<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 000-28285
----------------------------------
MEDICALOGIC/MEDSCAPE, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0890696
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
20500 NW EVERGREEN PARKWAY,
HILLSBORO, OREGON 97124
(Address of principal executive offices)
(503) 531-7000
(Registrant's telephone number,
including area code)
Check whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
As of August 7, 2000 there were 55,242,770 shares of the Registrant's Common
Stock outstanding.
1
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements: Number
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 19
ITEM 3. Default Upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Securities Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
Signatures 22
Index to Exhibits 23
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,899 $ 110,320
Short-term investments 61,675 28,536
Accounts receivable, net 17,371 6,473
Prepaid expenses and other current assets 14,475 4,515
---------- ----------
Total current assets 132,420 149,844
Investments 11,470 --
Property and equipment, net 34,734 13,087
Goodwill and intangible assets, net 960,113 4,988
Prepaid advertising and other assets 53,677 435
--------- ----------
Total assets $1,192,414 $ 168,354
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,076 $ 5,638
Accrued and other liabilities 25,892 2,639
Deferred revenue 8,843 3,269
Long-term liabilities, current portion 12,375 2,432
---------- ----------
Total current liabilities 59,186 13,978
Long-term liabilities, net of current portion 10,541 2,233
Deferred revenue, long-term 1,627 1,627
Other long-term liabilities 801 676
---------- ----------
Total liabilities 72,155 18,514
---------- ----------
Shareholders' equity:
Common stock, no par value; 150,000,000 shares
authorized; 55,091,549 and 32,364,391 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively $1,255,487 $ 229,724
Warrants 32,818 --
Common stock notes receivable, net ( 7,887) (11,788)
Deferred stock compensation (3,037) (4,570)
Accumulated deficit (157,122) (63,526)
---------- ----------
Total shareholders' equity 1,120,259 149,840
---------- ----------
Total liabilities and shareholders' equity $1,192,414 $ 168,354
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Licenses, service and support $ 2,156 $ 4,088 $ 7,512 $ 7,085
Sponsorship and advertising 6,055 -- 6,055 --
Subscriptions and eCommerce 2,678 -- 2,930 --
----------- ----------- ----------- -----------
Total revenues 10,889 4,088 16,497 7,085
----------- ----------- ----------- -----------
Operating expenses:
Cost of operations 8,692 1,748 13,164 3,277
Sales and marketing 15,518 2,907 24,177 5,262
Research and development 4,318 2,696 8,077 4,883
General and administrative 5,957 958 9,262 1,215
Depreciation and amortization 43,331 322 45,285 628
Restructuring charges 13,906 -- 13,906 --
----------- ----------- ----------- -----------
Total operating expenses 91,722 8,631 113,871 15,265
----------- ----------- ----------- -----------
Operating loss (80,833) (4,543) (97,374) (8,180)
Other income, net 1,963 206 3,778 417
----------- ----------- ----------- -----------
Net loss $ (78,870) $ (4,337) $ (93,596) $ (7,763)
=========== =========== =========== ===========
Net loss per share:
basic and diluted $ (1.85) $ (0.54) $ (2.53) $ (1.02)
=========== =========== =========== ===========
Weighted average shares:
basic and diluted 42,715 7,994 37,059 7,641
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (93,596) $ (7,763)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 45,285 628
Deferred stock compensation and
other non-cash charges 3,660 2,223
Non-cash restructuring charges 8,892 --
Changes in assets and liabilities, net of balances acquired:
Accounts receivable (1,733) 3,877
Prepaid expenses and other assets 2,298 (614)
Accounts payable 1,985 733
Accrued liabilities 4,474 (1,082)
Deferred revenue 116 (363)
----------- -----------
Net cash used in operating activities (28,619) (2,361)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (12,111) (5,066)
Payments related to business combinations, net
of cash acquired (16,795) (3,152)
Purchases of short-term investments, net (13,660) (24,095)
----------- -----------
Net cash used in investing activities (42,566) (32,313)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock -- 34,300
Net proceeds from issuance of common stock 605 612
Proceeds from issuance of notes payable -- 5,390
Principal payments under capital lease obligations
and notes payable (841) (286)
----------- -----------
Net cash provided by (used in)
financing activities (236) 40,016
----------- -----------
Net increase (decrease) in cash and cash
equivalents (71,421) 5,342
Cash and cash equivalents, beginning of period 110,320 4,718
----------- -----------
Cash and cash equivalents, end of period $ 38,899 $ 10,060
=========== ===========
Supplemental summary of non-cash investing and financing activities:
Fair value at conversion of the outstanding common stock,
options and warrants in conjunction with the business
combinations with Medscape, Inc. and
Total eMed, Inc. (Note 2). $1,058,492 $ --
Common stock issued for purchase of a business -- 3,300
Accretion of preferred stock redemption preference -- 49
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MedicaLogic/Medscape, Inc. and its subsidiaries ("MedicaLogic/Medscape" or the
"Company") focus on the timely delivery of clinical data and up-to-date
knowledge to healthcare professionals and consumers, saving both time and
money, and improving the healthcare experience. The Company integrates the
broad reach of its authoritative web sites, www.medscape.com and
cbs.healthwatch.com, with the depth of its clinical applications for online
medical records. These online medical records are the digital hub for
Internet and wireless connection of healthcare professionals, consumers, and
other healthcare stakeholders.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated statements of operations and
cash flows include the results of operations and cash flows of
MedicaLogic/Medscape, Inc. and its wholly owned subsidiaries for the three
months and six months ended June 30, 2000 and 1999. For subsidiaries acquired
during those periods, the related results of operations and cash flows are
included from the date of acquisition or merger forward.
The unaudited condensed consolidated balance sheets include the accounts of the
Company as of June 30, 2000 and 1999. The unaudited condensed financial
statements have been prepared by the Company's management and reflect all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the interim periods presented. All significant intercompany
accounts and transactions have been eliminated in consolidation. The results of
operations for the three months and six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the year ended December 31, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted under the Securities and Exchange Commission's
rules and regulations. The unaudited condensed consolidated financial statements
and notes included herein should be read in conjunction with MedicaLogic,
Inc.'s, Medscape, Inc.'s, and Total eMed, Inc.'s audited consolidated financial
statements and notes thereto for the year ended December 31, 1999 included in
the Company's Registration Statement on Form S-4/A and the Annual Reports of
Medicalogic, Inc. and Medscape, Inc. on Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
current year presentations.
