<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-28285
------------------------
MEDICALOGIC/MEDSCAPE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OREGON 93-0890696
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(Address of principal executive offices)
</TABLE>
(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 October 23, 2000 there were 55,602,056 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
NUMBER
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000 and 3
December 31, 1999....................................................
Condensed Consolidated Statements of Operations for the three months 4
and nine months ended September 30, 2000 and 1999....................
Condensed Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 2000 and 1999....................................
Notes to Condensed Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations.................................
ITEM 3. Quantitative and Qualitative Disclosures About Market 19
Risk......................................................
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 20
ITEM 2. Changes in Securities and Use of Proceeds................... 20
ITEM 3. Default Upon Senior Securities.............................. 21
ITEM 4. Submission of Matters to a Vote of Securities Holders....... 21
ITEM 5. Other Information........................................... 21
ITEM 6. Exhibits and Reports on Form 8-K............................ 21
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 33,937 $110,320
Short-term investments.................................... 29,707 28,536
Accounts receivable, net.................................. 17,798 6,473
Prepaid expenses and other current assets................. 13,545 4,515
---------- --------
Total current assets.................................... 94,987 149,844
Investments................................................. 11,470 --
Property and equipment, net................................. 36,715 13,087
Goodwill and intangible assets, net......................... 876,882 4,988
Prepaid advertising and other assets........................ 52,261 435
---------- --------
Total assets............................................ $1,072,315 $168,354
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,791 $ 5,638
Accrued and other liabilities............................. 16,804 2,639
Deferred revenue.......................................... 9,363 3,269
Long-term liabilities, current portion.................... 15,728 2,432
---------- --------
Total current liabilities............................... 52,686 13,978
Long-term liabilities, net of current portion............... 6,564 2,233
Deferred revenue, long-term................................. 1,620 1,627
Other long-term liabilities................................. 591 676
---------- --------
Total liabilities....................................... 61,461 18,514
---------- --------
Shareholders' equity:
Common stock, no par value; 150,000,000 shares authorized;
55,571,674 and 32,364,391 shares issued and outstanding
at September 30, 2000 and December 31, 1999,
respectively............................................ 1,255,594 229,724
Warrants.................................................. 32,818 --
Common stock notes receivable, net........................ (7,860) (11,788)
Deferred stock compensation............................... (1,518) (4,570)
Accumulated deficit....................................... (268,180) (63,526)
---------- --------
Total shareholders' equity.............................. 1,010,854 149,840
---------- --------
Total liabilities and shareholders' equity.............. $1,072,315 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Licenses, service and support.................. $ 3,850 $ 6,017 $ 11,362 $ 13,102
Sponsorship and advertising.................... 6,453 -- 12,508 --
Subscriptions and eCommerce.................... 4,483 -- 7,413 --
---------- -------- ---------- ---------
Total revenues............................. 14,786 6,017 31,283 13,102
---------- -------- ---------- ---------
Operating expenses:
Cost of operations............................. 13,977 2,184 27,141 5,457
Sales and marketing............................ 14,424 5,510 38,601 10,779
Research and development....................... 6,518 3,238 14,595 8,114
General and administrative..................... 5,504 1,389 14,766 1,795
Depreciation and amortization.................. 86,532 1,023 131,817 2,464
Restructuring charges.......................... -- -- 13,906 --
---------- -------- ---------- ---------
Total operating expenses................... 126,955 13,344 240,826 28,609
---------- -------- ---------- ---------
Operating loss................................... (112,169) (7,327) (209,543) (15,507)
Other income, net.............................. 1,112 525 4,890 657
---------- -------- ---------- ---------
Net loss......................................... $ (111,057) $ (6,802) $ (204,653) $ (14,850)
========== ======== ========== =========
Net loss per share:
basic and diluted.............................. $ (2.02) $ (0.85) $ (4.75) $ (1.91)
========== ======== ========== =========
Weighted average shares:
basic and diluted.............................. 55,066 8,042 43,100 7,774
========== ======== ========== =========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (204,653) $(14,850)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 131,817 2,464
Deferred stock compensation and other non-cash
charges............................................. 5,875 2,129
Non-cash restructuring charges........................ 8,847 --
Changes in assets and liabilities, net of balances
acquired:
Accounts receivable................................... (2,160) 5,142
Prepaid expenses and other assets..................... 3,368 (1,663)
Accounts payable...................................... 700 1,383
Accrued liabilities................................... (4,614) (939)
Deferred revenue...................................... 629 1,993
---------- --------
Net cash used in operating activities............... (60,191) (4,341)
---------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (17,943) (9,009)
Payments related to business combinations, net of cash
