory Fortescue $ 83
68 Kathleen O'Malley
69 Maria Gaiso
Mike Collins
70 Deborah J. Norton
71 Wayne Strauss $ 629
Karin Napier $ 450
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
<S> <C> <C>
72 Daniel Bukzspan
73 Richard Marback $ 540
Bryan Currie
Jerry Donnelly $ 3
Melanie Moore $ 78,494
Jason Rosenbaum $ 78,494
Sandra Sims $ 31,396
74 Edward King
75 Jennifer Braine
76 Jay Reither
77 Michael Friedberg
78 Richard Foley
79 Adams Laville
80 Susan Gregg
81 Odette Veneziano
Christy Nichols
82 Erena Langley
83 Sunny Lee
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
<S> <C> <C>
84 Mike McNally
85 Heather Hatfield
86 Susanna Leuci
87 Mary Fuchs
88 Adekunle Ajadi
89 Spencer Flanders
90 Michael Lee
91 Debra Makarowski
92 Thomas Shinn
93 Glen DaSilva
94 Vanessa Staeheli
95 Molly Dolan
96 Janelle Haider
97 Benjamin Needham
98 Annie Ng
99 Kristabelle Munson
100 Steven K. Smith
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
<S> <C>
101 Mindy Hung
1/3/95 102 Anna Kartavenko
1/3/95 103 Stacy Lavin
104 Solomon Duskis
1/24/95 105 David Good
106 Sophia Cariati
107 Asya Daufman
108 James Santo Domingo
2/21/95 109 Marc Andre
110 Mary Alice Culpepper
111 David Sheptock
3/21/95 112 Andrea Austin
113 Rita Erhman
3/3/95 114 Amy Drill
3/24/95 115 Christina Ferrari
3/24/95 116 Angie Jackson
3/24/95 117 Barbara Campbell
3/24/95 118 Rita McSharry
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
<S> <C> <C>
119 Michael Amaditz
3/28/95 120 Sandra Kirton
121 Christina Myers
122 Gretchen Hargarten
123 Pam Peters
124 Debra Fox
125 Glynna Prentice
126 June Nakashio
127 Dana Brackett
128 Ellen Lehrich
129 Ann Contijoch
130 Raelene Birkett
131 Liz Gordon
132 Bob Enteen
NEW OPTIONS TO BE ISSUED
TOTAL MEDSCAPE EMPLOYEES
Employee Reserved Options
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
Total Available for Employees
<S> <C>
$ 192,693.9
-----------
$ 34,668,976.6
----------------------------
Total $ 34,668,977 20,733,275
</TABLE>
Weighted average of Stock
Note: This capitalization table includes 730,174 Shares issued in accordance
with the Purchase Agreement between Medscape, Inc., and Jeffrey Drezner,
Melanie Moore, Sandra Sims, and Jason Rosenbaum
(2) This capitalization table includes 730,174 restricted shares issued as part
of Jeffrey Drezner's Employment Agreement.
<PAGE> 123
<TABLE>
<S> <C>
Note: Vesting-All
Options vest over 3 or 4
Years:
1996 Options step vest on 31-May-93
31-May-94
31-May-95
June 1997 Options vest 1/3 on
7/1/98 and monthly thereafter
December 1997 Options vest
1/3 on 12/15/98 and monthly
thereafter
February 1998 Options vest
1/3 on 2/19-2/23/99 and monthly
thereafter
October 1998 Options vest 1/4
on 10/99 and monthly thereafter
Options vest 1/4 on
anniversary date and monthly
thereafter
MARCH 17, 1998 SERIES C & C-1
PREFERRED INVESTMENT ROUND
</TABLE>
<PAGE> 124
<TABLE>
<CAPTION>
Amount % of Total # of Shares
----------- ---------- -----------
<S> <C> <C> <C>
Pre Money $14,000,000 56.5% 20,949,078
MTV 1,771,690 7.1% 1,032,452.5
MTE 228,758 0.9% 133,310.0
MTV $2,000,448 2,000,448 8.1% 1,165,763
MTV-Preferred C-1 885,598 3.6% 516,082.5
MTE Preferred C-1 114,401 0.5% 66,667.5
MTV $1.0M 999,999 4.0% 582,750
----------- -----------
MTV $3.0M 3,000,447 12.1% 1,748,513
----------- -----------
MTV Summary $3.0M
MTV 2,657,288 10.7% 1,548,535.0
MTE 343,159 1.4% 199,977.5
TOTAL MTV 3,000,447 12.1% 1,748,252.5
----------- -----------
TBG@3 3.0M Preferred & C-1 3,000,000 12.1% 1,748,252.5
CSK @ $1.5M 1,500,000 6.0% 874,125.0
CSK @ $0.5M 500,000 2.0% 291,375.0
CSK @ $2.0M 2,000,000 8.1% 1,165,500
----------- -----------
APA Excelsior IVLP 836,400 3.4% 487,412.5
Counts & Co (Cayman) Ltd. o/f
APA Excelsior IV/offshore L.P. 147,600 0.6% 86,015.0
Patricof Private Investment Club 15,999 0.1% 9,322.5
Excelsior IV/Patricof $1.0M 999,999 4.0% 582,750
Wormser Freres @ $500,000 500,000 2.0% 291,375.0
Robert Bernhard - Trust 9/3/64 150,000 0.6% 87,412.5
Robert Bernhard - Trust Art 9th 150,000 0.6% 87,412.5
Robert Bernhard - Trust @ $300,000 300,000 1.2% 174,825
----------- -----------
Oppenheimer & Co. @ $300,000 300,000 1.2% 174,825.0
RHL Ventures @ $250,000 250,000 1.0% 145,687.5
Toledot Investments (Linhart) 50,000 0.2% 29,137.5
Richard Linhart 50,000 0.2% 29,137.5
Linhart @ $100,000 100,000 0.4% 58,275.0
Victor Scaraville @ $100,000 100,000 0.4% 58,275.0
BE Partners @ $100,000 100,000 0.4% 58,275.0
Esther Dyson @ $50,000 50,000 0.2% 29,137.5
Roger Mulvihill 15,000 0.1% 8,742.5
Mary Mulvihill 35,000 0.1% 20,395.0
Total Mulvihill @ $50,000 50,000 0.2% 29,138
----------- -----------
Mark Braunstein @ $50,000 50,000 0.2% 29,137.5
Total Investment 10,800,446 43.5% 6,293,965
Post Money $24,800,446 100.0% 27,243,043
----------- -----------
</TABLE>
MARCH 5, 1999 SERIES D
PREFERRED INVESTMENT ROUND
<TABLE>
<CAPTION>
Amount % of Total # of Shares
----------- ---------- -----------
<S> <C> <C> <C>
Pre Money $100,000,000 82.9% 22,848,835
Media Technology Ventures, L.P. 885,656,96 0.7% 188,920.0
</TABLE>
<PAGE> 125
<TABLE>
<S> <C> <C> <C> <C>
MTV Entrepreneurs Fund, L.P. 114,352.04 0.1% 24,392.5
MTV $1,000,009 1,000,009.00 0.8% 213,313
CSK - 1(A) 333,340.24 0.3% 71,105.0
CSK - 1(B) 333,340.24 0.3% 71,105.0
CSK - 2 333,328.52 0.3% 71,102.5
CSK @ $1,000,009 1,000,009.00 0.8% 213,313
Hearst Communications, Inc. 1,000,000.00 0.8% 213,312.5
Wormser Freres 600,000.00 0.5% 127,987.5
Weston Presidio Capital II, L.P. 3,000,003.56 2.5% 639,932.5
Weston Presidio Capital III, L.P. 4,762,914.24 3.9% 1,015,980.0
WPC Entrepreneur Fund, L.P. 237,083.88 0.2% 50,572.5
Weston @ $8,000,002 8,000,001.68 6.6% 1,706,485
Highland Capital Partners IV 7,679,998.80 6.4% 1,638,225.0
Highland Entrepreneurs Fund IV 320,002.88 0.3% 68,260.0
Highland @ $8,000,002 8,000,001.68 6.6% 1,706,485
APA Excelsior IV LP 836,391.94 0.7% 178,412.5
APA Excelsior IV/Offshore, L.P. 147,607.54 0.1% 31,487.5
Patricof Private Investment Club 15,997.80 0.0% 3,412.5
Excelsior IV/Patricof $1.0M 999,997.28 0.8% 213,313
Total Investment 20,600,018.64 17.1% 4,394,208
-----------
Post Money 120,600,018.64 100.0% 27,243,043
-------------- -----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS
SUMMARY OF OPTIONS AVAILABLE OPTION POOL ISSUED
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRICE Medscape Initial Stock Option
Pool 4,250,000.0
$0.011 SCP OptionHolders @4/1/96-
Option's (1,299,500.0) 1,299,500
$0.011 Medscape 1996 Director Grants (157,500.0) 157,500
$0.011 Medscape 5/23/96 Employee
Option Grant (312,110.0) 312,110
$0.011 SCP 5/28/96 Optionees-Mirror
Grants (517,912.5) 517,913
$0.144 June 1997 Grant (681,250.0) 681,250
$0.172 Dec 1997 Grant (51,250.0) 51,250
$0.172 Feb 1998 Grant (1,000,000.0) 1,000,000
$0.172 Marc Butlein (45,000.0) 45,000
$0.172 Oakleigh Thorne-3 yr vesting (45,000.0) 45,000
$0.172 Judy Blackwell-3 yr vesting (25,000.0) 25,000
$0.344 August 1998 Grant-4 year
vesting (315,000.0) 315,000
$0.344 October 1998 Grant Ed King (25,000.0) 25,000
$0.344 October 1998 Grant Steve Kalin (195,000.0) 195,000
June 1998 increase in options 1,250,000.0
$0.344 December 1998 Option Grant (340,117.5) 340,118
February 1999 increase in 1,250,000.0
</TABLE>
<PAGE> 126
<TABLE>
<S> <C> <C> <C>
options
$0.344 Mindy Hung (1,250.0) 1,250
$0.480 Anna Kartavenko (1,250.0) 1,250
$0.480 Stacy Lavin (1,250.0) 1,250
$0.480 Solomon Duskis (1,875.0) 1,875
$0.480 David Good (18,750.0) 18,750
$0.480 Sophia Carlati (5,000.0) 5,000
$0.480 Asya Kaufman (1,250.0) 1,250
$1.000 James Santo Domingo (1,250.0) 1,250
$1.000 Ira Kirschenbaum (250,000.0) 250,000
$1.000 George Lundberg (150,000.0) 150,000
$1.000 Marnie LaVigne (56,250.0) 56,250
$1.000 Marc Andre (1,250.0) 1,250
$1.000 Paul Sheils (250,000.0) 250,000
$1.000 Steve Kalin (55,000.0) 55,000
$1.000 Rita Ehrman (2,500.0) 2,500
$1.000 Amy Drill (62,500.0) 62,500
$1.000 Meg Walsh (387,500.0) 387,500
$3.400 Mary Alice Culpepper (1,875.0) 1,875
$3.400 David Sheptock (1,875.0) 1,875
$3.400 Andrea Austin (1,250.0) 1,250
$3.400 Tom Luciani (250,000.0) 250,000
$3.400 Christina Ferrari (15,000.0) 15,000
$3.400 Angie Jackson (15,000.0) 15,000
$3.400 Barbara Campbell (1,875.0) 1,875
$3.400 Rita McSharry (15,000.0) 15,000
$3.400 David Yakimischak (87,500.0) 87,500
$3.400 Bill Silberg (62,500.0) 62,500
$3.400 Michael Amaditz (1,875.0) 1,875
$3.400 Sandra Kirton (750.0) 750
$3.400 Tony Plesner (75,000.0) 75,000
Options Terminated to 12/98 281,227.5 (1,775,125)
Options Terminated Q1 to 1999 28,650.0 695,550
$10,000 Christina Myers (1,250.0) 1,250
$10,000 Gretchen Hargarten (2,500.0) 2,500
$10,000 Pam Peters (18,750.0) 18,750
$10,000 Debra Fox (1,500.0) 1,500
$10,000 Glynna Prentice (17,500.0) 17,500
$10,000 June Nakashio (1,250.0) 1,250
April 1999 increase in options 1,500,000.0
$10,000 Dana Brackett (6,000.0) 6,000
$10,000 Ellen Lehrich (6,250.0) 6,250
</TABLE>
<PAGE> 127
<TABLE>
<S> <C> <C> <C>
$10.000 Ann Contijoch (8,000.0) 8,000
$10.000 Raelene Birkett (625.0) 625
$10.000 Liz Gordon (500.0) 500
$5.626 Credit Suisse/First Boston (14,887.5) 14,888
$10.000 Bob Enteen (17,500.0) 17,500
Remaining Pool after latest 1,677,350.0 5,802,953
Grant ----------- ---------
</TABLE>
SUMMARY OF OPTIONS EXERCISED
<TABLE>
<CAPTION>
Weighted Average
Shares Date Exercised of Options
<S> <C> <C> <C> <C>
OPTIONS EXERCISED:
1 Bobby Bernhard 7,500.0 9/30/92 81.00
2 Art Buskin 7,500.0 9/30/92 81.00
3 Esther Dyson 7,500.0 11/30/92 81.00
4 Alan Patricof 15,000.0 1/31/93 162.00
Art Buskhkin 7,500.0 4/30/93 81.00
5 Peter Frishauf 15,000.0 5/31/93 162.00
6 Gerard Donnelly 255.0 7/31/93 2.75
7 Gregory Fortescue 7,722.5 7/31/93 83.40
Bobby Bernhard 16,667.5 9/30/93 180.01
Bobby Bernhard 15,000.0 9/30/93 162.00
Bobby Bernhard 22,500.0 9/30/93 3,240.00
8 Lydia Cavieux 19,050.0 1/29/94 204.67
9 Don Edwards cxl Treasury Stock 19,050.0 3/24/94 204.67
10 Donald Goodwin 4,672.5 3/24/94 50.20
Art Bushkin 22,500.0 7/12/94 3,240.00
Art Bushkin 7,500.0 7/12/94 81.00
11 Katherine Rice 120,000.0 8/17/94 1,289.28
Katherine Rice 43,097.5 8/17/94 463.04
Peter Frishauf 8,125.0 8/17/94 1,170.00
</TABLE>
<PAGE> 128
<TABLE>
<S> <C> <C> <C> <C> <C>
Peter Frishauf 153,000.0 8/17/94 1,643.83
12 Wini Sapong 152.5 12/14/94 1.64
13 Cynthia Colter 305.0 12/14/94 3.28
14 Anne Landry 5,690.0 12/14/94 61.13
15 Joe Martino 7,315.0 12/14/94 78.59
16 Margaret Burrell 1,220.0 12/14/94 13.11
17 Karin Napier 3,125.0 12/14/94 450.00
TOTAL OPTIONS EXERCISED 536,947.5
---------
1998 options exercised 414,802.5
Pr P/Sh Q2 1999 Options Exercised # of Shares Exercise Date Total Price
18 Richard Purcell 9,752.5 4/14/95 104.78
19 Sheryl Lefkowitz 305.0 4/14/95 3.28
20 Andres Katsihtis 152.5 4/14/95 1.64
21 Alex Martin 48,612.5 4/14/95 7,000.20
22 Richard Marback 3,750.0 4/14/95 540.00
23 Judy Leong 5,690.0 4/14/95 61.13
24 Joanna Flagler 7,112.5 4/14/95 76.42
25 Scott Navitsky 7,315.0 4/14/95 78.59
Timothy Fallon 4/14/95 -
26 Alvia Ducille 6,097.5 4/14/95 65.51
27 Donald Eckert 16,660.0 4/14/95 2,399.04
28 Wayne Strauss 1,367.5 4/14/95 628.92
SUBTOTAL-EXERCISED 4/15/99 109,815.0 -
---------
29 Sandra Perez 6,097.5 4/23/95 65.51
30 Marissa Seligman 63,097.5 4/23/95 677.92
31 Sharon Callahan 27,315.0 4/23/95 293.47
32 Elaine Nichols 12,192.5 4/23/95 131.00
33 Katrina Benson 4,877.5 4/23/95 54.40
Peter Frishauf 7,500.0 4/23/95 80.58
Peter Frishauf 5,000.0 4/23/95 720.00
</TABLE>
<PAGE> 129
<TABLE>
<S> <C> <C> <C>
34 Faustino Galan 5,000.0 4/23/95 53.72
35 Jill Finn 1,220.0 4/23/95 13.11
36 Joseph Gillis 12,192.5 4/23/95 131.00
Peter Frishauf 152,617.5 4/23/95 52,500.42
Subtotal - exercised 4/24/99 297,110.0
---------
Ester Dyson 13,125.0 5/13/95 1,890.00
Ester Dyson 15,000.0 5/13/95 162.00
Priscella Scherer 7,315.0 5/13/95 78.59
Peter Collins 5,690.0 5/13/95 61.13
Erena Langley 525.0 5/13/95 90.30
Bill Seitz 15,282.5 5/13/95 2,200.68
Bill Seitz 30,680.0 5/13/95 331.34
Jeff Hannissian 18,325.0 5/13/95 2,638.80
Subtotal - exercised 5/14/99 105,942.5
---------
Ken Hyams 9,752.5 105.33
Paul Shells 312,500.0 53,750.00
Stephen E. Smith 22,925.0 3,301.20
Stephen E. Smith 51,000.0 550.80
Subtotal - exercised 5/26/99 396,177.5 690,417.50
---------
Ken Hyams 4,877.5 52.68
Stephen Hopkins 610.0 6.59
Joe Martino 3,657.5 39.50
Coleen Cosgrove 4,267.5 45.83
Cynthia Colter 152.5 1.65
Alvia Ducilla 3,047.5 32.91
Leah Wang 12,497.5 134.97
Leah Wang 23,967.5 3,451.32
Vincent Keane 38,405.0 414.77
Theodore Singer 7,925.0 85.59
</TABLE>
<PAGE> 130
<TABLE>
<CAPTION>
<S> <C> <C>
Jeff Hannissian 832.5 119.88
Stephen E. Smith 26,602.5 275.43
Subtotal -- exercised 6/6/99 125,742.5
------------
Margaret Burrell 610.0 6.59
Anne Landry 2,845.0 30.73
Theodore Singer 7,990.0 1,150.56
Scott Navitsky 3,657.5 39.50
Peter Frishauf 76,500.0 826.20
Katherine Rice 14,050.0 151.74
Katherine Rice 60,000.0 648.00
Judy Leong 2,845.0 30.73
Subtotal -- exercised 6/14/99 168,497.5
------------
Total Options Exercised 1999 1,203,285.0 78,949.25
Total Options Exercised 1,740,232.5
------------
Summary of Options
Terminated
Gary Welz 9,447.5
Chris Pepper 2,590.0
Craig Pearlman 762.5
Honor Mosher 610.0
Cliff Maxwell 14,020.0
Gerry Ryerson 30,785.0
Rene Simonelli 610.0
John Pal 30,785.0
Gerard Donnelly 507.5
Gregory Fortescue 15,442.5
Donald Goodwin 9,347.5
Laura Watrous 7,500.0
Donald Goodwin 7,500.0
Charlie Stern 7,500.0
SCP 1997 Terminations 6,017.5
Susan Love 10,000.0
Craig Pearlman 7,500.0
Becky Sue River 7,500.0
Angelo Sirigos 7,500.0
Victor Lombardi 7,500.0
Karin Napier 4,375.0
Christy Nichols 3,750.0
SCP 1998 Terminations 89,677.5
</TABLE>
<PAGE> 131
<TABLE>
<S> <C>
Total Terminations to 12/98 281,227.5
Q1 1999 Terms
SCP Terms 16,050.0
Richard Marback 8,750.0
Bryan Currie 1,250.0
Erena Langley 2,600.0
Q1 1999 Terms 28,650.0
Total Terminations to 3/31/99
</TABLE>
<PAGE> 132
Schedule 3.5
Subsidiaries
- - Healthcare Communications Group, LLC
Maryland
- - SoftWatch Ltd.
