<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2000
REGISTRATION NO. 333-32390
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDICALOGIC, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OREGON 7374 93-0890696
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(503) 531-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
MARK K. LEAVITT
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(503) 531-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
It is respectfully requested that the Commission send copies of all notices,
orders and communications to:
<TABLE>
<S> <C> <C>
STEPHEN E. BABSON JOHN P. SCHMITT PETER OLDHAM
JOHN M. SCHWEITZER PETER J. SCHAEFFER KRIS KEMP
TODD A. BAUMAN PATTERSON, BELKNAP, WEBB & TYLER LLP HARWELL HOWARD HYNE GABBERT & MANNER,
STOEL RIVES LLP 1133 AVENUE OF THE AMERICAS P.C.
900 SW FIFTH AVENUE, NEW YORK, NEW YORK 10036-6710 1800 FIRST AMERICAN CENTER
SUITE 2600 (212) 336-2000 315 DEADERICK STREET
PORTLAND, OREGON 97204 NASHVILLE, TENNESSEE 37238
(503) 224-3380 (615) 256-0500
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this registration statement becomes effective. If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement of the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock................................ 25,350,569 not applicable $548,336,785.21 $144,761
</TABLE>
(1) Represents the maximum amount of common stock of MedicaLogic issuable upon
completion of the mergers described in this Registration Statement, assuming
the conversion of each outstanding share of common stock of Medscape into
.323 shares of MedicaLogic common stock and each outstanding share of common
stock (or common stock equivalent) of Total eMed into .8070438 shares of
MedicaLogic common stock.
(2) Pursuant to Rule 457(f) under the Securities Act of 1933 and solely for the
purpose of calculating the registration fee, the proposed maximum aggregate
offering price is based upon the book value, as of December 31, 1999, of the
9,912,721 shares of Total eMed common stock (or common stock equivalent) to
be exchanged in one of the mergers and, with respect to the shares to be
exchanged in the other merger, the average of the high and low sale prices
of Medscape common stock as reported on the Nasdaq Stock Market on March 10,
2000.
(3) A filing fee of $49,627 has previously been paid by MedicaLogic, Inc.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
MEDICALOGIC, INC.
20500 NW Evergreen Parkway
Hillsboro, Oregon 97124
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 10, 2000
To the Shareholders of MedicaLogic:
A special meeting of shareholders of MedicaLogic will be held on May 10,
2000 at 8:00 a.m. local time, at our headquarters, located at 20500 NW Evergreen
Parkway, Hillsboro, Oregon 97124, for the following purposes:
1. To consider and vote on a proposal to approve the issuance of
MedicaLogic common stock to stockholders of Medscape under the terms of a
merger agreement among MedicaLogic, Medscape and Moneypenny Merger Corp.,
a wholly owned subsidiary of MedicaLogic. As a result of the merger,
Medscape will become a wholly owned subsidiary of MedicaLogic.
2. To consider and vote on a proposal to approve the issuance of
MedicaLogic common stock to stockholders of Total eMed under the terms of
a merger agreement among MedicaLogic, Total eMed and AQ Merger Corp., a
wholly owned subsidiary of MedicaLogic. As a result of the merger, Total
eMed will become a wholly owned subsidiary of MedicaLogic.
3. To consider and vote on a proposal to amend MedicaLogic's 1999 restated
articles of incorporation to change its corporate name to
"MedicaLogic/Medscape, Inc." subject to approval of the
MedicaLogic/Medscape merger.
4. To transact other business relating to the proposals above that may
properly come before the special meeting and any postponement or
adjournment.
The close of business on March 31, 2000 has been fixed by the board of
directors of MedicaLogic as the record date for determination of the
shareholders of MedicaLogic entitled to notice of, and to vote at, the special
meeting and any postponement or adjournment.
A form of proxy and Joint Proxy Statement/Prospectus containing more
detailed information about the matters to be considered at the special meeting
(including a copy of each merger agreement) accompany this notice. We urge you
to give this material your careful attention.
By Order of the Board of Directors
David C. Moffenbeier
Secretary
Hillsboro, Oregon
April 6, 2000
YOUR VOTE IS IMPORTANT.
TO VOTE YOUR SHARES, PLEASE SIGN,
DATE, COMPLETE AND MAIL THE
ENCLOSED PROXY CARD PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE.
<PAGE>
[LOGO]
MEDSCAPE, INC.
134 West 29th Street
New York, New York 10001-5399
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 2000
To the Stockholders of Medscape:
A special meeting of stockholders of Medscape will be held on May 15, 2000
at 9:30 a.m. local time, at CBS Corporation, Studio 19, 19(th) Floor, Black Rock
Room, 51 W. 52(nd) Street, New York, New York 10019, for the following purposes:
1. To consider and vote on a proposal to approve the merger agreement among
Medscape, MedicaLogic and Moneypenny Merger Corp., a wholly owned
subsidiary of MedicaLogic. Under the terms of the merger agreement,
Medscape will become a wholly owned subsidiary of MedicaLogic.
2. To transact other business relating to the proposal above that may
properly come before the special meeting and any postponement or
adjournment.
The close of business on April 14, 2000 has been fixed by the board of
directors of Medscape as the record date for determination of the stockholders
of Medscape entitled to notice of, and to vote at, the special meeting and any
postponement or adjournment.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the special
meeting, we urge you to complete, sign and return the enclosed proxy card in the
enclosed postage-paid envelope. You may revoke your proxy at any time before it
is voted by delivering to Medscape at 134 West 29(th) Street, New York, New York
10001-5399, Attention: Mark E. Boulding, Secretary, a written notice of such
revocation or a duly executed, later-dated proxy or by attending the special
meeting and voting in person.
By Order of the Board of Directors
Mark E. Boulding
Secretary
New York, New York
April 18, 2000
YOUR VOTE IS IMPORTANT.
TO VOTE YOUR SHARES, PLEASE SIGN,
DATE, COMPLETE AND MAIL THE
ENCLOSED PROXY CARD PROMPTLY IN
THE ENCLOSED RETURN
ENVELOPE.
<PAGE>
[LOGO]
TOTAL EMED, INC.
5301 VIRGINIA WAY, SUITE 250
BRENTWOOD, TENNESSEE 37027
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 10, 2000
To the Stockholders of Total eMed:
A special meeting of stockholders of Total eMed will be held on May 10, 2000
at 10:00 a.m. local time, at our headquarters, located at 5301 Virginia Way,
Suite 250, Brentwood, Tennessee 37027, for the following purposes:
1. To consider and vote on a proposal to approve the merger agreement among
Total eMed, MedicaLogic and AQ Merger Corp., a wholly owned subsidiary of
MedicaLogic. Under the terms of the merger agreement, Total eMed will
become a subsidiary of MedicaLogic.
2. To transact other business relating to the proposal above that may
properly come before the special meeting and any postponement or
adjournment.
The close of business on April 5, 2000 has been fixed by the board of
directors of Total eMed as the record date for determination of the stockholders
of Total eMed entitled to notice of, and to vote at, the special meeting and any
postponement or adjournment.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the special
meeting, we urge you to complete, sign and return the enclosed proxy card in the
enclosed postage-paid envelope. You may revoke your proxy at any time before it
is voted by delivering to Total eMed at 5301 Virginia Way, Suite 250, Brentwood,
Tennessee 37027, Attention: Winfield C. Dunn, Secretary, a written notice of
such revocation or a duly executed, later-dated proxy or by attending the
special meeting and voting in person.
By Order of the Board of Directors
Winfield C. Dunn
Secretary
Brentwood, Tennessee
April 10, 2000
YOUR VOTE IS IMPORTANT.
TO VOTE YOUR SHARES, PLEASE SIGN,
DATE, COMPLETE AND MAIL THE
ENCLOSED PROXY CARD PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
MEDICALOGIC, INC.
MEDSCAPE, INC.
TOTAL EMED, INC.
PROPOSED MERGERS
The board of directors of MedicaLogic, Inc. has approved two merger
agreements which would result in Medscape, Inc. and Total eMed, Inc. becoming
wholly owned subsidiaries of MedicaLogic. The board of directors of each of
Medscape and Total eMed has approved its company's merger agreement with
MedicaLogic. However, neither merger is conditioned on the other--depending on
the shareholder votes, both, one or neither of the mergers could happen.
Here is what Medscape and Total eMed stockholders will receive if their
respective mergers are completed:
MEDSCAPE
- .323 shares of MedicaLogic common stock for each share of Medscape common
stock you own.
TOTAL EMED
- .8070438 shares of MedicaLogic common stock for each share of Total eMed
common stock (or common stock equivalent) you own.
MedicaLogic shareholders will continue to hold their existing shares.
Assuming one or both of the mergers are completed, here is what the stock
ownership percentages of MedicaLogic would be:
<TABLE>
<CAPTION>
MERGERS MEDICALOGIC MEDSCAPE TOTAL EMED
COMPLETED: SHAREHOLDERS STOCKHOLDERS STOCKHOLDERS
- ---------- ------------ ------------ ------------
<S> <C> <C> <C>
Both........................................................ 59.7% 26.6% 13.7%
Medscape only............................................... 69.2% 30.8% --
Total eMed only............................................. 81.4% -- 18.6%
</TABLE>
We based these percentages on the number of shares of capital stock for each
company outstanding on February 29, 2000.
Here is what we are asking you to approve:
MEDICALOGIC SHAREHOLDERS:
- The issuance of MedicaLogic common stock in the MedicaLogic/Medscape
merger.
- The issuance of MedicaLogic common stock in the MedicaLogic/Total eMed
merger.
- An amendment of MedicaLogic's 1999 restated articles of incorporation that
will change its corporate name to "MedicaLogic/Medscape, Inc." if the
MedicaLogic/Medscape merger is approved.
MEDSCAPE STOCKHOLDERS:
- The MedicaLogic/Medscape merger agreement.
TOTAL EMED STOCKHOLDERS:
- The MedicaLogic/Total eMed merger agreement.
YOUR VOTE IS IMPORTANT. Please take the time to vote on the proposals by
completing and mailing the enclosed proxy card or consent form, even if you plan
to attend the shareholders meeting of your company. Also, we encourage you to
read this document carefully before you vote. It provides detailed information
about the proposed mergers. In addition, you may obtain information about
MedicaLogic and Medscape from documents filed with the Securities and Exchange
Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE MERGERS DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR THE MEDICALOGIC COMMON STOCK TO BE ISSUED IN CONNECTION
WITH THIS DOCUMENT OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus is dated April 4, 2000,
and is first being mailed to MedicaLogic shareholders on or about April 6, 2000,
to Total eMed stockholders on or about April 10, 2000 and to Medscape
stockholders on or about April 18, 2000.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGERS..................... 1
SUMMARY..................................................... 3
The companies............................................. 3
MedicaLogic............................................. 3
Medscape................................................ 3
Total eMed.............................................. 4
Reasons for the mergers................................... 4
The mergers............................................... 4
What Medscape stockholders will receive................. 4
What Total eMed stockholders will receive............... 5
Total eMed escrows...................................... 5
Material federal income tax consequences................ 6
Comparative per share market price and dividend
information............................................ 6
Listing of MedicaLogic common stock..................... 6
Ownership of MedicaLogic/Medscape after the mergers..... 6
Appraisal rights........................................ 7
Regulatory approvals.................................... 7
Conditions to the mergers............................... 7
Termination of the merger agreements.................... 7
Amendment of MedicaLogic articles of incorporation........ 7
The special meetings...................................... 7
Record date and shareholder vote required to approve
proposals............................................... 8
Voting agreements......................................... 8
Recommendations to shareholders........................... 9
To MedicaLogic shareholders............................. 9
To Medscape stockholders................................ 9
To Total eMed stockholders.............................. 9
Selected financial data................................... 10
MedicaLogic selected historical consolidated financial
data................................................... 11
Medscape selected historical consolidated financial
data................................................... 11
Total eMed selected historical consolidated financial
data................................................... 12
Selected unaudited pro forma condensed combined
financial data and
comparative per share information for the
MedicaLogic/Medscape merger and the
MedicaLogic/Total eMed merger......................... 13
Selected unaudited pro forma condensed combined
financial data......................................... 13
Comparative historical and unaudited pro forma per share
data................................................... 14
RISK FACTORS................................................ 16
Risks relating to the combined businesses................. 16
Risks relating to the healthcare industry and the
Internet................................................ 23
Risks relating to the mergers............................. 27
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 29
SELECTED CONSOLIDATED FINANCIAL DATA OF MEDICALOGIC......... 30
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS OF MEDICALOGIC................................. 31
Overview.................................................. 31
Acquisitions.............................................. 32
Results of Operations..................................... 32
Liquidity and capital resources........................... 35
Year 2000 compliance...................................... 36
Recent accounting pronouncements.......................... 36
Quantitative and qualitative disclosures about market
risk.................................................... 37
SELECTED CONSOLIDATED FINANCIAL DATA OF MEDSCAPE............ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MEDSCAPE..................... 39
Overview.................................................. 39
Results of operations..................................... 40
Liquidity and capital resources........................... 42
Year 2000 compliance...................................... 43
Subsequent events......................................... 44
Interest rate sensitivity................................. 44
Exchange rate sensitivity................................. 44
SELECTED CONSOLIDATED FINANCIAL DATA OF TOTAL EMED.......... 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TOTAL EMED................... 46
Overview.................................................. 46
Results of operations..................................... 47
Liquidity and capital resources........................... 47
Year 2000................................................. 48
BUSINESS OF MEDICALOGIC..................................... 49
Overview.................................................. 49
Internet health services center........................... 49
Products and markets...................................... 50
Customer service and support.............................. 52
Customers................................................. 52
Sales and marketing....................................... 52
Strategic relationships................................... 53
Competition............................................... 55
Technology................................................ 56
Development and engineering............................... 56
Intellectual property rights.............................. 56
Employees................................................. 57
Facilities................................................ 57
Legal Proceedings......................................... 57
BUSINESS OF MEDSCAPE........................................ 58
Overview.................................................. 58
The Medscape.com site..................................... 59
A profile of CBSHealthWatch.com........................... 61
Registered members........................................ 62
Editorial, design and production.......................... 63
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Sales..................................................... 63
Marketing and public relations............................ 63
Infrastructure, operations and technology................. 64
Competition............................................... 64
Significant customers..................................... 65
Intellectual property and domain names.................... 65
Legal proceedings......................................... 65
Employees................................................. 66
Facilities................................................ 66
BUSINESS OF TOTAL EMED...................................... 67
General................................................... 67
Products and services..................................... 68
Strategy.................................................. 69
Competition............................................... 70
Litigation................................................ 70
Employees................................................. 70
Facilities................................................ 70
MONEYPENNY MERGER CORP. AND AQ MERGER CORP.................. 70
DIRECTORS AND EXECUTIVE OFFICERS OF MEDICALOGIC............. 71
Additional directors and executive officers............... 73
MedicaLogic/Medscape executive compensation............... 74
Stock option grants..................................... 77
Option exercises and holdings........................... 77
Long term incentive awards.............................. 78
Employment contracts and change in control
arrangements........................................... 79
Director compensation................................... 80
Information on the board of directors and its
committees............................................. 80
Compensation committee interlocks and insider
participation.......................................... 80
Certain relationships and related transactions.......... 80
PRINCIPAL SHAREHOLDERS OF MEDICALOGIC....................... 83
PRINCIPAL STOCKHOLDERS OF MEDSCAPE.......................... 87
PRINCIPAL STOCKHOLDERS OF TOTAL EMED, INC................... 89
MEDICALOGIC SPECIAL MEETING................................. 92
Recommendations of the MedicaLogic board.................. 92
Solicitation, voting and revocability of proxies.......... 93
MEDSCAPE SPECIAL MEETING.................................... 95
Recommendation of the Medscape board...................... 95
Record date and vote required............................. 95
Voting of proxies......................................... 95
Revoking proxies.......................................... 96
Solicitation of proxies................................... 96
TOTAL EMED SPECIAL MEETING.................................. 98
Recommendation of the Total eMed board.................... 98
Record date and vote required............................. 98
Voting of proxies......................................... 99
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Revoking proxies.......................................... 99
Solicitation of proxies................................... 100
BACKGROUND OF THE MERGERS................................... 101
MedicaLogic/Medscape merger............................... 101
MedicaLogic/Total eMed Merger............................. 103
Joint reasons for mergers................................. 104
Reasons of MedicaLogic for the mergers.................... 105
Medscape................................................ 105
Total eMed.............................................. 106
Opinions of MedicaLogic financial advisor regarding the
mergers................................................. 108
MedicaLogic/Medscape merger............................. 108
MedicaLogic/Total eMed merger........................... 114
Reasons of Medscape for the MedicaLogic/Medscape merger... 120
Interests of members of Medscape's board of directors and
management in the MedicaLogic/Medscape merger........... 121
Opinion of Medscape financial advisor regarding the
MedicaLogic/Medscape merger............................. 122
Reasons of Total eMed for the MedicaLogic/Total eMed
merger.................................................. 128
Interests of members of Total eMed's board of directors
and management in the MedicaLogic/Total eMed merger..... 129
Certain United States federal income tax consequences of
the mergers............................................. 130
Regulatory approvals...................................... 130
Appraisal rights.......................................... 131
Nasdaq listing of MedicaLogic common stock................ 133
Federal securities law consequences; stock transfer
restriction agreements.................................. 133
THE MEDICALOGIC/MEDSCAPE MERGER AGREEMENT................... 134
The merger................................................ 134
Merger consideration...................................... 134
Exchange of certificates for shares....................... 134
Representations and warranties............................ 135
Continuation of business pending the merger............... 135
No solicitation........................................... 136
Agreement with CBS........................................ 137
Material United States federal income tax consequences of
the MedicaLogic/Medscape merger......................... 137
Conditions to our obligations to complete the merger...... 139
Additional conditions to obligations of MedicaLogic and
Moneypenny Merger Corp.................................. 140
Additional conditions to obligations of Medscape.......... 140
Termination............................................... 140
Termination fees and expenses............................. 141
Amendments and waiver..................................... 142
Voting agreements......................................... 142
THE MEDICALOGIC/TOTAL EMED MERGER AGREEMENT................. 143
The merger................................................ 143
Merger consideration...................................... 143
Exchange of certificates for shares....................... 143
Escrows................................................... 144
Contract escrow fund.................................... 144
Litigation escrow fund.................................. 144
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Escrow agent............................................ 145
Material United States federal income tax consequences of
the MedicaLogic/Total eMed merger....................... 145
Representations and warranties............................ 148
Continuation of business pending the merger............... 149
No solicitation........................................... 150
Conditions to our obligations to complete the merger...... 150
Additional conditions to obligations of MedicaLogic and AQ
Merger Corp............................................. 150
Additional conditions to obligations of Total eMed........ 151
Termination............................................... 151
Amendments and waiver..................................... 151
Voting agreements......................................... 151
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 153
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 156
COMPARATIVE MARKET PRICES AND DIVIDENDS..................... 169
COMPARISON OF RIGHTS OF SHAREHOLDERS OF MEDICALOGIC,
MEDSCAPE AND TOTAL EMED................................... 169
General................................................... 169
Number of directors....................................... 170
Classified board of directors............................. 170
Removal of directors...................................... 170
Vacancies on the board of directors....................... 171
Shareholder action by written consent..................... 171
Amendments of certificate/articles of incorporation....... 171
Amendment of bylaws....................................... 172
Notice of shareholders' proposals/nominations of
directors............................................... 172
Calling of special meeting of shareholders; shareholder
action by written consent............................... 174
Transactions with interested shareholders................. 174
Dissenters' and appraisal rights.......................... 175
Consideration of other constituencies..................... 176
Liability of directors.................................... 176
Indemnification of directors and officers................. 176
Payment of dividends...................................... 177
Transactions with officers or directors................... 177
Shareholders' suits....................................... 178
AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO
CHANGE MEDICALOGIC'S CORPORATE NAME TO
MEDICALOGIC/MEDSCAPE, INC................................. 179
LEGAL MATTERS............................................... 179
EXPERTS..................................................... 179
OTHER MATTERS............................................... 180
WHERE YOU CAN FIND MORE INFORMATION......................... 180
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
<TABLE>
<S> <C> <C>
APPENDIX A - MEDICALOGIC/MEDSCAPE AGREEMENT OF
REORGANIZATION AND MERGER
APPENDIX B - MEDICALOGIC/TOTAL EMED AGREEMENT OF
REORGANIZATION AND MERGER
APPENDIX C - FAIRNESS OPINION OF DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION CONCERNING
THE MEDICALOGIC/MEDSCAPE MERGER
APPENDIX D - FAIRNESS OPINION OF DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION CONCERNING
THE MEDICALOGIC/TOTAL EMED MERGER
APPENDIX E - FAIRNESS OPINION OF LAZARD FRERES & CO. LLC
CONCERNING THE MEDICALOGIC/MEDSCAPE MERGER
APPENDIX F - SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW--APPRAISAL RIGHTS
APPENDIX G - PROPOSED AMENDMENT TO MEDICALOGIC'S
RESTATED ARTICLES OF INCORPORATION
</TABLE>
vi
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGERS
Q: PLEASE DESCRIBE THE MERGERS.
A: Pursuant to the proposed mergers, Medscape and Total eMed will each merge
with separate subsidiaries of MedicaLogic and become wholly owned
subsidiaries of MedicaLogic.
Q: PLEASE EXPLAIN WHAT I WILL RECEIVE IN THE MERGERS.
A: If the mergers are completed, Medscape stockholders will receive .323 shares
of MedicaLogic common stock for each share of Medscape common stock they
own, and Total eMed stockholders will receive .8070438 shares of MedicaLogic
common stock for each share of Total eMed common stock (or common stock
equivalent) they own. Medscape and Total eMed stockholders will receive cash
for any fractional shares. MedicaLogic shareholders will continue to own
their existing shares.
Q: WILL I RECOGNIZE ANY INCOME TAX GAIN OR LOSS ON THE MERGERS?