GOODWILL AND INTANGIBLE ASSETS
Goodwill, which represents costs in excess of net tangible and intangible assets
of businesses acquired, and intangible assets primarily result from acquisitions
accounted for under the purchase method as described in Note 2. Amortization of
goodwill and intangible assets is provided on the straight-line basis over the
estimated useful lives of the assets; three to four years for goodwill, 18
months to five years for intangible assets. Intangible assets consist primarily
of acquired technology, customer lists and trademarks. In accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," management reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable. As a result
of this review and the corporate restructuring described in Note 3, the Company
recorded a provision in the amount of $860 during the three months ended June
30, 2000 to write down intangible assets associated with the workforces acquired
in the business combinations described in Note 2.
6
<PAGE>
(2) MERGER AND ACQUISITIONS
Medscape, Inc.
In May 2000, the Company completed its merger with Medscape, Inc. ("Medscape") a
Delaware corporation, for approximately 14,932,000 shares of the Company's
common stock and assumption of approximately 2,545,000 options and warrants in a
merger transaction valued at approximately $724.2 million.
The merger with Medscape was accounted for using the purchase method of
accounting with the purchase price allocated to assets acquired and liabilities
assumed based on their fair values. The purchase price was comprised of Company
common stock issued amounting to approximately $637.1 million valued at $42.6688
per share, option and warrant rights converted into option and warrant rights of
the Company valued at approximately $82.3 million, and professional fees
amounting to approximately $4.7 million. The value of option rights converted at
the merger date was determined in accordance with the fair value method under
FAS 123 using the following weighted-average assumptions: exercise price $12.38,
volatility of 100%, expected life of 3 years, interest rate of 6.5%; and no
dividends. The value of warrant rights converted at the merger date was
determined using the Black-Scholes method with the following assumptions:
exercise price $30.96, volatility of 100%, expected life of 6 years, interest
rate of 6.5%; and no dividends. Professional fees include banking fees, legal
fees, accounting fees, and fees for other related professional services.
The purchase price over the fair value of net tangible and intangible assets of
Medscape (goodwill), which amounted to approximately $597.2 million, will be
amortized over three years. The results of operations and cash flows of Medscape
have been included in the Company's condensed consolidated financial statements
from the date of acquisition forward.
Total eMed, Inc.
In May 2000, the Company completed its acquisition of Total eMed, Inc. ("Total
eMed") a Delaware corporation, for approximately 7,450,000 shares of the
Company's common stock and assumption of approximately 550,000 options in a
transaction valued at approximately $343.8 million.
The acquisition of Total eMed was accounted for using the purchase method of
accounting with the purchase price allocated to assets acquired and liabilities
assumed based on their fair values. The purchase price was comprised of Company
common stock issued amounting to approximately $317.9 million valued at $42.6688
per share, option rights converted into option rights of Company common stock
valued at approximately $21.2 million, and professional fees amounting to
approximately $4.7 million. The value of option rights converted at the
acquisition date was determined in accordance with the fair value method under
FAS 123 using the following weighted-average assumptions: exercise price $6.45,
volatility of 100%, expected life of 3 years, interest rate of 6.5%; and no
dividends. Professional fees include banking fees, legal fees, accounting fees,
and fees for other related professional services.
The purchase price over the fair value of net tangible and intangible assets of
Total eMed (goodwill), which amounted to approximately $326.8 million, will be
amortized over four years. The results of operations and cash flows of Total
eMed have been included in the Company's condensed consolidated financial
statements from the date of acquisition forward.
Other Investments
In April 2000, the Company purchased all of the outstanding capital stock of
AnywhereMD.com, Inc., a California corporation, for approximately $7.8
million in cash, professional fees and assumed liabilities. The acquisition
was accounted for using the purchase method and, accordingly, the purchase
price was allocated to the tangible and intangible assets acquired and the
liabilities assumed on the basis of their fair values on the acquisition
date. The total goodwill recorded in connection with the purchase was
approximately $7.7 million and is being amortized over 3 years.
In June 2000, the Company acquired an interest in Lifechart.com, Inc. for
approximately $8.3 million in cash representing an approximate 10% ownership
in connection with establishing a joint development, sales and marketing
agreement. The investment was accounted for using the cost method.
Pro Forma Financial Information
7
<PAGE>
The following unaudited pro forma financial information combines the results of
operations of the Company, Medscape and Total eMed assuming the respective
merger and acquisition were consummated at the beginning of the periods
presented. The other investments referred to above were not material and are not
included in the pro forma results below. The pro forma results are not
necessarily indicative of what would have occurred if the merger and acquisition
had been in effect for the periods presented. In addition, they are not intended
to be a projection of future results and do not reflect any synergies that might
be achieved from combined operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 26,788 $ 13,574
Net loss $ (281,960) $ (178,730)
Net loss per share:
basic and diluted $ (5.23) $ (5.95)
</TABLE>
The above pro forma net loss amounts for the six months ended June 30, 2000 and
1999 have been adjusted to include the amortization of goodwill and other
intangibles related to the Medscape merger and Total eMed acquisition for each
period.
(3)RESTRUCTURING CHARGES
Restructuring charges relate to the consolidation of duplicate functions and
activities primarily as a result of the merger and acquisition described in Note
2. These actions resulted in a reduction of approximately 10% of the Company's
workforce, a reduction in total facilities, and impairment of certain assets.
Restructuring charges are primarily comprised of costs associated with severance
packages, cancellation of lease agreements, and impairments of abandoned
technologies and property and equipment. These charges amounted to approximately
$13.9 million for the three months and six months ended June 30, 2000. At June
30, 2000, approximately $3.6 million relating to these programs was included in
current liabilities.
As of June 30, 2000, the following amounts were recorded:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30, 2000
-------------------------------
Accrual at
Accruals Write-offs/Payments June 30, 2000
-------- -------------------- ---------------
<S> <C> <C> <C>
Employee severance and related
expenses $ 8,319 $ 5,283 $ 3,036
Impairment of technology and
intangible assets 3,108 3,108 --
Abandonment and impairment of
of facilities and property
and equipment 2,479 1,934 545
-------- -------------------- ---------------
$ 13,906 $ 10,325 $ 3,581
======== ==================== ===============
</TABLE>
The above provisions and related restructuring reserves are estimates based on
the Company's current knowledge. Adjustments to the restructuring provisions may
be necessary in the future based on further developments regarding restructuring
related costs.