acquired................................................ (16,795) (2,117)
Purchases of short-term investments, net.................. -- (42,990)
Proceeds from maturities of short-term investments........ 18,308 11,761
---------- --------
Net cash used in investing activities............... (16,430) (42,355)
---------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............. -- 47,758
Net proceeds from issuance of common stock................ 1,912 771
Proceeds from (repayments of) notes payable and capital
leases, net............................................. (1,674) 530
---------- --------
Net cash provided by financing activities........... 238 49,059
---------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (76,383) 2,363
Cash and cash equivalents, beginning of period.............. 110,320 4,718
---------- --------
Cash and cash equivalents, end of period.................... $ 33,937 $ 7,081
========== ========
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 in exchange for note receivable......... -- 4,196
Common stock issued for purchase of a business.............. -- 3,300
Assets acquired or exchanged under capital leases........... -- 1,371
</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. d/b/a/ Medscape and its subsidiaries ("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 the Company
for the three months and nine months ended September 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 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
nine months ended September 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, which is estimated to be
three to four
6
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED) (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
years for goodwill and 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 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 combination described in
Note 2.
(2) MERGER AND ACQUISITIONS
MEDSCAPE, INC.
In May 2000, the Company completed its merger with Medscape, Inc.
("Medscape, Inc.") a Delaware corporation, issuing approximately 14,932,000
shares of the Company's common stock and assuming approximately 2,545,000
options and warrants in a merger transaction valued at approximately
$724.2 million.
The merger with Medscape, Inc. 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 of $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 of $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, Inc. (goodwill), which amounted to approximately $597.2 million,
will be amortized over three years. The results of operations and cash flows of
Medscape, Inc. 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, issuing approximately 7,450,000 shares of
the Company's common stock and assuming 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
7
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED) (CONTINUED)
(2) MERGER AND ACQUISITIONS (CONTINUED)
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 of $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.
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. The purchase price was allocated to the
tangible and intangible assets acquired and the liabilities assumed based on
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.
OTHER INVESTMENTS
In June 2000, the Company acquired an approximate 10% interest in
Lifechart.com, Inc. for approximately $8.3 million in cash. The investment is
accounted for using the cost method. The Company also entered into a joint
development, sales and marketing agreement with Lifechart.com.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information combines the results
of operations of the Company, Medscape, Inc. 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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
Revenues.............................................. $ 41,574 $ 23,154
Net loss.............................................. $ (393,017) $(277,120)
Net loss per share:
basic and diluted................................... $ (7.24) $ (9.19)
</TABLE>
8
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED) (CONTINUED)
(2) MERGER AND ACQUISITIONS (CONTINUED)
The above pro forma net loss amounts for the nine months ended
September 30, 2000 and 1999 have been adjusted to include the amortization of
goodwill and other intangibles related to the Medscape, Inc. merger and Total
eMed acquisition for each period.
(3) RESTRUCTURING CHARGES
Primarily as a result of the merger and acquisition described in Note 2, the
Company's board of directors approved management's restructuring plan during the
quarter ended June 2000. The restructuring plan resulted in restructuring
charges related to the consolidation of duplicate functions and activities.
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 nine months ended September 30, 2000. At
September 30, 2000, approximately $1.2 million relating to these programs was
included in current liabilities.
As of September 30, 2000, the following amounts were recorded:
<TABLE>
<CAPTION>
ABANDONMENT
EMPLOYEE IMPAIRMENTS AND
SEVERANCE OF TECHNOLOGY IMPAIRMENT OF
AND RELATED AND INTANGIBLE FACILITIES, PROPERTY
EXPENSES ASSETS AND EQUIPMENT TOTAL
----------- -------------- -------------------- --------
<S> <C> <C> <C> <C>
2000 restructuring charges................... $8,319 $3,108 $2,479 $13,906
Write-offs/payments.......................... 7,333 3,108 2,241 12,682
------ ------ ------ -------
Restructuring accrual balance
at September 30, 2000...................... $ 986 $ -- $ 238 $ 1,224
====== ====== ====== =======
</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
As a result of the Company's merger with Medscape, Inc. (Note 2), the
Company acquired, among other intangible assets, certain assets related to
Medscape, Inc.'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
9
<PAGE>
MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED) (CONTINUED)
(4) BALANCE SHEET COMPONENTS (CONTINUED)
and promotion in the United States for the Company's consumer and professional
web sites and other products and services. At September 30, 2000, the Company is
entitled to receive approximately $123.5 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.