A: Neither Medscape nor Total eMed stockholders will recognize gain or loss for
U.S. federal income tax purposes if the mergers are completed, except that
stockholders will recognize gain or loss with respect to cash received
instead of fractional shares or received after the exercise of appraisal
rights. However, all stockholders are urged to consult their own tax advisor
to determine their particular tax consequences.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in this
document, please complete and sign your proxy card. Then, mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at the special meeting and voted as you wish.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES ON THE MERGER FOR ME?
A: Your broker will vote your shares on the merger only if you provide
instructions on how to vote. You should follow the directions provided by
your broker regarding how to instruct your broker to vote your shares.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: You can change your vote at any time before your proxy is voted at the
special meetings. You can do this in one of three ways. First, you can send
a written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy
card to MedicaLogic at the address on page 3 if you are a MedicaLogic
shareholder, to Medscape at the address on page 3 if you are a Medscape
stockholder, or to Total eMed at the address on page 4 if you are a Total
eMed stockholder. Third, you can attend the special meeting of the company
of which you are a shareholder and vote in person. Simply attending the
meeting, however, will not revoke your proxy. If you have instructed a
broker to vote your shares, you must follow directions received from your
broker to change your vote.
Q: IF I AM A MEDSCAPE OR TOTAL EMED STOCKHOLDER, SHOULD I SEND IN MY STOCK
CERTIFICATES NOW?
A: No. After the mergers are completed, MedicaLogic will send written
instructions to Medscape and Total eMed stockholders explaining how to
exchange their stock certificates.
Q: WILL ANY OF MY SHARES BE SUBJECT TO AN ESCROW?
A: Yes, if you are a Total eMed stockholder. Five percent of the MedicaLogic
shares to be issued to Total eMed stockholders will be subject to an escrow
for general claims by MedicaLogic under the
1
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merger agreement and an additional $21,000,000 in value of MedicaLogic
shares will be held in escrow for a litigation contingency of Total eMed.
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS?
A: Under Oregon law, holders of MedicaLogic stock are not entitled to
dissenters' or appraisal rights in the MedicaLogic/Medscape or
MedicaLogic/Total eMed merger.
Under Delaware law, holders of Medscape stock are not entitled to
dissenters' or appraisal rights in the MedicaLogic/Medscape merger.
Under Delaware law, holders of Total eMed stock are entitled to appraisal
rights in the MedicaLogic/Total eMed merger. For a description of appraisal
rights for Total eMed stockholders, see the section entitled "Appraisal
rights" on page 131.
Q: WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
A: We are working toward completing the mergers as quickly as possible. In
addition to shareholder approvals, we must also satisfy all applicable
regulatory waiting periods. We hope the mergers will be completed by the
middle of 2000.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT MEDICALOGIC OR MEDSCAPE?
A: You may obtain additional information about MedicaLogic or Medscape as
described under "Where You Can Find More Information" on page 180.
Q: WHO DO I CONTACT IF I HAVE QUESTIONS ABOUT THE MEETINGS OR THE MERGERS?
<TABLE>
<S> <C> <C> <C>
A: MEDICALOGIC MEDSCAPE STOCKHOLDERS: TOTAL EMED STOCKHOLDERS:
SHAREHOLDERS:
MedicaLogic, Inc. Medscape, Inc. Total eMed, Inc.
20500 NW Evergreen Pkwy 134 West 29th St. 5301 Virginia Way, Ste. 250
Hillsboro, Oregon 97124 New York, NY 10001-5399 Brentwood, TN 37027
(503) 531-7000 (212) 760-3100 (615) 234-1300
Attention: Frank J. Attention: Mark E. Boulding Attention: Ted S. MacDonald
Spina
</TABLE>
Q: IS THIS THE MEDICALOGIC ANNUAL MEETING?
A: No. MedicaLogic shareholders will receive a separate proxy statement prior to
the annual meeting to be held on May 9, 2000.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGERS AND RELATED MATTERS FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE
LEGAL TERMS OF THE MERGERS, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND
THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE 180. EACH ITEM IN THIS SUMMARY INCLUDES A PAGE REFERENCE
DIRECTING YOU TO A MORE COMPLETE DESCRIPTION OF THAT ITEM.
THE COMPANIES
MEDICALOGIC (SEE PAGE 49)
20500 NW Evergreen Parkway
Hillsboro, Oregon 97124
(503) 531-7000
MedicaLogic's business is connecting physicians and patients through the
Internet. For physicians, it offers a line of enterprise and recently introduced
Internet-based online health record products and services for use at the point
of care in the exam room, with configurations suitable for practices of all
sizes. In addition to assisting physicians, MedicaLogic's products are used by a
wide range of health professionals, such as physician assistants, medical
assistants and nurses. For patients, it will provide, in the first half of 2000,
a web site that will allow them to access healthcare information directly from
their physician-generated medical records, enter personal medical information
and communicate with their physicians. For both physicians and patients,
MedicaLogic will provide healthcare content and e-commerce transaction services,
corresponding to information in a selectively shared database that unites
physicians and patients. This system is currently in the pilot phase of
development and will be available in the second half of 2000. Together, these
products, services and databases will comprise MedicaLogic's Internet Health
Services Center.
MEDSCAPE (SEE PAGE 58)
134 West 29th Street
New York, New York 10001-5399
(212) 760-3100
Medscape provides comprehensive, authoritative and timely medical
information and interactive programs to physicians, allied healthcare
professionals and consumers. Medscape operates two principal healthcare web
sites, Medscape.com. and CBSHealthWatch.com. Medscape.com's original and third-
party medical content and interactive programs assist medical professionals in
keeping abreast of medical advances. Medscape.com also offers its professional
users continuing medical education credits, electronic commerce solutions and
selected clinical data interchange and data management services through its
strategic partners. CBSHealthWatch.com, a recently launched consumer site, is
designed to help families and individuals make better informed healthcare
decisions and to simplify management of their healthcare needs. The site
provides personalized, authoritative medical content written for the consumer,
access to professional content on Medscape.com and interactive personal health
management tools, such as health diaries. CBS and the CBS eye device are
registered trademarks of CBS Broadcasting Inc.
3
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TOTAL EMED (SEE PAGE 67)
5301 Virginia Way, Suite 250
Brentwood, Tennessee 37027
(615) 234-1300
Total eMed is a provider of transcription services, primarily for outpatient
physicians, and a pioneer in the development of web-enabled transcription. Total
eMed's principal service is web-enabled medical transcription featuring a
centralized system by which voice is digitized and transported across dedicated
circuits and the Internet. Total eMed's process connects physicians with their
medical records stored in its clinical database. Physicians and other clinicians
utilizing Total eMed's system can dictate patient encounters and review, edit
and electronically sign completed transactions. Records are then maintained at
its data center for access by the physician or clinician with a secure Internet
browser.
REASONS FOR THE MERGERS
The boards of directors of our three companies have identified various
benefits that are likely to result from the mergers. The boards of directors
believe the mergers will provide the following benefits:
- the combination of MedicaLogic's online health record products and
services, Total eMed's online medical transcription services and
Medscape's physician and consumer web sites will enable
MedicaLogic/Medscape to move decisively toward its goal of offering a
comprehensive Internet Health Services Center that connects physicians,
patients and other healthcare stakeholders through the Internet;
- the combination will broaden each company's offerings of Internet-based
healthcare products and services;
- the combination of three providers of online products and services for
physicians will enable MedicaLogic/Medscape to achieve increased market
penetration of the physician market;
- the combination will allow the combined company to have diversified
revenue sources; and
- the merger will create a strong combined management team.
These and other reasons for approving and recommending the respective
mergers identified by each board are explained in greater detail on pages 104,
120 and 128 of this document.
THE MERGERS
In the MedicaLogic/Medscape merger, Medscape will merge with a subsidiary of
MedicaLogic, after which MedicaLogic will change its name to
MedicaLogic/Medscape, Inc. As a result, Medscape will become a wholly owned
subsidiary of MedicaLogic/Medscape. In the MedicaLogic/Total eMed merger, Total
eMed will merge with a subsidiary of MedicaLogic. As a result, Total eMed will
become a wholly owned subsidiary of MedicaLogic, or, if the MedicaLogic/Medscape
merger occurs, of MedicaLogic/Medscape.
THE MERGER AGREEMENTS ARE ATTACHED AS APPENDIX A AND APPENDIX B TO THIS
DOCUMENT. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENTS BECAUSE THEY ARE THE
LEGAL DOCUMENTS THAT GOVERN THE MERGERS. THE MEDICALOGIC/MEDSCAPE MERGER
AGREEMENT IS DISCUSSED MORE FULLY ON PAGE 134. THE MEDICALOGIC/TOTAL EMED MERGER
AGREEMENT IS DISCUSSED MORE FULLY ON PAGE 143.
WHAT MEDSCAPE STOCKHOLDERS WILL RECEIVE (SEE PAGE 134)
As a result of the MedicaLogic/Medscape merger, Medscape stockholders will
receive, for each Medscape common share, .323 shares of MedicaLogic common
stock. MedicaLogic will not issue any fractional shares. Instead, a Medscape
stockholder will receive a check in the amount equal to the
4
<PAGE>
closing price per share of MedicaLogic common stock on the trading day
immediately preceding the closing date of the merger multiplied by the
fractional share the stockholder would have otherwise received in the merger.
EXAMPLE:
- At the conversion ratio of .323, if you own 100 Medscape common shares,
then after the merger you will be entitled to receive 32 MedicaLogic
common shares and a check for the .3 shares of MedicaLogic common stock
you would have otherwise received.
Medscape stockholders should not send in their stock certificates until
instructed to do so after the merger is completed. After the merger is
completed, Medscape stockholders will no longer have any rights as Medscape
stockholders. Medscape stockholders who turn in their Medscape stock
certificates will receive the merger consideration from the exchange agent on
terms described in a letter of transmittal to be sent to Medscape stockholders.
WHAT TOTAL EMED STOCKHOLDERS WILL RECEIVE (SEE PAGE 143)
As a result of the MedicaLogic/Total eMed merger, Total eMed stockholders
will receive, for each share of Total eMed common stock (or common stock
equivalent), .8070438 shares of MedicaLogic common stock. MedicaLogic will not
issue any fractional shares. Instead, a Total eMed stockholder will receive a
check in the amount equal to the closing price per share of MedicaLogic common
stock on the trading day immediately preceding the closing date of the merger
multiplied by the fractional share the stockholder would have otherwise received
in the merger.
EXAMPLE:
- At the conversion ratio of .8070438, if you own 100 shares of Total eMed
common stock (or common stock equivalent), then after the merger you will
be entitled to receive 80 MedicaLogic common shares and a check for the
.70438 shares of MedicaLogic common stock you would have otherwise
received.
Total eMed stockholders should not send in their stock certificates until
instructed to do so after the merger is completed. After the merger is
completed, Total eMed stockholders will no longer have any rights as Total eMed
stockholders. Total eMed stockholders who turn in their Total eMed stock
certificates will receive the merger consideration from the exchange agent on
terms described in a letter of transmittal to be sent to Total eMed
stockholders.
TOTAL EMED ESCROWS (SEE PAGE 144)
Under the MedicaLogic/Total eMed merger agreement, five percent of the
MedicaLogic shares to be issued to Total eMed stockholders will be deposited in
a general escrow fund that will be available to compensate MedicaLogic and its
affiliates for any claims, losses or other damages incurred as a result of any
inaccuracy or breach of Total eMed's representations and warranties contained in
the merger agreement. The general escrow fund terminates five business days
after MedicaLogic receives its audited financial statements for the year ending
December 31, 2000, except with respect to shares necessary to satisfy claims
which have been identified but not yet paid. Generally, MedicaLogic may not
receive any shares from this general escrow fund until an officer's certificate
identifying damages in excess of $1,000,000 has been delivered to the escrow
agent and that amount is determined to be payable.
The MedicaLogic/Total eMed merger agreement also provides that MedicaLogic
shares to be issued to Total eMed stockholders valued at $21,000,000, based on
the average closing price for the 10 trading days before the effective date of
the merger, will be deposited in an escrow fund to compensate
5
<PAGE>
MedicaLogic and its affiliates for any claims, losses and other damages
resulting from a lawsuit filed against Total eMed and its founder. Except to
reimburse MedicaLogic for litigation expenses exceeding $1,000,000, these shares
will be held in escrow until final resolution of the lawsuit, but MedicaLogic
will consider facts and circumstances that may allow some of the escrowed shares
to be distributed early.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 130, 137 AND 145)
The mergers have been structured as reorganizations for federal income tax
purposes. Accordingly, Medscape and Total eMed stockholders generally will not
recognize any gain or loss for federal income tax purposes on the exchange of
their Medscape or Total eMed common stock (or common stock equivalent) for
MedicaLogic common stock in the mergers, except for any gain or loss on receipt
of cash instead of a fractional share of MedicaLogic common stock. The companies
themselves, as well as MedicaLogic shareholders, will not recognize gain or loss
as a result of the mergers.
This summary addresses only U.S. federal income taxes. This summary does not
address other taxes that may be relevant to you, such as state, local or foreign
taxes. In addition, the tax consequences described above and elsewhere in this
document may not apply to all Medscape and Total eMed stockholders, including
those specifically referred to on pages 137 and 145.
The tax consequences to you of the respective mergers will depend on the
facts of your own situation. You should consult your tax advisor for a full
understanding of the tax consequences to you of the mergers.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION (SEE PAGE 169)
Shares of MedicaLogic common stock and Medscape common stock are listed for
quotation on the Nasdaq National Market. On February 18, 2000, the last full
trading day before the public announcement of the proposed MedicaLogic/Medscape
merger, MedicaLogic common stock closed at $50.69 per share, and Medscape common
stock closed at $11.88 per share. On March 31, 2000, MedicaLogic common stock
closed at $17.38 per share, and Medscape common stock closed at $5.34 per share.
We urge you to obtain current market quotations.
None of MedicaLogic, Medscape or Total eMed has ever paid cash dividends.
After the mergers, the combined company does not expect to pay dividends in the
foreseeable future.
LISTING OF MEDICALOGIC COMMON STOCK (SEE PAGE 133)
MedicaLogic/Medscape will list the shares of MedicaLogic/Medscape common
stock to be issued to Medscape and Total eMed stockholders in the mergers for
quotation on the Nasdaq National Market.
OWNERSHIP OF MEDICALOGIC/MEDSCAPE AFTER THE MERGERS (SEE PAGES 134 AND 143)
If both mergers are completed, the existing MedicaLogic shareholders, the
Medscape stockholders and the Total eMed stockholders would own 59.7%, 26.6% and
13.7%, respectively, of the MedicaLogic/Medscape common stock then outstanding.
If only the Medscape merger is completed, the MedicaLogic and Medscape
shareholders would own 69.2% and 30.8%, respectively. If only the Total eMed
merger is completed, the MedicaLogic and Total eMed shareholders would own 81.4%
and 18.6%, respectively. These calculations do not give effect to
MedicaLogic/Medscape shares subject to options issued by MedicaLogic, Medscape
or Total eMed or subject to warrants issued by MedicaLogic or Medscape.
6
<PAGE>
APPRAISAL RIGHTS (SEE PAGE 131)
Neither the MedicaLogic shareholders nor the Medscape stockholders will have
any right to an appraisal of their shares of common stock as a result of the
mergers. However, the Total eMed stockholders will have a right to an appraisal
of their shares of Total eMed common stock.
REGULATORY APPROVALS (SEE PAGE 130)
Under the Hart-Scott-Rodino Act, the mergers cannot be completed until after
we have given certain information and materials to the Federal Trade Commission
and Department of Justice and a required waiting period has expired or been
terminated. The companies and certain stockholders plan to submit pre-merger
notification and report forms during the week of March 27, 2000.
CONDITIONS TO THE MERGERS (SEE PAGES 139 AND 150)
The completion of the mergers depends upon meeting a number of conditions,
including:
- obtaining shareholder approval; and
- listing on the Nasdaq National Market of the MedicaLogic shares to be
issued in the mergers to Medscape and Total eMed stockholders.
TERMINATION OF THE MERGER AGREEMENTS (SEE PAGES 140 AND 151)
MedicaLogic and Medscape can agree to terminate the MedicaLogic/Medscape
merger agreement without completing their merger. If the merger agreement is
terminated under certain circumstances, MedicaLogic or Medscape will be required
to pay the other a $30 million termination fee. Either of MedicaLogic or
Medscape may terminate the merger agreement if the merger is not completed by
August 31, 2000.
MedicaLogic and Total eMed can agree to terminate the MedicaLogic/Total eMed
merger agreement without completing their merger. Either of MedicaLogic or Total
eMed may terminate the merger agreement if the merger is not completed by
July 31, 2000.
Neither merger is conditioned on the other. Depending on the shareholder
votes, both, one or neither of the mergers could happen.
AMENDMENT OF MEDICALOGIC ARTICLES OF INCORPORATION (SEE PAGE 179)
The MedicaLogic board is also proposing an amendment to MedicaLogic's 1999
restated articles of incorporation to change its corporate name to
"MedicaLogic/Medscape, Inc." if the MedicaLogic/ Medscape merger is approved.
THE SPECIAL MEETINGS
The MedicaLogic special meeting will be held at MedicaLogic's headquarters
located at 20500 NW Evergreen Parkway, Hillsboro, Oregon 97124, at 8:00 a.m.
local time on May 10, 2000.
The Medscape special meeting will be held at CBS Corporation, Studio 19,
19(th) Floor, Black Rock Room, 51 W. 52(nd) Street, New York, New York 10019, at
9:30 a.m. local time on May 15, 2000.
The Total eMed special meeting will be held at Total eMed's headquarters
located at 5301 Virginia Way, Suite 250, Brentwood, Tennessee 37027 at
10:00 a.m. local time on May 10, 2000.
7
<PAGE>
RECORD DATE AND SHAREHOLDER VOTE REQUIRED TO APPROVE PROPOSALS
FOR MEDICALOGIC SHAREHOLDERS: You are entitled to vote at your special
meeting if you owned shares as of the close of business on March 31, 2000, the
record date. Approval of the issuance of the shares of MedicaLogic common stock
under the merger agreements and approval of the amendment to the articles of
incorporation each requires a majority of the votes cast by holders on the
record date of MedicaLogic common shares at the MedicaLogic special meeting,
provided a quorum is present. The presence, in person or by proxy, of holders of
a majority of the outstanding shares of MedicaLogic common stock entitled to
vote is necessary for a quorum.
FOR MEDSCAPE STOCKHOLDERS: You are entitled to vote at your special meeting
if you owned shares as of the close of business on April 14, 2000, the record
date. Approval of the MedicaLogic/Medscape merger agreement requires a majority
of the votes cast by holders on the record date of Medscape common shares at the
Medscape special meeting, provided a quorum is present. The presence, in person
or by proxy, of holders of a majority of the outstanding shares of Medscape
common stock entitled to vote is necessary for a quorum.
FOR TOTAL EMED STOCKHOLDERS: You are entitled to vote at your special
meeting if you owned shares as of the close of business on April 15, 2000, the
record date. Approval of the MedicaLogic/Total eMed merger agreement requires:
- a majority of the total votes represented by the outstanding shares of
Total eMed common stock, Series A preferred stock and Series B preferred
stock (all voting together as a single class) on the record date; and
- a majority of the total votes represented by Total eMed Series B preferred
stock and Series C preferred stock (each voting as a separate class) on
the record date.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Total eMed stock entitled to vote and a majority of the
outstanding shares of each class of Total eMed Series B and Series C preferred
stock is necessary to constitute a quorum for the transaction of business at the
Total eMed special meeting.
VOTING AGREEMENTS (SEE PAGES 142 AND 151)
As an inducement to MedicaLogic and Medscape to enter into the
MedicaLogic/Medscape merger agreement, certain stockholders of Medscape owning a
total of 18,044,430 shares of the common stock of Medscape as of February 21,
2000 (which represented 40.3% of the outstanding common stock of Medscape as of
that date) have entered into voting agreements with MedicaLogic, and certain
shareholders of MedicaLogic owning a total of 11,303,937 shares of the common
stock of MedicaLogic as of February 21, 2000 (which represented 34.9% of the
outstanding common stock of MedicaLogic) have entered into voting agreements
with Medscape. Under these voting agreements, these shareholders have agreed to
vote, as applicable, all shares of Medscape or MedicaLogic common stock owned by
them in favor of the merger or the issuance of MedicaLogic stock in the merger,
as the case may be.
Similarly, as an inducement to MedicaLogic and Total eMed to enter into the
MedicaLogic/Total eMed merger agreement, certain stockholders of Total eMed
owning a total of 2,265,780 shares of Total eMed common stock, 261,743 shares of
Total eMed Series A preferred stock, 13,973.077 shares of Total eMed Series B
preferred stock, and 11,976.923 shares of Total eMed Series C preferred stock
(representing 81% of the outstanding common stock, 60% of the outstanding
Series A preferred stock, 99.8% of the outstanding Series B preferred stock, and
99.8% of the outstanding Series C preferred stock) have entered into voting
agreements with MedicaLogic, and certain shareholders of MedicaLogic owning a
total of 11,303,937 shares of the common stock of MedicaLogic as of
February 21, 2000
8
<PAGE>
(which represented 34.9% of the outstanding common stock of MedicaLogic) have
entered into voting agreements with Total eMed. Under these voting agreements,
these shareholders have agreed to vote, as applicable, all shares of Total eMed
or MedicaLogic stock owned by them in favor of the merger or issuance of
MedicaLogic stock in the merger, as the case may be.