(4) BALANCE SHEET COMPONENTS
Prepaid Advertising
8
<PAGE>
As a result of the Company's merger with Medscape (Note 2), the Company
acquired, among other intangible assets, certain assets related to Medscape's
agreements with CBS Corporation ("CBS") which commenced on September 3, 1999.
These assets primarily consist of prepaid advertising with a discounted, tax
effected fair value of approximately $64.8 million, based on an independent
appraisal, and are included in prepaid advertising and other assets net of the
current portion expected to be recognized during the next year. Over the
remainder of the seven-year term of the Advertising and Promotion Agreement, CBS
will arrange for the placement of the remaining balance of advertising and
promotion in the United States for the Company's consumer and professional web
sites and other products and services. At June 30, 2000, the Company is entitled
to receive approximately $127 million of additional advertising and promotion
from CBS under this agreement. Pursuant to the Trademark and Content Agreement,
CBS granted the Company a license to use the "CBS" trademark and "Eye" design
and to access health related news content for a seven-year period. Under the
agreement CBS retains significant control over the use and presentation of the
CBS health content and CBS trademarks.
The approximately $64.8 million related to the advertising services to be
provided by CBS will be expensed as used over the life of the agreement.
Included in sales and marketing during the three months and six months ended
June 30, 2000 was approximately $1.5 million of expense related to the
utilization of advertising and promotion services under these agreements.
WARRANTS
As a result of the Company's merger with Medscape in May 2000 (Note 2),
outstanding warrants to purchase shares of Medscape common stock were converted
to warrants to purchase 0.323 shares of the Company's common stock. At June 30,
2000, 905,794 warrants to purchase Company common stock were exercisable at
$30.96 per share. The warrants were issued in connection with an agreement with
America Online, Inc., under which AOL has agreed to promote the Company's
co-branded web sites, through contextual links and banners, on the following AOL
properties: AOL, AOL.com, CompuServe Service, Netscape Netcenter and Digital
City.
(5) INCOME STATEMENT COMPONENTS
DEFERRED STOCK COMPENSATION
The Company recognized deferred stock compensation expense as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
------------------- ---------------------
2000 1999 2000 1999
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Cost of operations $ 87 $ -- $ 183 $ --
Sales and marketing 97 -- 311 --
Research and development 118 -- 182 --
General and administrative 60 -- 129 --
-------- --------- --------- --------
Total deferred stock compensation $ 362 $ -- $ 805 $ --
======== ========= ========= ========
</TABLE>
Deferred stock compensation represents the difference between the purchase or
exercise price of certain restricted stock and stock option grants and the
deemed fair value of the Company's common stock at the date of grant. The
deferred stock compensation balance at June 30, 2000 was $3.0 million and is
being amortized over the three year vesting period. Amortization expense is
estimated to total $1.4 million in 2000, $1.2 million in 2001 and $0.4 million
in 2002.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS.
Except for historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Moreover, from time to time the Company and its management may issue and make
forward-looking statements. These forward-looking statements include, among
others, those statements using terminology such as "may", "will", "expects",
"plans", "estimates", "anticipates", "potential", "believes", "intends" or the
negative thereof or other comparable terminology regarding beliefs, plans,
expectations, or intentions regarding the future. Forward-looking statements
include statements regarding the rate of growth and acceptance of
MedicaLogic/Medscape's Internet and wireless products and services, new
products, web sites and services, expected revenues from advertising, sponsored
programs, sponsored content, eCommerce, transcription services, license and
subscription fees and the relative mix between revenue sources, the level of
research and development, sales and marketing, administrative and other
operating costs, additional investment in staff and infrastructure and
additional capital needs. MedicaLogic/Medscape wishes to caution the reader that
these forward-looking statements involve risks and uncertainties and the factors
below, as well as the factors detailed below under "Factors That May Affect
Future Results of Operations", the factors detailed in our Annual Report on Form
10-K filed with the Securities and Exchange Commission under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Results of Operations" and the factors described
under "Risk Factors" in our Registration Statement on Form S-4 filed with the
Securities and Exchange Commission, may cause MedicaLogic/Medscape's results to
differ materially from those stated in the forward-looking statements. These
factors include: (i) our business will be harmed if we do not achieve broad
acceptance of our products and services by physicians, patients, medical care
providers and other healthcare stakeholders; (ii) our Internet-based business
model is new and unproven and may not be successfully implemented; (iii) our
business will be harmed if Medscape's and Total eMed's operations and products
are not successfully integrated with MedicaLogic/Medscape's operations and
products; (iv) our failure to successfully introduce new products and services
or to enhance our current products and services will adversely affect our
business; (v) our failure to establish and maintain strategic relationships will
adversely affect our business; and (vi) we are experiencing rapid growth and our
failure to manage our growth effectively will harm our business and operations.
The following discussions also should be read in conjunction with MedicaLogic,
Inc.'s, Medscape, Inc.'s, and Total eMed, Inc.'s audited consolidated financial
statements and notes thereto for the year ended December 31, 1999 included in
the Company's Registration Statement on Form S-4/A and the Annual Reports of
Medicalogic, Inc. and Medscape, Inc. on Form 10-K for the year ended December
31, 1999 filed with the Securities and Exchange Commission.
OVERVIEW
The business of MedicaLogic/Medscape, Inc. ("we", "our" or "the Company") is to
deliver "health information that matters" to health professionals and consumers,
with the goal of saving time and money, and improving the healthcare
experience. We provide health information ranging from journalistic content
including medical news, articles, and conference summaries, to highly
specific data such as individual digital medical records. The Company
combines this information to facilitate improved decision making by
physicians and patients at the point of care. The Company provides to
healthcare providers and consumers an array of offerings that range from the
simplest to adopt - browsing a website or downloading pages to a handheld or
wireless device - to the deepest applications, including a comprehensive,
paperless, digital medical record system. The Company's strategy is to engage
as many end users as possible with its broad reaching services, then to move
customers toward deeper applications, in manageable steps of complexity and
functionality. The web-based transcription offering is an example of how the
Company is providing such steps that minimize the behavioral change required
of physicians while moving them toward the fully digital medical record.