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 nine months ended
September 30, 2000 was approximately $1.8 and $3.3 million, respectively, of
expense related to the utilization of advertising and promotion services under
these agreements.
WARRANTS AND LONG-TERM LIABILITIES
As a result of the Company's merger with Medscape, Inc. in May, 2000
(Note 2), outstanding warrants to purchase shares of Medscape, Inc. common stock
were converted to warrants to purchase 0.323 shares of the Company's common
stock. At September 30, 2000, warrants to purchase 905,794 shares of the
Company's common stock were exercisable at $30.96 per share. The warrants were
issued in connection with an agreement with America Online, Inc. ("AOL"), under
which AOL has agreed to promote the Company's co-branded websites, through
contextual links and banners, on the following AOL properties: AOL, AOL.com,
CompuServe Service, Netscape Netcenter and Digital City. The agreement also
requires cash payments of $33 million to be paid to AOL, of which, the Company
has paid approximately $13 million through September 30, 2000. The remaining
$20 million is included in long-term liabilities, net of the current portion of
approximately $13.6 million at September 30, 2000. The remaining payments are
due through May 2002.
(5) INCOME STATEMENT COMPONENTS
DEFERRED STOCK COMPENSATION
The Company recognized deferred stock compensation expense as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of operations...................................... $ 85 $ -- $ 268 $ --
Sales and marketing..................................... 68 -- 379 --
Research and development................................ 61 -- 243 --
General and administrative.............................. 25 -- 154 --
---- ----- ------ -----
Total deferred stock compensation....................... $239 $ -- $1,044 $ --
==== ===== ====== =====
</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 September 30, 2000 was approximately $1.5
million and is being amortized over the three year vesting period. Amortization
expense is estimated to total $1.3 million in 2000, $0.8 million in 2001 and
$0.4 million in 2002.
10
<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 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. 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 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 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
sufficiently broad acceptance of our products and services by physicians,
patients, medical care providers and other healthcare stakeholders; (ii) our
eHealthcare business model is new and unproven and may not be successfully
implemented or may not achieve market acceptance; (iii) our business will be
harmed if Medscape, Inc.'s and Total eMed's operations and products are not
successfully integrated with Medscape's operations and products; (iv) our
business will be adversely affected if we fail to successfully introduce new
products and services or to enhance our current products and services; (v) our
business will be adversely affected if we fail to establish and maintain
strategic relationships; and (vi) our business operations will be adversely
affected if we fail to manage our growth effectively.
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. d/b/a/ Medscape ("Medscape",
"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
11
<PAGE>
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 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.
In May 2000, the Company completed its merger with Medscape, Inc. and its
acquisition of Total eMed, as described below, and is currently doing business
under the name Medscape. 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 the impairment of
certain assets. The estimated cost saving to be realized from the reorganization
is estimated to be greater than $20 million on an annual basis. The Company
expects full implementation of the workforce reductions during the fourth
quarter of 2000, with the realization of cost benefits in the second half of
2000, as described below.
MERGER AND ACQUISITIONS
During May 2000, the Company acquired all the outstanding capital stock of
Medscape, Inc. ("Medscape, Inc.") 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, Inc. and Total eMed, respectively. The total
purchase price, including acquisition expenses and the estimated fair value of
converted warrants and options, was approximately $1,068 million, and resulted
in goodwill of approximately $924 million. 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 date of
acquisition forward.
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 based on their fair
values at the acquisition date. Total goodwill recorded in connection with the
purchase was approximately $7.7 million and is being amortized over 3 years.
OTHER INVESTMENTS
In June 2000, the Company acquired an approximate 10% interest in
Lifechart.com, Inc. for approximately $8.3 million in cash. The investment is
accounted for using the cost method. The Company also entered into a joint
development, sales and marketing agreement with Lifechart.com.