RECOMMENDATIONS TO SHAREHOLDERS
TO MEDICALOGIC SHAREHOLDERS:
The MedicaLogic board believes the mergers are in the best interests of
MedicaLogic shareholders and unanimously recommends that MedicaLogic
shareholders vote FOR the proposals to:
- approve the issuance of MedicaLogic common stock to stockholders of
Medscape in the MedicaLogic/Medscape merger;
- approve the issuance of MedicaLogic common stock to stockholders of Total
eMed in the MedicaLogic/Total eMed merger; and
- approve the amendment to MedicaLogic's 1999 restated articles of
incorporation that will change its corporate name to
"MedicaLogic/Medscape, Inc." subject to approval of the
MedicaLogic/Medscape merger.
TO MEDSCAPE STOCKHOLDERS:
The Medscape board believes the MedicaLogic/Medscape merger is in the best
interests of Medscape and its stockholders and unanimously recommends that
Medscape stockholders vote FOR the proposal to approve the MedicaLogic/Medscape
merger agreement.
TO TOTAL EMED STOCKHOLDERS:
The Total eMed board believes the MedicaLogic/Total eMed merger is in the
best interests of Total eMed and its stockholders and unanimously recommends
that Total eMed stockholders vote FOR the proposal to approve the
MedicaLogic/Total eMed merger agreement.
9
<PAGE>
SELECTED FINANCIAL DATA
The following tables show (i) selected historical consolidated financial
data of MedicaLogic, Medscape and Total eMed and (ii) unaudited similar
information reflecting the mergers of MedicaLogic, Medscape and Total eMed
(which we refer to as "pro forma" information). In presenting the pro forma
statement of operations data for the year ended December 31, 1999, we assumed
our companies had been merged throughout 1999. In presenting the pro forma
balance sheet data as of December 31, 1999, we assumed MedicaLogic, Medscape and
Total eMed merged on December 31, 1999. The following tables also show
information about each of our companies' historical earnings per share and book
value per share and similar pro forma information.
We base some of the information in the following tables on the historical
consolidated financial information of our companies accompanying this document.
When you read the summary financial information we provide in the following
tables, you should also read the more detailed financial information we provide
in this document, which you can find beginning on page F-1.
Transaction costs are expected to be incurred to complete the mergers and
consist primarily of financial advisor, legal, accounting and consulting fees,
and printing, mailing and registration expenses. Due to the non-recurring nature
of these costs, they have not been reflected in the selected unaudited pro forma
condensed combined financial data. For purposes of the selected unaudited pro
forma condensed combined financial data, we have assumed that .323 shares of
MedicaLogic common stock will be exchanged for each outstanding Medscape share
and each outstanding option or warrant for Medscape stock, and .8070438 shares
of MedicaLogic common stock will be exchanged for each outstanding Total eMed
share of common stock (or common stock equivalent) and each outstanding option
for Total eMed stock.
The selected unaudited pro forma condensed combined financial data are not
necessarily indicative of operating results which would have been achieved had
the mergers been completed as of the beginning of the period and should not be
construed as representative of future operations. This selected unaudited pro
forma condensed combined financial data should be read in conjunction with the
unaudited pro forma financial statements included elsewhere in this document.
The total estimated purchase price of the transaction has been allocated on
a preliminary basis to assets and liabilities based on management's estimate of
their fair values. The excess of the purchase price over the fair value of the
net assets acquired has been allocated to goodwill and other intangible assets.
These allocations are subject to change pending the completion of the final
analysis of the total purchase price and fair values of the assets acquired and
the liabilities assumed. The impact of such changes could be material.
10
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MEDICALOGIC SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Revenues................................. $ 7,537 $ 9,664 $ 12,807 $ 16,160 $ 19,717
Operating loss........................... $ (4,227) $(10,424) $(10,992) $ (7,698) $(29,084)
Net loss attributed to common
shareholders........................... $ (4,261) $(10,364) $(10,819) $ (7,232) $(27,987)
Basic and diluted net loss per
share(1)............................... $ (0.68) $ (1.64) $ (1.64) $ (1.06) $ (3.07)
Basic and diluted weighted average
shares................................. 6,302 6,318 6,580 6,807 9,108
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................ $ 10,614 $ 18,651 $ 4,924 $ 4,718 $110,320
Working capital.......................... 10,245 19,096 14,870 16,091 135,866
Total assets............................. 14,787 26,074 22,072 24,308 168,354
Long-term obligations, net of current
portion................................ 1,454 977 278 679 2,233
Convertible redeemable preferred stock... 15,795 35,867 42,791 49,782 --
Total shareholders' equity (deficit)..... (4,995) (15,317) (26,093) (32,439) 149,840
</TABLE>
- ------------------------
(1) Calculated by dividing the loss attributable to common shares by the
weighted average number of shares outstanding. Does not include outstanding
common stock options and warrants in the loss per common share calculation,
as their effect is anti-dilutive.
MEDSCAPE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------
1996 1997 1998 1999
------------- -------- -------- --------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Revenues........................................ $ 1,015 $ 1,522 $ 3,069 $ 11,156
Loss from operations............................ $(1,316) $(3,452) $(4,150) $(37,914)
Net loss........................................ $(1,344) $(3,464) $(3,901) $(36,711)
Basic and diluted net loss per share (1)........ $ (0.66) $ (1.26) $ (1.07) $ (1.89)
Basic and diluted weighted average shares....... 2,026 2,751 3,637 19,400
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1997 1998 1999
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets..................................... $ 560 $ 4,294 $3,038 $62,021
Working capital.................................... (1,570) 2,350 1,368 50,874
Total assets....................................... 836 4,633 5,874 85,335
Stockholders' equity (deficit)..................... (1,294) 2,689 4,204 74,188
</TABLE>
- ------------------------
(1) Calculated by dividing the loss attributable to common shares by the
weighted average number of shares outstanding. Does not include outstanding
common stock options and warrants in the loss per common share calculation,
as their effect is anti-dilutive.
11
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TOTAL EMED SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1998
(INCEPTION) TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
SELECTED FINANCIAL DATA:
Revenues.................................................. $ 23 $ 4,598
Loss from operations...................................... $(1,581) $(6,731)
Net loss applicable to common stock....................... $(1,612) $(7,883)
Basic and diluted net loss per share (1).................. $ (1.56) $ (3.39)
Basic and diluted weighted average shares................. 1,033 2,325
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Cash, cash equivalents and short term investments......... $ 1,826 $ 3,150
Working capital........................................... 2,188 15,709
Total assets.............................................. 3,130 23,882
Long-term obligations, net of current portion............. 23 17
Convertible redeemable preferred stock.................... 4,448 5,817
Total stockholders' equity (deficit)...................... (1,612) 16,052
</TABLE>
- ------------------------
(1) Calculated by dividing the loss attributable to common shares by the
weighted average number of shares outstanding. Does not include outstanding
common stock options in the loss per common share calculation, as their
effect is anti-dilutive.
12
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL DATA AND COMPARATIVE PER SHARE INFORMATION
FOR THE MEDICALOGIC/MEDSCAPE MERGER
AND THE MEDICALOGIC/TOTAL EMED MERGER
The following selected unaudited pro forma condensed combined financial data
give effect to the MedicaLogic/Medscape merger and the MedicaLogic/Total eMed
merger using the purchase accounting method. The unaudited pro forma combined
balance sheet data assumes the MedicaLogic/Medscape merger and the
MedicaLogic/Total eMed merger each took place on December 31, 1999.
The following tables set forth various per share data for MedicaLogic,
Medscape and Total eMed on an historical basis, for MedicaLogic, Medscape and
Total eMed on a pro forma combined basis and on a per share equivalent pro forma
combined basis for Medscape and Total eMed. The information gives effect to the
proposed MedicaLogic/Medscape merger at the conversion ratio of .323 shares of
MedicaLogic common stock for each share of Medscape common stock, and the
proposed MedicaLogic/Total eMed merger at the conversion ratio of .8070438
shares of MedicaLogic common stock for each share of Total eMed common stock (or
common equivalent) and assuming dilution.
The unaudited pro forma combined and equivalent financial data do not
reflect any cost savings or other synergies anticipated by management as a
result of the mergers. Also in connection with the mergers, the companies expect
to incur charges for merger-related costs. None of MedicaLogic, Medscape or
Total eMed has included the amount of these merger-related costs in their
historical financial data. The pro forma earnings per share data do not reflect
any of these costs. The companies may have performed differently if they had
always been combined. You should not rely on the pro forma information as being
indicative of the historical results the combined companies would have had or
the results they will experience in the future.
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues.................................................. $ 35,471
Operating loss............................................ $ (347,681)
Net loss attributed to common shareholders................ $ (345,163)
Basic and diluted net loss per share...................... $ (11.14)
Basic and diluted weighted average shares................. 30,991
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash and short-term investments........................... $ 195,641
Working capital........................................... 192,945
Total assets.............................................. 1,185,879
Long-term obligations, net of current portion............. 2,250
Total shareholders' equity................................ 1,144,736
</TABLE>
- ------------------------
(1) For detailed information, see "Unaudited pro forma condensed combined
financial information" on pages 153 through 168.
13
<PAGE>
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth:
(1) historical net loss per share and historical net tangible book value per
share data of MedicaLogic;
(2) historical net loss per share and historical net tangible book value per
share of Medscape;
(3) historical net loss per share and historical net tangible book value per
share data of Total eMed;
(4) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share data of
MedicaLogic/Medscape after giving effect to the MedicaLogic/Medscape
merger and the MedicaLogic/Total eMed merger;
(5) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share data of
MedicaLogic/Medscape after giving effect to the MedicaLogic/Medscape
merger; and
(6) net loss per share and unaudited pro forma condensed combined net
tangible book value per share of MedicaLogic/Medscape after giving effect
to the MedicaLogic/Total eMed merger.
The information in the table should be read in conjunction with the
historical financial statements of MedicaLogic, Medscape and Total eMed and the
related notes contained in this Joint Proxy Statement/Prospectus and the
unaudited pro forma condensed combined financial information and related notes
also included elsewhere in this Joint Proxy Statement/Prospectus. The unaudited
pro forma condensed combined financial information is not necessarily indicative
of the net loss per share or book value per share that would have been achieved
had the mergers been consummated as of the beginning of the period presented and
should not be construed as representative of these amounts for any future dates
or periods.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED
HISTORICAL INCLUDING:
----------------------------------- ---------------------------------------
MEDICALOGIC
MEDSCAPE MEDICALOGIC MEDICALOGIC
MEDICALOGIC MEDSCAPE TOTAL EMED TOTAL EMED MEDSCAPE TOTAL EMED
(1) (2) (3) (4) (5) (6)
----------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss per share--basic and
diluted for the year ended
December 31, 1999............... $(3.07) $(1.89) $(3.39) $(11.14) $ (11.42) $ (6.30)
Equivalent pro forma net loss per
share for the year ended
December 31, 1999:
Medscape........................ $ (3.60) $ (3.69) N/A
Total eMed...................... $ (8.99) N/A $ (5.08)
Net tangible book value per share
at December 31, 1999............ $ 4.48 $ 1.38 $ 1.47 $ 4.00 $ 4.26 $ 4.08
Equivalent pro forma net tangible
book value per share at
December 31, 1999:
Medscape........................ $ 1.29 $ 1.38 N/A
Total eMed...................... $ 3.23 N/A $ 3.29
</TABLE>
14
<PAGE>
- ------------------------
- Historical net tangible book value per share is computed by dividing
shareholders' equity less goodwill and other intangible assets by the
number of shares of common stock and common stock equivalents outstanding
at the end of the period.
- The pro forma condensed combined book value per share is computed by
dividing pro forma shareholders' equity less goodwill and other intangible
assets, including the effect of pro forma adjustments, by the pro forma
number of shares of MedicaLogic/Medscape common stock which would have
been outstanding had the mergers been consummated as of December 31, 1999.
- The Medscape equivalent pro forma condensed combined per share amounts are
calculated by multiplying the pro forma condensed combined book value per
share amounts by the exchange ratio of .323 shares of MedicaLogic/Medscape
common stock for each share of Medscape common stock.
- The Total eMed equivalent pro forma condensed combined per share amounts
are calculated by multiplying the pro forma condensed combined book value
per share amounts by the exchange ratio of .8070438 shares of
MedicaLogic/Medscape common stock for each share of Total eMed common
stock (or common stock equivalent).
15
<PAGE>
RISK FACTORS
THE MERGERS INVOLVE A HIGH DEGREE OF RISK. BY VOTING IN FAVOR OF THE
MEDICALOGIC/MEDSCAPE MERGER OR THE MEDICALOGIC/TOTAL EMED MERGER, YOU WILL BE
CHOOSING TO INVEST IN MEDICALOGIC COMMON STOCK, WHICH WILL BE REFERRED TO UPON
COMPLETION OF THE MEDICALOGIC/MEDSCAPE MERGER AS MEDICALOGIC/MEDSCAPE COMMON
STOCK. AN INVESTMENT IN MEDICALOGIC/MEDSCAPE COMMON STOCK INVOLVES A HIGH DEGREE
OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
IN DECIDING WHETHER TO VOTE FOR THE MERGERS.
RISKS RELATING TO THE COMBINED BUSINESSES
IF MEDICALOGIC/MEDSCAPE DOES NOT ACHIEVE BROAD ACCEPTANCE OF ITS PRODUCTS AND
SERVICES BY PHYSICIANS, PATIENTS AND OTHER HEALTHCARE STAKEHOLDERS, ITS BUSINESS
WILL BE HARMED.
MedicaLogic's business model depends substantially on its ability both to
sell its LOGICIAN and LOGICIAN INTERNET systems to physicians and other
healthcare providers and to generate usage by a large number of physicians.
Failure to achieve broad acceptance of our products and services by physicians
and other healthcare stakeholders would severely limit our ability to implement
the Internet-based business model.
Likewise, failure to achieve or maintain market acceptance of Medscape.com,
CBSHealthWatch.com and Medscape's AOL co-branded web sites would result in a
loss of revenues. Medical professionals or consumers may not accept
Medscape.com, CBSHealthWatch.com, or Medscape's AOL co-branded web sites or even
the Internet, as a replacement for traditional sources of healthcare
information. Market acceptance of Medscape.com, CBSHealthWatch.com and
Medscape's AOL co-branded web sites depends upon continued growth in the use of
the Internet generally and, in particular, as a source of healthcare information
services for medical professionals and consumers.
Achieving market acceptance for our products and services will require
substantial marketing efforts and the expenditure of significant financial and
other resources. Use of MedicaLogic/Medscape's products and services requires
physicians to integrate MedicaLogic/Medscape's products and services into their
office work flow and to adopt different behavior patterns and new methods of
conducting business and exchanging information. Physicians may not choose to use
MedicaLogic/Medscape's products and services.
THE BUSINESS MODEL OF PROVIDING INFORMATION AND SERVICES OVER THE INTERNET IS
DIFFICULT TO EVALUATE AND THE MEDICALOGIC/MEDSCAPE BUSINESS MODEL IS NEW AND
UNPROVEN.
Because each of MedicaLogic and Total eMed recently began operations for
their Internet-based businesses and Medscape only recently launched its consumer
web sites, it is difficult to evaluate their businesses and prospects. The
MedicaLogic/Medscape pro forma historical financial information included in this
document is of limited value in projecting future operating results because we
have no operating history as a combined organization and the emerging nature of
our markets. We will initially derive a substantial portion of our revenue from
non-Internet enterprise software and related services. We may never achieve
favorable operating results or profitability.
MEDICALOGIC, MEDSCAPE AND TOTAL EMED HAVE INCURRED, AND WE WILL CONTINUE TO
INCUR, NET OPERATING LOSSES WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
STOCK.
Failure to achieve or maintain profitability could materially and adversely
affect the market price of MedicaLogic/Medscape's common stock. In 1997, 1998
and 1999, MedicaLogic experienced net losses of approximately $10.8 million,
$7.2 million and $28.0 million and Medscape experienced net losses of
approximately $3.5 million, $3.9 million and $36.7 million. In 1998 and 1999,
Total eMed experienced net losses of approximately $1.6 million and
$7.9 million. At December 31, 1999, the three
16
<PAGE>
companies had accumulated losses of approximately $118.4 million. We will be
investing heavily to develop our Internet-based products and services and expand
sales and marketing capabilities related to our Internet-based business. We may
continue to experience net losses and may not become profitable.
OUR FAILURE TO INTRODUCE NEW PRODUCTS AND SERVICES AND ENHANCE CURRENT PRODUCTS
SUCCESSFULLY COULD ADVERSELY AFFECT THE IMPLEMENTATION OF OUR INTERNET-BASED
BUSINESS MODEL.
Any failure by MedicaLogic/Medscape to introduce planned products and
services, or to enhance current products and services on schedule could make it
difficult for MedicaLogic/Medscape to implement successfully its Internet-based
business model. For example, MedicaLogic is working on enhancements that will
allow LOGICIAN and LOGICIAN INTERNET to communicate with each other to
facilitate connections between physicians in integrated healthcare delivery
networks, who primarily use LOGICIAN, and physicians who use LOGICIAN INTERNET.
MedicaLogic/Medscape may not be able to introduce products, services and
enhancements on schedule, or at all.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, WE MAY BE UNABLE
TO SUSTAIN OR GROW OUR BUSINESS.
MedicaLogic/Medscape will depend upon strategic relationships to extend the
reach of its products and services to a larger number of participants in the
healthcare industry, develop and deploy new products and generate additional
revenue. If MedicaLogic/Medscape loses any of its existing strategic
relationships or fails to establish additional strategic relationships, or if
its strategic relationships fail to provide anticipated benefits,
MedicaLogic/Medscape may not be able to sustain or grow its business. We have
limited experience in establishing and maintaining strategic relationships with
healthcare and Internet industry participants. Entering into strategic
relationships is complicated by the following factors:
- current or future strategic partners may decide to compete with us in some
or all of our markets;
- key participants in the healthcare industry may refuse to establish
strategic relationships with us if we have entered into relationships with
their competitors; and
- potential strategic partners may be reluctant to work with us until our
products and services have obtained widespread market acceptance.
INTENSE COMPETITION MAY LEAD TO REDUCED SALES OF OUR PRODUCTS AND SERVICES.
The industries in which MedicaLogic, Medscape and Total eMed compete are
intensely competitive and subject to fragmentation, high growth and rapid
technological change. MedicaLogic faces significant competition from traditional
healthcare information system vendors and Internet healthcare companies as they
expand their product offerings. Medscape currently competes, or potentially
competes, with many providers of web content, information services and products,
as well as traditional media and promotional efforts, for audience attention and
advertising and sponsorship expenditures. Total eMed competes with many
Internet-based and non-Internet-based medical transcription services companies.
Many of these companies have significantly greater financial resources than
MedicaLogic/ Medscape will have, as well as well-established brand names and
large installed customer bases. We may be unable to compete successfully against
these organizations.
OUR FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL COULD SIGNIFICANTLY HINDER THE
EXECUTION OF OUR BUSINESS STRATEGY.
Our success depends in large part on the continued service of our management
and other key personnel and our ability to continue to attract, motivate and
retain highly qualified employees.
17
<PAGE>
Individuals with experience and expertise related to the successful operation of
an Internet-based business are currently in great demand and difficult to
recruit and retain. If one or more of our key employees leaves
MedicaLogic/Medscape and we are unable to find a replacement with the
combination of skills and attributes necessary to execute our strategy, we may
be unable to execute our strategy successfully. In particular, the service of
Dr. Mark K. Leavitt, our chairman and chief executive officer, is integral to
the execution of our business strategy. We do not maintain key person life
insurance on any of our employees.
IF MEDICALOGIC OR TOTAL EMED FAILS TO ACHIEVE A SIGNIFICANT MARKET SHARE, WE MAY
BE UNABLE TO COMPETE SUCCESSFULLY.
To be successful, MedicaLogic and Total eMed must gain significant market
share with their products and services before competitors introduce alternative
products and services. Failure to achieve a significant market share may
materially reduce our ability to compete successfully, if at all, with other
market participants and may lead to reduced sales of our products and services.
MEDSCAPE HAS DEPENDED, AND MEDICALOGIC/MEDSCAPE WILL DEPEND, ON THE
PHARMACEUTICAL INDUSTRY FOR A SIGNIFICANT PORTION OF ITS REVENUES.
MedicaLogic/Medscape's revenues could seriously decrease if there were
adverse developments in the pharmaceutical industry. MedicaLogic/Medscape's
near-term and long-term prospects depend upon selling its services to the
pharmaceutical industry. In 1998, 92% of Medscape's revenues were derived from
services provided to pharmaceutical companies. In 1999, 91% of Medscape's
revenues were derived from services provided to pharmaceutical companies.
Accordingly, our success is highly dependent on the sales and marketing
expenditures of pharmaceutical companies and our ability to attract these
expenditures. Some of the adverse developments in the pharmaceutical industry
that could affect our revenues would be:
- a reduction in sales and marketing expenditures of pharmaceutical
companies;
- public or private market initiatives or reforms designed to regulate the
manner in which pharmaceutical companies promote their products;
- regulatory or legislative developments that discourage or prohibit
pharmaceutical companies' promotional activities;
- a decrease in the number of new drugs being developed; or
- the adoption of current legislative and regulatory proposals to control
drug costs for Medicare and Medicaid patients, including proposals in the
U.S. Congress.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HAVE A SIGNIFICANT NEGATIVE
IMPACT ON OUR BUSINESS OPERATIONS.
MedicaLogic, Medscape and Total eMed have rapidly and significantly expanded
their operations. MedicaLogic/Medscape will need to continue to expand rapidly.
Difficulties in managing any future growth could have a significant negative
impact on our business operations, increase our costs and make it more difficult
for us to achieve profitability. We may not be able to project the rate or
timing of increases in the use of our products and services accurately or to
expand and upgrade our systems and infrastructure to accommodate these
increases. Our future results of operations will depend on the ability of our
officers and key employees to manage changing business conditions and to
implement and improve our technical, administrative, financial control and
reporting systems in response to our anticipated rapid growth.