Israel
<PAGE> 133
Schedule 3.9
Agreements
Certain registration rights have been granted in connection with the transaction
contemplated by the CBS Documents.
Pursuant to the Existing Stockholders Agreement, registration rights have been
granted in accordance with the terms thereof.
<PAGE> 134
Schedule 3.12
Intellectual Property
- - The Company has the domain name "Medscape.com". All of the written
materials that appear on the website of the Company are copyrighted.
Pursuant to the Publishers' Circle Agreements listed on Schedule 3.18,
the Company is given the right to publish certain copyrighted materials
not owned by the Company.
- - The Company licenses certain third party software pursuant to
off-the-shelf and other licenses.
Refer to table (attached).
<PAGE> 135
MEDSCAPE, INC.
SCHEDULE 3.12
INTELLECTUAL PROPERTY
Medscape, Inc. Hold the following registered and unregistered trademarks,
trademark registrations, service marks and service mark registration.
<TABLE>
<CAPTION>
MARK APPLICATION REGISTRATION FILING ISSUE MRK FRISHAUF COUNTRY
NUMBER NUMBER DATE DATE DOCKET #
<S> <C> <C> <C> <C> <C> <C> <C>
MEDSCAPE 74694062 1978357 6/26/95 6/4/96 (R) 9650223 US
MEDSCAPE 112296/96 4177836 10/7/96 8/14/98 9650223 Japan
MEDSCAPE 4/16/96 EU
MEDSCAPE 4/29/98 950223 Mex,
Brazil
& Australia
MEDSCAPE 588,090 7/22/98 7/22/98 960147 Mexico
MEDSCAPE 873996 TMA506,890 4/1/98 1/20/99 950223 Canada
MEDSCAPE 761340 2/23/99 Australia
MEDSCAPE THE ONLINE
RESOURCE FOR BETTER
PATIENT CARE 74693130 1978350 6/26/95 6/4/96 (R) 950224 US
BANNERLINK 75048453 2113141 1/25/96 11/11/97 (R) 950687 US
PICTOURS 75048454 2083213 1/25/96 7/29/97 (R) 950688 US
</TABLE>
<PAGE> 136
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNET MEDICAL MARKETING 75048463 2093810 1/25/96 9/2/97 (R) 950689 US
PUBLISHERS' CIRCLE 75048452 2075218 1/25/96 7/1/97 (R) 950690 US
MEDPULSE 75105531 2069424 3/26/96 6/10/97 (R) 960147 US
MEDPULSE 4/29/98 960147 Mex,
Brazil
& Australia
MEDPULSE 588091 7/22/98 9/28/98 960147 Mexico
MEDPULSE 761341 2/23/99 960147 Australia
</TABLE>
- -------------------------------------
Domain names: Medscape.com
<PAGE> 137
Schedule 3.13
Financial Statements
The unaudited financial statements of the Company referred to in Section 3.13 of
the Agreement do not contain the appropriate financial footnote disclosure
required by generally accepted accounting principles.
<PAGE> 138
Schedule 3.14
Material Adverse Changes
Changes which have occurred in connection with the transactions contemplated by
(i) the CBS Documents, (ii) the Preferred Share Purchase Agreement, by and among
SoftWatch Ltd., the Company, and the persons named therein (together with the
other agreements executed therewith, the "Softwatch Documents") and (iii) the
Initial Public Offering of the Common Stock of the Company.
<PAGE> 139
Schedule 3.18
Contracts
- - Employment Agreement between the Company and Paul T. Sheils, dated
January 26, 1998.
- - Employment Agreement between the Company and Steven Kalin, dated
September 30, 1998.
- - Employment and Restricted Stock Purchase Agreement between the Company
and Jeffrey L. Drezner, M.D., Ph.D., dated October 27, 1998.
- - Promissory Note dated October 27, 1998, in the principal amount of
$627,949.64 made by Jeffrey L. Drezner, M.D., Ph.D. in favor of the
Company.
- - Employment Agreement between the Company and Peter M. Frishauf, dated
February 16, 1998.
- - Employment Agreement between the Company and George D. Lundberg, M.D.,
dated February 15, 1999.
- - Employment Agreement between the Company and David Yakimischak, dated
March 15, 1999.
- - Employment Agreement between the Company and Meg Walsh, dated March 4,
1999.
- - Employment Agreement between the Company and Mark Boulding, dated June
28, 1999.
- - Consulting Agreement between the Company and MSI New York (April 15,
1998).
- - Independent Contractor Agreements for the HIV Medical Advisory Board
Members between the Healthcare Communications Group, L.L.C. and
members.
- - Engagement letter between the Company and Credit Suisse First Boston
(January 4, 1999).
- - Publishers' Circle Agreements:
Adis International, a Wolters Kluwer Company
Clinical Drug Investigations
<PAGE> 140
Drug & Therapy Perspectives
American Board of Family Practice
JABFP
Association of Community Cancer Centers
Oncology Issues
Clinicians Publishing Group/Williams & Wilkins
Clinician News
Clinician Reviews
The duPont Hospital for Children
Pediatric Orthopedic Education Module
First DataBank -- A wholly owned subsidiary of the Hearst
Corporation National Drug Data File
Healthcare Media International
Medical Practice Communicator
- - Agreement of Lease between the Company and R.A.A. Realty Company LP
dated February 1999.
- - Lease Assignment made by SCP Communications, Inc. made in favor of the
Company.
- - Agreement of Lease between Surgical Care Publishing, Inc. and
Satyanman, Inc., dated October 7, 1996.
- - Agreement of Lease between Surgical Care Publishing, Inc. and
Satyanman, Inc., dated August 29, 1995.
- - Agreement of Lease between Surgical Care Publishing, Inc. and
Satyanman, Inc., dated March 17, 1994.
- - Agreement of Lease between Surgical Care Publishing, Inc. and
Satyanman, Inc., dated August 18, 1993.
- - Clinical Care Options Annual Meeting Hotel Commitments Commitment
----------
2000 Conference at Hyatt Regency Scottsdale AZ $ 282,240
2001 Ritz Carlton Laguna CA $ 303,525
- - Architect
Stonehill & Taylor Architects and Planners -- for 2nd and 3rd floors
(not signed) $80,000
- - Office Relocation Independent Contractor SA Gavish (not signed) $56,800
<PAGE> 141
- - Stock Purchase Agreement, between the Company and investors dated
October 31, 1997 in respect of the Series C Preferred Stock.
- - First Amendment to Stock Purchase Agreement between the Company and
investors, dated February 19, 1998.
- - Supplemental Agreement to Amendment to Stock Purchase Agreement and
First Amendment to, and Waiver of Certain Terms of, Stockholders'
Agreement between the Company and investors, dated March 9, 1998 in
respect of the Series C Preferred Stock.
- - Series D Preferred Stock Purchase Agreement between the Company and
investors, dated March 5, 1999.
- - Content Distribution Agreement, by and between the Company and Dow
Jones & Company, Inc., dated January 22, 1999,
- - CBS Documents.
- - Softwatch Documents.
- - Agreement, by and between the Company and Donaldson, Lufkin and
Jenrette.
<PAGE> 142
Schedule 3.23
Negotiations
None except for those negotiations which have been entered into in connection
with the transaction contemplated by the CBS Documents.
<PAGE> 1
Exhibit 10.38
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE OMISSIONS.
LICENSE AND PRODUCT DEVELOPMENT AGREEMENT
This AGREEMENT is made as of July __, 1999 (the "Effective Date"),
between MEDSCAPE, INC., a Delaware corporation with offices at 134 W. 29th
Street, New York, New York 10001-5399 ("Medscape") and NATIONAL DATA
CORPORATION, a Delaware corporation with offices at National Data Plaza,
Atlanta, Georgia 30329 ("NDC" and together with Medscape, collectively, the
"Parties," and each a "Party"). Unless otherwise specified herein, capitalized
terms used in this Agreement have the meanings defined in this Agreement and the
Schedules and Exhibits hereto.
WHEREAS, Medscape is in the business of, and has substantial
skills and experience in, developing, providing and managing on-line clinical
and healthcare information.
WHEREAS, NDC is in the business of, and has substantial skills
and experience in, electronic data interchange products and services and data
management.
WHEREAS, subject to the terms and conditions of this
Agreement, Medscape and NDC wish to cooperate (x) to market each other's
products and services, and (y) to jointly develop, market and distribute certain
clinical practice management and healthcare-related, electronic data interchange
services to physicians, allied healthcare professionals, pharmaceutical
manufacturers, consumers and pharmacists.
WHEREAS, subject to the terms and conditions of this
Agreement, Medscape and NDC further desire to set forth the terms on which (x)
NDC may act as Medscape's preferred clinical data interchange and data
management services partner, and (y) Medscape may act as NDC's preferred
healthcare clinical content and information services partner.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein contained, and for other good and
valuable consideration the receipt of which is hereby acknowledged, the Parties
hereby agree as follows:
<PAGE> 2
ARTICLE I
DEFINED TERMS
Section 1.1 As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate," as to any Party, means any Person directly or
indirectly controlling, controlled by or under common control with such Party,
and shall include any officer, director and partner of any such Party. A Party
shall be deemed to control another Person if it owns or has the power to
exercise voting rights with respect to more than 50 percent of the voting
securities of such other Person.
"Agreement" means this License and Product Development
Agreement, as modified, supplemented, restated or amended from time to time.
"AMA" has the meaning provided in Section 2.1(f).
"AMA License" has the meaning provided in Section 15.1(b).
"AMA Sublicense" has the meaning provided in Section 2.1(a).
"Confidential Information" has the meaning provided in Section
14.2.
"EDI Services" has the meaning provided in Section 9.1
"EDI Services Commission" has the meaning provided in Exhibit
11.1
"Effective Date" has the meaning provided in the preamble
hereto.
"HCC Services" has the meaning provided in Section 9.2.
"Healthcare Clinical Content" means (i) any clinical content
derived from any Person whose primary business involves the provision of
healthcare information on the internet substantially similar to healthcare
information on any Medscape Website, or (ii) any clinical content that is
substantially similar to healthcare information offered on any Medscape Website.
"Independent Auditor" has the meaning provided in Section
11.4.
"Intellect Database" has the meaning provided in Section
2.1(a).
"Intellect License" has the meaning provided in Section
2.1(a).
2
<PAGE> 3
"Jointly Developed Products" has the meaning provided in
Section 6.1(a) below.
"Losses" has the meaning provided in Section 15.3.
"LYTEC," "LYTEC 99," and "LYTEC 99 Specifications" have the
respective meanings provided in Section 3.1.
"LYTEC 99 Exclusivity Period" has the meaning provided in
Section 3.2(c).
"LYTEC/Web" and "LYTEC/Web Specifications" have the respective
meanings provided in Section 4.1.
"LYTEC/Web Exclusivity Period" has the meaning provided in
Section 4.2(b).
"Medscape" has the meaning provided in the preamble hereto.
"Medscape Content" means Medscape's proprietary data and
content, including text and visual material regarding itself, Medscape products,
services, pricing, Medscape Trademarks, and any conditions of use (including
proprietary notices).
"Medscape Materials" has the meaning provided in Section 12.2.
"Medscape Reporting Period" has the meaning provided in
Section 11.3.
"Medscape Website" means any website now or hereafter owned or
operated by Medscape, including the website currently located at
www.medscape.com.
"NDC" has the meaning provided in the preamble hereto.
"NDC Distribution Commissions" has the meaning provided in
Exhibit 11.1.
"NDC Healthcare Products" means, collectively, LYTEC 99,
LYTEC/Web and the Other NDC Products, or any of them.
"NDCHIS" has the meaning provided in Section 15.1(b).
"NDC Materials" has the meaning provided in Section 12.1.
"NDC Reporting Period" has the meaning provided in Section
11.5.
3
<PAGE> 4
"Notified Party" has the respective meanings provided in
Section 9.1 and Section 9.2.
"Offering Party" has the respective meanings provided in
Section 9.1 and Section 9.2.
"Other NDC Products" has the meaning provided in Section 5.1.
"Party" and "Parties" have the respective meanings provided in
the preamble hereto.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, trust, business association or other
entity, including any governmental entity.
"Products" has the meaning provided in Section 7.1.
"R&D Pipeline Information" has the meaning provided in Section
6.1(c).
"Services" has the meaning provided in Section 7.1.
"Shared Materials" has the meaning provided in Section 12.3.
"Shares" has the meaning provided in the Stock Purchase
Agreement.
"Specifications" means, collectively, (i) the LYTEC 99
Specifications, (ii) the LYTEC/Web Specifications, (iii) any other
specifications agreed by the Parties pursuant to this Agreement as to a product
or service to be developed hereunder, and (iv) as the context requires, any of
them.
"Stock Purchase Agreement" means that certain Stock Purchase
Agreement, dated as of the date hereof, between Medscape and NDC, as the same is
in effect from time to time.
"Term" has the meaning provided in Section 16.1.
"Trademarks" means, collectively, trademarks, service marks,
trade names, logos and other similar proprietary rights, and as the context
requires, any of them.