12
<PAGE>
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 nine months ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses, service and support.................... 26.0% 100.0% 36.3% 100.0%
Sponsorship and advertising...................... 43.7 -- 40.0 --
Subscriptions and eCommerce...................... 30.3 -- 23.7 --
------ ------ ------ ------
Total revenues............................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Cost of operations............................... 94.5 36.3 86.8 41.7
Sales and marketing.............................. 97.6 91.6 123.4 82.3
Research and development......................... 44.1 53.8 46.6 61.9
General and administrative....................... 37.2 23.1 47.2 13.7
Depreciation and amortization.................... 585.2 17.0 421.4 18.8
Restructuring charges............................ -- -- 44.4 --
------ ------ ------ ------
Total operating expenses..................... 858.6 221.8 769.8 218.4
------ ------ ------ ------
Operating loss..................................... (758.6) (121.8) (669.8) (118.4)
Other income, net................................ 7.5 8.7 15.6 5.0
------ ------ ------ ------
Net loss........................................... (751.1)% (113.1)% (654.2)% (113.4)%
====== ====== ====== ======
</TABLE>
KEY METRICS
Adoption of the Company's offerings continues to grow as demonstrated by the
recent release of Medscape Mobile, a suite of web-enabled clinical applications
designed for the Palm-Registered Trademark- personal digital assistant. Demand
for Medscape Mobile surged in nine days from the date of its release on
September 21, 2000 with over 9,800 users registering by September 30, 2000. The
Company also experienced an increase in clinician users of online health record
applications (including Medscape Mobile) to approximately 33,500, compared with
19,600 at the end of the previous quarter, a 71% increase in three months. Of
this total, approximately 13,400 were using the Company's Internet and handheld
(wireless) products, exclusive of Medscape Mobile users. Total digital health
records in all of the Company's systems was approximately 15.6 million at
September 30, 2000, compared with 13.4 million at June 30, 2000, an increase of
16% for the three months ended September 30, 2000.
Continued growth was also evident in the metrics for the medscape.com
professional site. Registered physician users exceeded 480,000, an increase of
approximately 40,000, or 9%, for the three months ended September 30, 2000.
Registered allied health professional users reached 1.3 million, growing by
approximately 148,000, or 13%.
THREE MONTHS ENDED SEPTEMBER 30, 2000
The Company incurred a net loss of approximately $111.1 million and $6.8
million for the three months ended September 30, 2000 and 1999, respectively.
Net loss increased primarily from a full quarter of non-cash amortization
expense of approximately $82.7 million related to the merger with
Medscape, Inc. and the acquisition of Total eMed consummated during the second
quarter of 2000. Other operating expenses also increased by approximately $30.9
million primarily due to the addition of
13
<PAGE>
operating costs from companies acquired during the second quarter of 2000, and
increased costs related to the expansion of our product offerings during the
period June 1999 through September 30, 2000. As of September 30, 2000, the
Company had an accumulated deficit of approximately $268.2 million.
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 licenses and related
installation services and support contracts primarily related to digital medical
record applications. Sponsorship and advertising is comprised of revenue
generated primarily from pharmaceutical companies that 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 $14.8 million from approximately
$6.0 million for the three months ended September 30, 2000 and 1999,
respectively. Of this increase, approximately $10.9 million relates to increased
revenue from new product offerings and acquired businesses. As expected, this
increase was partially offset by a decrease of approximately $2.2 million in
revenue from licenses, service and support revenues as the Company moved to
subscription and application service provider (ASP) models for more of its
product offerings. The Company expects licenses, service, and support revenue to
remain constant during the remainder of the year.
Sponsorship and advertising revenue increased to approximately $6.5 million
for the three months ended September 30, 2000. 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. During the next quarter, the Company expects
sponsorship and advertising revenue to increase approximately 30% to 40% as we
move out of the seasonality experienced during the summer months.
Subscription and eCommerce revenues increased to approximately $4.5 million
for the three months ended September 30, 2000. 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. During the fourth quarter, the Company expects
approximately 20% to 30% growth in subscription and eCommerce revenues.