18
<PAGE>
MEDSCAPE HAS RELIED, AND WE WILL RELY, ON MEDSCAPE'S AGREEMENTS WITH CBS FOR
SIGNIFICANT PROMOTION AND ADVERTISING, AND THE EARLY TERMINATION OF THESE
AGREEMENTS COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS AND STOCK PRICE.
If Medscape's agreements with CBS are terminated prior to the end of their
term, our financial results and stock price could be adversely affected.
Under a license agreement, Medscape licenses the "CBS" trademark and "Eye"
design and health-related news content from CBS. The "CBS" trademark and "Eye"
design are very important to Medscape's marketing and brand building activities
for Medscape's consumer web sites. Medscape's license agreement with CBS will
expire on August 3, 2006 and CBS has no obligation to renew it. Under specified
circumstances, CBS also has the right to terminate that agreement and keep its
MedicaLogic/Medscape stock.
CBS HAS SIGNIFICANT CONTROL OVER THE CONTENT OF MEDSCAPE'S CONSUMER WEB SITES
AND ITS ADVERTISING AND PROMOTION OF MEDSCAPE'S WEB SITES.
Under Medscape's license agreement with CBS, CBS can require us to remove
any content on Medscape's consumer web sites which CBS determines conflicts
with, interferes with or is detrimental to its reputation or business or for
other reasons. Medscape is also required to conform to CBS's guidelines for the
use of its trademark. CBS has the right to approve all materials, such as
marketing materials, that include the "CBS" trademark and "Eye" design. Because
of these restrictions, we may not be able to perform our desired marketing
activities.
CBS agreed, with some limitations, to provide Medscape with approximately
$150 million of advertising and on-air promotions during the period from
August 3, 1999 through August 3, 2006. However, CBS has discretion as to the
timing and placement of these advertisements and promotions. CBS could change
the manner in which it promotes Medscape. CBS also makes no guarantees as to the
demographic composition or size of the audience that views these advertisements
or promotions. This advertising and on-air promotion, as well as our association
with the CBS brand, are important elements of our strategy to increase brand
awareness. This obligation to provide advertising and promotion may terminate at
CBS's option if the license agreement with CBS terminates.
MEDSCAPE HAS RELIED, AND WE WILL RELY, ON MEDSCAPE'S AGREEMENT WITH AOL FOR
SIGNIFICANT PROMOTION AND ADVERTISING, AND ITS TERMINATION COULD NEGATIVELY
AFFECT OUR FINANCIAL RESULTS AND STOCK PRICE.
If Medscape's agreement with AOL is terminated prior to the end of its term,
our financial results and stock price could be adversely affected.
Medscape's relationship with AOL and the impressions to be delivered by AOL
are very important to our marketing and brand building activities for our
consumer web sites. Medscape's agreement with AOL will expire on September 3,
2002. The agreement may be extended unilaterally by AOL for nine months, but AOL
has no obligation to extend or renew it. Medscape's merger with MedicaLogic
gives AOL the right to terminate the agreement or to continue the agreement and
receive all payments due to it under the agreement. In addition, under specified
circumstances, AOL has the right to terminate the agreement or its obligation to
provide us with the impressions and keep the warrants it received from Medscape.
AOL MAY LIMIT THE CONTENT OF MEDSCAPE'S AOL CO-BRANDED CONSUMER WEB SITES AND
MEDSCAPE'S ABILITY TO WORK WITH THIRD PARTIES, WHICH COULD IMPEDE OUR GROWTH,
NEGATIVELY AFFECT USER LOYALTY, REDUCE TRAFFIC ON OUR WEB SITES AND REDUCE
REVENUES.
Under Medscape's interactive services agreement with AOL, AOL has
significant control over the content, interactive tools and links to other web
sites that we may feature on Medscape's AOL
19
<PAGE>
co-branded consumer sites. Medscape is also prohibited from linking to or
selling advertising to specified third parties. AOL could limit the content,
tools and links available on Medscape's co-branded consumer sites to an extent
that might make these sites less useful and attractive to users, which could
negatively affect user loyalty and reduce traffic on the sites.
AOL HAS SIGNIFICANT CONTROL OVER ITS PROMOTION OF MEDSCAPE'S CONSUMER WEB SITES,
WHICH MAY NEGATIVELY IMPACT OUR OPERATING RESULTS.
If AOL does not promote Medscape's consumer web sites in a manner that
generates traffic to those sites, our future prospects could be harmed and our
revenues will decline. AOL has broad discretion as to the form, placement,
timing and nature of its promotions of Medscape's co-branded sites. AOL may
choose not to promote the co-branded web sites in a way that we believe is most
effective. Medscape's agreement with AOL does not give Medscape the power to
redirect the AOL promotions. AOL also makes no guarantees as to the demographic
composition of the audience that views these promotions.
MEDSCAPE HAS DEPENDED, AND WE WILL DEPEND, ON REVENUES FROM ADVERTISING AND
SPONSORSHIPS, AND THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING AND
SPONSORSHIP IS UNCERTAIN.
Our future success depends on an increase in the use of the Internet as an
advertising medium. Most of Medscape's revenues have been derived from the sale
of advertisements and sponsorships on Medscape's web sites, and Medscape expects
this to continue for the foreseeable future. The market for Internet advertising
may not continue to emerge or become sustainable. If the market for Internet
advertising and sponsorship fails to develop or develops more slowly than
expected, our revenues will decline.
The Internet advertising market is new and rapidly evolving. It cannot yet
be compared with the traditional advertising market to gauge its effectiveness.
As a result, there is significant uncertainty about the demand and market
acceptance for Internet advertising. Many of Medscape's advertising customers
and sponsors have limited experience with Internet advertising and sponsorship
and may ultimately conclude that Internet advertising and sponsorship are not
effective relative to traditional advertising media and sponsorship
opportunities. Different pricing models are used to sell advertising on the web,
and it is difficult to predict which model, if any, will emerge as the industry
standard. This makes it difficult to project our future advertising and
sponsorship rates and revenues.
In addition, widespread adoption or increased use by Internet users of
filter software programs that allow them to limit or remove advertising from
their desktops or the adoption of this type of software by Internet access
providers could have a material adverse effect on the viability of advertising
on the Internet and on our financial condition.
OUR BUSINESS WILL SUFFER IF WE FAIL TO SUCCESSFULLY INTEGRATE ANY ACQUIRED
TECHNOLOGIES AND COMPANIES IN THE FUTURE.
Integrating any newly acquired organizations and technologies into
MedicaLogic/Medscape in the future could be expensive, time consuming and may
strain our resources. Future acquisitions could divert management's attention
from other business concerns and expose us to unforeseen liabilities or risks
associated with entering new markets. In addition, we may lose key employees
while integrating these new companies. We may also lose our current customers if
any acquired companies have relationships with competitors of our customers.
Consequently, we may not be successful in integrating acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. Also,
these acquisitions may not result in sufficient revenues or earnings to justify
our investment in, or expenses related to, these acquisitions, and synergies may
not develop. Our industry is consolidating and we expect that we will face
intensified competition for acquisitions, especially from larger, better-
20
<PAGE>
funded organizations. If we fail to execute our acquisition strategy
successfully for any reason, our business will suffer significantly.
FAILURE TO CONTINUE TO EXPAND AND ADAPT MEDICALOGIC'S AND TOTAL EMED'S NETWORK
INFRASTRUCTURE TO ACCOMMODATE INCREASED USE BY OUR CUSTOMERS COULD MAKE IT
DIFFICULT TO SUCCESSFULLY IMPLEMENT OUR INTERNET-BASED BUSINESS MODEL.
To successfully implement our Internet-based business model, we must
continue to expand and adapt MedicaLogic's and Total eMed's network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. Our infrastructure may not accommodate
increased use while maintaining acceptable overall performance. To date,
MedicaLogic has processed a limited number and variety of Internet-based
transactions. In addition, MedicaLogic's and Total eMed's Internet products and
services have only been used by a limited number of physicians and healthcare
consumers. An unexpectedly large increase in the volume or pace of traffic on
our web sites, the number of physicians using LOGICIAN INTERNET or MedicaLogic's
and Total eMed's other Internet-based products and services, or orders placed by
customers may require us to expand and further upgrade our technology. This
expansion and adaptation would be expensive and would divert our attention from
other activities.
OUR SYSTEMS MAY EXPERIENCE FAILURES WHICH COULD CAUSE OUR REVENUES TO DECLINE.
Any significant interruption in our operations would cause our revenues to
decline. Medscape has experienced periodic system interruptions in the past,
which may occur again. Any significant interruptions in our services or an
increase in response time could result in a loss of potential or existing users
and members, strategic partners or advertisers and sponsors and, if sustained or
repeated, could reduce the attractiveness of our web sites to these parties in
the future. The insurance policies of MedicaLogic, Medscape and Total eMed have
low coverage limits and, therefore, cannot adequately compensate us for any
material losses that may occur due to disruptions in our service.
Medscape's web sites may be required to accommodate a high volume of traffic
and deliver frequently updated information. Users may experience slower response
times or system failures due to increased traffic on these web sites or for a
variety of other reasons. Medscape depends on content providers to provide
information and data feeds on a timely basis. These web sites could experience
disruptions or interruptions in service due to the failure or delay in the
transmission or receipt of this information.
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS.
Our security measures may not prevent security breaches. Substantial or
ongoing security breaches on our system or other Internet-based systems could
reduce user confidence in our web sites and other Internet-based products and
services, leading to reduced usage and lower revenues. The secure transmission
of confidential information over the Internet is essential in maintaining
confidence in our web sites and will be increasingly important as we expand our
consumer-oriented and Internet-based offerings. Consumers generally are
concerned with security and privacy on the Internet and any publicized security
problems could inhibit the growth of the Internet and, therefore, our products
and services. We will need to incur significant expense to protect against and
remedy security breaches.
A party that is able to circumvent our security systems could steal
proprietary information or cause interruptions in our operations. Employees who
handle proprietary information may also misappropriate that information.
Security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our insurance policies carry low coverage
limits, which may not be adequate to reimburse us for losses caused by security
breaches. We also face risks associated with security breaches affecting third
parties conducting business over the Internet.
21
<PAGE>
MEDSCAPE'S BRANDS MAY NOT ACHIEVE THE BROAD RECOGNITION NECESSARY TO CONTINUE TO
GROW MEMBERSHIP AND TRAFFIC AND ATTRACT ADVERTISERS AND SPONSORS.
Broad recognition and a favorable audience perception of the Medscape brands
are essential to our future success. Any failure to increase membership and
traffic on Medscape's web sites may make it difficult to attract advertisers and
sponsors. Successful positioning of the Medscape brands will largely depend on:
- the success of our advertising and promotional efforts; and
- our ability to continue to provide a high-quality experience for our
audience.
MEDICALOGIC/MEDSCAPE AND ITS MANAGEMENT HAVE LIMITED EXPERIENCE WITH
INTERNATIONAL OPERATIONS, WHICH MAY RESULT IN ITS INABILITY TO SUCCEED ON AN
INTERNATIONAL LEVEL.
Our revenues could be adversely affected if our current or future foreign
business associates are unable to market successfully and operate our online
services in foreign markets. To date, MedicaLogic/ Medscape and its management
have had limited experience in developing localized versions of
MedicaLogic/Medscape's online services and in marketing and operating our online
services internationally. One element of our strategy is to develop our online
service brands in international markets. To achieve this, it is necessary for us
to enter into relationships with foreign business partners. We may experience
difficulty in obtaining these partners and managing international operations
because of distance, trade regulation, language barriers and cultural
differences.
BECAUSE TOTAL EMED DOES NOT HAVE PROPRIETARY RIGHTS IN THE SOFTWARE IT USES, IT
CANNOT PREVENT OTHERS FROM BUILDING A SIMILAR PLATFORM.
Total eMed generally has no proprietary rights in the software or hardware
that comprises its platform. The platform has been structured using commercially
available software and hardware. Thus, it does not have the protection of
patent, copyright or trademark laws to prevent others from building a similar
platform and offering the same services.
FUTURE STOCK ISSUANCES WILL DILUTE OUR SHAREHOLDERS AND COULD RESULT IN ADVERSE
ACCOUNTING CONSEQUENCES.
We intend to pay for some of our acquisitions by issuing additional common
stock and this would dilute our shareholders. We may also use cash to buy
companies or technologies, and we may need to incur debt to pay for these
acquisitions. Acquisition financing may not be available on favorable terms or
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which would materially increase our operating expenses.
SALES OF LARGE AMOUNTS OF OUR SHARES FOLLOWING THE MERGERS COULD ADVERSELY
AFFECT OUR STOCK PRICE.
The market price of the MedicaLogic/Medscape common stock could fall
dramatically if shareholders sell large amounts of stock in the public market
following the mergers. These sales, or the possibility that these sales may
occur, could make our shareholders unable to realize the value of the merger
consideration received, as measured prior to completion of the mergers, and may
make it more difficult for us to sell equity or equity-related securities in the
future. Before the mergers, a significant portion of the common stock of
MedicaLogic and Medscape was subject to restrictions on transfer under federal
securities laws and "lock-up" agreements with the underwriters of their initial
public offerings, and there was no public market for the capital stock of Total
eMed. On or shortly after the mergers, all of the shares of MedicaLogic/Medscape
will be eligible for immediate sale. However, shares held by affiliates of the
companies will be subject to limitations on the volume of sales under
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federal securities laws. Some MedicaLogic/Medscape shareholders will also have
the right to demand registration of their shares for resale.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE
POSITION MAY BE ADVERSELY AFFECTED.
Our ability to compete depends upon our proprietary systems and technology,
including LOGICIAN INTERNET and LOGICIAN. The steps MedicaLogic, Medscape and
Total eMed currently take to protect their intellectual property rights may
prove to be inadequate, time consuming and expensive. Misappropriation of our
intellectual property may make us less competitive and require us to engage in
expensive litigation to enforce or protect our intellectual property rights or
to defend against claims of invalidity.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN
THE LOSS OF SIGNIFICANT RIGHTS.
MedicaLogic previously has been, and we in the future could be, subjected to
intellectual property infringement claims. We could incur substantial costs and
diversion of management resources defending any infringement claims. In
addition, a party making a claim could secure a judgment 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.
RISKS RELATING TO THE HEALTHCARE INDUSTRY AND THE INTERNET
FEDERAL AND STATE LEGISLATION AND REGULATION AFFECTING THE HEALTHCARE INDUSTRY
COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS.
MedicaLogic, Medscape and Total eMed are subject to federal and state
legislation and regulation affecting the healthcare industry. Existing and new
laws and regulations applicable to the healthcare industry could have a material
adverse effect on our ability to operate our business. The federal and state
governments extensively regulate the confidentiality and release of patient
records. Additional legislation governing the distribution of medical records
and health information has been proposed at both the state and federal level. It
may be expensive to implement security or other measures designed to comply with
any new legislation. Moreover, we may be restricted or prevented from delivering
patient records or health information electronically.
Other legislation currently being considered at the federal level could also
negatively affect our business. For example, the Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions and
identifiers, prescribed security measures and other provisions within two years
after the adoption of final regulations by the Department of Health and Human
Services.
A federal law commonly known as the Medicare/Medicaid anti-kickback law, and
several similar state laws, prohibit payments that are intended to induce
physicians or others to acquire, arrange for or recommend the acquisition of
healthcare products or services. Another federal law, commonly known as the
Stark law, prohibits physicians from referring Medicare and Medicaid patients
for designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. The application and interpretation of these laws are complex
and difficult to predict and could constrain our financial and marketing
relationships or our ability to obtain pharmaceutical company sponsorship for
our products.
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STATE RESTRICTIONS ON THE PRACTICE OF MEDICINE MAY NEGATIVELY AFFECT OUR
ACTIVITIES.
Any finding in a state that we are not in compliance with its laws could
require us to restructure our services, which could adversely affect our
revenues or share price. The laws in some states prohibit some business
entities, such as MedicaLogic/Medscape, from practicing medicine. This is
commonly referred to as the prohibition against the "corporate practice of
medicine." These laws generally prohibit us from employing physicians to
practice medicine or from directly furnishing medical care to patients. Each
state has license requirements for the practice of medicine within that state,
and some states consider the receipt of an electronic transmission of selected
healthcare information in that state to be the practice of medicine. Some states
have similar prohibitions on corporate practice and license requirements for
other regulated health care professions (for example, nurse practitioners or
pharmacists). These laws restrict our activities and the extent to which we can
provide medical advice to consumers, physicians and others. If challenged, our
activities may not be found to be in compliance with these laws. We are also
expanding internationally, and may face similar restrictions on our activities
outside the United States.
THE INTERNET IS SUBJECT TO MANY LEGAL UNCERTAINTIES AND POTENTIAL GOVERNMENT
REGULATIONS THAT MAY DECREASE DEMAND FOR OUR SERVICES, INCREASE OUR COST OF
DOING BUSINESS OR OTHERWISE HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
RESULTS OR PROSPECTS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our financial results and prospects.
Laws and regulations may be adopted in the future that address
Internet-related issues, including online content, user privacy, pricing and
quality of products and services. For example, although it was held
unconstitutional, in part, the Communications Decency Act of 1996 prohibited the
transmission over the Internet of various types of information and content. In
addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Because the
growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure in many areas, local exchange carriers have
petitioned the FCC to regulate Internet service providers in a manner similar to
long distance telephone carriers and to impose access fees on the Internet
service providers.
The United States or foreign nations may adopt legislation aimed at
protecting Internet users' privacy. This legislation could increase our cost of
doing business and negatively affect our financial results. For example, the
Federal Trade Commission will start enforcing requirements under the Children's
Online Privacy Protection Act in April 2000. The Act applies to the online
collection of personal information from children under 13, and imposes
significant compliance burdens and potential penalties on operators of web sites
that collect covered information. Moreover, it may take years to determine the
extent to which existing laws governing issues like property ownership, libel,
negligence and personal privacy are applicable to the Internet. Currently, U.S.
privacy law consists of disparate state and federal statutes regulating specific
industries that collect personal data. Most of them predate and therefore do not
specifically address online activities. However, European nations are now
implementing a European Union Data Privacy Directive regulating the transmission
and storage of personal information and data. In addition, a number of
comprehensive legislative and regulatory privacy proposals are now under
consideration by federal, state and local governments in the United States. In
some cases, such as the European Directive, these comprehensive privacy
proposals include special rules that provide added protections for sensitive
information, including information about health and medical conditions.
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State and federal laws that protect individual health information may limit
our plans to collect, use and disclose that information.
If we fail to comply with current or future laws or regulations governing
the collection, dissemination, use and confidentiality of patient health
information, this failure could have a material adverse effect on our business,
operating results and financial condition.
Consumers sometimes enter private health information about themselves or
their family members when using our services. Physicians or other health care
professionals who use our products may directly enter health information about
their patients, including information that constitutes a medical record under
applicable law, that we will store on our computer systems. Also, our systems
record use patterns when consumers access our databases that may reveal
health-related information or other private information about the user. Numerous
federal and state laws and regulations, the common law and contractual
obligations govern collection, dissemination, use and confidentiality of
patient-identifiable health information, including:
- state privacy and confidentiality laws;
- our contracts with customers and partners;
- state laws regulating health care professionals, such as physicians,
pharmacists and nurse practitioners;
- Medicaid laws;
- the Health Insurance Portability and Accountability Act of 1996 and
related rules proposed by the Health Care Financing Administration; and
- Health Care Financing Administration standards for Internet transmission
of health data.
The U.S. Congress has been considering proposed legislation that would
establish a new federal standard for protection and use of health information.
In addition, the laws of other countries also govern the use of and disclosure
of health information. Any failure by us or our personnel or partners to comply
with any of these legal and other requirements could result in material
liability. Although we have systems in place for safeguarding patient health
information from unauthorized disclosure, these systems may not preclude
successful claims against us for violation of applicable law or other
requirements. Other third-party sites or links that consumers access through our
web sites also may not maintain systems to safeguard this health information, or
may circumvent systems we put in place to protect the information from
disclosure. In some cases, we may place our content on computers that are under
the physical control of others, which may increase the risk of an inappropriate
disclosure of health information. For example, both MedicaLogic and Medscape
currently contract out the hosting of our web sites to third parties. In
addition, future laws or changes in current laws may necessitate costly
adaptations to our systems.
In the year 2000, the Department of Health and Human Service expects to
finalize proposed regulations at the federal level authorized under the Health
Insurance Portability and Accountability Act of 1996. These proposed regulations
will establish a new federal standard for privacy of health information. We
believe that these regulations, which will not be effective until two years from
finalization, will directly regulate some aspects of our business. Achieving
compliance with these regulations could cost us significant amounts or delay or
prevent implementation of our business model, and any noncompliance by us could
result in civil and criminal penalties. In addition, development of related
federal and state regulations and policies on confidentiality of health
information could negatively affect our business.
We intend to develop medical information systems and market research
services that we will use to collect, analyze and report aggregate medical care,
medical research, outcomes and financial data
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pertaining to items such as prescribing patterns and usage habits. Some states
have enacted legislation regulating the aggregation of health information and
the manipulation, use and ownership of that aggregated data, even when this data
does not reveal the patient's identity. Because this area of the law is rapidly
changing, our collection, analysis and reporting of aggregate healthcare data
maintained in our database may not at all times and in all respects comply with
laws or regulations governing the ownership, collection and use of this data.
Future laws or changes in current laws governing the ownership, collection and
use of aggregate healthcare data may necessitate costly adaptations to our
systems or limit our ability to use this data.
FDA AND FTC REGULATIONS ON ADVERTISING AND PROMOTIONAL ACTIVITIES MAY BE
BURDENSOME AND NEGATIVELY AFFECT OUR ABILITY TO PROVIDE SOME APPLICATIONS OR
SERVICES, WHICH COULD LEAD TO HIGHER THAN ANTICIPATED COSTS OR LOWER THAN
ANTICIPATED REVENUES.