4
<PAGE> 5
ARTICLE II
NDC INTELLECT DATABASE
Section 2.1 (a) Intellect Database License Grant. Subject to
the terms and conditions of this Agreement, NDC grants to Medscape during the
Term a non-exclusive, perpetual, fully paid, non-assessable license (the
"Intellect License") to access (via internet and/or other means), to use, and to
execute only for Medscape's and its wholly-owned subsidiaries' internal purposes
(and not for public display), all the information and data embodied in the
elements of NDC's Intellect Q&A database described on Exhibit 2.1(a)-1 (as such
information and data may be enhanced, updated, modified or corrected from time
to time, the "Intellect Database"). Medscape's use of the Intellect Database
shall be subject to the terms and conditions of the AMA license agreement
attached hereto as Exhibit 2.1(a)-2, which Medscape shall, subject to Section
2.1(f) below, execute and deliver to NDC contemporaneously with the execution of
this Agreement (the "AMA Sublicense"). Medscape shall be responsible for all of
its telecommunications charges associated with Medscape's access to the
Intellect Data via the internet or other means.
(b) Scope of License. The Intellect License does not include,
and Medscape shall not have the right of access to information and data embodied
in the Intellect Database which pertains to territories, locations, activities,
products or individuals outside of the United States of America, unless such
information and data is subsequently licensed by NDC to Medscape.
(c) Update Services NDC will update the repository for the
Intellect Database on a monthly basis. NDC will advise Medscape of the date on
which such periodic updates customarily occur, and whether the Intellect
Database will at any time become unavailable for any extended period as a result
of such updates or otherwise.
(d) Cooperation; New Market Research Products. During the
Term, NDC and Medscape agree to work together and cooperate in good faith to
identify and develop new market research products that combine Medscape's
database information and the Intellect Database. The development of any such
products shall be subject to the Parties' agreement as to Specifications as
provided in Article VIII and as to intellectual property rights as provided in
Article XII.
(e) Updates, Modifications; Copying; Corrections. During the
Term, Medscape shall be entitled to receive and/or have access to the most
current version or compilation of the Intellect Database which NDC has available
and uses for its own internal purposes, and has the right to use the same
pursuant to the terms of Section 2.1(a). Medscape may not copy the Intellect
Database except as necessary to effectuate its license under Section 2.1(a), or
for maintenance, backup, test and disaster recovery
5
<PAGE> 6
purposes. If, at any time during the Term, the Intellect Database (or the media
on which it is contained) (x) fails through no fault of Medscape to perform in a
reasonably effective and consistent manner, or (y) is found to contain any
material error, bug, virus or other material defect, then in either case, NDC
will correct such failure to perform, material error, bug, virus or other
material defect at no charge to Medscape or, if unable to do so, within
forty-five (45) days, will refund to Medscape a pro-rata portion of the
Intellect License Fee (such proration to be based on the Initial Term).
(f) Approval for AMA Sublicense. The Parties recognize that,
pursuant to the terms of the AMA License, the consent of the American Medical
Association ("AMA") may be required in connection with, and as a condition to
the effectiveness of, the AMA Sublicense. Promptly upon execution hereof, NDC
shall exercise (or cause its Affiliates to exercise) best efforts to obtain any
such consent, which consent shall, in all events, be sufficient, in Medscape's
sole and absolute discretion, to secure the scope of use or uses of the AMA-PPD
(as defined in the AMA Sublicense) required by Medscape. In the event that any
consent required by the AMA as a condition to the effectiveness of the AMA
Sublicense cannot be or is not obtained by July 26, 1999, or such consent is not
sufficient, in Medscape's sole and absolute discretion, to secure the scope of
use or uses which it requires, then the provisions of Section 1(b) of Exhibit
11.1 shall be applicable.
ARTICLE III.
LYTEC 99
Section 3.1 LYTEC 99. NDC will develop a new version of its
proprietary LYTEC physician practice management software (the existing software
(currently marketed as "Lytec Medical 98(TM)") is referred to as "LYTEC" in this
Agreement, and the new version thereof referred to as "LYTEC 99") that will
include Medscape Website integration capability developed in accordance with
specifications and a project timetable to be mutually developed and agreed by
the Parties (the "LYTEC 99 Specifications") by no later than August 1, 1999.
Section 3.2 LYTEC 99 Specifications and Terms. Unless NDC and
Medscape otherwise agree, the following terms shall be applicable to LYTEC 99:
(a) Release Date. LYTEC 99 will be ready for full commercial release by no
later than September 30, 1999;
(b) Integration of Medscape. LYTEC 99 will include, and the LYTEC 99
Specifications will specify, an integrated web browser function, a
direct access function (via hotlink) to a Medscape Website, and an
optional internet service provider service.
6
<PAGE> 7
(c) Exclusivity. From the Effective Date until September 30, 2000 (the
"LYTEC 99 Exclusivity Period"), NDC agrees that the Medscape Website
designated by Medscape will be the sole and exclusive website providing
Healthcare Clinical Content integrated into LYTEC 99. During the LYTEC
99 Exclusivity Period, NDC covenants that it will not integrate (or
permit, or enter into any discussions concerning, the integration of)
any Healthcare Clinical Content into LYTEC 99 other than the content
contained in the relevant Medscape Website designated by Medscape.
(d) Right of First Negotiation. NDC hereby grants Medscape the exclusive
right of first negotiation to extend the LYTEC 99 Exclusivity Period on
mutually agreeable terms. If Medscape wishes to extend the LYTEC
Exclusivity Period, it shall give notice to NDC to this effect not less
than one hundred and twenty (120) days prior to the end of the LYTEC 99
Exclusivity Period. Within a reasonable time after delivery of such
notice, the Parties shall in good faith meet or discuss as often as is
necessary to reach mutual agreement on specific extension terms. If no
agreement can be reached following good faith negotiations on or before
the end of the LYTEC 99 Exclusivity Period, either Party may elect by
written notice to the other to discontinue further discussions. From
the date on which Medscape gives notice of its intent to extend, and
until such time as the earlier of either the date on which the original
LYTEC Exclusivity Period Ends or the date on which good faith
negotiations between the Parties are discontinued as aforesaid, NDC
covenants and agrees that it shall not enter into any discussions with,
or make any offer to, any third party with respect to the integration
of any website providing Healthcare Clinical Content into LYTEC 99. If
Medscape does not give notice to NDC of its desire to extend the LYTEC
99 Exclusivity Period Agreement at least ninety (90) days prior to the
end of the LYTEC 99 Exclusivity Period, Medscape will be deemed to have
waived its right of first negotiation under this Section 3.2(d), and
NDC shall be free to negotiate with third parties.
Section 3.3 License. For purposes of integrating the relevant
Medscape Website in LYTEC 99, Medscape grants to NDC during the Term a
non-exclusive, royalty free, fully paid and non-assessable license, to use,
execute and display, and/or otherwise to incorporate and display within LYTEC
99, such of Medscape's computer programs (such as Java applets), Trademarks,
designs, content and other intellectual property as Medscape may deem necessary
or appropriate to fully effect the integration of such Medscape Website into
LYTEC 99. The foregoing license shall be subject to the other terms of this
Agreement and such other terms as may be agreed by the Parties in the LYTEC 99
Specifications.
7
<PAGE> 8
ARTICLE IV
LYTEC/WEB.
Section 4.1 LYTEC/Web. NDC intends to develop a fully
web-enabled version of LYTEC (hereinafter referred to as "LYTEC/Web") that will
include Medscape Website integration capability developed in accordance with
specifications and a project timetable to be mutually developed and agreed by
the Parties (the "LYTEC/Web Specifications").
Section 4.2 LYTEC/Web Specifications and Terms. If LYTEC/Web
is developed by NDC, the following terms shall be applicable to LYTEC/Web unless
NDC and Medscape otherwise agree:
(a) Specifications. LYTEC/Web will include, and the LYTEC/Web
Specifications will specify: (i) a direct access function (via hotlink)
to a Medscape Website designated by Medscape; (ii) in-context,
integrated links to such Medscape Website from within the point-of-care
clinical features of LYTEC/Web (e.g., relevant Medscape content will be
automatically displayed when users insert ICD-9 codes); (iii)
navigational features, such as hypertext links, permitting direct
access to LYTEC/Web from within such Medscape Website; and (iv) a
feature permitting individual users to select a Medscape Website
specialty page.
(b) Exclusivity. Subject to Section 4.2(c) below, from the Effective Date
and until September 30, 2000 (the "LYTEC/Web Exclusivity Period"), NDC
agrees that the Medscape Website which Medscape designates will be the
sole and exclusive website providing Healthcare Clinical Content
integrated into LYTEC/Web. During the LYTEC/Web Exclusivity Period, NDC
covenants that it will not integrate (or permit, or enter into any
discussions concerning, the integration of) any website providing
Healthcare Clinical Content into LYTEC/Web other than such Medscape
Website.
(c) Right of First Negotiation. NDC hereby grants Medscape the exclusive
right of first negotiation to extend the LYTEC/Web Exclusivity Period
on mutually agreeable terms. If Medscape wishes to extend the LYTEC/Web
Exclusivity Period, it shall give notice to NDC to this effect not less
than one hundred twenty (120) days prior to the end of the LYTEC/Web
Exclusivity Period. Within a reasonable time after delivery of such
notice, the Parties shall in good faith meet or discuss as often as is
necessary to reach mutual agreement on specific extension terms. If no
agreement can be reached following good faith negotiations on or before
the end of the LYTEC/Web Exclusivity Period, either Party may elect by
written notice to the other to discontinue further discussions. From
the date on which Medscape gives notice of its intent to extend, and
until such time as the earlier of either the date on which the original
LYTEC/Web Exclusivity Period Ends or the date on which good
8
<PAGE> 9
faith negotiations between the Parties are discontinued as aforesaid,
NDC covenants and agrees that it shall not enter into any discussions
with, or make any offer to, any third party with respect to the
integration of any website providing Healthcare Clinical Content into
LYTEC/Web. If Medscape does not give notice to NDC of its desire to
extend the LYTEC/Web Exclusivity Period at least ninety (90) days prior
to the end of the LYTEC/Web Exclusivity Period, Medscape will be deemed
to have waived its right of first negotiation under this Section
4.2(c), and NDC shall be free to negotiate with third parties.
Section 4.3 License. If LYTEC/Web is developed by NDC, for
purposes of integrating a Medscape Website to be designated by Medscape in
LYTEC/Web, Medscape agrees that it shall grant to NDC during the Term a
non-exclusive, royalty free, fully paid and non-assessable license to use,
execute and display, and/or otherwise to incorporate and display within
LYTEC/Web, such of Medscape's computer programs (such as Java applets),
Trademarks, designs, content and other intellectual property as Medscape may
deem necessary or appropriate to fully effect the integration of such designated
Medscape Website into LYTEC/Web. The foregoing license shall be subject to the
other terms of this Agreement and such other terms as may be agreed by the
Parties in the LYTEC/Web Specifications.
ARTICLE V
WEB-ENABLING OF OTHER NDC PRODUCTS.
Section 5.1 Web-Enabling of Other NDC Products. NDC also
intends to develop (or has already developed) and make available separately, or
in bundled packages, web-enabled versions of its products known as NDC Connect,
NDC Assist, Intellect Q&A, Practice Analyzer, Medication Manager, and certain
credit card services (such products as so enabled, collectively, the "Other NDC
Products"). Subject to the Parties' agreement as to Specifications pursuant to
Article VIII, and the other terms and conditions of this Agreement, the Parties
intend that any web-enabled Other NDC Products may be modified to include an
integrated function permitting users thereof to directly access a Medscape
Website designated by Medscape, and that such Medscape Website may include
navigational features, such as hypertext links, permitting direct access to
Other NDC Products.
ARTICLE VI
JOINTLY DEVELOPED PRODUCTS.
Section 6.1 Jointly Developed Products. (a) General Terms.
Subject to Article VIII and the other terms and conditions of this Agreement,
NDC and Medscape intend and agree to work together and cooperate in good faith
during the Term to jointly
9
<PAGE> 10
identify market opportunities and, based on such opportunities, if any, to
jointly develop, market and sell new products (collectively, the "Jointly
Developed Products"). The Parties will agree at the time of development of any
Jointly Developed Products on appropriate compensation levels, ownership
interests, and licenses for each Jointly Developed Product. Jointly Developed
Products may include (x) new, web-enabled versions of products and applications
that will be integrated with various features and functions of a Medscape
Website which Medscape designates; (y) new products and applications targeted at
the consumer market; and (z) database and data management projects and products
targeted at pharmaceutical manufacturers. The Jointly Developed Products may
include products that integrate Medscape content and databases and NDC products
and databases.
(b) Consumer Products. Jointly Developed Projects for the
consumer audience may include NDC's prescription adherence/compliance tool
called Care Alert, which the Parties acknowledge will initially target consumers
and the prescription refill market. If the Parties mutually agree, Care Alert
may also target the physicians market by leveraging other NDC and Medscape tools
and services. The Parties further acknowledge that the consumer-based Care Alert
product is currently in prototype and is expected to launch in the third quarter
of 1999.
(c) R&D Pipeline Associated with Clinical Trials. NDC agrees
to license to Medscape, and Medscape shall have the right to incorporate, R&D
Pipeline Information for use within a Medscape Website designated by Medscape,
and/or as part of a broader consumer/physician clinical trials product, possibly
in partnership with third-party clinical research organizations involved in
providing clinical trials support, services and products. As used herein, "R&D
Pipeline Information" includes information about the therapeutic use, product
name, generic name, company name, stage of development and source abstracts of,
and NDC's comments regarding, drugs in development, as more particularly
described on Exhibit 6.1(c).
ARTICLE VII
OPERATING GUIDELINES AND DEDICATED RESOURCES
APPLICABLE TO ALL PRODUCTS AND SERVICES
Section 7.1 Operating Guidelines and Dedicated Resources. The
Parties agree that the following general principles and operating guidelines
will be applicable to each of the products and services described in this
Agreement to be developed or in development by NDC, Medscape or the Parties
jointly (including LYTEC 99, LYTEC/Web, and any market research product relating
to the Intellect Database) (collectively, the "Products" and "Services"): (a)
each of the Parties will assign at least one project manager to the development
and deployment of Products and Services; (b) joint senior level management
reviews involving representatives from both Parties will be held at least
10
<PAGE> 11
monthly during the Term; and (c) each Party shall provide personnel and
resources at its sole cost and expense unless otherwise agreed.
ARTICLE VIII
DEVELOPMENT OF SPECIFICATIONS;
ADDITIONAL TERMS APPLICABLE TO ALL
PRODUCTS AND SERVICES.
Section 8.1 Development of Product Specifications; Agreement
as to Terms. Each Product or Service to be jointly developed pursuant to this
Agreement shall be based upon detailed, written Specifications to be mutually
agreed by the Parties, as evidenced by written agreements executed by authorized
officers of the Parties. Upon such agreement, such Specifications shall be
deemed appended to and shall form part of this Agreement, and shall be binding
on the Parties for all purposes hereof. Unless and until the relevant
Specifications for a proposed Product or Service have been agreed by the
Parties, neither Medscape nor NDC shall have any obligation under this Agreement
to undertake the development of, or otherwise incur any cost or liability in
connection with, any such proposed Product or Service. The Specifications for
each such Product or Service shall include, at a minimum, provision for the
following, and shall be in addition to any other specific terms expressly
provided with respect to such Product or Service in this Agreement:
(a) Business Plan. An initial business plan establishing, among other
things, projected funding requirements, allocation of development costs
and other expenses, schedule for product development, production and
initial product launch, and projected pricing, sales volume and revenue
for such Product or Service;
(b) Technical Specifications. A summary of the technical specifications for
such Product or Service, including the architectural and graphical
design components thereof (including specifications for any Medscape or
third party components and integration requirements); and guidelines
and specifications, based upon generally accepted technical standards
applicable to the computer program and internet industry, pertaining to
acceptance testing and performance criteria for the Product or Service;
(c) Marketing and Support Plan. Subject to the general covenants and
agreements of the Parties set forth in Article X (Marketing), a
marketing and support plan for such Product or Service;
(d) Distribution, Licensing and Exclusivity. Distribution, licensing and
exclusivity terms applicable to such Product or Service, including
distribution territories, it being
11
<PAGE> 12
acknowledged, however, that the initial distribution territory for the
Products and Services now contemplated by the Parties will be North
America;
(e) Branding. Subject to the general covenants and agreements of the
Parties set forth in Article XIII (Branding), the terms on which such
Product or Service will be branded;
(f) Economic Rights. The respective economic rights of, or compensation due
to, the Parties in connection with the sale, licensing or other
distribution of such Product or Service, which may be based, without
limitation, on principles of revenue sharing, royalty, or bounty;
(g) Rights on Termination; Restrictions. The respective ownership interests
of the Parties in the relevant Product or Service (to the extent
applicable), and the respective rights of the Parties in and to such
Product or Service, both during the Term and upon any termination or
other expiration of this Agreement, which rights may be subject to
reasonable restrictions on each Party's right to sell, license or
assign its respective interest in such Product or Service to third
parties, or reciprocal rights of forced sale or co-sale; and
(h) Licensing of Intellectual Property or Other Proprietary Rights. To the
extent the intellectual property or other proprietary rights of a Party
are required to be used in connection with any such Product or Service
owned or to be owned by the other Party (for example, the use of
Medscape's Trademarks and content when the same are required to be
integrated in any of NDC's proprietary computer programs), the terms on
which such Party's intellectual property or other proprietary rights
will be licensed to the other Party.