OPERATING EXPENSES
COST OF OPERATIONS. Cost of operations is comprised of costs associated
with our data centers, certain licensing and editorial development costs, and
cost of transcriptionists. Cost of operations as a percentage of revenues was
approximately 94.5% and 36.3% for the three months ended September 30, 2000 and
1999, respectively. Cost of operations increased to approximately $14.0 million
from $2.2 million for the three months ended September 30, 2000 and 1999,
respectively, primarily due to the addition of a full quarter's operating
expenses from acquired companies and revenue growth. During the next quarter, we
expect modest increases in cost of operations as we continue to grow our web-
based transcription business. Primarily to support this growth, the Company
expects quarterly increases of 10% to 20% in cost of operations during 2001.
SALES AND MARKETING. Sales and marketing expense represented approximately
97.6% and 91.6% of total revenues for the three months ended September 30, 2000
and 1999, respectively. Total sales and marketing expense increased to
approximately $14.4 million from $5.5 million for the three months ended
September 30, 2000 and 1999, respectively. These costs included non-cash
expenses related
14
<PAGE>
primarily to the CBS advertising and promotion agreement of approximately $1.8
million. The increase in sales and marketing expense resulted primarily from the
addition of a full quarter's costs relating to companies acquired during the
previous quarter, and increased expenditures due to the expansion of the
Company's products and services. During the next quarter, the Company expects
these costs to increase by approximately $1.0 million as we continue to promote
the Company's name-change and re-branding efforts coupled with increased sales
expenditures due to anticipated revenue growth. During 2001, the Company expects
sales and marketing costs to be approximately $16 million per quarter.
RESEARCH AND DEVELOPMENT. Research and development costs represented
approximately 44.1% and 53.8% of total revenues for the three months ended
September 30, 2000 and 1999, respectively. The decrease of research and
development expense as a percentage of revenue is primarily related to the
greater growth in revenue from companies acquired during the previous quarter.
Research and development expense increased to approximately $6.5 million from
$3.2 million for the three months ended September 30, 2000 and 1999,
respectively, primarily due to the addition of staff for the development of our
internet and wireless offerings, and also due to nonrecurring charges of
approximately $600,000 related to transitioning certain development projects to
new engineering teams. Research and development expense also increased due to
certain expenditures related to planning of additional website infrastructure.
As a result of these charges, the Company expects research and development costs
to decrease up to 10% during the next quarter.
GENERAL AND ADMINISTRATIVE. General and administrative costs represented
approximately 37.2% and 23.1% of total revenues for the three months ended
September 30, 2000 and 1999, respectively. General and administrative costs
increased to approximately $5.5 million from $1.4 million for the three months
ended September 30, 2000 and 1999, respectively. The increase resulted primarily
from the addition of costs from companies acquired during the second quarter of
2000 and increased facility expenditures related to the expansion of our product
offerings and locations since June 1999. Compared to the quarter ended June 30,
2000, general and administrative costs for the three months ended September 30,
2000 declined by approximately 7.6% primarily due to restructuring efforts
undertaken by management in the prior quarter, net of the increase resulting
from the full quarter of combined operations with company's acquired during the
second quarter. During the remainder of the year, the Company expects general
and administrative expenses to remain at approximately the third quarter level
as the Company continues to recognize the efficiencies gained from the Company's
combined operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization represented
approximately 585.2% and 17.0% of total revenues for the three months ended
September 30, 2000 and 1999, respectively. Depreciation and amortization
increased to $86.5 million from $1.0 million for the three months ended
September 30, 2000 and 1999, respectively. The increase primarily resulted from
the inclusion of the full quarter's amortization of intangible assets related to
the Company's merger and acquisitions during the quarter ended June 30, 2000. In
future quarters, depreciation and amortization is expected to approximate $87
million as the Company continues to amortize goodwill and intangible assets over
their remaining useful lives.
OTHER INCOME. Other income increased to approximately $1.1 million from
$0.5 million for the three months ended September 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.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The Company incurred a net loss of approximately $204.7 million and $14.9
million for the nine months ended September 30, 2000 and 1999, respectively. Net
loss increased primarily from a full quarter of non-cash amortization expense of
approximately $123.3 million related to the merger with Medscape, Inc. and the
acquisition of Total eMed. Other operating expenses also increased by
approximately $88.9 million primarily due to the addition of operating costs
from companies acquired during the second quarter of 2000, and increased costs
related to the expansion of our product offerings during the period June 1999
through September 30, 2000.