We have been developing, marketing and supporting electronic medical records for
over a decade with products in daily use by physicians throughout the United
States. While most healthcare information systems have primarily supported
financial and administrative functions, we have focused on the challenge of
providing clinical solutions for physicians, patients and medical care
providers. Our technology uses both the Internet and wireless technology to link
medical care providers and consumers to physicians using our many offerings. The
Company is a leading provider of electronic medical record software in
10
<PAGE>
the healthcare industry. We also provide physicians with Internet based
transcription services, via voice capture by either telephone or handheld
devices, returning finished notes through the Internet. In addition, we provide
web-based healthcare information that assists both physicians and patients,
services to facilitate connectivity, transactions, information and
communications between physicians, patients and medical care providers.
The Company recently completed its merger with Medscape, Inc. and its
acquisition of Total eMed, described below, and changed its name from
MedicaLogic, Inc. to MedicaLogic/Medscape, Inc. In our efforts to combine and
integrate these companies, we took significant steps to properly size the
business and focus our efforts on key success factors. This led to the
consolidation of duplicate functions and activities and resulted in a reduction
of approximately 10% of the Company's workforce, a reduction in total
facilities, and impairment of certain assets. The estimated cost savings to be
realized from this reorganization is estimated to be greater than $20 million on
an annual basis. The Company expects full implementation of the workforce
reductions within 90 days, with the realization of cost benefits in the second
half of 2000.
STRATEGIC ACQUISITIONS
During May 2000, the Company acquired all the outstanding capital stock of
Medscape, Inc. ("Medscape") and Total eMed, Inc. ("Total eMed") in transactions
accounted for using the purchase method. The Company issued approximately
14,932,000 and 7,450,000 shares of the Company's common stock in the
transactions with Medscape and Total eMed, respectively. The total purchase
price, including acquisition related charges and the estimated fair value of
converted warrants and options, was approximately $1,068 million, and resulted
in a total of approximately $924 million of goodwill. The results of operations
and cash flows of all acquisitions during the period have been included in the
Company's condensed consolidated financial statements from the respective dates
of acquisition forward.
OTHER INVESTMENTS
In April 2000, the Company purchased all of the outstanding capital stock of
AnywhereMD.com, Inc. for approximately $7.8 million in cash, professional
fees and assumed liabilities. The acquisition was accounted for using the
purchase method and, accordingly, the purchase price was allocated to the
tangible and intangible assets acquired and the liabilities assumed on the
basis of their fair values on the acquisition date. The total goodwill
recorded in connection with the purchase was approximately $7.7 million and
is being amortized over 3 years.
In June 2000, the Company acquired an interest in Lifechart.com, Inc. for
approximately $8.3 million in cash representing an approximate 10% ownership
in connection with establishing a joint development, sales and marketing
agreement. The investment was accounted for using the cost method.
RESULTS OF OPERATIONS
The following table sets forth the Company's revenues, operating expenses, other
income and expense, and net loss as a percentage of total revenues for the three
and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Licenses, service and support 19.8% 100.0% 45.5% 100.0%
Sponsorship and advertising 55.6 -- 36.7 --
Subscriptions and eCommerce 24.6 -- 17.8 --
-------- -------- -------- -------
Total revenues 100.0 100.0 100.0 100.0
-------- -------- -------- -------
Operating expenses:
Cost of operations 79.8 42.8 79.8 46.3
Sales and marketing 142.5 71.1 146.6 74.3
Research and development 39.7 65.9 49.0 68.9
General and administrative 54.7 23.4 56.1 17.1
Depreciation and amortization 397.9 7.9 274.5 8.9
Restructuring charges 127.7 -- 84.3 --
-------- -------- -------- -------
Total operating expenses 842.3 211.1 690.3 215.5
-------- -------- -------- -------
Operating loss (742.3) (111.1) (590.3) (115.5)
11
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Total other income, net 18.0 5.0 22.9 5.9
-------- --------- -------- -------
Net loss (724.3)% (106.1)% (567.4)% (109.6)%
======== ========= ======== =======
</TABLE>
KEY METRICS
Adoption of the Company's offerings continues to grow as demonstrated by an
increase in clinician users of online health record applications to 19,600,
compared with 12,000 at the end of the previous quarter, a 63% increase in three
months. Of this total, 10,700 were using the Company's Internet and handheld
(wireless) products, and 30% of these users were paying subscribers. The total
number of patient records in all of the Company's systems approached 13.4
million on June 30, 2000, compared with 9.2 million on March 31, 2000, an
increase of 46% for the three months ended June 30, 2000.
Similar continued growth was evident in the metrics for the medscape.com
professional site as registered physician users exceeded 440,000, an increase of
90,000, or 26%, for the three months ended June 30, 2000. Nonphysician clinician
users reached 1.2 million, growing by 200,000, or 20%. Total consumer growth
exceeded 6%, or 50,000, for the quarter, as consumer membership reached 850,000.
THREE MONTHS ENDED JUNE 30, 2000
The Company incurred a net loss of approximately $78.9 million and $4.3 million
for the three months ended June 30, 2000 and 1999, respectively. This net loss
increased primarily from the amortization of approximately $40.6 million of
goodwill and intangible assets and subsequent restructuring charges of
approximately $13.9 million related to the merger with Medscape and the
acquisition of Total eMed. As of June 30, 2000, MedicaLogic/Medscape had an
accumulated deficit of approximately $157.1 million. The Company expects the
third quarter net loss to increase primarily due to the inclusion of non-cash
amortization expense for the full quarter, increasing from approximately $40.6
million to approximately $83.2 million, and the inclusion of a full quarter of
operating results from companies acquired during the second quarter.
REVENUES
The Company generates revenues from three sources: licenses, service and
support; sponsorship and advertising; and subscriptions and eCommerce. Licenses,
service and support includes fees charged for product license and related
installation services and support contracts primarily related to digital medical
record applications. Sponsorship and advertising is comprised of fees and
revenue from other healthcare entities, primarily pharmaceutical companies, who
wish to reach the Company's customers as they access and utilize our online
continuing professional education and detailed content offerings. Subscriptions
and eCommerce includes monthly subscription fees for digital medical record
applications, our Internet based and wireless technologies, transcription
services, and electronic commerce.
Total revenues increased to approximately $10.9 million from approximately $4.1
million for the three months ended June 30, 2000 and 1999, respectively. Of this
increase, approximately $8.7 million relates to increased revenue from new
product offerings and acquired businesses. This increase was partially offset by
a decrease of approximately $1.9 million in revenue from licenses, service and
support revenues as expected as the Company moved to subscription and
application service provider (ASP) models for more of its product offerings.