In the event of any conflict between the terms of this Agreement and the terms
of any Specifications subsequently agreed by the Parties, the terms of the
Specifications shall be controlling.
ARTICLE IX
PREFERRED PARTNER STATUS
Section 9.1 Provision by NDC of Electronic Data Interchange
Services. Medscape hereby grants to NDC, during the Term, the right of first
negotiation to provide, on a product-by-product basis, the clinical data
interchange and data management services ("EDI Services") to Medscape in the
United States. If, at any time during the Term, Medscape (in this capacity and
for this purpose, Medscape is referred to as an "Offering Party") requires EDI
Services in the United States from a third party, it shall provide written
notice to NDC (in this capacity and for this purpose, NDC is referred to as
12
<PAGE> 13
a "Notified Party"). Medscape's notice to NDC shall include a statement that NDC
is being offered the right to provide EDI Services to Medscape in the United
States, and setting forth the proposed terms and conditions of NDC's provision
thereof, including as relates to timing, pricing, content, quality and feature
requirements. The provisions of Section 9.3 shall thereafter be applicable.
Section 9.2 Provision by Medscape of Clinical Content and
Information Services. NDC hereby grants to Medscape during the Term the right of
first negotiation to provide Healthcare Clinical Content ("HCC Services") to NDC
Healthcare Products in the United States. If, at any time during the Term, NDC
(in this capacity and for this purpose, NDC is referred to as an "Offering
Party") requires HCC Services with respect to one or more of its Healthcare
Products in the United States from a third party, it shall provide written
notice to Medscape (in this capacity, and for this purpose, Medscape is referred
to as a "Notified Party"). NDC's notice shall include a statement that Medscape
is being offered the right to provide HCC Services with respect to the relevant
NDC Healthcare Product(s) in the United States, and setting forth the proposed
terms and conditions of Medscape's provision thereof, including as relates to
timing, pricing, content, quality and feature requirements. The provisions of
Section 9.3 shall thereafter be applicable.
Section 9.3 Terms Applicable to Medscape's and NDC's
Respective Rights of First Negotiation. Within a reasonable time after delivery
of the Offering Party's notice, the Parties shall enter into good faith
discussions for a period not to exceed thirty (30) days to determine whether the
Notified Party is able to meet the proposed terms and conditions specified in
the Offering Party's notice. If the Notified Party determines that it is unable
to provide the services requested in the Offering Party's notice on all of the
terms and conditions specified in the Offering Party's notice, or the Parties
cannot otherwise agree on different or modified terms prior to the end of such
thirty (30) day period, then either Party may elect by written notice to the
other to discontinue further discussions. From the date on which the Offering
Party gives notice to the Notified Party of the Offering Party's proposed terms
and conditions until the end of the foregoing thirty (30) day period (or, if
earlier, the date on which either Party gives notice that discussions are to be
discontinued), the Offering Party covenants and agrees that it shall not enter
into any discussions with, or make any offer to, any third party with respect to
the provision of the services specified in the Offering Party's notice. If no
agreement can be reached by the Parties by the end of the foregoing thirty (30)
day period, the Offering Party shall have the right, without any further
obligation to the Notified Party hereunder, to seek the services of and to
retain any third-party provider of the services specified in the Offering
Party's notice.
13
<PAGE> 14
ARTICLE X
MARKETING, PROMOTION, SUPPORT.
Section 10.1 General Marketing, Promotional and Support
Responsibilities. During the Term, each of the Parties covenants and agrees to
exercise its reasonable, good faith commercial efforts to market and promote the
products and services of the other, as well as the Products and/or Services
developed or to be developed pursuant to this Agreement. The Parties further
covenant and agree that they shall cooperate in good faith to develop and agree
upon a detailed, coordinated marketing and support plan for each of such
Products or Services, which shall include a designation of marketing, sales,
installation, and customer support responsibilities. Unless otherwise agreed by
the Parties, all costs and expenses relating to a Party's marketing and
promotional responsibilities under this Agreement shall be borne exclusively by
such Party. Without limiting the generality of the foregoing, the Parties agree
that, during the term:
(a) Medscape shall market and promote LYTEC 99, LYTEC/Web and NDC Connect
to its registered physician members with direct links from Medscape
Websites to NDC's demonstration and processing website, and NDC shall
market and promote LYTEC 99 and LYTEC/Web to all 15,000 of LYTEC's
current licensed sites (which sites support approximately 30,000
users);
(b) NDC shall market and promote Medscape and its products and services to
its existing customer base (including NDC's network of pharmacists and
third-party value-added resellers), and shall exercise good faith,
commercially reasonable efforts to promote Medscape's proprietary
clinical content to other distributors of physician practice management
software which market NDC's EDI Services; and
(c) NDC and Medscape will jointly market LYTEC 99, LYTEC/Web, NDC Connect,
NDC Assist, Medscape and an internet service provider to both Parties'
prospective customers.
Section 10.2 Agreement as to Specific Marketing Plans. In
furtherance of the foregoing Section 10.1, the Parties shall agree upon
marketing plans at the beginning of each year of the Term, including provisions
as to timing, budget, and scope, which plans shall upon agreement by the Parties
be deemed incorporated in this Agreement by reference. On or before the date
which is thirty (30) days after the Effective Date, the Parties shall cooperate
in good faith and shall agree upon a marketing plan for the initial one-year
period following the Effective Date.
14
<PAGE> 15
ARTICLE XI
FEES; NDC DISTRIBUTION COMMISSION; REPORTING.
Section 11.1 Fees; Payments. The Parties acknowledge and agree
that the payments, commissions, fees and credits set out in Exhibit 11.1
attached hereto shall be applicable to the transactions contemplated in this
Agreement and the relationships being established hereby and by the Stock
Purchase Agreement.
Section 11.2 Payment Terms; Taxes. All payments due by a Party
to the other Party under this Article XI are stated and payable in U.S. dollars
and shall be paid to such account and using such means as the Parties shall from
time to time notify each other in writing. Amounts subject to NDC Distribution
Commissions and received by Medscape during each Medscape Reporting Period shall
be paid to NDC within thirty (30) days after the end of such Medscape Reporting
Period, but only to the extent that amounts due and owing to NDC in any such
Medscape Reporting Period actually exceed the amount of any outstanding credit
allocable to the advance payment of NDC Distribution Commissions as provided in
Exhibit 11.1. Each such payment shall be accompanied by a copy of the report
specified in Section 11.3. Amounts subject to EDI Services Commissions and
received by NDC during each NDC Reporting Period shall be paid to NDC within
thirty (30) days after the end of such NDC Reporting Period. Each such payment
shall be accompanied by a copy of the report specified in Section 11.5.
Section 11.3 Reporting by Medscape for purposes of Calculating
NDC Distribution Commissions. Within thirty (30) days after the end of each
calendar quarter during the Term (each such quarterly period a "Medscape
Reporting Period" with the first such Medscape Reporting Period to end on the
last day of the first full calendar quarter to occur after any amounts subject
to NDC Distribution Commissions are first received by Medscape), Medscape shall
send a statement to NDC summarizing, and certifying as to, the information used
by Medscape to calculate the NDC Distribution Commissions payable to NDC for
such Medscape Reporting Period in order to confirm the actual amounts received
or projected to be received by Medscape during the applicable Medscape Reporting
Period for each category in respect of which an NDC Distribution Commission is
payable as provided in Exhibit 11.1.
Section 11.4 Audit Rights. Medscape will maintain for at least
three (3) years its records, contracts and accounts relating to each transaction
in respect of which an NDC Distribution Commission is payable by Medscape
hereunder, and will permit examination not more frequently than once per
calendar year of that information upon reasonable request and during normal
business hours by NDC and/or an independent auditor reasonably acceptable to
both Parties, who shall agree to be bound by the confidentiality obligations set
forth in Article XIV (an "Independent Auditor"). In addition, NDC shall be
entitled annually to appoint an Independent Auditor to audit the books of
account of Medscape, at NDC's expense, during normal business hours, with at
least two weeks' prior
15
<PAGE> 16
notice. If during the course of such audit, it is discovered that Medscape has
underpaid NDC by an amount in excess of five percent (5%) of the amount
determined to be due for the audited period, then the cost of such audit shall
be borne by Medscape. Furthermore, any error discovered by the Independent
Auditor shall be promptly remedied by Medscape after receipt of notice from NDC.
Section 11.5 Reporting by NDC for purposes of Calculating EDI
Services Commissions. Within thirty (30) days after the end of each calendar
quarter during the Term (each such quarterly period an "NDC Reporting Period"
with the first such NDC Reporting Period to end on the last day of the first
full calendar quarter to occur after any amounts subject to EDI Services
Distribution Commissions are first received by NDC), NDC shall send a statement
to Medscape summarizing, and certifying as to, the information used by NDC to
calculate the EDI Services Commissions payable to Medscape for such NDC
Reporting Period in order to confirm the actual amounts received or projected to
be received by NDC during the applicable NDC Reporting Period for each category
in respect of which an EDI Services Commission is payable as provided in Exhibit
11.1.
Section 11.6 Audit Rights. NDC will maintain for at least
three (3) years its records, contracts and accounts relating to each transaction
in respect of which an EDI Services Commission is payable by NDC hereunder, and
will permit examination not more frequently than once per calendar year of that
information upon reasonable request and during normal business hours by Medscape
and/or an Independent Auditor. In addition, Medscape shall be entitled annually
to appoint an Independent Auditor to audit the books of account of NDC, at
Medscape's expense, during normal business hours, with at least two weeks' prior
notice. If during the course of such audit, it is discovered that NDC has
underpaid Medscape by an amount in excess of five percent (5%) of the amount
determined to be due for the audited period, then the cost of such audit shall
be borne by NDC. Furthermore, any error discovered by the Independent Auditor
shall be promptly remedied by NDC after receipt of notice from Medscape.
ARTICLE XII
INTELLECTUAL PROPERTY RIGHTS
Section 12.1 NDC Owned Materials. NDC owns all copyright and
other proprietary rights in its intellectual property (including the Intellect
Database, LYTEC, LYTEC 99 and LYTEC/WEB, all other extensions and derivative
works thereof created solely by NDC), all of the other materials NDC licenses or
otherwise supplies or makes available to Medscape under this Agreement,
including all NDC Healthcare Products (but subject to Medscape's rights to any
Medscape Materials integrated therein), other computer programs, and all of
NDC's content and its Trademarks (including as may be integrated in any Medscape
Website), (the foregoing, collectively, the "NDC Materials").
16
<PAGE> 17
Subject to the grants of license and assignments of ownership rights made
pursuant to this Agreement, NDC retains sole and exclusive ownership of all
right, title and interest in and to the NDC Materials and all copies thereof.
Section 12.2 Medscape-Owned Materials. Medscape owns all
copyright and other proprietary rights in all of its intellectual property and
all of the materials Medscape licenses or otherwise supplies or makes available
to NDC under this Agreement, including all Medscape Websites, all computer
programs, all Medscape Content, Medscape's Trademarks (including as may be
integrated in LYTEC 99, LYTEC/WEB and any NDC Healthcare Products), and customer
and professional data (all of the foregoing, collectively, the "Medscape
Materials"). Subject to the grants of license and assignments of ownership
rights made pursuant to this Agreement, Medscape retains sole and exclusive
ownership of all right, title and interest in and to the Medscape Materials and
all copies thereof
Section 12.3 Shared Materials. Each Party shall contribute
materials pursuant to this Agreement which are to be used jointly throughout the
Term (collectively, the "Shared Materials"). Except as provided to the contrary
in Section 12.4 as to Jointly Developed Products or as otherwise agreed by the
Parties in any applicable instance (and then only to the extent agreed by the
Parties), each Party retains ownership of whatever material that Party
contributed to the Shared Materials pursuant to this Agreement both during the
Term and thereafter, and each Party may re-implement or otherwise use its
respective portion of the Shared Material both during and after the Term. Under
no circumstances will either Party use after the Term any portion of the Shared
Materials that the other Party contributed to the Shared Materials.
Section 12.4 Ownership of Jointly Developed Product; Related
Rights. Medscape and NDC shall agree in advance as to ownership of Jointly
Developed Products pursuant to Section 6.1. The Parties agree to assist each
other in making such filings, and preparing such information, as may be required
to register and protect any intellectual property rights in the Jointly
Developed Products.
Section 12.5 Trademarks and Uniform Resource Locators
("URLs"). Medscape owns all rights in its Trademarks and URLs, and NDC owns all
rights in its Trademarks and URLs.
17
<PAGE> 18
ARTICLE XIII
TRADEMARKS; COPYRIGHT NOTICES; BRANDING; CONTENT
Section 13.1 Branding of Joint Products. The Parties intend
and agree that NDC and Medscape will each receive prominent branding for the
Jointly Developed Products.
Section 13.2 Incorporation of Marks. Medscape and NDC shall
incorporate the other's Trademarks as they may mutually agree in good faith,
provided that each of Medscape and NDC shall comply with such restrictions and
requirements as may be notified to it from time to time by the other with
respect to the use of the same. Neither Party shall incorporate the other's
Trademarks without first submitting a sample of the use to the Trademark owner
and obtaining written consent.
Section 13.3 Mutual Covenants as to Marks and Notices. NDC
covenants and agrees that it shall not knowingly delete any Trademarks or
copyright notices of Medscape or any of its Affiliates, or otherwise use without
Medscape's consent any of Medscape's or its Affiliates' Trademarks or other
identifiers in any manner other than as is expressly provided by this Agreement.
Medscape covenants and agrees that it shall not knowingly delete any Trademarks
or copyright notices of NDC or its Affiliates, or otherwise use without NDC's
consent any of NDC's or its Affiliates' Trademarks or other identifiers in any
manner other than as is expressly provided by this Agreement. If either Party
for any reason deletes or causes the deletion of any Trademark or copyright
notice of the other Party or any of its Affiliates, such Party shall, upon
notice by the affected Party, promptly take such reasonable remedial actions as
the affected Party may request.
Section 13.4 Editorial and Artistic Control. Medscape will
have exclusive editorial and artistic control over the selection of any of its
intellectual property or other proprietary materials (including Trademarks and
Medscape Content) integrated or appearing in any of the Products or Services
developed or to be developed under this Agreement, and the determination of the
design and look and feel of all visual elements relating to such proprietary
materials (including any in-context, integrated links to any Medscape Website
from within any such Products). NDC will have exclusive editorial and artistic
control over the selection of any of its intellectual property and other
proprietary materials (including Trademarks and content) integrated or appearing
in any of the Products or Services developed or to be developed under this
Agreement, and except as provided in the immediately following sentence and the
provisos thereto, the determination of the design and look and feel of all
visual elements relating to such proprietary materials. Medscape shall have the
right, in its discretion, to determine the visual elements, the placement, and
the design and look and feel, of such of NDC's proprietary materials as may
appear or be integrated in any Medscape Website, provided that Medscape shall
have no right to request the alteration or other modification of any of NDC's
Trademarks,
18
<PAGE> 19
and provided further, that NDC shall have the right to approve any such
determination (which shall not be unreasonably withheld or delayed).
ARTICLE XIV
CONFIDENTIALITY; NON-COMPETE
Section 14.1 Confidentiality Obligations. Each Party
acknowledges that it and its subcontractors (if any) have had prior to the
Effective Date, and in performing its obligations under this Agreement, it and
its subcontractors (if any) will have access to or be directly or indirectly
exposed to Confidential Information. Except as may be required to comply with
any valid legal requirement, each Party covenants and agrees that it shall hold
confidential all Confidential Information and shall not use or disclose such
Confidential Information without the express consent of the disclosing Party.