REVENUES
Total revenues increased to approximately $31.3 million from approximately
$13.1 million for the nine months ended September 30, 2000 and 1999,
respectively. Of this increase, approximately $19.9 million relates to increased
revenue from new product offerings and acquired businesses. As expected, this
increase was partially offset by a decrease of approximately $1.7 million in
revenue from licenses, service and support revenues as the Company moved to
subscription and ASP models for more of its product offerings.
Sponsorship and advertising revenue increased to approximately $12.5
million, and 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 $7.4 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.
OPERATING EXPENSES
COST OF OPERATIONS. Cost of operations is comprised of costs associated
with our data centers, certain licensing and editorial development costs, and
costs of transcriptionists. Cost of operations as a percentage of revenues was
approximately 86.8% and 41.7% for the nine months ended September 30, 2000 and
1999, respectively. Cost of operations increased to approximately $27.1 million
from $5.5 million for the nine months ended September 30, 2000 and 1999,
respectively, primarily due to the addition of a full quarter's operating
expenses from acquired companies and anticipated revenue growth. During the next
quarter, the Company expects modest increases in cost of operations as we
continue to grow our web-based transcription business. Primarily to support this
growth, the Company expects quarterly increases of 10% to 20% in cost of
operations during 2001.
SALES AND MARKETING. Sales and marketing expense represented approximately
123.4% and 82.3% of total revenues for the nine months ended September 30, 2000
and 1999, respectively. Total sales and marketing expense increased to
approximately $38.6 million from $10.8 million for the nine months ended
September 30, 2000 and 1999, respectively. These costs included non-cash
expenses related primarily to the CBS advertising and promotion agreement of
approximately $3.3 million. The increase in sales and marketing expense resulted
primarily from the addition of a full quarter's costs relating to companies
acquired during the previous quarter, and increased expenditures due to the
expansion of the Company's products and services. During the next quarter, the
Company expects these costs to increase by approximately $1.0 million as we
continue to promote the Company's name-change and re-branding efforts coupled
with increased sales expenditures due to anticipated revenue growth. During
2001, the Company expects sales and marketing costs to be approximately
$16 million per quarter.
16
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development costs represented
approximately 46.6% and 61.9% of total revenues for the nine months ended
September 30, 2000 and 1999, respectively. The decrease of research and
development expense as a percentage of revenue is primarily related to the
greater growth in revenue from companies acquired during the previous quarter.
Research and development expense increased to approximately $14.6 million from
$8.1 million for the nine months ended September 30, 2000 and 1999,
respectively, primarily due to the addition of staff for the development of our
internet and wireless offerings, and also due to nonrecurring charges of
approximately $600,000 related to transitioning certain development projects to
new engineering teams. Research and development costs also increased due to
certain expenditures related to planning of additional website infrastructure.
GENERAL AND ADMINISTRATIVE. General and administrative costs represented
approximately 47.2% and 13.7% of total revenues for the nine months ended
September 30, 2000 and 1999, respectively. General and administrative costs
increased to approximately $14.8 million from $1.8 million for the nine months
ended September 30, 2000 and 1999, respectively. The increase resulted primarily
from the addition of costs from companies acquired during the second quarter of
2000 and increased facilities related to the expansion of our product offerings
and locations since June 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization represented
approximately 421.4% and 18.8% of total revenues for the nine months ended
September 30, 2000 and 1999, respectively. Depreciation and amortization
increased to $131.8 million from $2.5 million for the nine months ended
September 30, 2000 and 1999, respectively. The increases resulted primarily from
the inclusion of a full quarter's amortization of intangible assets related to
the Company's merger and acquisitions during the quarter ended June 30, 2000. In
future quarters, depreciation and amortization is expected to approximate $87
million as the Company continues to amortize goodwill and intangible assets over
their remaining useful lives.
OTHER INCOME. Other income increased to approximately $4.9 million from
$0.7 million for the nine months ended September 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 calculates the net operating loss before depreciation
and amortization:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net operating loss.................................. $(112,169) $(7,327) $(209,543) $(15,507)
Depreciation and amortization....................... 86,532 1,023 131,817 2,464
--------- ------- --------- --------
Net operating loss before depreciation
and amortization................................ $ (25,637) $(6,304) $ (77,726) $(13,043)
========= ======= ========= ========
</TABLE>
The Company's management believes net operating loss before depreciation and
amortization 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. The Company's
definition of net operating loss before depreciation and amortization may not be
comparable to similarly titled measures reported by other companies.