Sponsorship and advertising revenue increased to approximately $6.1 million and
was a new revenue source for the Company during the quarter. This revenue is
derived from a variety of sources including advertising, sponsorship of online
medical conferences, and certain continuing professional education activities.
Sponsorship and advertising revenue is expected to continue to be a significant
source of revenue for the Company but will be subject to seasonal variations
during the summer months.
Subscription and eCommerce revenues increased to approximately $2.7 million. The
Company began recognizing subscription revenue in the first quarter of 2000. The
Company expects total subscription and eCommerce revenues will continue to grow
as we focus on alternative pricing programs for our wireless, transcription, and
digital medical record applications and also due to the inclusion of revenues
from acquired companies for entire periods.
OPERATING EXPENSES
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<PAGE>
COST OF OPERATIONS. Cost of operations is comprised of our data centers, certain
licensing and editorial development costs, and cost of transcriptionists. Cost
of operations as a percentage of revenues was approximately 80% and 43% for the
three months ended June 30, 2000 and 1999, respectively. Cost of operations
increased to approximately $8.7 million from $1.7 million for the three months
ended June 30, 2000 and 1999, respectively, primarily due to additional data
center sites, capacity, and the addition of editorial costs for sponsorship and
advertising activities from companies acquired during the period. During the
next quarter, we expect these costs to be nearly 50% higher as it will include
the full quarter of operating expenses from acquired companies coupled with
anticipated revenue growth.
SALES AND MARKETING. Sales and marketing expense represented approximately 143%
and 71% of total revenues for the three months ended June 30, 2000 and 1999,
respectively. Sales and marketing increased to approximately $15.5 million from
$2.9 million for the three months ended June 30, 2000 and 1999, respectively,
and included non-cash costs related primarily to the CBS advertising and
promotion agreement of approximately $1.5 million. The increase in sales and
marketing resulted primarily from the addition of costs from companies acquired
during the quarter, and increased expenditures due to the expansion of the
Company's products and services. During the next quarter, we expect these costs
to increase by approximately 30% as it will include the full quarter of
operations of acquired companies coupled with increased sales expenditures due
to anticipated revenue growth.
RESEARCH AND DEVELOPMENT. Research and development costs represented
approximately 40% and 66% of total revenues for the three months ended June 30,
2000 and 1999, respectively. The decrease of research and development as a
percentage of revenue is primarily related to the greater growth in revenue from
acquired companies. Research and development increased to approximately $4.3
million from $2.7 million for the three months ended June 30, 2000 and 1999,
respectively, primarily due to the addition of development staff for the
development of our internet and wireless offerings. In addition, during the
third quarter we expect to incur nonrecurring charges of approximately $0.6
million, primarily related to transitioning certain development efforts to new
engineering teams, bringing third quarter development costs to approximately
$6.0 million.
GENERAL AND ADMINISTRATIVE. General and administrative costs represented
approximately 55% and 23% of total revenues for the three months ended June 30,
2000 and 1999, respectively. General and administrative costs increased to
approximately $6.0 million from $1.0 million for the three months ended June 30,
2000 and 1999, respectively. The increase resulted from the addition of
administrative personnel, contractors and professional services to support the
growth of the Company's business, added costs related to being a public company,
and the additional costs from acquired companies. Due to the restructuring
efforts undertaken recently, these costs are expected to decline by up to 10% in
the third quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization represented
approximately 398% and 8% of total revenues for the three months ended June 30,
2000 and 1999, respectively. Depreciation and amortization increased to $43.3
million from $0.3 million for the three months ended June 30, 2000 and 1999,
respectively. The increases resulted almost entirely from the Company's merger
and acquisitions during the quarter, which resulted in increased amortization of
approximately $40.2 million. Depreciation and amortization is expected to be
approximately $90 million in future quarters due primarily to the inclusion of
the full quarter of amortization of intangible assets.
OTHER INCOME. Other income increased to approximately $2.0 million from $0.2
million for the three months ended June 30, 2000 and 1999, respectively. The
increase in other income is primarily attributable to an increase in interest
earned on cash and cash equivalents and short-term investments resulting from
the issuance of stock in the Company's initial public offering. The Company
expects other income to decrease in future quarters as the proceeds from the
initial public offering are used primarily to finance its operations and support
its growth.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The Company incurred a net loss of approximately $93.6 million and $7.8 million
for the six months ended June 30, 2000 and 1999, respectively. This net loss
increased primarily from the amortization of approximately $40.9 million of
goodwill and intangible assets and subsequent restructuring charges of
approximately $13.9 million related to the merger with Medscape and the
acquisition of Total eMed. As of June 30, 2000, MedicaLogic/Medscape had an
accumulated deficit of approximately $157.1 million. MedicaLogic/Medscape
expects that it will continue to see increasing net losses as the Company
completes its first full quarter of operations as a combined company due to the
increased amortization of goodwill
13
<PAGE>
and intangible assets acquired in the merger with Medscape and the acquisition
of Total eMed.
REVENUES
Total revenues increased to approximately $16.5 million from approximately $7.1
million for the six months ended June 30, 2000 and 1999, respectively. Of this
increase, approximately $9.0 million relates to increased revenue from new
product offerings and acquired businesses. This increase was partially offset by
a decrease of approximately $0.4 million in revenue from licenses, service and
support revenues as expected as the Company moved to subscription and ASP models
for more of its product offerings.
Sponsorship and advertising revenue increased to approximately $6.1 million and
was a new revenue source for the Company during the quarter. This revenue is
derived from a variety of sources including advertising, sponsorship of online
medical conferences, and certain continuing professional education activities.
Sponsorship and advertising revenue is expected to continue to be a significant
source of revenue for the Company but will be subject to seasonal variations in
the summer months.
Subscription and eCommerce revenues increased to approximately $2.9 million. The
Company began recognizing subscription revenue in the first quarter of 2000. The
Company expects total subscription and eCommerce revenues to continue to grow as
we focus on alternative pricing programs for our wireless, transcription, and
digital medical record applications and also due to the inclusion of revenues
from acquired companies for entire periods.