Complying with Food and Drug Administration and Federal Trade Commission
regulations may be time consuming, burdensome and expensive and could negatively
affect our ability to continue providing some applications or services, or to
introduce new applications or services in a timely manner. This may result in
higher than anticipated costs or lower than anticipated revenues. In addition,
because part of our business involves direct-to-consumer advertising of
prescription drugs, any increase in FDA or FTC regulation of these
advertisements or the enforcement of these regulations or policies could make it
more difficult for us to provide existing or future applications or services to
our audience or obtain the necessary corporate sponsorship to do so.
Any current or future regulatory requirements that the FDA or the FTC impose
on us or our advertisers and sponsors could harm us by:
- making it harder to persuade pharmaceutical, biotechnology and medical
device companies to advertise or promote their products on our web sites,
or to sponsor programs that we offer to healthcare professionals and the
public;
- restricting our ability to continue to provide some of our services or
content, or to introduce new services or content in a timely manner;
- damaging our relationships with pharmaceutical, biotechnology and medical
device companies, particularly if programs we recommend or endorse result
in FDA or FTC enforcement action directed against us or these companies;
or
- making it more expensive and time-consuming to comply with new
requirements.
As a consequence of these harms, we might lose advertising or sponsorship
revenue, spend significant amounts of our limited resources on regulatory
experts in the area of FDA or FTC compliance, or receive adverse publicity that
negatively affects share value. In addition to existing FDA and FTC regulation
of advertising and promotion by pharmaceutical, biotechnology and medical device
companies, our business faces a potential risk of increased FDA and FTC
regulation of these activities in an online context.
CHANGES IN EXISTING FDA REGULATORY REQUIREMENTS OR POLICIES, OR OUR FAILURE TO
COMPLY WITH CURRENT OR FUTURE REQUIREMENTS OR ADOPTION OF NEW REQUIREMENTS COULD
INCREASE OUR COST OF DOING BUSINESS AND CAUSE OUR REVENUES TO DECLINE.
We face potential FDA regulation of software that we develop for use on our
web sites. Some computer applications and software are considered medical
devices and are subject to regulation by the FDA. If FDA regulations were
applicable to any of our products and services, complying with those regulations
would be time consuming, burdensome and expensive and could delay or prevent
introduction of new products or services.
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While the FDA's policies regarding the regulation of software are evolving,
based on the FDA's informal policy statements regarding the scope of its
regulation of stand-alone software, none of MedicaLogic, Medscape or Total eMed
believes that its current products or services are subject to FDA regulation as
medical devices because they do not meet the statutory definition of a device.
However, the FDA may take the view that some of our current or future
applications or services do in fact meet the definition of a medical device and,
therefore, are subject to regulation, or the FDA may change its policies or
regulations with respect to regulation of software or Internet technologies.
Also, we may expand our product and service offerings into areas that subject us
to FDA regulation. If the FDA finds that our software is subject to regulation
as a medical device, the applicable regulatory controls could include both
premarket and postmarket requirements and the FDA might require us:
- to obtain premarket clearance or approval of the medical device software
from the FDA, which might include the conduct of supporting clinical
trials or other studies;
- to register ourselves as a medical device manufacturer and to list our
devices with the FDA;
- to create our software in compliance with the FDA design and manufacturing
standards;
- to permit the FDA to inspect our facilities and records; and
- to make periodic reports to the FDA.
Neither MedicaLogic, Medscape, nor Total eMed have any experience in
preparing the required documentation for FDA clearance or approval of a medical
device, including the conduct of supporting clinical trials or other studies, or
complying with other FDA regulations that would apply both before and after
clearance or approval.
RISKS RELATING TO THE MERGERS
THE VALUE OF YOUR MERGER CONSIDERATION MAY FLUCTUATE.
The value of the consideration received by Medscape and Total eMed
stockholders in the mergers may be different from the value at the time of the
signing of the merger agreements, the date of this document and the date of the
shareholder meetings, since it may vary depending on fluctuations in the value
of the MedicaLogic common stock. Factors that could cause these fluctuations
include:
- changes in the business, operations or prospects of MedicaLogic, Medscape
or Total eMed;
- market assessments of the likelihood that the mergers will be completed;
- the date of the completion of the mergers;
- regulatory considerations;
- industry developments; and
- general market and economic conditions.
Accordingly, we urge you to obtain current market quotations for MedicaLogic
common stock.
WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US
FROM SUCCESSFULLY INTEGRATING MEDICALOGIC, MEDSCAPE AND TOTAL EMED.
The mergers involve risks related to the integration and management of
technology, operations and personnel. The integration of MedicaLogic, Medscape
and Total eMed will be a complex, time consuming and expensive process and may
disrupt our business if not completed in a timely and efficient manner.
Following the mergers, we must operate as a combined organization utilizing
common information and communication systems, operating procedures, financial
controls and human resources
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practices. We may encounter substantial difficulties, costs and delays involved
in integrating the operations of MedicaLogic, Medscape and Total eMed,
including:
- potential incompatibility of business cultures;
- potential conflicts in sponsor, advertising or strategic relationships;
and
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
THE MERGERS MAY FAIL TO QUALIFY FOR TAX-FREE TREATMENT.
We have structured the mergers to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code. Although the Internal Revenue
Service has not provided a ruling on the matter, Medscape will obtain a legal
opinion that the MedicaLogic/Medscape merger qualifies as a tax-free
reorganization, and Total eMed will obtain a legal opinion that the
MedicaLogic/Total eMed merger qualifies as a tax-free reorganization. These
opinions neither bind the IRS nor prevent the IRS from adopting a contrary
position. If your merger fails to qualify as a tax-free reorganization, you
would recognize gain on each share surrendered in the amount of the difference
between your basis in the share and the fair market value of the merger
consideration you receive.
A PORTION OF THE SHARES ISSUABLE TO TOTAL EMED STOCKHOLDERS WILL BE HELD IN
ESCROW.
If you are a Total eMed stockholder, five percent of the MedicaLogic shares
issuable to you in the MedicaLogic/Total eMed merger will be deposited in an
escrow fund and may be held by the escrow agent for one year or more. These
shares will be available to compensate MedicaLogic for any damages incurred as a
result of any inaccuracy or breach of Total eMed's representations and
warranties in the MedicaLogic/Total eMed merger agreement. In addition,
MedicaLogic shares issuable to you in the MedicaLogic/Total eMed merger having a
value equal to $21,000,000, based on the average closing price of MedicaLogic
shares for the ten trading days before the date of the merger, will be deposited
in a separate escrow fund. These shares will be available to compensate
MedicaLogic for any damages incurred as a result of a lawsuit that has been
filed against Total eMed and its founder. Accordingly, Total eMed stockholders
may suffer a loss of their escrowed shares.
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document and the accompanying documents or documents incorporated by
reference contain forward-looking statements that are subject to risks and
uncertainties. You can find many of these statements by looking for words such
as "believes," "expects," "anticipates," "estimates" or similar expressions in
this document or in the materials included with this document. We caution you
not to place undue reliance on these statements, which only speak as of the date
of the document in which they are contained. Forward-looking statements include
information concerning possible or assumed future results of operations of
MedicaLogic, Medscape or Total eMed, including any forecasts, projections and
descriptions of anticipated cost savings or other anticipated synergies related
to the mergers. You should note that many factors could affect our actual
financial results, and could cause actual results to differ materially from
those in the forward-looking statements. These factors include the following:
- the mergers may not be completed;
- regulatory authorities may make adverse determinations regarding the
mergers;
- expected cost savings from the mergers may not be fully realized or
realized within the expected time frame;
- revenues following the mergers may be lower than expected;
- competitive pressures facing our companies may increase significantly;
- costs or difficulties related to the integration of the businesses of our
companies may be greater than expected;
- demands placed on management may increase because of the substantial
increase in the combined company's size;
- financing and other costs may increase unexpectedly;
- general economic or business conditions where our companies do business,
either nationally or internationally, may be less favorable than expected;
- legislative or regulatory changes may adversely affect the industries in
which our companies compete; and
- other opportunities may be presented to and pursued by our companies.
All subsequent written and oral forward-looking statements attributable to
any of us or persons acting on our behalf are qualified in their entirety by the
cautionary statements contained or referred to in the paragraph above. None of
us promises to release publicly any revisions to any forward-looking statements
to reflect:
- events or circumstances after the date of this document or the
accompanying documents or the documents incorporated by reference; or
- the occurrence of unanticipated events.
You should also read the risk factors beginning on page 16.
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SELECTED CONSOLIDATED FINANCIAL DATA OF MEDICALOGIC
The following selected consolidated financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of MedicaLogic" and the consolidated financial statements and notes
of MedicaLogic that are included in this document. The following information has
been derived from the audited consolidated financial statements of MedicaLogic
beginning on page F-3:
- consolidated statements of operations data for the three-year period ended
December 31, 1999; and
- consolidated balance sheet data as of December 31, 1998 and 1999.
The following information has been derived from the audited consolidated
financial statements of MedicaLogic not included in this document:
- consolidated statements of operations data for the two-year period ended
December 31, 1996; and
- consolidated balance sheet data as of December 31, 1995, 1996 and 1997.
We encourage you to read the consolidated financial statements included in
this document. Historical results of operations are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Licenses................................... $ 6,765 $ 6,845 $ 7,617 $10,410 $ 12,261
Service and support........................ 772 2,819 5,190 5,750 7,456
------- -------- -------- ------- --------
Total revenues............................... 7,537 9,664 12,807 16,160 19,717
Operating expenses:
Cost of licenses........................... 1,036 2,089 1,702 939 1,163
Cost of service and support................ 2,105 4,031 6,054 5,815 7,171
Marketing and sales........................ 5,061 6,667 7,681 7,882 21,740
Research and development................... 2,980 6,583 7,047 8,071 13,260
General and administrative................. 582 718 1,315 1,151 5,467
------- -------- -------- ------- --------
Total operating expenses..................... 11,764 20,088 23,799 23,858 48,801
------- -------- -------- ------- --------
Operating loss............................... (4,227) (10,424) (10,992) (7,698) (29,084)
------- -------- -------- ------- --------
Other income (expense) net................... (34) 109 322 663 1,431
------- -------- -------- ------- --------
Loss before income taxes..................... (4,261) (10,315) (10,670) (7,035) (27,653)
Provision for income taxes................... -- -- -- -- --
Accretion of preferred stock redemption
preference................................. -- (49) (149) (197) (334)
------- -------- -------- ------- --------
Net loss attributed to common shareholders... $(4,261) $(10,364) $(10,819) $(7,232) $(27,987)
======= ======== ======== ======= ========
Net loss per share:
Basic and diluted.......................... $ (0.68) $ (1.64) $ (1.64) $ (1.06) $ (3.07)
======= ======== ======== ======= ========
Weighted average shares:
basic and diluted.......................... 6,302 6,318 6,580 6,807 9,108
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $10,614 $ 18,651 $ 4,924 $ 4,718 $110,320
Working capital.............................. 10,245 19,096 14,870 16,091 135,866
Total assets................................. 14,787 26,074 22,072 24,308 168,354
Long-term obligations, net of current
portion.................................... 1,454 977 278 679 2,233
Convertible redeemable preferred stock....... 15,795 35,867 42,791 49,782 --
Total shareholders' equity (deficit)......... (4,995) (15,317) (26,093) (32,439) 149,840
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MEDICALOGIC
OVERVIEW
MedicaLogic was founded in 1985 and released its first DOS-based electronic
medical record product in 1989. In 1996, it released LOGICIAN, a Windows-based
electronic medical record product. During 1999, MedicaLogic released its current
version of LOGICIAN, for which an upgrade was shipped in the third quarter of
1999, and released its latest product LOGICIAN INTERNET in the fourth quarter of
1999. MedicaLogic's consumer web site, 98point6.com, is being tested in a pilot
program and is expected to be introduced in the first half of 2000.
MedicaLogic receives revenues from licensing its software products both
directly to end-users and indirectly through resellers. Revenue is recognized
from licenses when a signed agreement has been obtained, the delivery of the
product has occurred, the fee is fixed and determinable, and collectibility is
probable. MedicaLogic receives service revenues from customer support contracts
and consulting contracts. Customer support revenue, which consists of annual
subscription fees for ongoing support of the product, including upgrades, is
recognized ratably over the term of the contract, which is typically one year.
MedicaLogic derives consulting revenues primarily from the implementation
services performed on a time-and-materials basis under separate service
arrangements related to the implementation of software products. MedicaLogic
recognizes revenues from consulting services as the services are performed.
MedicaLogic recognizes software license revenues consistent with Statement
of Position 97-2, SOFTWARE REVENUE RECOGNITION, as amended by Statement of
Position 98-4 and 98-9. These statements provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions
and have been applied to transactions entered into after January 1, 1998. The
application of SOP 97-2 and related amendments have not had a material impact on
MedicaLogic's results of operations.
As a result of the implementation of its LOGICIAN INTERNET product, with
revenues recognized for monthly subscriptions, along with a transition to
monthly subscription-based pricing for its LOGICIAN enterprise products,
MedicaLogic expects that its historical revenue sources, sales of software
licenses and services will gradually be replaced by these subscriptions
revenues. Because MedicaLogic's subscription business model is in an emerging
stage, revenue and income potential from MedicaLogic's subscription products and
services is unproven. For this reason, MedicaLogic expects historical revenue
sources will continue to be major contributors to overall revenues. Despite the
continued importance of historical revenue sources, you should not use
MedicaLogic's past results as a basis to predict its future performance due to
the implementation of MedicaLogic's subscription business model.
MedicaLogic has two key metrics which will be reported on an on-going basis,
"clinicians" and "online health records." Many types of health professionals use
the LOGICIAN product, including medical personnel at the point of care, such as
physicians, registered nurses, physician assistants and medical assistants, as
well as a range of administrative support personnel such as front office and
billing staff. For reporting purposes, MedicaLogic will define "clinicians" as
health professionals involved at the point of care, excluding administrative
support. In addition, clinicians will include registered users of the LOGICIAN
INTERNET product. "Online health records" are defined as the electronic medical
record equivalent to a paper-based medical chart for an individual patient.
Costs of license revenues consist of licensing fees paid to third-party
software vendors, product media, product duplication, and manuals. Costs of
service revenues consist of implementation and support personnel and third-party
service provider costs related to customer support. Third-party licensing fees
represent charges for use of Oracle databases and industry specific content
included in the software. The majority of these licensing fees are based on the
number of licenses MedicaLogic
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distributes to customers. Marketing and sales expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
travel and promotional expenses and facility and communication costs. Research
and development expenses consist primarily of salaries and benefits paid to
software developers, quality assurance personnel and technical writers,
equipment for software developers and payments to outside contractors. General
and administrative expenses consist primarily of salaries, benefits and related
costs for our finance, legal and other administrative personnel and professional
services fees.
ACQUISITIONS
Effective January 1999, MedicaLogic acquired PrimaCis Health Information
Technology, Inc. in a transaction that was accounted for as a purchase.
PrimaCis, which was founded by faculty members of the Baylor College of
Medicine, was a developer of electronic medical record software and had
developed in-depth Internet-based oncology content for its Internet site.
MedicaLogic paid PrimaCis shareholders total consideration of $6.3 million and
paid $153,000 in merger-related costs to acquire the outstanding shares of
PrimaCis capital stock. These amounts consisted of $2.1 million in cash, the
issuance of shares of MedicaLogic common stock valued at $3.3 million and the
assumption of $1.1 million in PrimaCis' liabilities. Goodwill in the amount of
$6.5 million, reflecting the excess of the purchase price for PrimaCis over the
fair value of the net tangible and other intangible assets acquired, will be
amortized on a straight-line basis over a four-year period.
At about the time of the PrimaCis acquisition, MedicaLogic entered into an
agreement with the Baylor College of Medicine. This agreement provides that for
each purchase of licenses of LOGICIAN by December 31, 2002 by Baylor College of
Medicine or any other institution or health care provider in the Houston, Texas
area, MedicaLogic will issue as payment to Baylor College of Medicine shares of
its common stock having a then-current fair market value equal to 50% of the
license fees received from that sale, up to an aggregate maximum of
$12.0 million of common stock.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licenses.................................................. 59.5% 64.4% 62.2%
Service and support....................................... 40.5 35.6 37.8
------ ------ ------
Total revenues............................................ 100.0 100.0 100.0
Operating expenses:
Cost of licenses.......................................... 13.3 5.8 5.9
Cost of service and support............................... 47.3 36.0 36.4
Marketing and sales....................................... 60.0 48.8 110.3
Research and development.................................. 55.0 49.9 67.3
General and administrative................................ 10.3 7.1 27.7
------ ------ ------
Total operating expenses.................................... 185.9 147.6 247.6
Operating loss............................................ (85.9) (47.6) (147.6)
Total other income (expense), net:.......................... 2.5 4.1 7.3
Loss before income taxes.................................... (83.4) (43.5) (140.3)
Provision for income taxes -- -- --
------ ------ ------
Net loss.................................................... (83.4)% (43.5)% (140.3)%
====== ====== ======
</TABLE>
32
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
As of December 31, 1999, over 7,800 clinicians maintained more than
8.1 million electronic medical records with MedicaLogic products. These totals
represent approximately 55% and 40% increases over year earlier figures of
approximately 5,000 clinicians and 5.8 million electronic medical records,
respectively.
During 1997, VHA, Inc. accounted for approximately 23% of total revenues and
Wake Forest Baptist Medical Center accounted for approximately 13% of total
revenues. In 1998, VHA, Inc., accounted for approximately 20% of total revenues.
During 1999, Baylor College of Medicine accounted for approximately 16% of total
revenues, and Texas Childrens Hospital accounted for approximately 13% of total
revenues.
Since inception, but increasingly during the past year, MedicaLogic has made
substantial investments in infrastructure and in staffing and management to
accommodate current and anticipated future growth. From January 1, 1999 through
December 31, 1999, it hired 146 employees, or approximately 49% of the current
workforce, and invested approximately $12.5 million in capital assets. A large
portion of these assets is dedicated to the development of the Internet Health
Services Center. The planned growth will require additional staff and
infrastructure.
For the year ended December 31, 1999, MedicaLogic recorded aggregate
deferred compensation of $4.7 million for the grant of stock options and
restricted stock at prices less than the deemed fair value on the grant date.
The deferred compensation is being amortized over the vesting period of the
securities, which is generally three years. Of the total deferred compensation,
$0.4 million was amortized during 1999. MedicaLogic expects to amortize
approximately $1.6 million, $1.6 million and $1.2 million for the years 2000,
2001 and 2002.
MedicaLogic has incurred net losses each year since it began operations. The
Company incurred net losses of approximately $10.7 million, $7.0 million and
$27.7 million for the years ended December 31, 1997, 1998 and 1999. As of
December 31, 1999, MedicaLogic had an accumulated deficit of $63.5 million.
MedicaLogic intends to increase further its spending on technology
infrastructure development, marketing and promotion, services development and
strategic relationships, all of which are related to the establishment of the
Internet Health Services Center. As a result, it expects to continue incurring
net losses and negative cash flows from operations at least through 2000.
REVENUES
Total revenues, which consisted of software licenses and service and support
revenues, increased from $12.8 million in 1997 to $16.2 million in 1998, and to
$19.7 million in 1999. License revenues increased from $7.6 million in 1997 to
$10.4 million in 1998, and to $12.3 million in 1999. The increase in license
revenues from 1997 to 1998 primarily resulted from an increase in the average
selling price due to increased sales through the direct sales channel. The
increase in license revenues from 1998 to 1999 continued the trend of realizing
higher average selling prices of LOGICIAN, partly offset by a decrease in the
total number of licenses sold. The increase in the average selling price
resulted primarily from a higher percentage of products sold through direct
channels versus products sold through reseller channels. This trend is not
expected to continue as MedicaLogic moves to a subscription business model for
LOGICIAN and LOGICIAN INTERNET, and these sources of revenue become the primary
sources of revenues. However, the timing and acceptance of new products or the
financial conditions of key customers could negatively impact the physician
adoption rate, which would have a material adverse effect on the business,
operating results and financial condition of MedicaLogic.
Service revenues increased from $5.2 million in 1997 to $5.8 million in
1998, and to $7.5 million in 1999 representing a growth rate of 12% in 1998 and
29% in 1999. The increase in service revenues is the result of new support
contracts on an increasing installed base of LOGICIAN licenses. MedicaLogic
33
<PAGE>
expects total service revenue to continue to grow. However, failure of or delay
in the adoption of LOGICIAN by physicians could have a material adverse effect
on MedicaLogic's business, operating results and financial condition.
MedicaLogic customers may not maintain their LOGICIAN licenses or support
contracts.
OPERATING EXPENSES
COSTS OF REVENUES. Costs of licenses were $1.7 million in 1997,
$0.9 million in 1998 and $1.2 million in 1999. Costs of license revenues as a
percentage of license revenues was approximately 22% in 1997, 9% in 1998 and 9%
in 1999. The decrease in dollar amounts and the percentage of revenue amounts
from 1997 to 1998 is primarily due to more favorable license fee terms
negotiated with Oracle in 1998 due to MedicaLogic's larger installed base. In
1999, costs of license revenues as a percentage of license revenues remained
level with 1998.
Costs of service and support decreased from $6.1 million in 1997 to
$5.8 million in 1998, and increased to $7.2 million in 1999. The decrease in
cost from 1997 to 1998 reflects the reorganization of MedicaLogic's consulting
practice, which included personnel changes, the relocation of personnel to
in-home offices from rented space and the reduction of use of third-party
contractors. The increase in cost of service from 1998 to 1999 is primarily due
to additional personnel costs to support the growth in installations and
revenues. MedicaLogic expects these costs to continue to increase along with the
growth in the use of MedicaLogic's products. Costs of service revenues as a
percentage of service revenues was 117% in 1997, 101% in 1998 and 96% in 1999.
The declining percentage of costs to revenues is the result of improving staff
utilization over a larger base, as well as the cost reduction measures taken in
1998 as noted above. MedicaLogic does not assume this trend will continue due to
the launch of new products and the uncertain mix of products sold. The cost of
providing service to customers as a percentage of associated revenues often
varies between periods because the costs of implementation and support personnel
are relatively fixed.