17
<PAGE>
As of September 30, 2000, the Company had cash and cash equivalents of
approximately $33.9 million and short-term investments of approximately $29.7
million, a reduction of approximately $75.2 million from the December 31, 1999
balances of approximately $110.3 million and $28.5 million in cash and cash
equivalents, and short-term investments, respectively. During the quarter ended
September 30, 2000, the Company reached an agreement to extend the due dates of
certain cash payments previously required to have been made by the Company
during the three months ended September 30, 2000.
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 $60.2 million and $4.3 million for the nine months ended September
30, 2000 and 1999, respectively. Net operating loss before depreciation and
amortization, as calculated above, increased approximately $64.7 million for the
nine months ended September 30, 2000. This increase is primarily due to the
inclusion of a full quarter's operating expenses of acquired companies and
increased expenditures due to the expansion of the Company's product and service
offerings during the nine months ended September 30, 2000.
Investing activities resulted in net cash outflows of approximately $16.4
million and $42.4 million for the nine months ended September 30, 2000 and 1999,
respectively. Cash outflows for the nine months ended September 30, 2000
resulted primarily from purchases of property and equipment of approximately
$17.9 million and payments related to business combinations, net of cash
acquired, of approximately $16.8 million. Cash outflows for the nine months
ended September 30, 1999 resulted from net increases of approximately $43.0
million in short-term investments, $9.0 million related to purchases of property
and equipment, and $2.1 million for the acquisition of PrimaCis Health
Information Technology, Inc. (for a description of the PrimaCis acquisition, see
the Annual Report of MedicaLogic, Inc. on Form 10-K for the Year Ended December
31, 1999 filed with the Securities and Exchange Commission).
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, increases its 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
restructuring 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. The Company may not be able to obtain adequate
or favorable financing at that time. Any financing the Company obtains may
dilute the ownership interest of its shareholders prior to the financing.
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.
18
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION ("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 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 option awards to add a reload feature are effective for awards modified
after January 12, 2000. The Company adopted the provisions of FIN 44 as of the
required effective dates, and this adoption has not had a material impact on our
financial statements.
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 certain costs during the web application and
infrastructure and graphics development stages of development. The consensus is
effective for all costs incurred beginning after June 30, 2000, although earlier
adoption is encouraged. The Company adopted the provisions of EITF 00-2 as of
the required effective dates, and this adoption has not had a material impact on
our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of 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 September 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 $63.6 million. The Company had
long-term liabilities outstanding of approximately $22.9 million at
September 30, 2000. If market interest rates were to increase immediately and
uniformly by 10% from levels as of September 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.
19
<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 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.
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, Inc. options held
primarily by Medscape, Inc.'s employees, who joined the Company after the
closing of the merger, and warrants held primarily by America Online, Inc.
20
<PAGE>
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 the Company, net of underwriting discounts,
commissions and other expenses, were approximately $104.3 million. Through
September 30, 2000, net proceeds from the initial public offering of
approximately $16.8 million were used to complete mergers and acquisitions,
approximately $60.2 million were used for general operating expense for the nine
months ended September 30, 2000 and a net balance of approximately $29.7 million
was invested in short-term investments at September 30, 2000.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
On August 21, 2000 the Company announced the resignation of Frank J. Spina,
Executive Vice President and Chief Financial Officer, effective October 31,
2000. In August 2000, the Company's Board of Directors nominated and approved
David C. Moffenbeier, Chief Executive Officer to act as Chief Financial Officer
until a successor for Mr. Spina is identified.
On September 19, 2000, the Company announced: (1) the resignation of Richard
Rehm, M.D., as co-Chief Executive Officer of the Company, effective immediately;
and (2) the appointment of Kevin Hutchinson as Chief Operating Officer.
Dr. Rehm will serve as an advisor to the Board of Directors. Esther Dyson
resigned from the Board of Directors of the Company, effective October 20, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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:
None.
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<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 October 27, 2000.
<TABLE>
<S> <C> <C>
MEDICALOGIC/MEDSCAPE, INC.
By: /s/ DAVID C. MOFFENBEIER
-----------------------------------------
David C. Moffenbeier
CHIEF EXECUTIVE OFFICER
</TABLE>
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
27.1 Financial data schedule (EDGAR only)
</TABLE>
23