EXPENSES
COST OF OPERATIONS. Cost of operations is comprised of our data centers, certain
licensing and editorial development costs, and cost of transcriptionists. Cost
of operations as a percentage of revenues was approximately 80% and 46% for the
six months ended June 30, 2000 and 1999, respectively. Cost of operations
increased to approximately $13.2 million from $3.3 million for the six months
ended June 30, 2000 and 1999, respectively, primarily due to additional data
center sites, capacity, and the addition of editorial costs for sponsorship and
advertising activities from companies acquired during the period. During the
remainder of the year, we expect these costs to be substantially higher as it
will include the full period of operating expenses from acquired companies
coupled with anticipated revenue growth.
SALES AND MARKETING. Sales and marketing expense represented approximately 147%
and 74% of total revenues for the six months ended June 30, 2000 and 1999,
respectively. Sales and marketing increased to approximately $24.2 million from
$5.3 million for the six months ended June 30, 2000 and 1999, respectively, and
included non-cash costs related primarily to the CBS advertising and promotion
agreement of approximately $1.5 million. The increase in sales and marketing
resulted primarily from the addition of costs from companies acquired during the
quarter, and increased expenditures due to the expansion of the Company's
products and services. During the next period, we expect these costs to be
substantially higher as it will include the full period of operations of
acquired companies coupled with increased sales expenditures due to anticipated
revenue growth.
RESEARCH AND DEVELOPMENT. Research and development costs represented
approximately 49% and 69% of total revenues for the six months ended June 30,
2000 and 1999, respectively. The decrease of research and development as a
percentage of revenue is primarily related to the greater growth in revenue from
acquired companies. Research and development increased to approximately $8.1
million from $4.9 million for the six months ended June 30, 2000 and 1999,
respectively, primarily due to the addition of development staff for the
development of our internet and wireless offerings. In addition, during the
third quarter we expect to incur nonrecurring charges of approximately $0.6
million, primarily related to transitioning certain development efforts to new
engineering teams.
GENERAL AND ADMINISTRATIVE. General and administrative costs represented
approximately 56% and 17% of total revenues for the six months ended June 30,
2000 and 1999, respectively. General and administrative costs increased to
approximately $9.3 million from $1.2 million for the six months ended June 30,
2000 and 1999, respectively. The increase resulted from the addition of
administrative personnel, contractors and professional service to support the
growth of the Company's business, added costs related to being a public company,
and the additional costs from acquired companies. Due to the restructuring
efforts undertaken recently, general and administrative costs are expected to
decline by up to 10% in the third quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization represented
approximately 275% and 9% of total revenues for the six months ended June 30,
2000 and 1999,
14
<PAGE>
respectively. Depreciation and amortization increased to $45.3 million from $0.6
million for the six months ended June 30, 2000 and 1999, respectively. The
increases resulted almost entirely from the Company's merger and acquisitions in
May 2000. Depreciation and amortization is expected to be approximately $90
million in future quarters or approximately $180 million during the remainder of
the year due primarily to the inclusion of the full period's amortization.
OTHER INCOME. Other income increased to approximately $3.8 million from $0.4
million for the six months ended June 30, 2000 and 1999, respectively. The
increase in other income is primarily attributable to an increase in interest
earned on cash and cash equivalents and short-term investments resulting from
the issuance of stock in the Company's initial public offering. The Company
expects other income to decrease in future quarters as the proceeds from the
initial public offering are used primarily to finance its operations and support
its growth.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents net loss before non-cash and restructuring charges:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss $(78,870) $(4,337) $(93,596) $(7,763)
Restructuring charges 13,906 -- 13,906 --
-------- ------- -------- -------
Net loss before restructuring charges (64,964) (4,337) (79,690) (7,763)
Depreciation and amortization 43,331 322 45,285 628
-------- ------- -------- -------
Net loss before restructuring, depreciation
and amortization charges (21,633) (4,015) (34,405) (7,135)
Other non-cash charges 2,814 2,039 3,660 2,223
-------- ------- -------- -------
Net loss before non-cash and restructuring
charges $(18,819) $(1,976) $(30,745) $(4,912)
========= ======== ======== =======
</TABLE>
Net loss before non-cash and restructuring charges, as calculated above,
consists of net loss before restructuring charges, depreciation and
amortization, and other non-cash charges. The Company's management believes
net loss before non-cash and restructuring charges to be an important
indicator of the operational strength and performance for the Company,
including the ability to provide cash flows to fund operations and other
expenditures as required. This indicator, however, should not be considered
an alternative to operating or net income (loss) as an indicator of the
performance of the Company, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance
with generally accepted accounting principles. This definition of net loss
before non-cash and restructuring charges may not be comparable to similarly
titled measures reported by other companies.
As of June 30, 2000, the Company had cash and cash equivalents of approximately
$38.9 million and short term investments of approximately $61.7 million, down a
total of approximately $38.3 million from the December 31, 1999 balances of
approximately $110.3 million and $28.5 million respectively.
In December, 1999, the Company completed its initial public offering and issued
6,785,000 shares of its common stock. The net proceeds from the issuance of the
common stock in the initial public offering were approximately $104.3 million.
In addition, in May 1999, the Company closed a round of private funding raising
approximately $34.8 million.
The Company's operating activities resulted in net cash outflows of
approximately $28.6 million and $2.4 million for the six months ended June 30,
2000 and 1999, respectively. Net loss before non-cash and restructuring charges,
as calculated above, increased approximately $25.8 million primarily from the
inclusion of operating expenses of acquired companies and increased expenditures
due to the expansion of the Company's product and service offerings for the six
months ended June 30, 2000. Cash outflows were partially
15
<PAGE>
offset for the six months ended June 30, 2000 by an increase in accounts payable
and accrued liabilities and a decrease in prepaid expenses and other assets, net
of assets acquired in mergers and acquisitions during the period.
Investing activities resulted in net cash outflows of approximately $42.6
million and $32.3 million for the six months ended June 30, 2000 and 1999,
respectively. Cash outflows for the six months ended June 30, 2000 resulted
primarily from purchases of fixed assets of approximately $12.1 million and
payments for business combinations, net of cash acquired of approximately $16.8
million. Cash outflows for the six months ended June 30, 1999 resulted from net
investments of approximately $24.1 million in short-term investments, $5.1
million related to the purchase of fixed assets and $3.2 million for the
acquisition of PrimaCis.