MARKETING AND SALES. Marketing and sales expenses increased from
$7.7 million in 1997 to $7.9 million in 1998, and to $21.7 million in 1999. The
increases in marketing and sales expenses from 1997 to 1998 resulted primarily
from an increase in commissions paid to sales staff based on increased sales and
marketing activities, which included trade shows and public relations. Marketing
and sales expenses represented 60% of total revenues in 1997, 49% in 1998 and
110% in 1999. The decrease in marketing and sales expenses as a percentage of
total revenues from 1997 to 1998 reflects the more rapid growth in revenues
compared to the growth of marketing and sales expenses due to early investment
in marketing activities to create product awareness. The increase in both the
marketing and sales dollar amount and percentage of revenues from 1998 to 1999
resulted primarily from costs related to additional direct and indirect
workforce required to promote and launch new products of approximately
$6.6 million, and an increase in trade shows, public relations and advertising
of $28.8 million in support of these product launches. MedicaLogic believes that
it will need to continue to increase its sales and marketing efforts to expand
market penetration and increase acceptance of its Internet products and
services.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$7.0 million in 1997 to $8.1 million in 1998, and to $13.3 million in 1999.
Research and development costs represented 55% of total revenues for 1997, 50%
in 1998 and 67% in 1999. The increases in research and development expenses from
1997 to 1998 resulted from an increase in the number of software developers and
quality assurance personnel and the use of outside contractors to support
product development and testing activities. The decrease in research and
development expenses as a percentage of total revenues primarily reflects the
increase in revenues relative to the increase in research and development staff
to develop and enhance the LOGICIAN product. The increases in research and
development dollar amount and percentage from 1998 to 1999 resulted primarily
from additional development staff and contractors required to develop new
products and product upgrades, and related
34
<PAGE>
equipment and facilities cost totaling approximately $4.9 million. MedicaLogic
believes that research and development costs will continue to increase as it
expands its product offering of LOGICIAN software and other products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
from $1.3 million in 1997 to $1.2 million in 1998, and increased to
$5.5 million in 1999. General and administrative expenses represented
approximately 10% of total revenues in 1997, 7% in 1998 and 28% in 1999. The
increase from 1998 to 1999 resulted from the addition of administrative
personnel and the use of contractors to support the growth of MedicaLogic's
business of $2.2 million, amortization of goodwill related to the PrimaCis
acquisition of $1.5 million, and the costs associated with the set up of the San
Francisco facility of $0.5 million. MedicaLogic believes that general and
administrative expenses will continue to increase as it expands administrative
staff and incurs expenses associated with being a public company, including
annual and other public reporting costs, director and officer liability
insurance, investor relations programs and professional services fees.
OTHER INCOME (EXPENSE), NET
Other income increased from $0.3 million in 1997 to $0.7 million in 1998,
and to $1.4 million in 1999. The increase from 1997 to 1999 in other income is
mainly attributable to an increase in interest earned on cash and cash
equivalents and short term investments from issuance of preferred stock and the
initial public offering. MedicaLogic expects other income to increase
substantially in 2000 primarily due to the increase in cash and cash equivalents
and short-term investments. However, the amount of the increase will be effected
by changes in interest rates, and the rate at which MedicaLogic uses the funds
to support its growth.
PROVISION FOR INCOME TAXES
As a result of net operating losses in 1999 and prior years, MedicaLogic
made no provision or benefit for federal or state income taxes. As of
December 31, 1999, it had net operating loss carryforwards for tax reporting
purposes of approximately $59.6 million and research and experimentation credits
of approximately $2.0 million which expire through 2019. Approximately
$7.1 million of the net operating loss carryforwards are subject to an annual
utilization limitation due to ownership changes in prior years.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, MedicaLogic had cash and cash equivalents of
$110.3 million and short term investments of $28.5 million, up a combined
$127.1 million from the December 31, 1998 balances of $4.7 million and
$7.0 million, respectively.
Financing activities provided cash of $5.6 million, $7.8 million and
$154.9 million in the years ended December 31, 1997, 1998 and 1999 as follows:
in 1997, primarily from the issuance of preferred stock of $6.8 million offset
by payments of $1.3 million for obligations under capital lease agreements; in
1998, primarily from the issuance of preferred stock of $6.8 million offset by
payments of $1.3 million for obligations under capital lease agreements and
notes payable; and in 1999, primarily from MedicaLogic's initial public offering
of $104.3 million, and the issuance of preferred stock in the amount of
$47.8 million, offset by payments of $1.2 million for obligations under capital
lease agreements and notes payable.
On December 10, 1999, MedicaLogic 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 was $104.3 million. Prior to
its initial public offering, MedicaLogic financed its operations with private
placements of equity securities with investors such as Continental Casualty
Company; Dell Computer Corporation; Franklin Capital Associates III, L.P.;
Furman Selz SBIC, L.P.;
35
<PAGE>
Glynn Ventures III, L.P.; New Enterprise Associates VI, Limited Partnership;
Sequoia funds; Soros Fund Management LLC funds; and VHA, Inc. As of
December 31, 1999, net proceeds from these private placements totaled
$97.1 million. MedicaLogic has borrowed $3.3 million under a term loan facility
with General Electric Capital Business Asset Funding Corporation to finance the
purchase of new capital equipment. No amounts were available under this facility
at December 31, 1999.
MedicaLogic's operating activities resulted in net cash outflows of
$11.6 million, $6.8 million and $12.7 million for the years ended December 31,
1997, 1998 and 1999. Cash outflows in 1997, 1998 and 1999 resulted from
MedicaLogic's investment in sales and marketing of $7.7 million, $7.9 million
and $21.7 million, and research and development of $7.0 million, $8.1 million
and $13.3 million, which contributed to operating losses of $11.0 million,
$7.7 million and $29.1 million. Cash outflows in 1999 also increased for prepaid
assets of $4.0 million due to the purchase of prepaid maintenance contracts,
prepaid insurance and prepaid royalties. These costs were partially offset by a
reduction of $3.1 million in MedicaLogic's accounts receivable due to improved
collection on customer contracts, an increase in accounts payable of
$4.1 million due to the timing of invoice due dates, and an increase of
$2.2 million in deferred revenue because of an increasing base of LOGICIAN
licenses.
Investing activities resulted in net cash outflows of $7.6 million,
$1.2 million and $36.6 million for the years ended December 31, 1997, 1998 and
1999. Cash outflows in 1997 resulted from net investment of $7.1 million in
short term instruments. Cash outflows in 1998 resulted from $1.3 million related
to the purchase of fixed assets. Cash outflows in 1999 resulted from
$21.8 million invested in short-term instruments, $12.5 million related to the
purchase of fixed assets and $2.1 million for the acquisition of PrimaCis.
MedicaLogic currently anticipates that it will continue to experience
significant growth in its operating expenses as it enters new markets for its
products and services, increases marketing activities, increases research and
development spending, develops new distribution channels, expands its
infrastructure, and improves its operational and financial systems. These
operating expenses will consume a material amount of MedicaLogic's cash
resources. MedicaLogic believes the net proceeds from its financing activities
during 1999, together with its existing cash and cash equivalents, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. Depending upon the market
opportunity, MedicaLogic may seek additional funds to support potential merger
and acquisition activities or for other purposes through public or private
equity financing or from other sources. MedicaLogic may not be able to obtain
adequate or favorable financing at that time. Any financing MedicaLogic obtains
may dilute the ownership interest of its shareholders prior to the financing.
YEAR 2000 COMPLIANCE
In 1998, MedicaLogic began working to address the possible effects of the
potential inability of the computer programs to adequately process date
information after December 31, 1999 (Year 2000). MedicaLogic conducted a review
of its products, information technology and facilities computer systems to
identify all software that could be affected by the Year 2000 issue and
developed and executed plans to address it. These actions were completed in the
fourth quarter of 1999. With the passing of January 1, 2000, MedicaLogic can
report that no significant Year 2000 problems arose. Identifiable expenditures
through the fourth quarter of 1999 total approximately $0.7 million. These costs
were expended as incurred. No further significant expenditures related to the
Year 2000 issue are expected.
To date MedicaLogic has not experienced any Year 2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
36
<PAGE>
SFAS No. 133 established 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 issues 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
MedicaLogic currently hold no derivative financial instruments and do not
currently engage in hedging activities, it expects that the adoption of SFAS
No. 133 will have no material impact on its financial condition or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MedicaLogic's exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income it can
earn on its investment portfolio and on the increase or decrease in the amount
of any interest expense it must pay with respect to outstanding debt
instruments. The risk associated with fluctuating interest expense is limited,
however, to the exposure related to those debt instruments and credit facilities
instruments in the investment portfolio. MedicaLogic plans to ensure the safety
and preservation of its invested principal funds by limiting default risk,
market risk and investment risk. MedicaLogic plans to mitigate default risk by
investing in low-risk securities. At December 31, 1999, MedicaLogic had an
investment portfolio of money market funds, commercial securities and U.S.
government securities, including those classified as short-term investments, of
$138.9 million. MedicaLogic had notes payable outstanding of $3.4 million at
December 31, 1999. If market interest rates were to increase immediately and
uniformly by 10% from levels as of December 31, 1999, the decline of the fair
market value of the fixed income portfolio and loans outstanding would not be
material.
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MEDSCAPE
The following selected consolidated financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Medscape" and the consolidated financial statements and notes of
Medscape that are included in this document. The following information has been
derived from the audited consolidated financial statements of Medscape beginning
on page F-28:
- consolidated statements of operations for each of the years in the
three-year period ended December 31, 1999; and
- consolidated balance sheet data as of December 31, 1998 and 1999.
The following information has been derived from the audited consolidated
financial statements of Medscape not included in this document:
- consolidated statements of operations data for the nine months ended
December 31, 1996; and
- consolidated balance sheet data as of December 31, 1996 and 1997.
We encourage you to read the consolidated financial statements included in
this document. Historical results of operations are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------------
1996 1997 1998 1999
------------ -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................................. $ 1,015 $ 1,522 $ 3,069 $ 11,156
------- ------- ------- --------
Operating expenses:
Editorial, production, content and technology.... 1,182 1,967 2,694 12,967
Sales and marketing.............................. 278 1,397 2,520 26,944
General and administrative....................... 830 1,450 1,469 6,048
Depreciation and amortization.................... 41 160 287 1,010
Stock-based compensation......................... -- -- 249 2,101
------- ------- ------- --------
Total operating expenses............................. 2,331 4,974 7,219 49,070
------- ------- ------- --------
Loss from operations................................. (1,316) (3,452) (4,150) (37,914)
Interest expense (income)............................ 28 12 (249) (1,203)
------- ------- ------- --------
Net loss $(1,344) $(3,464) $(3,901) $(36,711)
======= ======= ======= ========
Basic loss per share(1) $ (0.66) $ (1.26) $ (1.07) $ (1.89)
Weighted average number of shares of common stock
outstanding........................................ 2,026 2,751 3,637 19,400
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1997 1998 1999
------------ -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Current assets....................................... $ 560 $ 4,294 $ 3,038 $ 62,021
Working capital...................................... (1,570) 2,350 1,368 50,874
Total assets......................................... 836 4,633 5,874 85,335
Stockholders' equity................................. (1,294) 2,689 4,204 74,188
</TABLE>
- ------------------------
(1) Medscape calculates loss per common share by dividing the loss attributable
to common shares by the weighted average number of shares outstanding. It
does not include outstanding common stock options and warrants in the loss
per common share calculation as their effect is anti-dilutive.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF MEDSCAPE
OVERVIEW
Medscape operates Medscape.com, a healthcare web site for physicians and
allied healthcare professionals, such as pharmacists and nurses. To enhance and
personalize the consumer experience, Medscape launched a separate consumer site,
CBSMedscape.com, in the third quarter of 1999. On November 1, 1999,
CBSMedscape.com was relaunched as CBSHealthWatch.com. Medscape developed and
launched several additional co-branded consumer sites in the fourth quarter of
1999 and the first quarter of 2000 under an agreement with America Online, Inc.
Medscape commenced operations in April 1996. In October 1998, Medscape
acquired Healthcare Communications Group, LLC, which operated a leading HIV web
site. In the first quarter of 1999, Medscape acquired the trademarks and hired
key employees of Bonehome.com, a leading orthopedic web site, and
CompuRx, Inc., a healthcare market research company serving pharmaceutical and
other healthcare companies. The Bonehome.com and CompuRx transactions were not
material to Medscape's financial statements. These transactions are consistent
with Medscape's strategy to be the leading online information source for
selected medical specialties and to broaden its revenue streams.
Since its inception, Medscape has derived substantially all of its revenues
from advertising and sponsorships from pharmaceutical companies. Medscape also
generates revenues from its e-commerce partners who either provide it with a
placement fee or a commission on sales of their products generated through
Medscape's web sites. Medscape offers banner advertising to third-party
advertisers and generally guarantees delivery of a specified number of
advertising impressions. Medscape derives sponsorship revenues from the
development of client-sponsored content, including modules on disease topics and
editorial coverage of medical conferences. Medscape expects its revenues to be
seasonal due to the scheduling of major medical conferences.
Medscape recognizes banner advertising revenues in the period that it
displays the advertisement, provided that no significant obligations remain and
collection of the resulting receivable is probable. Medscape recognizes revenues
from modules on a cost-of-completion basis and editorial coverage of medical
conferences in the period in which the conference was held. Medscape recognizes
revenues from e-commerce based on commissions when earned from its third-party
partners or, in cases where third-party partners pay placement fees to it, over
the life of the product placement. Medscape generally invoices for its services
at the inception of a project and records a receivable. Accordingly, Medscape's
receivables have increased in connection with its increase in revenues and due
to an increase in the number of large scale sponsored programs which have become
a more prominent part of its business following its acquisition of Healthcare
Communications Group.
To date, Medscape has incurred substantial costs to create and enhance its
content, build brand awareness, develop its infrastructure and grow its
business, and has yet to achieve significant revenue. As a result, Medscape has
incurred operating losses in each fiscal quarter since it was formed. Medscape
expects operating losses and negative cash flow to continue for the foreseeable
future as it intends to significantly increase its operating expenses to grow
its business. These costs could have an adverse effect on its future financial
condition and operating results. Medscape believes that period-to-period
comparisons of its financial results are not necessarily meaningful and you
should not rely upon them as an indication of its future performance.
39
<PAGE>
RESULTS OF OPERATIONS
REVENUE AND EXPENSE COMPONENTS
The following descriptions of the components of revenues and expenses apply
to the comparisons of results of operations:
REVENUES. Revenues consist primarily of sales of advertising banners and
sponsorships for developing content for modules and medical conferences.
Revenues also include commission revenues or placement fees from product sales,
such as medical books, and market research services to pharmaceutical and other
healthcare companies.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development expenses
consist primarily of salaries, third-party content acquisition costs, the
development of sponsored content and expenditures associated with maintaining
and enhancing its web sites.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, advertising, promotions and related marketing costs.
GENERAL AND ADMINISTRATION. General and administration expenses consist
primarily of salaries, facility costs and fees for professional services.
DEPRECIATION AND AMORTIZATION. Depreciation expense reflects the charge for
depreciation of capitalized fixed assets, including computer equipment, web site
servers and related equipment, and the amortization of office leasehold
improvements. Additionally, this category includes goodwill amortization related
to corporate acquisitions.
INTEREST EXPENSE/INCOME. Interest expense is related to loans that a
related party provided to Medscape, which were fully repaid by the end of 1998.
Interest income consists primarily of interest earned on cash and cash
equivalents invested in money market funds.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Revenues and operating expenses for the year ended December 31, 1999 include
Healthcare Communications Group, which Medscape acquired in October 1998.
REVENUES. Revenues increased 264% to $11.2 million for the year ended
December 31, 1999 from $3.1 million in 1998. The increase in revenues was driven
by an increased advertiser and sponsor base and an expansion of product lines
resulting from the acquisition of Healthcare Communications Group in
October 1998.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development, content
and technology expenses increased 381% to $13.0 million for the year ended
December 31, 1999 from $2.7 million in 1998. The increase in costs was primarily
due to increased variable production costs related to the growth of sponsored
content revenues, costs associated with expanding and enhancing editorial
content, an increase in the number of employees in Medscape's Editorial and
Information Technology groups and associated recruitment costs, and costs
incurred in upgrading the functionality of Medscape's web sites and its internal
networks. A significant portion of the 1999 cost increase reflects building out
core infrastructure across the different functions to support new initiatives
and the future growth of the business.
SALES AND MARKETING. Sales and marketing expenses increased 969% to
$26.9 million for the year ended December 31, 1999 from $2.5 million in 1998.
The increase in costs was primarily due to increased costs related to the
continued development and implementation of Medscape's marketing and branding
campaigns, the commencement of marketing activities associated with its
agreements with CBS, NDC and AOL, as well as additional sales and marketing
personnel. Of the $26.9 million incurred in 1999, $8.4 million relates to
non-cash expenses for the utilization of advertising and other
40
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services contributed by CBS and NDC in exchange for equity in Medscape. In 1998,
there were no such non-cash expenditures.
GENERAL AND ADMINISTRATION. General and administration expenses increased
312% to $6.0 million for the year ended December 31, 1999 from $1.5 million in
1998. The increase in costs was primarily a result of expenses related to
increased personnel and other employee compensation expenses, professional
service fees, and facility expenses necessary to support Medscape's growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 252% to $1.0 million for the year ended December 31, 1999 from
$287,000 in 1998. The increase in costs was attributable to increased
depreciation expense resulting from increased purchases of fixed assets,
capitalized software development costs associated with CBSHealthWatch.com and
full-year impact of amortization of goodwill related to the Healthcare
Communications Group acquisition in October 1998.
STOCK-BASED COMPENSATION. In connection with the issuance of stock options
during the second half of 1998 and the first half of 1999, an amount equal to
the excess of the fair market value of Medscape's common stock over the option
exercise prices is being amortized over four years, the vesting period of the
options. The amortization commenced in the fourth quarter of 1998. Additionally,
deferred stock compensation includes the amortization of the fair value of the
warrants issued to AOL.
INTEREST EXPENSE/INCOME. Net interest income for the year ended
December 31, 1999 was $1.2 million compared to $249,000 in 1998. The higher
interest income was due to a higher average of net cash and cash equivalents
balance as a result of Medscape's financing activities in 1999.
INCOME TAXES. As of December 31, 1999, Medscape had federal net operating
loss carryforwards of approximately $44.3 million which will be available to
reduce future taxable income. The federal net operating loss carryforwards
expire beginning in 2011 through 2019. A valuation allowance has been recorded
for the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset due to Medscape's lack of earnings history.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Operating results for the year ended December 31, 1998 include the results
of Healthcare Communications Group, which Medscape acquired in October 1998.
REVENUES. Revenues increased 102% from $1.5 million for the year ended
December 31, 1997 to $3.1 million for the year ended December 31, 1998. The
increase in revenues was driven by the inclusion of Healthcare Communications
Group revenues for November and December 1998 and an increase in the number of
advertisers and sponsors on Medscape's web sites. Advertising and sponsorship
revenues, for both comparison periods, comprise more than 98% of total revenues.
EDITORIAL, PRODUCTION, CONTENT AND TECHNOLOGY. Product development expenses
increased 37% from $2.0 million for the year ended December 31, 1997 to
$2.7 million for the year ended December 31, 1998. The increase in costs was
primarily due to increased variable costs associated with the development of
sponsored content, as well as from additional editorial, production and
technology personnel.
SALES AND MARKETING. Sales and marketing expenses increased 80% from
$1.4 million for the year ended December 31, 1997 to $2.5 million for the year
ended December 31, 1998. The increase in costs was primarily due to an expansion
of Medscape's sales force and client services staff and costs related to
marketing and branding campaigns.
GENERAL AND ADMINISTRATION. General and administration expenses remained
relatively constant at $1.5 million for the years ended December 31, 1997 and
December 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 79% from $160,000 for the year ended December 31, 1997 to $287,000 for
the year ended December 31, 1998.
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The increase in costs was largely attributable to increased purchases of fixed
assets and amortization of goodwill resulting from the Healthcare Communications
Group acquisition in October 1998.
INTEREST EXPENSE/INCOME. Net interest expense for the year ended
December 31, 1997 was $12,000. Net interest income for the year ended
December 31, 1998 was $249,000. The improvement was due to higher average net
cash and cash equivalents balances as a result of the issuance of preferred
stock at the end of 1997 and in 1998, as well as the payment in full of all
outstanding loans in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Medscape has largely financed its operations through
the private placement of equity securities and, to a lesser extent, from
revenues generated from advertising and sponsorship sales and loans received
from a related party.
On March 5, 1999, Medscape completed a private placement of 1,757,683 shares
of Series D preferred stock to 15 accredited investors for which it received net
proceeds, after deducting offering costs, of approximately $19.4 million.
On August 3, 1999, Medscape entered into agreements with CBS Corporation
under which, during the following seven years, CBS agreed to give Medscape
approximately $150 million in advertising and promotion in the United States and
a license to the "CBS" trademark and "Eye" design and selected health-related
news content in exchange for 13,938,368 shares of its common stock, which
represented approximately 32% of its outstanding capital stock upon completion
of the initial public offering in September 1999.
On August 4, 1999, Medscape entered into a strategic development and
marketing agreement with National Data Corporation, an electronic data
interchange and data management company for medical practices. As part of this
transaction, NDC invested $10 million cash in Medscape, and agreed, over the
three year term of the agreement, to provide $10 million in licensing and
promotional value and credits against future commission and product purchase
amounts due by Medscape to NDC. Of this amount, $6,000,000 will be expended as
used over the three-year life of the agreement, commencing August 4, 1999 and
terminating August 31, 2002. In addition, the license fee of $4,000,000 will be
amortized on a straight line basis over the life of the agreement. Under the
agreement, NDC received 1,000,000 shares of Medscape's common stock and 400,000
shares of Medscape's Series E preferred stock. The 400,000 shares of Series E
preferred stock converted into 1,250,000 shares of Medscape's common stock upon
completion of Medscape's initial public offering in September 1999.