Each Party shall take reasonable measures and efforts to provide protection for
the disclosing Party's Confidential Information, including measures at least as
strict as those the receiving Party uses to protect its own Confidential
Information. Such measures will include requiring employees and any independent
contractors to sign a non-disclosure agreement before obtaining access to the
disclosing Party's Confidential Information. The confidentiality obligations of
the Parties shall survive any termination or other expiration of this Agreement.
Section 14.2 Confidential Information. "Confidential
Information" means information in the possession or under the control of a Party
relating to a Party's technical, marketing, product and business affairs,
including customer, prospect, price, and other proprietary and trade secret
information, whether oral, graphic, written, electronic or in machine readable
form, and includes all computer programs (and source code therefor).
Confidential Information shall also include all proposals, plans, programs,
analyses, compilations, forecasts, studies or other documents prepared by a
Party or by them jointly relating to the subject matter of this Agreement
(including as relates to product development and deployment). In the case of
Medscape, Confidential Information includes the Medscape Content, member
information and other customer and user information, including any information
pertaining to usage of Medscape Websites. Confidential Information does not
include information which (A) was known to the receiving Party or in the public
domain before disclosure; (B) becomes part of the public domain after disclosure
by a publication or other means except by a breach of this Agreement by the
receiving Party, (C) was received from a third party under no duty or obligation
of confidentiality to the disclosing Party, or (D) was independently developed
by the receiving Party without reference to Confidential Information. Upon
termination or other expiration of this Agreement, all Confidential Information
disclosed by a Party to a receiving Party will be returned to the disclosing
Party or, upon the request of the disclosing Party, will be promptly destroyed
and certified as destroyed by the receiving Party. The disposition of
Confidential Information in which both of the Parties have proprietary or other
rights shall
19
<PAGE> 20
be determined by the Parties in good faith upon termination or expiration of
this Agreement.
Section 14.3 Exclusivity; Non-Competition Covenants as to NDC.
NDC hereby agrees for itself and on behalf of its Affiliates, that it shall not
independently or in connection with any other Person, directly or indirectly
until the end of the Term integrate NDC Connect or NDC Assist into any
Healtheon/WebMD service.
Section 14.4 Exclusivity; Non-Competition Covenants as to
Medscape. Medscape hereby agrees for itself and on behalf of its Affiliates,
that it shall not independently or in connection with any other Person, directly
or indirectly until the end of the Term:
(i) integrate any of Medscape's proprietary content in any Quintiles/Envoy
service (other than Quintiles business as a clinical research
organization, providing clinical trials services, goods, and support to
the pharmaceutical industry and other organizations involved medical
research) or in IMS Health; or
(ii) integrate Healtheon/WebMD EDI services into Medscape Web Sites.
Notwithstanding the foregoing, Medscape retains the right to license
its content to any other third party.
Section 14.5 Acknowledgment; Construction; Severability. Each
Party acknowledges that the other's business, insofar as its relates to
provision of content and services over the World Wide Web of the internet, is
global in scope, and that, accordingly, competition with such other Party's
business is possible from nearly every part of the world. Each Party further
acknowledges and agrees that the restrictions set forth in Section 14.3 as to
NDC and Section 14.4 as to Medscape are reasonable in scope and duration and are
necessary to protect, and to enable the other to receive the anticipated
benefits of this Agreement and the arrangements contemplated hereby. The Parties
agree that, if any of the length of time, the geographical area, the scope or
another parameter of the restrictions set forth in either or both of the
foregoing Sections 14.3 and 14.4 above is deemed to be unlawfully restrictive by
a court of competent jurisdiction, such provision shall be deemed to be amended
and shall be construed by such court to have the broadest type, scope and
duration permissible under applicable law, and if no validating construction is
possible, shall be severable from the rest of this Agreement, and the validity,
legality or enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
Section 14.6 Specific Performance. The Parties recognize that
the performance of the obligations by the Parties of their respective
obligations under this Article XIV is special, unique and extraordinary in
character. In addition to such other rights and remedies as a non-breaching
Party may have at equity or in law with respect
20
<PAGE> 21
to any breach of this Agreement, if a Party commits a breach of any of the
provisions of this Article XIV, the non-breaching Party shall have the right and
remedy to have such provisions specifically enforced by any court of competent
jurisdiction or to enjoin the breaching Party from performing any act being
taken by the breaching Party in violation of this Article XIV, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the non-breaching Party, its business, proprietary marks
and brands, and the goodwill associated therewith and that money damages will
not provide an adequate remedy to the non-breaching Party.
ARTICLE XV
REPRESENTATIONS, WARRANTIES, COVENANTS, AND INDEMNITIES
Section 15.1 NDC. NDC represents, warrants, and covenants (for
itself, and in the case of Section 15.1(b), for and on behalf of NDCHIS) to
Medscape as follows:
(a) NDC has full authority to enter into this Agreement, and
the person signing on behalf of NDC is authorized to sign on NDC's behalf;
(b) the license between NDC Health Information Services
(Arizona) Inc., a wholly-owned subsidiary of NDC ("NDCHIS"), and the American
Medical Association, dated as of January 1, 1998 (the "AMA License")(a true,
complete and accurate copy of which has been previously provided to Medscape) is
in full force and effect. Neither NDCHIS nor NDC is in breach or default, and
upon giving effect to the AMA Sublicense, will not be in breach or default, of
any of the material terms and conditions thereof. Upon receipt of AMA's consent
to the terms of the AMA Sublicense (if required), NDCHIS will have the right and
authority under the terms of the AMA License to sublicense its rights under the
AMA License to Medscape pursuant to the terms of the AMA Sublicense. The terms
of the AMA Sublicense do and shall comply in all respect with the terms or
conditions specified with respect thereto in the AMA License, and upon execution
of the AMA Sublicense by Medscape and NDCHIS, Medscape will be a duly authorized
sublicensee of NDCHIS, in accordance with and subject to the terms thereof and
the AMA License.
(c) NDC is the owner, or has the right to use, license,
reproduce, and distribute all materials and methodologies, including computer
programs, used, licensed or supplied by NDC to Medscape;
(d) NDC has the right to authorize Medscape to use, all
materials supplied or licensed by NDC to Medscape pursuant to this Agreement;
21
<PAGE> 22
(e) none of the materials that NDC supplies pursuant to this
Agreement infringes or will infringe any copyright, patent, Trademark, trade
secret or other third party proprietary right; and
(f) NDC will comply with all applicable and material federal,
state, and local laws and regulations in the performance of its obligations
under this Agreement, including laws concerning the encryption and import/export
of software products.
Section 15.2 Medscape. Medscape represents, warrants, and
covenants to NDC:
(a) Medscape has full authority to enter into this Agreement,
and the person signing on behalf of Medscape is authorized to sign on Medscape's
behalf;
(b) Medscape is the owner, or has the right to use, reproduce,
and distribute all materials and methodologies, including computer programs used
or supplied by Medscape to NDC in connection with this Agreement;
(c) Medscape has the right to authorize NDC to use all
materials supplied or licensed by Medscape to NDC pursuant to this Agreement;
(d) none of the materials that Medscape supplies to NDC
pursuant to this Agreement infringes or will infringe any copyright, patent,
Trademark, trade secret, or other third party proprietary right; and
(e) Medscape will comply will all applicable and material
federal, state and locals laws and regulations in the performance of its
obligations under this Agreement, including any applicable laws concerning the
encryption and import/export of software products.
Section 15.3 Indemnification. Each Party agrees to defend and
indemnify the other Party, its directors, officers, employees, and agents
against any claim, demand, suit, debt, liability, or costs, including reasonable
attorney's fees ("Losses"), to the extent that it is based on a claim that: (a)
constitutes a breach of the indemnifying Party's warranties, representations,
and undertakings in this Article XV; or (b) arises out of the gross negligence
or willful misconduct of the indemnifying Party in connection with this
Agreement; provided, however, that neither Party shall have any liability for
the breach of any representation or warranty, unless the aggregate of all Losses
for which the indemnifying party would, but for this proviso, be liable, exceeds
on a cumulative basis Two Hundred and Fifty Thousand Dollars ($250,000) Dollars.
Notwithstanding the foregoing:
22
<PAGE> 23
(x) NDC shall indemnify, defend and hold harmless Medscape for any Loss
relating to claims asserted by third parties with respect to any breach
of the representations and warranties contained in Section 15.1(a),
(b), (c), (d) and (e), regardless of whether the $250,000 threshold has
been met;
(x) Medscape shall indemnify, defend and hold harmless NDC for any Loss
relating to claims asserted by third parties with respect to any breach
of the representations and warranties contained in Section 15.2(a),
(b), (c) and (d), regardless of whether the $250,000 threshold has been
met;
(y) neither Party shall be liable to the other for Losses exceeding in the
aggregate the sum of Ten Million Dollars ($10,000,000); provided that
NDC's liability to Medscape for Losses relating to claims asserted by
third parties with respect to any breach of the representations and
warranties contained in Section 15.1(a), (b), (c), (d) and (e) shall
not be so limited, and provided further that Medscape's liability to
NDC for Losses relating to claims asserted by third parties with
respect to any breach of the representations and warranties contained
in Section 15.2(a), (b), (c) and (d) shall not be so limited.
Section 15.4 Indemnification Procedures. The Party claiming
indemnification pursuant to Section 15.3 shall notify the other Party promptly
of the claim. The indemnified Party may, at its own expense, assist in the
defense if it so chooses, provided that the indemnifying Party controls the
defense and all negotiations relative to any settlement and further provided
that any settlement intended to bind the indemnified Party is not final without
the indemnified Party's consent.
Section 15.5 Limitation of Liability. EXCEPT AS OTHERWISE
PROVIDED IN SECTION 15.3, THE CUMULATIVE LIABILITY OF EITHER PARTY FOR ALL
CLAIMS RELATING TO, ARISING UNDER, OR IN CONNECTION WITH THIS AGREEMENT, WHETHER
IN CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED $10,000,000 (TEN MILLION UNITED
STATES DOLLARS). NEITHER PARTY SHALL IN ANY EVENT BE LIABLE TO THE OTHER FOR
INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF THAT
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES) INCLUDING LOSS OF
REVENUE, LOSS OF DATA, OR ANTICIPATED PROFITS OR LOST BUSINESS.
ARTICLE XVI
TERM AND TERMINATION
Section 16.1 Term. This Agreement will begin on the date
signed by both of the Parties, with effect as of Effective Date and, unless
sooner terminated, shall continue until the date which is three (3) years from
the Effective Date (the "Initial Term",
23
<PAGE> 24
and together with any subsequent extension or renewal hereof as may be agreed by
the Parties, the "Term").
Section 16.2 Termination for Breach. Either Medscape or NDC
may terminate this Agreement on thirty (30) days' notice if the other materially
breaches any of its obligations hereunder unless the breach is cured within the
thirty (30) day period. Either Party may terminate this Agreement or revert any
of the licenses granted to the other Party hereunder effective immediately upon
written notice if the other Party breaches any of its obligations under Article
XIV (Confidentiality; Non-Compete).
Section 16.3 Bankruptcy and Related Events. Notwithstanding
the provisions of Section 16.2, either Party may terminate this Agreement,
effective immediately upon written notice, if (a) all or a substantial portion
of the other Party's assets are transferred to an assignee for the benefit of
creditors or to a receiver or trustee in bankruptcy; (b) a proceeding is
commenced by or against the other Party for relief under the bankruptcy or
similar laws and such proceeding is not dismissed within thirty (30) days; or
(c) the other Party is adjudged bankrupt or insolvent.
Section 16.4 Obligations Upon Termination or Expiration. Upon
termination or expiration of this Agreement, (a) NDC shall immediately return to
Medscape all copies of the Medscape Confidential Information in NDC's possession
or control; and (b) Medscape shall immediately return to NDC all copies of the
NDC Confidential Information. In addition, each Party shall promptly pay to the
other Party any and all amounts due and owing by such Party to such other Party
for all periods up to and including the date of termination or expiration.
Section 16.5 Survival. The provisions of Section 11.4, Section
11.6, Article XII, Article XIII, Section 14.1, Section 14.2, Section 14.6,
Section 15.3, Section 15.4, Section 15.5, Section 16.4, Section 17.8, and any
other provision of this Agreement necessary for the interpretation of any of the
foregoing shall survive the termination or expiration of this Agreement.
ARTICLE XVII
GENERAL PROVISIONS
Section 17.1 No Joint Venture Created. Nothing in this
Agreement shall be construed so as to constitute NDC and Medscape as joint
venturers, partners, or agents of each other, and neither NDC nor Medscape shall
have the power to obligate or bind the other in any way whatsoever.
Section 17.2 Entire Agreement. This Agreement constitutes the
complete agreement between the Parties and supersedes all other agreements,
promises,
24
<PAGE> 25
representations, and negotiations, whether written or oral, between the Parties
regarding the subject matter of the Agreement. No amendment of this Agreement
shall be valid or take effect unless it is in writing and signed by all the
Parties.
Section 17.3 Assignment. Neither Party may assign this
Agreement (in whole or in part) or any of its rights or obligations hereunder
without the written consent of the other. Any assignment in violation of this
provision will be null and void.
Section 17.4 Waiver. No waiver of any term or condition or of
any breach of this Agreement or of any part of it, shall be deemed a waiver of
any other term or condition or of any later breach of the Agreement or of any
part of it.
Section 17.5 Notices. Any notice, consent, approval or
disapproval, required or permitted under this Agreement, including any change to
this Section 17.5, shall not be valid unless in writing and shall be given
either: (i) personally; (ii) by nationally-recognized express courier service,
(iii) by certified mail, return receipt requested, or (iv) by fax (with copy via
any means specified in (i), (ii) or (iii)), in each case, at the following
addresses or telephone and fax numbers:
If to Medscape:
Medscape, Inc.
134 W. 29th Street
New York, New York 10001-5399
Attn: Paul Sheils
Phone: (212) 760-3200
Fax: (212) 265-9228
with a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036
Attn: John P. Schmitt
Phone: (212) 336-2849
Fax: (212) 336-2222
If to NDC:
National Data Corporation
National Data Plaza
Atlanta, Georgia 30329
Attention: Walter M. Hoff
25
<PAGE> 26
Tel: (404) 728-2988
Fax: (404) 728-2947
with a copy to:
National Data Corporation
National Data Plaza
Atlanta, Georgia 30329
Attention: Corporate Secretary
Tel: (404) 728-2000
Fax: (404) 728-2990
Notices shall be deemed effective upon receipt or upon refusal to accept receipt
documented by the U.S. Postal Service or nationally recognized courier service.
Section 17.6 Force Majeure. Neither Party shall be deemed in
default of this Agreement to the extent that performance of its obligations or
attempts to cure any breach are delayed, restricted, or prevented by reason of
any act of God or government, fire, natural disaster, labor stoppage, the
failure of necessary power systems or connections, or any other act or condition
beyond the reasonable control of the Parties, provided that the Party so
affected uses its commercially reasonable efforts to avoid or remove the causes
of non-performance and continues performance immediately after those causes are
avoided or removed. Notwithstanding this provision, any delay that exceeds (2)
two months shall entitle the Party whose performance is not affected by the
relevant event of force majeure to terminate the Agreement upon written notice
to the other Party.
Section 17.7 Publicity. A Party may use the name of the other
Party in press releases, sales material and literature only with the written
consent of the other Party. Neither Party may make any public statement or issue
any press release regarding the subject matter of this Agreement (including as
relates to new products or product launches) without the written approval of the
other Party.
Section 17.8 Governing Law. This Agreement shall be governed
by and construed under the laws of the State of New York and of the United
States, without regard to their conflicts of laws provisions. Any controversy or
proceeding arising out of or related to this Agreement shall be brought in the
federal or state courts in the State and County of New York. The Parties
expressly submit to personal jurisdiction and venue in any of those courts and
will not object to such jurisdiction on the ground of forum non conveniens or
otherwise.
Section 17.9 Including. The word "including" shall mean
"including without limitation" and "include(s)" shall mean "include(s)" without
limitation"
26
<PAGE> 27
Section 17.10 Schedules and Exhibits. The Exhibits hereto are
an integral part of this Agreement, and any reference herein to this Agreement
shall be deemed to mean and include a reference to such Exhibits, as may be
supplemented, modified, restated or amended from time to time. The Parties agree
that each such Exhibit is hereby incorporated in this Agreement by reference,
and shall have the same force and effect as if fully set forth in the body
hereof.