The Company currently anticipates that it will continue to experience growth in
its operating expenses as it expands the penetration of its products and
services, increasing operating, sales and marketing costs, expands research
and development efforts, and improves operational infrastructure. These
operating expenses will consume a material amount of the Company's cash
resources. The Company believes that savings to be realized from the
reorganization coupled with expected revenue growth in future quarters will
allow the Company to achieve positive cash flows during the second half of
2001. Our ability to execute on this portion of our business plan depends on
numerous factors including our ability to achieve the planned revenue growth
from our existing and new offerings, to realize the anticipated operating
efficiencies from the recent restructuring, and to efficiently manage and
control our operating expenditure rates. Depending upon the market
opportunity, the Company may, from time to time, seek additional funds to
support potential merger and acquisition activities or for other purposes
through public or private equity financing or from other sources.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. In June 1999,
the FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133.
Statement No. 137 defers the effective date of Statement No. 133 for one year.
Statement No. 133 is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Because we currently hold no derivative financial
instruments and do not currently engage in hedging activities, adoption of SFAS
No. 133 is not expected to have a material impact on our financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the Staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its current
revenue principles comply with SAB 101.
In January 2000, the Emerging Issues Task Force ("EITF") of the FASB reached
consensus on Issue 99-17 "Accounting for Advertising Barter Transactions" barter
transactions which involve nonmonetary exchanges of advertising. It requires
that an entity recognize revenue and expenses from advertising barter
transactions at the fair value of the advertising surrendered only when an
entity has a historical practice of receiving cash for similar transactions. The
Company does not believe that the adoption of EITF 99-17 will have a material
impact on its financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion No.
25, (FIN 44). FIN 44 applies prospectively to new awards, exchanges of awards in
a business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000, except for the provisions
related to repricings and the definition of an employee, which apply to awards
issued after December 15, 1998. The provisions related to modifications to fixed
stock options awards to add a reload feature are effective for awards modified
after January 12, 2000. We do not expect that this statement will have a
significant impact on our financial condition or results of operations.
In March 2000, the EITF of the FASB reached consensus on Issue 00-2 "Accounting
for Website development Costs" ("EITF 00-2"). EITF 00-2 establishes how an
entity should account for costs incurred to develop a website. It requires that
an entity capitalize costs during the web application and infrastructure and
graphics development stages of
16
<PAGE>
development. The consensus is effective for all costs incurred beginning after
June 30, 2000, although earlier adoption is encouraged. The Company is currently
evaluating the adoption of EITF 00-2 and its potential impact on its financial
condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of MedicaLogic/Medscape's investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. In general, money market
funds are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. In addition, we invest in
relatively short-term securities. Some of the securities that we have invested
in may be subject to market risk. This means that a change in the prevailing
interest rates may cause the principal amount of the investment to fluctuate.
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of any
interest expense we must pay with respect to outstanding debt instruments. The
risk associated with fluctuating interest expense is limited, however, to those
debt instruments and credit facilities which are tied to market rates. We do not
plan to use derivative financial instruments in our investment portfolio. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risk, market risk and investment risk. We plan to mitigate
default risk by investing in low-risk securities. At June 30, 2000, we had an
investment portfolio of money market funds, commercial securities and U.S.
Government securities, including those classified as cash and cash equivalents
and short-term investments, of approximately $100.6 million. We had notes
payable outstanding of approximately $2.6 million at June 30, 2000. If market
interest rates were to increase immediately and uniformly by 10% from levels as
of June 30, 2000, the decline of the fair market value of the fixed income
portfolio and loans outstanding would not be material.
EXCHANGE RATE SENSITIVITY
Currently all of the Company's sales and most of our expenses are denominated in
U.S. dollars and as a result we have experienced no significant foreign exchange
gains or losses to date. While we are conducting some transactions in foreign
currencies during 2000, we do not anticipate that foreign exchange gains or
losses will be significant. We have not engaged in foreign currency hedging
activities to date.
17
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 20, 1999, Medquist MRC, Inc. filed a suit in the District Court for
the Northern District of Ohio, Medquist MRC, Inc. v. John H. Dayani and Network
Health Services, Inc., against Network Health Services, Inc., predecessor to
Total eMed. In November of 1999, venue in the case was transferred to the
United States District Court for the Middle District of Tennessee. The
plaintiff filed an amended complaint on June 1, 2000 that alleges breach of
fiduciary duty of loyalty, misappropriation of trade secrets, tortious
interference with contract, and unjust enrichment. Specifically, Medquist MRC
alleges that Dayani, who served on the Medquist MRC board of directors both
prior to and after founding Network Health Services, misappropriated certain
trade secrets from Medquist MRC and used those trade secrets to develop
Network Health Service's business concepts and customer base. The complaint
also alleges that Network Health Services committed other actionable offenses
as described above. A scheduling order has been entered in this case setting
it for trial in November 2001. The case is presently in the discovery phase.
The Company does not believe that it interfered in any way with the
plaintiff's economic relationships and it intends to defend itself vigorously.
We are not currently subject to any other material legal proceedings. However,
we could be subject to intellectual property infringement claims as the number
of our competitors grows or the functionality of our products and services
overlaps with competing products. We could incur substantial costs and diversion
of management resources defending any infringement claims. In addition, a party
making a claim against us could secure a judgement awarding substantial damages,
as well as injunctive or other equitable relief that could effectively block our
ability to provide products or services. Licenses for intellectual property of
third parties that might be required for our products or services may not be
available on commercially reasonable terms, or at all.
We provide data for use by physicians, consumers and other healthcare
stakeholders. We may obtain this obtain this information from our physician
customers, strategic partners, other third parties or from the aggregation of
patient health records. We obtain individual consent for our use of this data
where we believe it is required by applicable law or regulation. Claims for
injuries related to the use of this data may be made in the future, and we may
not be able to insure adequately against these claims. A claim brought against
us that is uninsured or under-insured could lead to material damages against us.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 11, 2000 we issued approximately 7,450,000 shares of our common stock as
consideration for the acquisition of Total eMed, Inc., valued at approximately
$317.9 million. In addition to the issuance of the Company's common stock, the
consideration included (i) approximately $4.7 million in cash paid for
professional fees; (ii) the substitution of stock options to purchase
approximately 550,000 shares of the Company's common stock in replacement of the
Total eMed options held primarily by Total eMed's employees, who joined the
Company after the closing of the acquisition, valued at approximately $21.2
million.