On September 27, 1999, Medscape completed an initial public offering that
ultimately, after inclusion of the exercise on September 30, 1999 of the
900,000-share underwriters' over-allotment, resulted in the issuance of
7,650,000 shares of common stock. Net proceeds received, after deducting
offering costs, totaled approximately $54.4 million, including approximately
$6.7 million received on October 5, 1999 from the exercise of the
over-allotment.
Net cash used in operating activities was $3.6 million, $4.2 million and
$32.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Cash used in operating activities for all periods was attributable
to funding net operating losses and, for the 1999 period, also reflected
increases in accounts receivable and in prepaid expenses and other assets offset
by increases in accounts payable and accrued liabilities.
On September 3, 1999, Medscape entered into an agreement with America
Online, Inc., under which AOL agreed, among other things, to deliver a
guaranteed number of impressions. In addition, Medscape developed separate
co-branded web sites on the following AOL properties: AOL.com, CompuServe
Service, Netscape Netcenter and Digital City. In exchange, Medscape paid AOL
$13 million and agreed to pay an additional $20 million over the next two years.
These amounts will be charged to earnings over the three-year life of the
contract. In addition, Medscape granted AOL two seven-year warrants, each to
purchase up to 1,352,158 shares of its common stock. One of the warrants
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fully vested on signing and has an exercise price of $10 per share. The other
warrant will vest over a three-year period based on AOL meeting specified
performance requirements and will have exercise prices equal to the fair market
value of Medscape's common stock at the times the warrant becomes exercisable.
At the time of issuance, each warrant had a value of approximately $2,530,000 as
determined using the Black Scholes option pricing model. The value of the fully
vested warrant is fixed and will be charged to earnings over the three-year AOL
contract period, whereas the warrant that vests over three years will be charged
to earnings adjusted variably over the vesting period.
On June 15, 1999, Medscape entered into a License and Web Site Development
Agreement with Softwatch Ltd., an Israeli company, and its U.S. subsidiary,
Softwatch, Inc., under which Medscape licenses software from Softwatch to
support its consumer sites and to provide ongoing support services for its
consumer sites. At the same time, Medscape purchased 1,040,170 Series A
preferred shares of Softwatch Ltd. for $2,999,954.
Net cash used in investing activities was $0.2 million, $1.5 million and
$47.5 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Cash used in investing activities in 1999 related primarily to the
investment of the proceeds of Medscape's initial public offering in short-term
investment securities combined with the reinvestment of matured short-term
investment securities in its portfolio. The other primary uses of funds include
its investment in Softwatch and investments in its technology infrastructure,
including the development of Medscape's consumer web site launched in
September 1999. In 1998, the cash used in investing activities was primarily for
the purchase of Healthcare Communications Group.
Cash provided by financing activities was $7.3 million, $3.6 million and
$83.0 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
Cash provided by financing activities in 1999 reflects net proceeds received
from the initial public offering of common stock, as well as the issuance of
Series D and Series E preferred stock and common stock. Cash provided by
financing activities in 1998 reflects net proceeds received from the issuance of
Series C preferred stock, and in 1997 from the issuance of Series C preferred
stock.
As of December 31, 1999, the primary source of liquidity for Medscape was
$40.8 million of cash and cash equivalents and marketable investment securities.
As of that date, it had no bank credit facilities.
Medscape expects to continue to incur significant operating costs,
particularly content creation costs and sales and marketing costs to grow its
business and pursue its branding and marketing campaign. A large portion of its
promotional expenses for its consumer sites will result from approximately
$150 million in advertising to be received from CBS.
Medscape believes that its current cash, cash equivalents and investment
securities combined with any cash generated from operations will be sufficient
to meet anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. However, if during or following that period
Medscape is not successful in generating sufficient cash flow from operations or
in raising additional capital when required in sufficient amounts and on terms
acceptable to it, these failures could have a material adverse effect on its
business, results of operations and financial condition. If Medscape raises
additional funds through the issuance of equity securities, the percentage
ownership of its then current stockholders would be reduced.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many software and computer systems used by companies and governmental
agencies may need to be upgraded or replaced in order to correctly process dates
beginning in 2000 and comply with Year 2000 requirements.
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In preparation for the year 2000, Medscape conducted a comprehensive review
of both information technology and non-information systems to ensure that they
were Year 2000 compliant. Significant information technology systems include its
production system, composed of the servers, networks and software that comprise
the underlying technical infrastructure that runs its business, and various
internal office systems. Its significant non-information technology systems
include the telephone systems, air conditioning and security system. Because
Medscape is a relatively new business, the majority of its own hardware and
software has been acquired or developed within the last two years, during which
time there was a high awareness of Year 2000 issues.
To date, Medscape has not experienced any material difficulties associated
with the year 2000 that would have a negative effect on its ability to conduct
business. To its knowledge, no third party upon which Medscape depends has
experienced a material Year 2000 problem. However, it is still possible that
errors or defects may remain undetected or that dates other than January 1 may
trigger Year 2000 problems. If this occurs with respect to Medscape's software
systems, or those of third parties on which it relies, its business, reputation,
financial condition and results of operations may be adversely impacted.
SUBSEQUENT EVENTS
On February 9, 2000, Medscape's board of directors approved the creation of
Medscape Europe to accelerate Medscape's international expansion in the face of
rising global demand for web-based health information and services. In addition
to its European venture, Medscape already operates a Japanese-language site,
medscape japan.com.
In February 2000, Medscape signed a plan of merger and reorganization to
acquire all of the outstanding shares of Dialog Medical, Inc., a Delaware
corporation, in exchange for 275,000 shares of Medscape common stock. Dialog
Medical provides integrated patient education and informed consent materials for
physicians and consumers. Medscape expects to complete the acquisition in the
second quarter of 2000.
INTEREST RATE SENSITIVITY
The primary objective of Medscape's investment activities is to preserve
principal while at the same time maximizing the income received from investments
without significantly increasing risk. Accordingly, Medscape does not enter into
financial instrument transactions for trading purposes. Some investments may be
subject to market risk, which means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. To minimize this
risk, Medscape invests its cash in money market funds. In general, money market
funds are not subject to market risk as the interest paid on these funds
fluctuates with the prevailing interest rate. As of December 31, 1999, all of
Medscape's investments mature in less than one year.
EXCHANGE RATE SENSITIVITY
In the opinion of Medscape's management, Medscape's exposure to foreign
currency exchange rate fluctuations is minimal as no revenue is currently
denominated in a foreign currency and minimal expenses are paid in a foreign
currency.
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SELECTED CONSOLIDATED FINANCIAL DATA OF TOTAL EMED
The following selected consolidated financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Total eMed" and the consolidated financial statements and notes of
Total eMed that are included in this document. The following information has
been derived from the audited consolidated financial statements of Total eMed
beginning on page F-59:
- Consolidated statements of operations data for the year ended
December 31, 1999 and the period from March 4, 1998 (inception) to
December 31, 1998; and
- Consolidated balance sheet data as of December 31, 1998 and 1999.
We encourage you to read the consolidated financial statements included in
this document because they contain the complete, audited financial statements of
Total eMed for the periods presented. Historical results of operations are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $ 23 $ 4,598
Operating expenses:
Cost of revenues.......................................... 198 5,913
Selling, general and administrative....................... 1,368 4,385
Depreciation and amortization............................. 38 1,031
------- -------
Total operating expenses.................................... 1,604 11,329
------- -------
Operating loss.............................................. (1,581) (6,731)
------- -------
Other income (expense):
Interest income........................................... 168 808
Forgiveness of note receivable and accrued interest....... -- (555)
Other, net................................................ -- (35)
------- -------
Total other income (expense)................................ 168 218
------- -------
Net loss.................................................... (1,413) (6,513)
Preferred stock accretion................................... (199) (1,370)
------- -------
Net loss attributed to common stockholders.................. $(1,612) $(7,883)
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short term investments........... $1,826 $16,002
Working capital............................................. 2,188 15,709
Total assets................................................ 3,130 23,882
Long-term obligations, net of current portion............... 22 17
Convertible redeemable preferred stock...................... 4,448 5,817
Total stockholders' equity (deficit)........................ (1,612) 16,052
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TOTAL EMED
OVERVIEW
Total eMed is a provider of transcription services, primarily for outpatient
physicians. Total eMed's principal service is web-enabled medical transcription
featuring a centralized system by which voice is digitized and transported
across dedicated circuits and the Internet. Total eMed derives revenues from
charging its clients a "per transcribed line" fee which is set forth in its
various client contracts.
Total eMed believes that it has developed an innovative transcription
system. All physician dictation is collected centrally and redistributed to
medical transcriptionists through Total eMed's national data center. This system
allows nationwide load leveling of transcription production and centralized
quality assurance. Total eMed believes its system is substantially different
from traditional transcription systems, under which voice is recorded on analog
tape and processed in local or regional centers.
Total eMed connects its system directly to its client's systems in order to
more efficiently and quickly download patient demographic information and to
print or upload completed work. The connections with clinic systems are
maintained in real-time over dedicated circuits, which reduces the possibility
of service delays or interruptions. In addition, Total eMed's system allows
physicians to view, edit and electronically sign transcribed notes over a secure
web browser. The centralized system also enables the creation of clinical
databases for each physician and clinic. Total eMed believes these databases
will be valuable for its clients in areas such as delivery of care, billing and
reimbursement, and for other users in areas such as retrospective data analyses
and clinical research.
Total eMed was founded in March 1998 and began operations in November 1998.
Growth in 1999 was driven by direct sales and acquisitions. In February 1999,
Total eMed purchased substantially all of the assets of Accu-Scribe
Transcription Services, LLC, a medical transcription company in Memphis,
Tennessee. In April 1999, Total eMed purchased substantially all of the assets
of Bruyn Weber Information Systems, Inc., a medical transcription company in
Albany, New York. Revenues from these two acquisitions represented 43% of Total
eMed's 1999 revenues and 37% of its fourth quarter 1999 revenues. Total eMed is
currently focusing on internal sales growth.
Three clients represented more than 10% of Total eMed's 1999 revenues:
Diagnostic Clinic of Largo, Florida, 36%; Vancouver Clinic of Vancouver,
Washington, 12%; and IMA of Albany, New York, 10%. Total eMed believes that this
concentration is a function of its growth in 1999 and does not believe that this
kind of revenue concentration will be typical in the future as its business
expands.
As of December 31, 1999, Total eMed served approximately 950 physicians in
22 clinics located in seven states. Approximately 79% of these practiced in
outpatient settings and approximately 21% practiced in hospitals or
hospital-based departments. Slightly more than 50% of the hospital-based
physicians were radiologists.
In February 2000, Total eMed notified Diagnostic Clinic of Largo, Florida of
its intention to terminate its service agreement. Although Diagnostic Clinic was
Total eMed's largest revenue source in 1999, Total eMed believes that its
resources can be better utilized if redeployed to support additional growth
opportunities. Total eMed and Diagnostic Clinic have reached an agreement under
which Total eMed will continue to provide transcription services through
April 2000.
Total eMed began operations in November 1998, so references to 1998 numbers
include two months of operations compared to twelve months of operations for
1999. Total eMed believes that period-to-period comparison of its financial
results is not necessarily meaningful and you should not rely on them as an
indication of its future performance.
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RESULTS OF OPERATIONS
Revenues increased from $23,000 in 1998 to $4.6 million in 1999.
Substantially all revenue was derived from transcription services billed on a
"per transcribed line" basis. The increase in revenues was attributable to a
full year of operations in 1999, the acquisition of two medical transcriptions
companies in February and April 1999, and the internal growth in the number of
physicians on the Total eMed system.
Cost of revenues increased from $198,006 in 1998 to $5.9 million in 1999 in
order to support the rapid growth in revenues. These costs included wages,
benefits, recruiting and training of medical transcriptionists, technical
support and installation, facilities costs, and telecommunications costs.
Selling, general and administrative costs were $1.4 million in 1998 compared
to $4.4 million in 1999. The increase was due to the hiring of management,
adding administrative support and moving into larger office space.
Depreciation and amortization grew from $38,000 in 1998 to $1.0 million in
1999. Amortization expense in 1999 was $266,000 due to the acquisition of the
two medical transcription companies. Depreciation expenses increased $697,000
due to capitalized computer hardware and software purchased for physician
groups, medical transcriptionists and Total eMed's data center.
Interest income increased from $168,000 in 1998 to $808,000 in 1999 due to
increased cash and short-term investments from Total eMed's equity financing
that closed in March 1999.
In 1999, the board of directors forgave a note receivable from an executive
officer and director of Total eMed in the principal sum of $500,000 plus accrued
interest.
Preferred stock accretion was attributable to the right of Series A
preferred stockholders to require Total eMed to repurchase shares of Series A
preferred stock after January 1, 2003 at the greater of book value, liquidation
value, or seven times earnings before interest, taxes, depreciation and
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Total eMed has financed its operations through private placements of
convertible and redeemable equity securities. Investors included Halpern Denny
Fund II, L.P., EF Equity Partner (Americas) L.P. and Ridge Capital Fund L.P. As
of December 31, 1999, net proceeds from private placements totaled
$29.8 million. Cash, cash equivalents and short-term investments totaled
$16 million at the end of 1999 compared to $1.8 million at the end of 1998.
Total eMed had net cash out-flows from operating activities of $4.6 million
in 1999 compared to $1.2 million in 1998. This deficit was attributable to the
net operating losses of Total eMed since it commenced operations in
November 1998. Capital expenditures were $4.1 million in 1999 compared to
$665,000 in 1998. The expenditures included purchases of computers, voice cards,
routers and software licensing from voice and text vendors. In addition, Total
eMed acquired the assets of two medical transcription companies in 1999 for a
net cash investment of $2.4 million.
Financing activities provided cash of $25.3 million for the year ended
December 31, 1999. Financing included the net proceeds of Series B and C
preferred stock of $25.5 million. Cash was used to make payments of $258,000 on
notes payable assumed in the Bruyn Weber Information Services, Inc. acquisition.
Total eMed expects to continue consuming significant amounts of cash
resources. Both operating and capital expenditures are necessary to continue
Total eMed's growth. Cash is expected to be used for increased sales and
marketing activities, recruiting and training of new medical transcriptionists,
improving operational and financial reporting systems, expanding facilities, and
capital asset purchases.
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Total eMed invests available cash in short term investments depending on
operational needs, capital expenditures and other business requirements. It does
not have a credit facility. Total eMed did not pay any dividends in 1998 or
1999.
YEAR 2000
Total eMed undertook certain initiatives to ensure that none of its computer
systems would be affected by any date issues arising from the year 2000. Year
2000 issues generally describe the various problems that may arise from the
failure of computer systems to properly process certain dates and date sensitive
information in conjunction with the change of the first two digits of the years
from 19 to 20.
Total eMed's Year 2000 efforts involved certifying hardware and software
purchased in its two acquisitions, as well as certifying purchased hardware and
software. Total eMed believes that it adequately addressed these issues with its
newly created computer platform. It believes that all purchased equipment is
Year 2000 compliant. Total eMed has not experienced any material computer
disruption as a result of Year 2000 issues to date.
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BUSINESS OF MEDICALOGIC
OVERVIEW
MedicaLogic's business is connecting physicians and patients through the
Internet. For physicians, it offers a line of enterprise and recently introduced
Internet-based online health record products and services for use at the point
of care in the exam room, with configurations suitable for practices of all
sizes. In addition to assisting physicians, MedicaLogic's products are used by a
wide range of health professionals at the point of care, such as physician
assistants, medical assistants and registered nurses. For patients, it will
provide, in the first half of 2000, a web site that will allow them to access
healthcare information directly from their physician-generated medical records,
enter personal medical information and communicate with their physicians. For
both physicians and patients, MedicaLogic will provide healthcare content and
e-commerce transaction services, corresponding to information in a selectively
shared database that unites physicians and patients. This system is currently in
the pilot phase of development and will be available in the second half of 2000.
Together, these products, services and databases will comprise MedicaLogic's
Internet Health Services Center.
Founded in 1985, MedicaLogic has been developing, marketing and supporting
electronic medical records for over a decade and has products in daily use by
physicians across the country. While most healthcare information systems have
primarily supported financial and administrative functions, MedicaLogic has
focused exclusively on the challenge of providing clinical solutions that are
used by physicians at the point of care to create and access the electronic
medical record. Its customers include academic medical centers such as Baylor
College of Medicine in Houston, Texas, integrated healthcare delivery systems
such as Providence Health System in Portland, Oregon, and other customers such
as the NASA space shuttle program. Its technology will use the Internet to link
healthcare consumers to physicians using either LOGICIAN or LOGICIAN INTERNET
electronic medical record products and services. MedicaLogic believes that it is
a leading provider of electronic medical record software in the healthcare
industry.
The Internet, with its open architecture and broadening availability at
home, in the workplace and at the point of care, makes it possible for
MedicaLogic to create its Internet Health Services Center and make online health
records more useful and cost-effective for physicians who practice alone, in
small groups or with integrated healthcare delivery networks. As a result,
MedicaLogic believes that it can accelerate the rate of adoption of online
health record technology by physicians. By connecting physicians and patients
through this database of online health records, MedicaLogic believes it can
improve the physician-patient relationship and make common communications
processes, such as prescription refills or appointment requests, more
convenient. Finally, beginning in the second half of 2000, MedicaLogic expects
to offer healthcare consumers a combination of health news, education, goods and
services that will correspond to their health status and interests because it
will be based on the physician-created clinical information included in their
personal health record.
MedicaLogic, Inc. was incorporated in Oregon in May 1985 and commenced
operations that year. Its executive offices are located at 20500 NW Evergreen
Parkway, Hillsboro, Oregon 97124. Its telephone number is (503) 531-7000.
INTERNET HEALTH SERVICES CENTER
MedicaLogic's Internet Health Services Center will integrate the following:
- ELECTRONIC MEDICAL RECORDS--for physicians, Internet-hosted applications,
which have been commercially available since the fourth quarter of 1999,
and existing client-server applications, which will become
Internet-enabled in the second half of 2000, used at the point of care to
document physician-patient encounters and manage clinical information.
- PERSONAL HEALTH PORTFOLIO--for consumers, an Internet application which
will become commercially available in the first half of 2000 and let
consumers maintain a personal health portfolio,
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combining portions of their physician-created electronic medical record
with personally entered information.
- CONTEXT-SPECIFIC CONTENT AND E-COMMERCE--for both consumers and
physicians, health information content and e-commerce transaction
services, which will become commercially available beginning in the second
half of 2000, corresponding to the patient's clinical conditions and needs
based on data in the Internet health record. The content and e-commerce
transaction services will be provided through strategic relationships with
its e-healthcare partners.
- INTERNET HEALTH RECORD--a database for use by physicians, patients and
strategic partners, which, beginning in the first half of 2000, will be
available on a commercial basis and will combine data from the electronic
medical record generated by participating physicians, the personal health
portfolio and strategic partners. This database will allow for the sharing
of selective data among all the participants in the Internet Health
Services Center.
PRODUCTS AND MARKETS
The primary target markets for MedicaLogic's solution consist of healthcare
providers and healthcare consumers. The healthcare provider market is divided
into two segments: physicians in private practice and physicians in integrated
healthcare delivery systems.
PHYSICIANS IN PRIVATE PRACTICE. There are approximately 450,000 physicians
in private practice, constituting approximately 75% of the practicing physician
population in the United States. MedicaLogic's product offering for this market
is LOGICIAN INTERNET, which was introduced commercially in the fourth quarter of
1999. LOGICIAN INTERNET provides the following benefits:
- the creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- the ability to verify compliance with Health Care Financing Administration
documentation guidelines for the level of service billed;
- the ability to obtain patient clinical information from any web browser by
accessing the medicalogic.com web site;
- the ability to be used at the point of care in the exam room, without
requiring a continuous Internet connection;
- the ability to store electronic records at a data center; and
- additional planned benefits in future releases, including integration of
laboratory results, electronic prescription transmission, claims
submission and eligibility checking, as well as the ability of physicians
to communicate with patients using 98point6.com by sharing records data
and exchanging messages on the patients' personal health portfolios.
MedicaLogic expects these features to begin becoming commercially
available in the second half of 2000.
PHYSICIANS IN INTEGRATED HEALTHCARE DELIVERY SYSTEMS. Integrated healthcare
delivery systems currently employ approximately 150,000 physicians.
MedicaLogic's solutions for this market include LOGICIAN, a client-server based
electronic medical record software solution that has been commercially available
for several years, and LOGICIAN INTERNET, depending on the needs of the
institution. Clients will be able to migrate between LOGICIAN and LOGICIAN
INTERNET in future releases. After delivering first-generation electronic
medical record products for the PC-DOS environment from 1990 to 1995,
MedicaLogic released LOGICIAN for the Windows client-server environment in 1996
and has delivered three major upgrade releases since then. Its current customers
include Allina Health System, Baylor College of Medicine, Texas Children's
Hospital, Carilion Health System, Providence Health System, Riverside Health
System and more than 30 others.
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LOGICIAN provides the following benefits specially designed for this market:
- clinical decision support, including preventive care reminders, drug
interaction and allergy checking and formulary management;
- improved ability to measure and manage patient populations using query,
reporting and intervention tools;
- the creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- the ability to verify compliance with Health Care Financing Administration
documentation guidelines for the level of service billed; and
- the ability to be used at the point of care, in the exam room.
LOGICIAN interfaces have been developed and implemented with major vendor
systems encountered in the integrated healthcare delivery system environment,
including laboratory systems, practice management systems and transcription
systems. MedicaLogic intends to expand the interfacing capabilities of LOGICIAN
to include e-commerce transaction capabilities such as electronic prescription
transmission. It expects these expanded capabilities will start becoming
commercially available in the second half of 2000. It will continue to deliver
an enterprise-wide electronic medical record solution to this market, evolving
from its traditional license-based pricing to monthly subscription pricing.