Section 17.11 Captions. Headings and captions throughout this
Agreement are for convenience only and should not be considered part of the
Agreement.
Section 17.12 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same document.
Section 17.13 Right of Offset. Medscape shall have the right
to offset against any and all amounts due and owing by Medscape to NDC hereunder
any and all amounts due by NDC to Medscape hereunder. NDC shall have the right
to offset against any and all amounts due and owing by NDC to Medscape hereunder
any and all amounts due by Medscape to NDC hereunder.
[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
27
<PAGE> 28
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed and delivered on its behalf, as of the date and year first written
above, by its duly authorized representative.
MEDSCAPE INC.
By:
--------------------
Name:
Title:
NATIONAL DATA CORPORATION
By:
--------------------
Name:
Title:
<PAGE> 29
EXHIBIT 2.1(a)-1
to
License and
Product Development
Agreement
INTELLECT Q&A
PRODUCT OVERVIEW
Intellect Q&A allows Medscape to access Practitioner Level Detailing
from the NDC Intellect databases via a web or EICS Client Server deployment.
Users are able to select from a list of pre-written queries/reports and set
specific parameters within each report using a Windows-based, point-and-click
interface.
Through Intellect Q&A, Medscape has access to NDC Health Information
Services multi-terabyte retail prescription database. This database will
significantly aid Medscape in the targeting of Physicians as well as profiling
their writing patterns for up to a full 24 month window. The Intellect
repository is loaded with over 2.4 Billion prescriptions, collected from
approximately 36,000 pharmacies, and covering over 225,000 product variations,
and 1.2 million prescribers.
INTELLECT DELIVERABLE
The Intellect Q&A application comes complete with access to: geographic
level data and analysis, detailed level data subset of Practitioner Database
(requires contract with data agent), and subset of the Drug Database. Client to
furnish the Internet browser IE v3.02 or IE v4.01 for web based implementations,
NDC to furnish OLAP/EIS tool for Client Server implementations.
Intellect Q&A Physician Detailing application comes complete with 17
predefined reports as well as capabilities to create Medscape specific Reports,
Templates, and Filters, thus providing unique combinations of reporting to
support ongoing initiatives.
Intellect Q&A User Manual
Initial Intellect Q&A system training (2 Days)
Intellect Q&A EIS implementation (if needed)
2 Intellect Q&A user Logon ID's and 2 MicroStrategy software licenses
Note:
29
<PAGE> 30
Service is restricted to data which Medscape has purchased already from
NDC. Contracting for additional data elements outside the terms of the
clients data contract is covered in Additional Fees listed below.
INTELLECT PRE-DEFINED PRESCRIBER REPORTS
Lookup: Prescriber Lookup
Class / Specialty: Prescriber List
Class: Region Product Summary
Class: Specialty Summary
Class: State Product Summary
Class: Top 100 Prescribers
Class: Zip Product Summary
Prescriber/Product: Month Summary
Prescriber: Month Summary
Product / Specialty: Prescriber List
Product / State/ Plan : Month Summary
Product / State: Month Summary
Product / State: Pay Type Month Summary'
Product / Zip: Month Summary
Product : Region Summary
Product: Specialty Summary
Product: Top 100 Prescribers
USAGE
The Medscape price is based on 2 user ID's and a maximum of 5 hours
processing time per query, 12,000 row limit per query and 3 simultaneous queries
running per user. System usage will be captured in terms of server DSS
processing seconds, Medscape will not be accountable for system "Wall Time".
Medscape will be allocated 108,000 server DSS seconds per month.
SERVICE PARAMETERS
In providing Intellect Q&A to Medscape, NDC Health Information Services
is committed to delivering the highest level of service and quality. To meet
these service level goals, NDC has established the following basic service level
parameters:
Intellect Q&A will be available on a 5X16 basis (5 days a week, Monday
- Friday, 16 hours.
30
<PAGE> 31
NDC and Medscape will identify and designate one point of contact to
work through customer requests, comments, training issues, installation
issues, product enhancements, and general questions.
NDC will track Medscape usage at the report level. All product usage
will be reported in terms of server DSS utilization seconds.
TRAINING
Price includes 2 day of onsite training and materials in Medscape's New
York offices.
ADDITIONAL FEES
Additional User Fee
Intellect Q&A has been priced for usage by 2 Medscape users, for each
additional user, an additional charge of $5,000 will be assessed per year. The
"additional per user fee" covers the use and maintenance of the NDC Health
Information Services' proprietary Intellect Q&A application, the associated
service level, product support, and DSS software licensing.
The following components are included in the "additional per user fee:"
MicroStrategy software license (DSS Server and DSSWeb or DSS Agent)
MicroStrategy yearly software maintenance
Intellect Q&A processing capacity to support 5X16 availability
Intellect Q&A application (includes interface and predefined analysis
folders and reports)
Initial one (2) day basic user training and materials
Intellect Q&A is a subscription-based service that is driven off of
NDC's Intellect data warehouse infrastructure. The use our sophisticated
relational decision support architecture mitigates the need for our clients to
build, house and maintain an expense and cost prohibitive infrastructure of
their own. The "additional per user fees" allows NDC Health Information Services
to deliver cost effective business intelligence to our clients.
Additional CPU Seconds
Medscape will be accessed $1 US for every server DSS second over the
established threshold. NDC will be accountable for usage monitoring and
reporting to client.
31
<PAGE> 32
Additional Services
Medscape can elect to contract with NDC Health Information Services for
additional Physician Detailing services including Behavioral Segmentation, Early
Adopters Studies, and Quintiling/Deciling. Each service will be priced
independently at NDC Health Information Services most favorable partner pricing.
32
<PAGE> 33
APPENDIX A
to
Exhibit 2.1(a)-1
INTELLECT Q&A REPORT DESCRIPTIONS
LOOKUP ANALYSES
CLASS LIST
Returns a list of all Classes.
CLASS: PRODUCT LIST
Returns a list of NDC's for the selected Class.
NATIONAL: PLAN LIST
Returns a list of Health Plans that are affiliated with the selected
National Plan.
PBM: PLAN LIST
Returns a list of Health Plans that are affiliated with the selected
PBM.
PRESCRIBER LOOKUP
Returns a Prescriber list based on the First Name, Last Name and State
entered.
PRODUCT: NDC LOOKUP
Returns NDC, package size, generic name, and manufacturer code for the
selected drug name.
PRODUCT: NAME LOOKUP
Returns Drug name, package size, generic name and manufacturer code for
the entered NDC.
MARKET ANALYSES
CLASS: NATIONAL PAYER SUMMARY
Returns Rx values for all National Payers for the selected Class and
Time period.
CLASS: PBM SUMMARY
Returns Rx values for all PBM's for the selected Class and Time period.
CLASS: PLAN SUMMARY
Returns Rx values for all Health Plans for the selected Class and Time
period.
CLASS: PRODUCT MONTH SUMMARY
Returns Rx values by Product for selected Class and Time period.
CLASS: PRODUCT SHARE
Returns Rx shares by Product for selected Class and Time period.
33
<PAGE> 34
CLASS: PRODUCT TRX COUNT
Returns TRx Count by Product for the selected Class and Time period.
CLASS: PRODUCT TRX SHARE
Returns TRx Share by Product for the selected Class and Time period.
CLASS: SUMMARY
Returns Rx values for the selected Class and Time Period.
PRESCRIBER: CLASS SUMMARY
Returns all Product Rx values for the selected Class, Time period and
Prescriber ID.
PAYER ANALYSES
CLASS / PLAN: MONTH CHART
Returns TRx count by month for the selected Class, Plan and Time
period.
CLASS / PLAN: MONTH SUMMARY
Returns Rx values for the selected Plan, Class and Time period.
CLASS / PLAN: PRESCRIBER LIST
Returns Rx values for all Prescribers for the selected Class, Plan,
Time period and Specialty.
CLASS: PAYMENT TYPE MONTH SUMMARY
Returns Rx values by Payment Type (Cash, Medicaid, 3rd Party) for the
selected Class and Time period.
CLASS: TRX PAYMENT TYPE
Returns TRx Share by Payment Type (Cash, Medicaid, 3rd Party) for the
selected Class and Time period.
NATIONAL /PRODUCT: PLAN SUMMARY
Returns Rx values by affiliate Health Plan for the selected National
Plan, Product and Time period.
NATIONAL: PLAN SUMMARY
Returns Rx values for all Health Plans that are affiliates of the
selected National Plan.
NATIONAL: PRODUCT SUMMARY
Returns Rx values by Product for the selected National Plan and Time
period.
PBM/PRODUCT: PLAN SUMMARY
Returns Rx values by affiliate Health Plan for the selected PBM,
Product and Time period.
PBM: AFFILIATE PLAN SUMMARY
Returns Rx values for all Health Plans that are affiliates of the
selected PBM.
PBM: PRODUCT SUMMARY
Returns Rx values by Product for the selected PBM and Time period.
PLAN: CLASS SUMMARY
Returns Rx values for the selected Health Plan, Class and Time period.
PLAN: MONTH SUMMARY
34
<PAGE> 35
Returns Rx values for all products (summarized) for the selected Health
Plan and Time period
PLAN: PRODUCT SUMMARY
Returns Rx values by product for the selected Plan and Time period.
PRESCRIBER / CLASS: PLAN LIST
Returns Rx values for all Health Plans for the selected Product,
Prescriber and Time period.
PRESCRIBER / PRODUCT: PLAN LIST
Returns Rx values for all Health Plans for the selected Product,
Prescriber and Time period.
PRESCRIBER: PLAN LIST
Returns Rx values by Plan for all products for the selected Prescriber
and Time Period.
PAYER ANALYSES
PRODUCT / PLAN: MONTH CHART
Returns TRx count by month for the selected Product, Plan and Time
period.
PRODUCT / PLAN: MONTH SUMMARY
Returns Rx values for the selected Plan, Product and Time period.
PRODUCT / PLAN: PRESCRIBER LIST
Returns Rx values for all Prescribers for the selected Product, Plan,
Time period and Specialty.
PRODUCT: ALL PLANS
Returns Rx values for all plans for the selected Product and Time
period.
PRODUCT: PAYMENT TYPE MONTH SUMMARY
Returns Rx values by Payment Type (Cash, Medicaid, 3rd Party) for the
selected Product and Time period.
PRODUCT: TRX PAYMENT TYPE
Returns TRx Share by Payment Type (Cash, Medicaid, 3rd Party) for the
selected Product and Time period.
PRESCRIBER ANALYSES
CLASS / SPECIALTY: PRESCRIBER LIST
Returns Rx values by Prescriber for the selected Class, Time period and
Specialty.
CLASS: SPECIALTY SUMMARY
Returns Rx values and Prescriber Counts by Specialty for the selected
Class and Time period.
CLASS: TOP 100 PRESCRIBERS
Returns Rx values for the Top 100 Prescribers for the selected Class
and Time period.
PRESCRIBER/PRODUCT: MONTH SUMMARY
Returns Rx values for the selected Prescriber, Product and Time period.
PRESCRIBER: MONTH SUMMARY
Returns Rx values by Product for the selected Prescriber and Time
period.
35
<PAGE> 36
PRODUCT / SPECIALTY: PRESCRIBER LIST
Returns Rx values by Prescriber for the selected Product, Time period
and Specialty.
PRODUCT: SPECIALTY SUMMARY
Returns Rx values and Prescriber Counts by Specialty for the selected
Product and Time period.
PRODUCT: TOP 100 PRESCRIBERS
Returns Rx values for the Top 100 Prescribers for the selected Product
and Time period.
PRESCRIBER GEOGRAPHY ANALYSES
CLASS: REGION PRODUCT SUMMARY
Returns Rx values by product for the selected Class, Prescriber Region
and Time period.
CLASS: STATE PRODUCT SUMMARY
Returns Rx values by product for the selected Class, Prescriber State
and Time period.
CLASS: ZIP PRODUCT SUMMARY
Returns Rx values by product for the selected Class, Prescriber State
and Time period.
PRODUCT / STATE/ PLAN: MONTH SUMMARY
Returns Rx values for the selected Product, Prescriber State, Plan and
Time period.
PRODUCT / STATE: MONTH SUMMARY
Returns Rx values for the selected Product, Prescriber State and Time
period.
PRODUCT / STATE: PAY TYPE MONTH SUMMARY
Returns Rx values by Payment Type for the selected Product, Prescriber
State and Time period.
PRODUCT / ZIP: MONTH SUMMARY
Returns Rx values for the selected Product, Prescriber Zip and Time
period.
PRODUCT: REGION SUMMARY
Returns Rx values by Region for the selected Product and Time period.
RX ANALYSES
CLASS: MONTH SUMMARY W/PRSCR COUNT
Returns Rx values and Prescriber counts by month for the selected Class
and Time period.
PRODUCT / STRENGTH: MONTH SUMMARY
Returns Rx values and Prescriber Counts for the selected Product,
Strength and Time period.
PRODUCT: MONTH SUMMARY
Returns Rx values by month for the selected Product and Time period.
PRODUCT: MONTH SUMMARY W/PRSCR COUNT
Returns Rx values and Prescriber counts by month for the selected
Product and Time period.
PRODUCT: NDC SUMMARY
Returns Rx values and Prescriber Counts by month for the selected NDC
and Time period.
PRODUCT: TRX OVER TIME
36
<PAGE> 37
Returns TRx Count by month for the selected Product and Time period.
37
<PAGE> 38
EXHIBIT 6.1(c)
to
License and
Product Development
Agreement
---------
R&D PIPELINE INFORMATION
------------------------
Data Elements:
- --------------
Company Name
Product Name
Generic Name
Therapeutic Use
Stage of Development
Source of Abstracts
Comments
Approval Date
Prior Approval Date
Company Address
Company Phone Number
Company Fax
Company Web Site
39
<PAGE> 39
EXHIBIT 11.1
to
License and
Product Development
Agreement
FEES, COMMISSIONS, PAYMENTS AND CREDITS
The following fees, commissions, payments and credits shall be
applicable to the transactions contemplated by the License and Product
Development Agreement between Medscape and NDC, dated as of July __, 1999 ( (the
"Agreement"). Capitalized terms used herein without definition have the meanings
provided in the Agreement. The terms of this Exhibit 11.1 are an integral part
of the Agreement and shall be subject to all of the terms and conditions
thereof.
1. Intellect License Fee. (a) Allocation. For and in
consideration of the Intellect License grant, Medscape shall pay to NDC a
one-time authorization fee equal to *
(the "Intellect License Fee"). The Parties acknowledge
and agree that an amount equal to the Intellect License Fee has been allocated
to a portion of the non-cash consideration being given by NDC to Medscape in
exchange for NDC's acquisition, and Medscape's sale, of Shares pursuant to and
as contemplated in the Stock Purchase Agreement. Accordingly, NDC hereby
acknowledges payment by, and receipt of value from, Medscape of an amount equal
to the Intellect License Fee and further agrees that Medscape's obligation to
pay the Intellect License Fee is satisfied and discharged in full. The
components of the Intellect License Fee are as follows:
(1) * attributable to the
perpetual Intellect License grant contemplated in Section 2.1(a) of the
Agreement; and
(2) * attributable to
NDC's grant to Medscape of the right to access and use, subject to the
terms of the Intellect License, monthly updates for the Intellect
Database during the Initial Term, as contemplated in Section 2.1(c) of
the Agreement.
(b) Review; AMA Consent. At any time on or prior to August 1,
1999, the Parties may agree to reallocate all or any portion of the dollar
amount specified in clause (2) above * to the dollar amount
allocable to the ad hoc consulting services referred to in Section 6 below. The
Parties agree that any discussions concerning such reallocation shall be
conducted in good faith with due regard for the respective economic interests of
the Parties. Notwithstanding the foregoing, if any consent required by the AMA
41
[* * *]
<PAGE> 40
as a condition to the effectiveness of the AMA Sublicense cannot be or is not
obtained by July 26, 1999, or such consent is not sufficient, in Medscape's sole
and absolute discretion, to secure the scope of use or uses of the AMA-PPD (as
defined in the AMA Sublicense) which Medscape requires, then Medscape shall have
the right, exercisable in its sole and absolute discretion, to elect to
unilaterally reallocate all or any portion of the dollar amount specified in
clause (2) above * to the dollar amount allocable to the ad hoc
consulting services referred to in Section 6 below. If Medscape duly exercises
its right to make such election, NDC shall execute and deliver such amendatory
documents as Medscape may deem reasonably necessary or appropriate to give full
effect to the reallocation specified by Medscape.