On May 19, 2000 we issued approximately 14,932,000 shares of our common stock as
consideration for the merger with Medscape, Inc., valued at approximately $637.1
million. In addition to the issuance of the Company's common stock, the
consideration included (i) approximately $4.7 million in cash paid for
professional fees; (ii) the substitution of stock options and warrants to
purchase approximately 2,545,000 shares of our common stock valued at
approximately $82.3 million in replacement of the Medscape options held
primarily by Medscape's employees, who joined the Company after the closing of
the merger, and warrants held primarily by America Online, Inc.
The Company's registration statement (No. 333-87825) on Form S-1 for the initial
public offering was declared effective by the Securities and Exchange Commission
on December 9, 1999. In the initial public offering, which closed on December
15, 1999, the Company registered and issued 5,900,000 shares of Common Stock. In
addition, the Company registered and issued 885,000 shares upon exercise of an
overallotment option granted to the underwriters which closed on December 20,
1999. The managing underwriters for the initial public offering were Donaldson,
Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens Inc.,
U.S. Bancorp Piper Jaffray Inc. and DLJDIRECT Inc. The initial public offering
price was $17 per share, or an aggregate of approximately $115.3 million,
including the overallotment option. Underwriter discounts and commissions
totaled approximately $8.1. The Company paid an estimated total of approximately
$3.0 million for other expenses in connection with the initial public offering.
Proceeds to MedicaLogic/Medscape, net of underwriting discounts, commissions and
other expenses, were approximately $104.3 million. As of June 30, 2000, of the
net proceeds from the initial public offering of approximately $16.8 million
were used to complete mergers and acquisitions, approximately $28.6 million were
used for general operating expense and approximately $13.7 million was invested
in short-term investments.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its annual meeting of shareholders on May 9,2000. At such
meeting the following actions were voted upon:
1. Approval of the amendment to the Company's 1999 Stock Incentive Plan to
increase the total number of shares of Company common stock reserved for
issuance under such plan from 2,000,000 to 8,000,000 shares:
FOR AGAINST ABSTAIN
17,231,997 2,370,837 213,678
2. Approval of the amendment of the Company's 1999 Employee Stock Purchase
Plan to increase the total number of shares of Company common stock
reserved for issuance under such plan from 1,000,000 to 2,500,000 shares:
FOR AGAINST ABSTAIN
17,762,549 2,046,170 7,793
3. Election of Directors:
Class I Class II Class III
Bruce M. Fried Esther Dyson Fredric G. Reynolds
C. Martin Harris Richard D. Rehm
Mark K. Leavitt
Paul T. Sheils
FOR ALL NOMINEES WITHHOLD AUTHORITY
21,825,283 71,547
The Company held a special meeting on May 10, 2000, in connection with our
merger with Medscape, Inc. and our acquisition of Total eMed, Inc. The meeting
was adjourned on May 10, 2000 and continued on May 15, 2000. We submitted the
following matters to a vote of our shareholders through a proxy solicitation:
1. Approval of the issuance of common stock of MedicaLogic under the Agreement
of Reorganization and Merger, dated as of February 21, 2000, among
MedicaLogic, Inc., Medscape and Moneypenny Merger Corp.:
FOR AGAINST ABSTAIN
21,053,065 193,708 1,031,845
2. Approval of the issuance of common stock of MedicaLogic under the terms of
the Agreement of Reorganization and Merger, dated as of February 21, 2000,
among MedicaLogic, Inc., Total eMed, Inc. and AQ Merger Corp.:
FOR AGAINST ABSTAIN
18,713,769 123,251 1,039,265
3. Approval of an amendment to MedicaLogic's 1999 restated articles of
incorporation to change its corporate name to "MedicaLogic/Medscape, Inc."
subject to approval of the MedicaLogic/Medscape merger:
FOR AGAINST ABSTAIN
21,015,477 259,529 1,003,612
ITEM 5. OTHER INFORMATION
Paul T. Sheils resigned as an officer and member of the Board of Directors of
the Company on June 30, 2000. On August 3, 2000, the Board of Directors of the
Company nominated and approved George D. Lundberg, M.D. to succeed Mr. Sheils as
a member of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
20
<PAGE>
The exhibits listed in the accompanying Index to Exhibit on page 23 are filed
as part of this report.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K, dated April 4, 2000, with respect to a
suit filed on April 4, 2000 by MedQuist Transcriptions, LTD. in the Delaware
Court of Chancery, MEDQUIST TRANSCRIPTIONS, LTD. v. JOHN H. DAYANI, TOTAL EMED,
INC. and MEDICALOGIC, INC., against Dr. John H. Dayani, Total eMed, Inc. and
MedicaLogic, Inc.
The Company filed a report on Form 8-K, dated May 11, 2000, announcing the
completion of the merger with Medscape under the terms of the Agreement of
Reorganization and Merger dated February 21, 2000, and the completion of the
acquisition of Total eMed under the terms of the Agreement of Reorganization and
merger dated February 21, 2000, and that on May 19, 2000, the Company changed
its name to "MedicaLogic/Medscape, Inc."
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of 1934,
the Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hillsboro,
State of Oregon, on August 14, 2000.
MEDICALOGIC/MEDSCAPE, INC.
By /s/ FRANK J. SPINA
------------------------------------
Frank J. Spina
Executive Vice President and Chief
Financial Officer
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1(1) Agreement of Reorganization and Merger dated as of February 21, 2000 among
MedicaLogic, Inc., Medscape, Inc. and Moneypenny Merger Corp.
2.2(1) Agreement of Reorganization and Merger dated as of February 21,
2000 among MedicaLogic, Inc., Total eMed, Inc. and AQ Merger
Corp.
3.1.1(2) Articles of Amendment to the 1999 Restated Articles of
Incorporation dated May 19, 2000.
3.2.1(2) Restated Bylaws, as amended on May 19, 2000.
4.2.1 Specimen of common stock certificate.
10.4.1 1999 Stock Incentive Plan, as amended on May 9, 2000.
10.12 2000 Amended and Restated Investor Rights Agreement.
27.1 Financial data schedule (EDGAR only)
(1) Previously filed and incorporated herein by reference to the Company's
registration statement on Form S-4, filed on April 4,2000 (Registration
No. 333-32390).
(2) Previously filed and incorporated herein by reference to the Company's
Current Report on Form 8-K, dated May 11, 2000 (Registration No.
333-28285).
</TABLE>
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