2. LYTEC Distribution/Preferred Status Fee. For and in
consideration of NDC's agreement, subject to the terms and conditions of the
Agreement, to designate Medscape (x) as the exclusive website providing
Healthcare Clinical Content integrated in LYTEC 99, (y) as the exclusive website
providing Healthcare Clinical Content integrated into LYTEC/Web, and (z) a
preferred partner of NDC as contemplated in Article IX of the Agreement,
Medscape shall pay to NDC an aggregate amount equal to *
(the "LYTEC
Distribution/Preferred Status Fee"). The Parties acknowledge and agree that an
amount equal to the LYTEC Distribution/Preferred Status Fee has been allocated
to a portion of the non-cash consideration being given by NDC to Medscape in
exchange for NDC's acquisition, and Medscape's sale, of Shares pursuant to and
as contemplated in the Stock Purchase Agreement. Accordingly, NDC hereby
acknowledges payment by, and receipt of value from, Medscape of an amount equal
to the LYTEC Distribution/ Preferred Status Fee and further agrees that
Medscape's obligation to pay the LYTEC Distribution/ Preferred Status Fee is
satisfied and discharged in full. The components of the LYTEC
Distribution/Preferred Status Fee are as follows:
(a) *
attributable to modifications and integration efforts relating
to Medscape Content; and
(b) *
attributable to the designations referred to above.
3. Marketing and Promotion. For and in consideration of NDC's
marketing and promotion of LYTEC 99, LYTEC/Web and such other products and
services as the Parties may agree as contemplated in Article II of the
Agreement, Medscape shall pay to NDC an amount equal to *
(the "Marketing and Promotion
Fee"). The Parties acknowledge and agree that an amount equal to the Marketing
and Promotion Fee has been allocated to a portion of the non-cash consideration
being given by NDC to Medscape in exchange for NDC's acquisition, and Medscape's
sale, of Shares pursuant
42
[***]
<PAGE> 41
to and as contemplated in the Stock Purchase Agreement. Accordingly, NDC hereby
acknowledges payment by, and receipt of value from, Medscape of an amount equal
to the Marketing and Promotion Fee, and further agrees that Medscape's
obligation to pay the Marketing and Promotion Fee is satisfied and discharged in
full. The components of the Marketing and Promotion Fee are as follows:
(a) * attributable to the LYTEC 99
product launch, including in connection with a 100,000 Piece
VAR Catalog Mailing and a 250,000 Piece Pharmacy and
Physicians Mailing; and
(b) * attributable to
future product launches.
4. NDC Distribution Commission. During the Term, Medscape will
pay to NDC the following amounts (collectively, "NDC Distribution Commissions"):
(a) a bounty equal to * for each New
Medscape Member;
(b) * percent * of the Net Advertising Revenue attributable to the
number of Medscape page views which are generated when New Medscape
Members access any Medscape Website; and
(c) * percent * of Medscape's Net Revenue attributable to electronic
commerce purchases by each New Medscape Member, as reported by
Medscape's electronic commerce partners, but only to the extent tracked
and reported by such commerce partners.
For purposes of this Paragraph 4, the following terms have the
following meanings:
"Net Advertising Revenue" means all advertising revenue
actually received by Medscape less all related sales credits, rebates,
and third-party ad sales commissions, paid or issued by Medscape.
"Net Revenue" means all revenue, less any and all rebates,
credits, returns and charge backs.
"New Medscape Member" means either:
(i) a user of any Medscape Website who was not previously
registered as a Medscape member and subsequently registers on
his or her own behalf as a Medscape member either as a result
of (x) a link integrated into an NDC Healthcare Product, or
(y) NDC's direct sales effort; or
43
[***]
<PAGE> 42
(ii) a user of a Medscape Website who was previously registered as
a Medscape member but has not accessed the relevant Medscape
Website in the nine (9) month period prior to such user's
first access on his or her own behalf to such Medscape Website
from a link integrated into an NDC Healthcare Product.
5. Credit Against NDC Distribution Commissions. The Parties
acknowledge and agree that an amount equal to *
* (the "NDC Commissions Credit") has been allocated to a portion
of the non-cash consideration being given by NDC to Medscape in exchange for
NDC's acquisition, and Medscape's sale, of Shares pursuant to and as
contemplated in the Stock Purchase Agreement and, specifically, to the advance
payment of NDC Distribution Commissions payable by Medscape to NDC during the
Initial Term. Accordingly, NDC agrees that (i) Medscape's obligation to pay NDC
Commissions during the Initial Term up to an amount equal to the NDC Commissions
Credit is satisfied and discharged in full, and (ii) Medscape shall have no
obligation to pay any NDC Distribution Commission to NDC during the Initial Term
except and to the extent that the aggregate amount of all NDC Distribution
Commissions payable to NDC during the Initial Term exceeds the amount of the NDC
Commissions Credit.
6. Credit Against NDC Healthcare Products Purchases. The
Parties acknowledge and agree that an amount equal to *
* (the "NDC Healthcare Products
Credit") has been allocated to a portion of the non-cash consideration being
given by NDC to Medscape in exchange for NDC's acquisition, and Medscape's sale,
of Shares pursuant to and as contemplated in the Stock Purchase Agreement and,
specifically, to the advance payment by Medscape of purchases of NDC Healthcare
Products and related consulting or other ad hoc services. Accordingly, NDC
agrees that (i) Medscape's obligation to pay for purchases of NDC Healthcare
Products and related consulting or other ad hoc services up to an amount equal
to the NDC Healthcare Products Credit is satisfied and discharged in full, and
(ii) Medscape shall have no obligation to pay any funds for purchases of NDC
Healthcare Products or related consulting services or other ad hoc services
until the aggregate amount of such purchases (net of applicable taxes,
discounts, credits and returns), related consulting or other ad hoc services
exceeds the amount of the NDC Healthcare Products Credit. The terms of
Medscape's right to purchase and distribute NDC Healthcare Products and its
status as a reseller are as provided in Annex 1 attached hereto and made a part
hereof.
7. Review. On the date which is twelve (12) months after the
Effective Date, the Parties agree to commence good faith discussions (with due
regard being given to the respective economic interests of the Parties) to
review and to reconsider, as may be appropriate, the allocation of the dollar
amounts specified in, and as between, Paragraphs 5 and 6 above.
44
[**]
<PAGE> 43
8. EDI Services Commission. During the Term, *
for each electronic data interchange
transaction of the type identified in Annex 2 attached hereto which is processed
by NDC or on its behalf for any individual or entity brought to NDC through
Medscape's marketing efforts (the "EDI Services Commission").
[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
45
[**]
<PAGE> 44
EXHIBIT 11.1
ANNEX 1
RESELLER STATUS FOR MEDSCAPE
1. NDC authorizes Medscape to identify itself as a reseller of the NDC
Healthcare Products, and to act as an intermediary in sales of NDC
Healthcare Products to third parties.
2. In all such sales by Medscape, the third party will license the NDC
Healthcare Products from NDC directly, and NDC (or an affiliate or
value-added reseller selected by NDC) will provide all support and
services directly to the third party purchaser at applicable rates.
3. Medscape will receive a discount of up to * off of
the then current retail price of NDC Healthcare Products where its acts
as reseller. Medscape will pay NDC's shipping costs for Medscape's
purchases.
4. Medscape will submit orders for products for third parties in
accordance with NDC's then current end user support policies.
46
[*****]
<PAGE> 45
EXHIBIT 11.1
ANNEX 2
EDI SERVICES
(1) Claims (electronic transmission of HCFA 1500 forms).
(2) Eligibility (electronic transmission of patient-specific demographic
information to determine if patient is an eligible member).
(3) Referrals (electronic transmission of patient demographic information
to another participating provider for request of treatment).
(4) Claim Status (electronic request to verify the status of a previously
submitted claim).
(5) Remittance Advice (electronic acceptance of payable information for a
previously submitted claim).
47
<PAGE> 1
Exhibit 10.40
FIRSTDATABANK
Point-of-Care Knowledge Bases
FIRST DATA BANK
STANDARD LICENSE AGREEMENT
This LICENSE AGREEMENT made and entered into at San Bruno, California as of the
Effective Date noted on Exhibit 1 (attached and made a part hereof) between
FIRST DATABANK, INC., a wholly owned subsidiary of The Hearst Corporation, a
Delaware Corporation with offices at 1111 Bayhill Drive, San Bruno, California
94066 ("First DataBank") and LICENSEE identified in Exhibit 1.
WHEREAS:
1. First DataBank owns or is a Licensee of, and licenses or sublicenses
various copyrighted databases of medical, pharmaceutical and
nutritional information, and periodic updates thereto ("Databases"),
related access software products ("Toolkits") and user manuals
("Manuals") referred to collectively, as the "FDB Knowledge Bases";
2. Licensee desires to obtain the use of one or more of the FDB Knowledge
Bases with the Licensee's electronic information system or other
computer system (the "System") as described in the Declaration of Use
(Exhibit 1);
3. Subject to the terms and conditions of this Agreement, First DataBank
is willing to grant to Licensee a nonexclusive license or sublicense to
use the FDB Knowledge Bases indicated in Exhibit 1.
NOW, THEREFORE, in consideration of the premises and of the covenants and
Agreements hereinafter set forth, it is agreed as follows:
1. DEFINITIONS OF CERTAIN TERMS. As used in this Agreement:
a) "Licensed Products" means those FDB Knowledge Bases indicated in
Exhibit 1 as being licensed to Licensee;
b) "Effective Date" is the date stated in Exhibit 1 and is the
effective date of this Agreement;
c) "Fee Term" means the twelve month period beginning on the
Effective Date and each successive twelve month period.
<PAGE> 2
2. LICENSE. Subject to the terms and conditions of this Agreement, First
DataBank grants and Licensee accepts the following limited,
non-transferable and non-exclusive license or sublicense:
a) To use the Licensed Products solely for its business operations, as
defined in Exhibit 1 during the term of this Agreement;
b) To the extent Exhibit 1 permits bundling of any or all of the Licensed
Products, Licensee agrees to add substantial value to the Licensed
Products contained in the bundle;
c) Except as expressly granted in Exhibit 1, License shall have no right
to use, modify, reproduce or distribute the Licensed Products, nor the
right to license third parties to exercise any rights with regard to
the Licensed Products;
d) License shall have no right to use the Licensed Products on behalf of
any third party, on a service bureau basis or otherwise unless (i)
such services are specifically permitted in Exhibit 1, and (ii) such
third party has entered into a license Agreement with Licensee or
First DataBank and First DataBank has been paid the required license
fee;
e) Under no circumstances shall Licensee use the Licensed Products, or
any portion thereof, to develop a competitive product, regardless of
what is set forth in Exhibit 1;
f) Licensee shall obtain no implied license rights to the Licensed
Products. Any rights not expressly granted to Licensee in this
Agreement shall be retained by First DataBank;
g) Although some tangible objects may be delivered to Licensee pursuant
to this Agreement, title to such objects shall not pass to Licensee,
and this Agreement is not for the sale of goods. The Licensed Products
shall be delivered to Licensee within twenty (20) working days from
the effective date on Exhibit 1. Updates thereto shall be delivered
with the frequency and in the format indicated in Exhibit 1.
3. TERM AND TERMINATION.
a) This Agreement and license shall continue for a term of three (3)
years from the Effective Date and thereafter shall automatically renew
for successive one (1) year periods at each renewal date at the
effective renewal rate, unless notice of non-renewal is provided in
accordance with 3.b, below;
2
<PAGE> 3
b) At least sixty (60) days before commencement of the renewal date,
First DataBank shall send to Licensee written notice of the applicable
renewal rate. Either party may give notice of non-renewal in its sole
and absolute discretion, without cause and without stating any reason
therefor. First DataBank or Licensee shall give written notice of
non-renewal to the other at least thirty (30) days prior to the end of
the term then in effect. If Licensee fails to give notice of non-
renewal pursuant to this subsection, Licensee shall be deemed to have
agreed to the applicable renewal rate for the next Fee Term;
c) Either party may terminate this license on thirty (30) days written
notice, if the other party has materially beached any provision of
this Agreement, and such breach has not been cured within such thirty
(30) day period;
d) Upon termination of this Agreement, Licensee shall immediately cease
use of the Licensed Products, and shall take such steps as are
necessary to prohibit further use of the Licensed Products within
Licensee's System and shall furnish First DataBank a written
description of the steps so taken. Termination of this Agreement shall
automatically terminate all sublicenses of the Licensed Products
granted by Licensee. Within thirty (30) days of termination, Licensee
shall return to First DataBank all copies or duplicates thereof of the
Licensed Products.
4. PAYMENT OF LICENSEE FEES. In consideration of the grant of the license,
Licensee agrees to pay the Fees ("License Fees") listed in Exhibit 1.
License Fees may consist of Annual Fees plus User Fees as specified in
Exhibit 1. The Annual Fee for the first Fee Term is payable by Licensee to
First DataBank on the Effective Date and Annual Fees for subsequent Fee
Terms are due and payable on each anniversary of the Effective Date. End
User Fees, when applicable, are billed quarterly and are due and payable
upon receipt of an invoice from First DataBank. Licensee's obligation to
pay License Fees for periods preceding termination will survive termination
of this Agreement.
5. IMPLEMENTATION. Licensee assumes all responsibility to program, or obtain
compatible software, for use of the Databases. All programming shall be
done in accordance with specifications included in Database Manuals and
supplements and other documentation provided by First DataBank. Licensee
agrees that when programmed, the System shall display Copyright Notices,
Disclaimers, and Expiration Dates as specified in individual Database and
Licensed Products Manuals.
6. COVENANTS OF LICENSEE. Licensee hereby agrees with First DataBank as
follows:
a) Licensee will alter, amend, modify, or change in any respect, any of
the Licensed Products unless authorized to do so by First DataBank or
unless such changes are clearly identified as Licensee modifications.
Licensee assumes all liability for any such Licensee modification;
3
<PAGE> 4
b) Licensee will not use the name of First DataBank, Inc. or "First
DataBank", the names of any of the First DataBank Knowledge Bases, or
any trademark owned by or licensed to First DataBank, except as
authorized in writing;
c) Licensee shall reimburse First DataBank at First DataBank's direct
cost for all shipping and delivery and for all First DataBank
originated magnetic media received by Licensee from First DataBank;
d) Licensee will hold the terms of this Agreement in strictest confidence
releasing them only to employees of Licensee requiring such
information and not to release or disclose them to any other party;
e) CONFIDENTIAL INFORMATION. Licensee acknowledges that the Licensed
Products are the proprietary property of First DataBank and that the
processes, formulas and methodology used in producing the Licensed
Products are valuable trade secrets. Licensee shall hold in confidence
and take reasonable measure, but not less than the measures taken by
Licensee to safeguard its own confidential information, to safeguard,
to prohibit access to, copying of, or disclosure of all confidential
information and materials provided by First DataBank under this
License, including, but not limited to, the Licensed Products and all
information contained therein, any updates to the Licensed Products,
and the User's Manuals. Licensee shall not disclose the terms of this
Agreement, except as required by law.
f) Licensee will pay all taxes, however designated, including sales and
use taxes and state and local privilege or excise taxes arising out of
this Agreement and the transaction contemplated hereby;
g) That as long as this Agreement is in effect, and for a one (1) year
period thereafter, Licensee shall maintain complete records with
respect to the use of the Licensed Products, and the number and type
of end user sites, if any. During normal business hours, at reasonable
intervals but no more often than quarterly, and upon reasonable
notice, First DataBank or its designated representative may audit and
review those records necessary to confirm that the fees paid to First
DataBank are correct and that Licensee has complied with all of the
terms of this Agreement, including but not limited to, the Declaration
of Use and Fee and Payment Schedule set forth in Exhibit 1;
h) USAGE. Licensee shall use the Licensed Products solely for Licensee's
business purposes as described in Exhibit 1, "Declaration of Use".
Licensee may not, without the prior written consent of First DataBank,
transmit the Licensed Products to other data processing systems or
units that are "on-line" with Licensee's data processing unit, or use
the Licensed Products, or any data derived
4
<PAGE> 5
from the Licensed Products in a computer service business, network,
time-sharing, multiple CPU, or multiple user arrangements including
the Internet and Intranets, except as, if applicable, explicitly
identified in Exhibit 1. Licensee shall not copy, reproduce, store in
a retrieval system, sell, assign, pledge, sublicense, convey,
transfer, redistribute, transmit, grant other rights in, or permit any
unauthorized use of the Licensed Products, or any of them, in any form
or by any media (electronic, mechanical, photocopy, recording, or
otherwise), on either a permanent or temporary basis to any third
party except as authorized in Exhibit 1. Licensee may use an outside
Data Recovery Center provided First DataBank is notified in writing
within thirty (30) days of such location. In such case, the terms of
this Agreement shall be fully applicable.
i) Licensee hereby covenants and agrees to indemnify and hold First
DataBank harmless from and against any liability, loss, injury or
expense (including reasonable attorneys' fees and court costs) imposed
upon, incurred or suffered by First DataBank by reason of Licensee's
negligence.
j) Licensee acknowledges and agrees that the covenants and Agreements
made in this Paragraph 6 are made for the benefit of First DataBank
and shall survive the termination of this Agreement. In the event of
any breach by Licensee of the terms of this Agreement, in addition to
other relief to which First DataBank shall be entitled, First DataBank
shall be entitled to terminate this License.
7. PROPRIETARY RIGHTS INDEMNIFICATION. First DataBank shall hold harmless and
defend Licensee against suits based solely on a claim that the use of
Licensed Products by Licensee under this Agreement infringes on any U.S.
patent, copyright, trademark, or other property right, provided that
Licensee gives First DataBank prompt written notice of such suits and
permits First DataBank to control the defense thereof.
8. DISCLAIMERS.
a) Licensee shall inspect and test Licensed Products upon receipt
thereof. The Licensed Products are deemed proper and correct unless,
within ten (10) working days after receipt thereof, Licensee provides
First DataBank with written notice and documentation of any error in
the Licensed Products;
b) First DataBank has utilized reasonable care in collecting and
reporting the information contained in the Licensed Products and has
obtained such information from sources believed to be reliable. First
DataBank, however, does not warrant the accuracy of codes, prices or
other data contained in the Licensed Products. Information reflecting
prices is not a quotation or offer to sell or purchase. The clinical
information contained in the Licensed Products is intended as a
supplement to, and not a substitute for, the knowledge, expertise,
skill, and
5
<PAGE> 6
judgment of physicians, pharmacists, or other healthcare professionals
in patient care. The absence of a warning for a given drug or drug
combination should not be construed to indicate that the drug or drug
combination is safe, appropriate or effective in any given patient.
c) FIRST DATABANK MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR
IMPLIED, OTHER THAN THOSE IN THIS LICENSE AGREEMENT, AND FURTHER MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE ACCURACY
OF THE DATA FROM WHICH THE LICENSED PRODUCTS ARE COMPILED, NOR THE
COMPATIBILITY OF THE LICENSED PRODUCTS WITH LICENSEE'S HARDWARE AND
SYSTEMS, AND SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
d) IN NO EVENT SHALL FIRST DATABANK BE LIABLE TO LICENSEE OR ANY THIRD
PARTY FOR ANY CONSEQUENTIAL, INDIRECT, INCIDENTAL, RELIANCE, OR
SPECIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST PROFITS, EVEN IF
FIRST DATABANK HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
e) IN NO EVENT SHALL FIRST DATABANK'S LIABILITY EXCEED THE AMOUNT PAID TO
IT BY LICENSEE FOR THE CURRENT TERM OF THIS LICENSE AGREEMENT,
REGARDLESS OF THE FORM OF THE ACTION OR CLAIM, AND REGARDLESS OF
WHETHER THE ACTION OR CLAIM IS BASED ON ANY ALLEGED ACT OR OMISSION OF
FIRST DATABANK, INCLUDING BUT NOT LIMITED TO ANY ACTION BASED ON
NEGLIGENCE, BREACH OF WARRANTY OR BREACH OF CONTRACT.
9. PROFESSIONAL RESPONSIBILITY. Licensee acknowledges that the professional
duty to the patient in providing healthcare services lies solely with the
healthcare professional providing patient care services. Licensee takes
full responsibility for the use of information provided by the Licensed
Products in patient care and acknowledges that the use of the Licensed
Products in no way is intended to replace or substitute for professional
judgment. First DataBank does not assume any responsibility for actions of
Licensee which may result in any liability or damages due to malpractice,
failure to warn, negligence or any other basis. Licensee shall ensure that
all healthcare professionals using the Licensed Products are aware of the
limitations of the use of the Licensed Products.
10. USE OF PATIENT EDUCATION. Licensee agrees to include one of the following
two disclaimers at the top of any patient education information material
provided to patients from the Patient Education Knowledge Databases:
6
<PAGE> 7
NOTE: The following information is intended to supplement, not
substitute for, the expertise and judgment of your physician,
pharmacist or other healthcare professional. It should not be
construed to indicate that the use of the drug is safe, appropriate,
or effective for you. Consult your healthcare professional before
taking this drug.
or
NOTE: The information in this monograph is not intended to cover all
possible uses, directions, precautions, drug interactions, or adverse
affects. This information is generalized and is not intended as
specific medical advice. If you have questions about the medicines you
are taking or would like more information, check with your doctor,
pharmacist or nurse.
11. ASSIGNMENT. This license and Licensee's rights hereunder may not be
assigned or otherwise transferred, voluntarily or by operation of law. Any
purported assignment of the rights or delegation of the duties under this
Agreement by Licensee shall be void unless prior written consent is secured
from First DataBank.
12. FORCE MAJEURE. Failure of First DataBank to perform or delay in the
performance of First DataBank's obligations under this Agreement due to any
cause or event not reasonably within First DataBank's control, including
but not limited to casualty, labor disputes, failure of equipment,
compliance with governmental authority or Act of God, shall not constitute
a breach of this Agreement and First DataBank's performance shall be
executed during such period of delay.
13. NOTICES. Notices hereunder shall be delivered by hand, air courier or
certified mail with return receipt requested to the address of the Licensee
identified on Exhibit 1, and shall be deemed delivered three (3) days after
mailing.
14. CHOICE OF LAW; VENUE. This Agreement shall be governed by and construed in
accordance with the laws of the United States and the State of California,
as applied to Agreements entered into and to be performed entirely within
California between California residents. The application of the United
Nations Convention for Contracts for the International States of Goods is
hereby expressly excluded. In the event of any dispute concerning this
Agreement or the Licensed Products, suit may be brought only in a court of
competent jurisdiction in the U.S. District Court of the Northern District
of California or the California Superior Court for the County of San Mateo.
7
<PAGE> 8
15. ENTIRETY; AMENDMENTS. This Agreement, including all Exhibits hereto,
constitutes the complete and exclusive statement of the Agreement between
the parties which supersedes all prior Agreements, proposals, oral or
written, and all other communications between the parties relating to the
subject matter of this Agreement. All amendments to this Agreement shall be
in writing signed by both parties.
16. NO WAIVER. No term or provision hereof shall be deemed waived and no such
breach excused unless such waiver or consent shall be in writing and signed
by the party claimed to have waived or consented. Any consent by a party
to, or waiver of a breach by the other, whether express or implied, shall
not constitute a consent for, or waiver of, or excuse for any other
different subsequent breach.
17. SEVERABILITY. If any provision of this Agreement is declared by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions of this Agreement shall continue in full force and effect.
IN WITNESS HEREOF, the parties hereto have executed this Agreement as the
effective date on Exhibit 1.
FIRST DATABANK
DATED: July 21, 1999 By: /s/ Marilyn Davis
---------------------------------
Signature
Marilyn Davis
Name (Print)
Contract Administration Manager
Title
LICENSEE
DATED: July 1, 1999 Medscape, Inc.
Licensee
By: /s/ MaryBeth Dougherty
Signature
MaryBeth Dougherty
Name (Print)
Director, Business Development
8
<PAGE> 9
Title
EXHIBIT 1
LICENSEE REPRESENTATIONS
DECLARATION OF USE
FEE AND PAYMENT SCHEDULES
ADDITIONAL TERMS AND CONDITIONS
This Exhibit 1 is a part of the Standard License Agreement between First
DataBank and Licensee and identifies Licensee, the Databases, Declaration of
Use, License Fees, and Additional Terms (if any) applicable to that Agreement.
The Effective Date of this Agreement is April 1, 1997.
A. LICENSEE REPRESENTATIONS
Licensee Name: Medscape, Inc.
Street Address: 134 West 29th Street
City/State/Zip: New York, NY 10001-5399
Telephone (voice): 212-760-3100
Telephone (fax): 212-760-3140
email address:
B. KNOWLEDGE BASES: Unless otherwise specified, Knowledge Bases are updated
monthly.
1.1 Databases - Master Files
NATIONAL DRUG DATA FILE (TM) (NDDF)
DRUG-FOOD INTERACTION MODULE
MINIMUM/MAXIMUM DAILY DOSE
PRECAUTION MODULES (Geriatric, Pediatric, Pregnancy
Lactation)
DRUG-DISEASE CONTRAINDICATIONS
PATIENT EDUCATION MODULE, English
INDICATIONS MODULE
QUICK MEDICAL REFERENCE (QMR), updated as available
NUTRITIONIST IV, updated biannually
C. DECLARATION OF USE:
1. Licensee shall use NDDF, DRUG-FOOD INTERACTION MODULE,
MINIMUM/MAXIMUM DAILY DOSE, PRECAUTION MODULES, DRUG-
9
<PAGE> 10
DISEASE CONTRAINDICATIONS and INDICATIONS MODULE exclusively as a source of
drug product information to support the operation of Licensee's Internet
healthcare/medical information system on a single site (www.Medscape.com)
on the World Wide Web (The Internet) at the site identified above in
Section A. It is understood the Licensed Products shall be accessed through
the Therapeutic Topics menu, Reference Tab and used to provide healthcare
information to healthcare professionals. Use by CUSTOMER excludes
redistribution or use of data to or for use in pharmacy or medical practice
management systems which support drug dispensing, prescription pricing,
claims preparation, or clinical medical records management applications, or
any other clinical application.
2. Licensee shall use the PATIENT EDUCATION MODULE, English exclusively as a
source of drug product information to support the operation of Licensee's
Internet healthcare/medical information system on a single site
(www.Medscape.com) on the World Wide Web (The Internet) at the site
identified above in Section A. It is understood the Licensed Products shall
be accessed through the Patient Information Tab and used to provide patient
education information to consumers. Use by CUSTOMER excludes redistribution
or use of data to or for use in pharmacy or medical practice management
systems which support drug dispensing, prescription pricing, claims
preparation, or clinical medical records management applications, or any
other clinical application.
3. Licensee shall use QMR and NUTRITIONIST IV exclusively as a source of drug
product information to support the operation of Licensee's Internet
healthcare/medical information system on a single site (www.Medscape.com)
on the World Wide Web (The Internet) at the site identified above in
Section A. It is understood the Licenses Products shall be accessed through
the Reference Tab and the Patient Information Tab to provide diagnostic
support and nutritional analysis to healthcare professionals. Use by
CUSTOMER excludes redistribution or use of data or for use in pharmacy or
medical practice management systems which support drug dispensing,
prescription pricing, claims preparation, or clinical medical records
management applications, or any other clinical application.
D. FEE AND PAYMENT SCHEDULE:
1.1 Definitions
Limited exclusive sponsorship of a therapeutic indication within a topic
area:
Each Topic Area (located on the Medscape Home Page) is limited to 5
sponsors. Since Medscape only sells one sponsorship for a therapeutic
indication within a topic area, it is considered exclusive.
10
<PAGE> 11
Example:
Limited exclusivity's within the Infectious Diseases Topic
Area will be restricted to only one of the following: oral
antibiotic, injectable antibiotic, anti-fungal, anti-viral,
and vaccine.
Revenue pool:
40% of each Topic Area sponsorships allocated over the life of
the sponsorship commitment.
Example:
40% *$200,000=$80,000
$80,000 divided by 12 months = $6,667
$6,667 = will be added to monthly revenue pool
1.2 Revenue Shares:
First DataBank will be compensated for advertising/sponsorship
sales revenue as indicated below. Revenue shares are based on
actual dollars received by Medscape, net of agency
commissions.
Sponsorships sold on Products supported by First DataBank
content:
Medscape sells a sponsorship
- Medscape earns 60% of sale
- FDB earns 40% of sale
First DataBank sells a sponsorship
- FDB earns 60% of sale
- Medscape earns 40% of sale
Example:
First DataBank sells a $125,000 rotation, First DataBank earns
$75,000; Medscape earns $50,000.
11
<PAGE> 12
2.1 Definitions
Value per Pageview
A Partners Value per Pageview reflects a Partners level of
commitment to Medscape. For instance, if a Partner is actively
selling Medscape sponsorship packages or products, and also
has an exclusive Agreement with Medscape, their level of
commitment to the success of Medscape is higher. Therefore,
their Value per Pageview is more valuable.
A Partners Value per Pageview is calculated as follows:
Monthly, revenue pool, divided by total Medscape pageview,
multiplied by the respective Partners category classification.
Example:
$200,000 monthly revenue pool divided by 1 million pageviews =
$.20
$.20 *category class #2 (60%) = $.12
$.12 = Partners Value per Pageview.
2.2 Revenue Shares
First DataBank earns a share of the monthly revenue pool. This
share is based on FDB's value per pageview multiplied by FDB's
content exposures.
First DataBank's value per pageview is derived by taking the
monthly revenue pool, dividing it by the total Medscape
pageviews, and then multiplying it by First DataBanks category
classification.
Example:
Monthly Revenue Pool: $200,000
Total Medscape Pageviews: 1,000,00
First DataBank's Category Classification: #2 (or 60%)
First DataBank's content exposures: 10,000
First DataBank's value per pageview = ($200,000/1,000,000)*60%
= $.12
First DataBank's monthly revenue share = $12*10,000 = $1,200
3.1 Definitions
Category Classification
Category Classifications are based on an exclusive contract
vs. a non-exclusive contract and a Partner actively selling
vs. inactive.
12
<PAGE> 13
Category Classification Schedule:
<TABLE>
<CAPTION>
Medscape Sales non-exclusive exclusive
-------------- ------------- ---------
<S> <C> <C>
Inactive 1 2
Active 2 3
</TABLE>
Percentage of Monthly Revenue Pool based upon Category
Classification:
<TABLE>
<CAPTION>
Category Class % of Mo. Revenue Pool Entitlement
-------------- ---------------------------------
<S> <C> <C>
Category #1: 30%
Category #2 60%
Category #3 100%
</TABLE>
3.2 Revenue Shares
30% commission on First DataBank's sales of a limited
exclusive sponsorship within the Medscape Topic Areas, which
will sell for $200,000 for 12 months.
Example:
*30% of $200,000 or $60,000
E. ADDITIONAL TERMS AND CONDITIONS:
1. For the purposes of this Agreement, a healthcare professional is
defined as any trained healthcare provider such as pharmacists, nurses
and doctors.
13
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
33-77665 of Medscape, Inc. on Form S-1 of our report dated February 12, 1999
(May 17, 1999 as to Note 13 and July 22, 1999 as to Note 14) relating to the
consolidated financial statements of Medscape, Inc. and of our report dated
April 9, 1999 relating to the financial statements of Healthcare Communications
Group, LLC appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
July 26, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF FREDRIC G. REYNOLDS TO ACT AS A DIRECTOR OF MEDSCAPE, INC.
The undersigned does hereby consent to his nomination as a director of
Medscape, Inc. (the "Company") pursuant to Section 2.2c. of the Stockholders'
Agreement to be entered into by and among the Company, CBS Corporation and
certain other stockholders of the Company, as contemplated by that certain Stock
Purchase Agreement entered into by and between the Company and CBS Corporation
on July 4, 1999.
The undersigned hereby further consents to being named as a prospective
director in the Company's Registration Statement.
/s/ FREDRIC G. REYNOLDS
--------------------------------------
Name: Fredric G. Reynolds
Title: Executive Vice President and
CFO, CBS Corporation
Dated as of July 7, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ANDREW HEYWARD TO ACT AS A DIRECTOR OF MEDSCAPE, INC.
The undersigned does hereby consent to his nomination as a director of
Medscape, Inc. (the "Company") pursuant to Section 2.2c. of the Stockholders'
Agreement to be entered into by and among the Company, CBS Corporation and
certain other stockholders of the Company, as contemplated by that certain Stock
Purchase Agreement entered into by and between the Company and CBS Corporation
on July 4, 1999.
The undersigned hereby further consents to being named as a prospective
director in the Company's Registration Statement.
/s/ ANDREW HEYWARD
--------------------------------------
Name: Andrew Heyward
Title: President, CBS News
Dated as of July 7, 1999