MedicaLogic also expects to improve the enterprise product's compatibility with
the Internet and the interconnectivity between LOGICIAN and LOGICIAN INTERNET.
It expects these capabilities will become commercially available in the second
half of 2000.
HEALTHCARE CONSUMERS. MedicaLogic estimates that at least 75% of Americans
are healthcare consumers, whether they see a physician themselves on a regular
or episodic basis, or act as a coordinator of healthcare for a child, elderly
parent, or other relative. For healthcare consumers, MedicaLogic will offer a
web site, 98point6.com, which is currently in a pilot program and which is
expected to be commercially available in the first half of 2000. 98point6.com
will provide the following benefits for healthcare consumers:
- the ability to view summary data from participating physicians, including
medications, diagnoses, allergies, health directives and laboratory
results;
- the ability to enter information about medical and family history,
wellness goals and behaviors into a personal health portfolio;
- the ability to integrate these two sources of data into the Internet
health record generated by participating physicians, providing information
that can be shared selectively with other individuals and health
professionals;
- the ability to communicate with their participating personal physician,
request appointments, obtain medication refills, ask questions or clarify
their records;
- the ability to access health information content that corresponds to their
personal needs through data in the Internet health record; and
- the ability to engage in commerce, which would also correspond to specific
medical needs through data in the Internet health record.
OTHER HEALTHCARE STAKEHOLDERS. As a result of MedicaLogic's position as a
provider and custodian of personal and professional health data on the Internet,
it believes that it has the opportunity to facilitate healthcare e-commerce
transactions, such as placing prescription orders with pharmacies, and to become
a healthcare infomediary, providing aggregated and anonymous health data to
organizations such as clinical research organizations. With the consent of
individual patients and physicians, and to the extent permitted by law, these
opportunities include:
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- pharmacy--delivery of new and refill prescription orders from physicians
and patients to pharmacies and pharmacy benefit managers;
- laboratory--delivery of orders and return of results to physicians and
patients;
- payers--direct submission of claims to clearinghouses from physicians
using electronic data interchange and electronic bill presentment/payment
to clearinghouses by physicians on behalf of patients using their personal
health portfolio;
- clinical research organizations--recruitment of patients for studies
through automated screening and notification;
- healthcare organizations, both government and private--aggregated and
anonymous data about the health of designated populations for
epidemiologic research, planning and management;
- pharmaceutical marketing research--electronically available data on the
use and outcomes of drugs; and
- advertising/sponsorship--targeted marketing to consumers and physicians
for healthcare-related products or services.
MedicaLogic expects to begin providing these services beginning mid-2000
through 2001.
CUSTOMER SERVICE AND SUPPORT
MedicaLogic believes that effective customer service is essential to both
attracting and retaining physician usage of electronic healthcare applications,
as well as attracting consumers and retaining them as customers of
Internet-based services. It understands the demands of the healthcare community
for person-to-person responsiveness. It provides a wide range of customer
support services through a staff of customer service personnel, multiple call
centers and an e-mail help desk. MedicaLogic also offers web-based support
services that are available 24 hours a day, seven days a week and are frequently
updated to improve existing information and to support new services. Ongoing
telephone support is accessible by a toll-free telephone number and is available
from either 5 a.m. to 6 p.m. Pacific time, Monday through Friday or, for an
additional charge, 24 hours a day, seven days a week. Operators screen all
requests for telephone support and direct the call to the appropriate customer
service personnel. Technical support personnel are responsible for consulting
with strategic partners about technical support issues and for resolving
technical problems encountered by users, strategic partners or other parties.
MedicaLogic also employs technical support personnel who work closely with its
direct sales force, distribution partners and customers. MedicaLogic provides
its customers with the ability to purchase maintenance for its applications and
services, which includes technical support and upgrades. MedicaLogic also
provides training programs for customers.
In addition, MedicaLogic provides enterprise planning, site evaluation, work
flow preparation, hardware and software installation, interface development and
installation, and training of physicians and their staff in connection with the
implementation of the LOGICIAN application. Enterprise and site evaluation helps
MedicaLogic understand how best to implement the LOGICIAN application within the
enterprise and physician's office work flow. The objective of the implementation
process is to maximize the benefits of electronic medical records to the
enterprise and the physician's practice.
CUSTOMERS
MedicaLogic markets its products and services to physicians and large
integrated healthcare delivery networks.
SALES AND MARKETING
MedicaLogic's sales and marketing programs are organized around main
customer segments: integrated healthcare delivery systems, physicians in private
practice and healthcare consumers. Its
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products and services are distributed by a nationwide direct sales force, a
complementary inside sales team and a select number of strategic distribution
partners, and directly through the Internet. MedicaLogic also partners with
national consulting firms and systems integrators to deliver complete
information technology solutions for large system customers.
PHYSICIANS IN PRIVATE PRACTICE. MedicaLogic promotes its products and
services to physicians in private practice with programs designed to take
advantage of the value of peer-to-peer relationships in the physician community.
In contrast to the national image-building campaign required for sales to large
health systems, MedicaLogic is building individual physician sales and marketing
campaigns around activities that will stimulate physician referrals of LOGICIAN
INTERNET. Sales will be offered primarily through online subscription
capabilities supported by an inside telephone sales team.
INTEGRATED HEALTHCARE DELIVERY SYSTEMS. MedicaLogic approaches the
integrated healthcare delivery system market primarily through direct sales and
distribution partners. It believes its access to premier reference accounts
plays a large part in the success of the sales process.
HEALTHCARE CONSUMERS. MedicaLogic believes that marketing programs for the
healthcare consumer market are likely to be more successful when they are
supported by the existing relationship between the physician or local health
system and their patients. Based on that premise, MedicaLogic will be launching
a web site, 98point6.com, which is currently being tested in a pilot program and
which is expected to be released commercially in the first half of 2000. This
application can be co-branded with local integrated healthcare delivery
networks. In addition, promotion of 98point6.com will include a national brand
building campaign designed to create interest by healthcare consumers through
physicians. Consumers will register for membership at no charge at the
98point6.com site or through a co-branded provider partner site.
MedicaLogic's sales, marketing and business development resources are
located in its Hillsboro, Oregon and San Francisco, California facilities, while
its account representatives are deployed across the United States.
STRATEGIC RELATIONSHIPS
Because its products and services are used at the point of care, MedicaLogic
believes it is well positioned to offer electronic transaction services to both
physicians and their patients. To pursue these opportunities, MedicaLogic
intends to form relationships with strategic partners who can provide these
electronic transaction services, including electronic processing of claims,
automatic filling and refilling of prescriptions and electronic transmission of
laboratory results. In addition, it intends to enter into strategic partnerships
with vendors who will provide medical content to customers, as well as
partnerships that will allow physician customers to have access to computer
hardware on which they may use MedicaLogic products and services.
To date, MedicaLogic has entered into strategic relationships with the
following companies:
CVS.COM. CVS.com, a subsidiary of CVS Corporation, is a leading online
pharmacy and source of health, beauty and wellness products. MedicaLogic has
entered into an agreement, dated August 18, 1999, with CVS.com that provides
access to an online licensed pharmacy that will receive and fill orders for
prescriptions generated from physicians and patients using Internet-based
products. The one year agreement provides that CVS will pay a transaction fee
for each prescription filled by its pharmacy based on an order received through
MedicaLogic's Internet-based products. CVS.com will only pay for completed
transactions that MedicaLogic facilitates between CVS.com and third parties. The
agreement may be renewed for subsequent one-year terms.
DELL. Dell Marketing L.P. is a subsidiary of Dell Computer Corporation, a
leading manufacturer of personal computers and related equipment and a
shareholder of MedicaLogic. MedicaLogic has entered into a nonexclusive
agreement, dated September 1, 1999, with Dell Marketing L.P. providing
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for a mutual marketing relationship to promote each other's products and
services, including hyperlinks between web sites and cooperative marketing
efforts which may include trade shows, direct mail campaigns and sales training.
These expenses will be accounted for as marketing expenses as incurred. The
agreement designates Dell as MedicaLogic's preferred provider of notebooks,
personal computers and other hardware, and MedicaLogic granted Dell a
nonexclusive right and license to reproduce and install MedicaLogic's software
programs and related materials on Dell branded hardware products. MedicaLogic
will promote the Dell products with MedicaLogic's pre-installed software
programs.
DRUGSTORE.COM. Drugstore.com, inc. is a leading Internet pharmacy.
MedicaLogic has entered into an agreement, dated November 2, 1999, to
participate in drugstore.com's six-month certification program to create and
promote an industry standard for the electronic transmission of prescriptions to
online pharmacies. The program is expected to commence in the first half of
2000. Following certification, MedicaLogic will receive a fee for providing
drugstore.com with all relevant account information for a new customer that
elects to have drugstore.com fill an electronic prescription. Drugstore.com will
only pay for completed transactions that MedicaLogic facilitates between
drugstore.com and third parties.
ENVOY. Envoy Corporation is a leader in electronic transaction processing
in the healthcare industry. MedicaLogic has entered into an agreement, dated
September 3, 1999, with Envoy that provides MedicaLogic with a nonexclusive and
nontransferable license to Envoy's services for the processing of healthcare
transactions, including patient eligibility and referral checks and medical
claims submissions. Envoy will also provide technical assistance in developing
new functionality to facilitate claims submission. Envoy will charge transaction
fees for use of its services. The agreement provides that Envoy will rebate to
MedicaLogic a portion of the transaction fees received by Envoy for batch
electronic transactions generated through LOGICIAN INTERNET that are submitted
by Envoy to its participating payers. Envoy will only pay for completed
transactions that MedicaLogic facilitates between Envoy and third parties.
MedicaLogic expects that this service will become available to LOGICIAN INTERNET
subscribers in the second half of 2000.
HEALTHGATE. HealthGate Data Corp. is a health information content provider
offering health-related databases through its web site. MedicaLogic has entered
into an agreement, dated July 30, 1999, with HealthGate that allows
MedicaLogic's users to access some of HealthGate's databases. MedicaLogic will
make monthly payments, recognized as cost of revenues, to HealthGate for access
to these databases. This service is currently available to MedicaLogic's
98point6.com pilot program subscribers.
L&H. L&H Applications USA, Inc. is a subsidiary of Lernout & Hauspie Speech
Products N.V., a leading provider of dictation software programs for use in
professional services. MedicaLogic has entered into an agreement, dated
September 28, 1999, with L&H that provides MedicaLogic with a nonexclusive and
nontransferable license to L&H's medical-specific speech recognition software
programs for distribution with LOGICIAN INTERNET. MedicaLogic will make royalty
payments to L&H for each copy of the software licensed, including a maintenance
and support fee. Royalties will be prepaid quarterly and will be recognized as
cost of revenues when the products are delivered. This service is currently
available to LOGICIAN INTERNET subscribers.
TIPAAA FOUNDATION. TIPAAA is a nonprofit trade association of the
Independent Physicians Associations (IPAs). Under the agreement dated
December 8,1999, the TIPAAA Foundation, the association's educational arm, will
assist MedicaLogic in expanding the reach of LOGICIAN INTERNET, by both
providing a distribution channel and participating in joint educational
campaigns. The foundation plans to initiate a pilot study with independent
physicians designed to provide information on the advantages of using electronic
systems at the point of care, and the return on investment (ROI) for LOGICIAN
INTERNET. To fund this program, MedicaLogic has agreed to provide an educational
grant to the
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TIPAAA Foundation. As part of the program, TIPAAA will provide links from its
web site to other sites that educate physicians on the benefits of automation in
office-based physician practices.
PLANETRX.COM. PlanetRx.com is an Internet healthcare destination for
content, commerce and community. Under terms of an agreement dated January 27,
2000, MedicaLogic's qualified LOGICIAN and LOGICIAN INTERNET clinicians will be
able to send prescriptions and reorder authorizations electronically directly
from the physician's office to PlanetRx.com's online drugstore. Patients will be
able to order their prescription refills online through MedicaLogic's
98point.com patient channel or directly through the PlanetRx.com site.
PlanetRx.com will become a preferred online drugstore vendor for MedicaLogic's
LOGICIAN and LOGICIAN INTERNET clinicians, enabling their patients to fill
prescriptions online at PlanetRx.com. In addition, PlanetRx.com will also appear
on the 98point6.com patient channel as one of the top drugstore choices for
qualified MedicaLogic patients.
COMPETITION
High growth, intense competition, and technological change characterize the
market for electronic healthcare information services and e-commerce. In
addition to direct competitors in the electronic medical records market, none of
which has a significant share of the market, MedicaLogic faces competition from
many companies with significantly greater financial resources, well-established
brand names and large installed customer bases. MedicaLogic expects significant
competition from:
TRADITIONAL HEALTHCARE INFORMATION SYSTEM VENDORS. These vendors, including
Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC,
Medic, a division of Misys PLC, and Shared Medical Systems Corporation, focus on
providing information systems to large healthcare enterprises and physician
practice groups. They have large installed bases of customers. Although they
have not traditionally focused on providing electronic medical record solutions,
they have begun to pursue a variety of Internet strategies, some of which could
provide functions competitive with MedicaLogic's products and services.
INTERNET HEALTHCARE COMPANIES. Internet healthcare companies are focusing
on a wide variety of areas, including:
- automating financial, administrative and clinical transactions, such as
Healtheon Corporation and CareInsite, Inc.;
- attracting physicians with journalistic content, such as Physicians
Online, Inc.; and
- targeting the health consumer area, including drkoop.com, Inc. and
iVillage Inc. for content, as well as online pharmacies, such as
drugstore.com, Inc.
Each of these companies can be expected to compete with MedicaLogic within
segments of the evolving Internet healthcare market, but it is also likely that
some of them will serve in the role of partner or vendor. Major Internet
companies, including those not currently specializing in the healthcare
industry, may also enter these markets. Many of these companies have longer
operating histories, larger customer bases, substantially greater financial,
technical, sales and marketing resources and greater name recognition than does
MedicaLogic, and MedicaLogic may be unable to compete successfully against these
companies.
The most significant competitive factors include clinical focus, service
reliability, breadth of product offerings, price performance ratio, network
security, ease of access and use, content bundling, customer support, brand
recognition and operating experience. MedicaLogic believes that it will be able
to compete favorably in these areas.
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TECHNOLOGY
The Internet Health Services Center consists of a fault tolerant
configuration of web and database server computers interconnected through
redundant, high speed network components. The center is currently located at a
secure third-party data center. A new, state-of-the-art data center is being
constructed at MedicaLogic's San Francisco office. All data centers incorporate
advanced technology to provide a high degree of security in the transmission of
highly sensitive and confidential patient medical record data over the Internet.
This includes strict authentication, sophisticated data encryption techniques,
strong network firewalls, stringent personnel policies, tightly controlled
physical access to the data centers and independent overall security audits of
those sites. All of these services will be linked to advanced storage systems
that provide data protection through techniques such as replication. MedicaLogic
will also maintain on-site backup power systems in the San Francisco data center
and will install similar facilities in its back-up data center. These safeguards
are designed to provide a reliable and secure environment for the storage and
exchange of confidential patient and customer data. Although MedicaLogic
believes that its facilities are highly resistant to systems failure and
sabotage, it is developing, and is in the process of implementing, a disaster
recovery and contingency operations plan.
MedicaLogic's LOGICIAN product is based on Oracle Corporation's database
products. It licenses these databases from Oracle under an Oracle alliance
agreement. As an alliance member, it has been given the right to sublicense the
database software to customers.
DEVELOPMENT AND ENGINEERING
MedicaLogic believes that its future success will depend on its ability to
continue to maintain and enhance its Internet Health Services Center, LOGICIAN
applications and related services. MedicaLogic has developed applications and
services in house, although future extensions to its products and services may
come through acquisitions as well. MedicaLogic will continue to work closely
with other companies in its development efforts.
MedicaLogic has several significant projects currently in development. These
include the continued enhancement of LOGICIAN and LOGICIAN INTERNET, and the
development of new services such as physician and consumer oriented web sites
and development of interfaces with strategic partners' and others' technology.
Rapid technological developments and evolving industry standards
characterize the emerging market for Internet-based electronic medical records
and associated transaction processing. The emerging nature of this market and
its rapid evolution will require that MedicaLogic continually improve the
performance, features and reliability of LOGICIAN and the Internet Health
Services Center, particularly in response to competing offerings.
MedicaLogic must maintain a high standard and desire for the most effective
and innovative technologies. The success of new product and service
introductions is dependent on several factors, including:
- proper definition of new applications or services;
- appropriate staffing of expertise on the particular assignment;
- timely completion and introduction of new products and services; and
- differentiation of new products and services from those of its
competitors.
INTELLECTUAL PROPERTY RIGHTS
MedicaLogic believes that patent, trade secret and copyright protection are
less significant to its success than its ability to develop new products and
services. MedicaLogic relies on a combination of trademark, trade secret and
copyright law, and contractual restrictions to protect the proprietary
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aspects of its technology. MedicaLogic presently has several federal trademark
registrations, including MedicaLogic, Practice With Knowledge, KnowledgeBank,
Logician, SIMPL and LinkLogic and numerous pending trademark applications,
including AboutMyHealth, 98point6.com, Quickstep and ScheduLogic, Zero Degrees
of Separation and The Online Health Record Company. MedicaLogic has filed ten
applications for U.S. patents and is preparing two additional applications. It
seeks to protect its source code for software, documentation and other written
materials under trade secret and copyright laws. MedicaLogic presently has nine
pending copyright applications for software, tools and KnowledgeBank forms,
reports and templates. MedicaLogic licenses its software under signed license
agreements, which impose restrictions on the licensee's ability to utilize the
software. Finally, MedicaLogic seeks to avoid disclosure of its intellectual
property by requiring employees and consultants with access to proprietary
information to execute confidentiality agreements and by restricting access to
its source code.
The steps taken by MedicaLogic to protect its proprietary rights may be
inadequate and, as a result, third parties may infringe upon or misappropriate
its copyrights, trademarks, service marks and similar proprietary rights. In
addition, the global nature of the Internet makes it impossible to control the
ultimate destination of services and effective copyright and trademark
protection may be unenforceable or limited in foreign countries.
MedicaLogic's competitors or others may adopt product or service names
similar to those MedicaLogic, which may impede MedicaLogic's ability to build
brand identity and possibly lead to customer confusion. Moreover, because
Internet domain names derive value from the individual's ability to remember
these names, MedicaLogic's domain name may lose its value if, for example, users
begin to rely on mechanisms other than domain names to access online resources.
MedicaLogic's inability to protect its marks adequately could have a material
adverse effect on the acceptance of its brand and on its business, financial
condition and results of operations. In the future, litigation may be necessary
to enforce and protect MedicaLogic's trade secrets, copyrights and other
intellectual property rights. Litigation would divert management resources and
be expensive and may not effectively protect MedicaLogic's intellectual
property.
EMPLOYEES
As of December 31, 1999, MedicaLogic employed 298 persons on a full-time
basis, of whom there were 89 in technical development and support, 95 in sales
and marketing, 59 in professional services, 24 in operations and networks and 31
in other administration functions. None of MedicaLogic's employees is a member
of a labor union or is covered by a collective bargaining agreement, and
MedicaLogic has never experienced a work stoppage. MedicaLogic believes that it
has good relations with its employees.
FACILITIES
MedicaLogic's executive offices are located in Hillsboro, Oregon in
approximately 120,000 square feet of space under a lease that expires in
December 2007. MedicaLogic also occupies approximately 38,000 square feet of
office space in San Francisco, California under a lease that expires in
May 2009. MedicaLogic believes that its facilities are adequate for its current
operations.
LEGAL PROCEEDINGS
MedicaLogic is not currently subject to any material legal proceedings.
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BUSINESS OF MEDSCAPE
OVERVIEW
Medscape provides comprehensive, authoritative and timely medical
information and interactive programs to physicians, allied healthcare
professionals and consumers. Medscape operates two principal healthcare web
sites, Medscape.com and CBSHealthWatch.com. As of December 31, 1999, Medscape's
sites had more than 1,700,000 registered members worldwide, including over
280,000 registered as physicians, 860,000 registered as allied health
professionals and 630,000 registered as consumers.
Medscape.com is currently organized by medical specialty area, such as
oncology and cardiology, to make it easier for its members to access the
information most relevant to them. Medscape.com's medical content and
interactive programs assist medical professionals in keeping abreast of medical
advances. Medscape.com's original, exclusive and proprietary content includes
such innovative features as next day summaries of major medical conferences and
online, peer-reviewed medical journals. Medscape.com also provides proprietary
interactive programs that test a medical professional's diagnostic skills and
understanding of recent medical developments. Medscape.com provides access to
extensive online medical databases and what it believes is one of the web's
largest collections of free, peer-reviewed, full-text medical articles. In
addition, Medscape.com offers physicians the opportunity to earn continuing
medical education credits that are required by most states' licensing boards.
Through its strategic relationship with National Data Corporation (NDC), a
provider of healthcare information services and electronic commerce solutions,
Medscape.com will integrate selected clinical data interchange and data
management services provided by NDC into Medscape.com. Medscape.com will also
serve as the principal content provider to NDC's physician practice management
system and be an online distributor of some of NDC's other online clinical
products.
Medscape launched its consumer site, CBSHealthWatch.com, in September 1999.
CBSHealthWatch.com is designed to help families and individuals make better
informed healthcare decisions and to simplify management of their healthcare
needs. The site provides personalized, authoritative medical content written for
the consumer, access to professional content on Medscape.com and interactive
personal health management tools, such as health diaries. Medscape entered into
a strategic relationship with CBS Corporation under which CBSHealthWatch.com is
the exclusive Internet healthcare site integrated into CBS News programming and
will be promoted on CBS media properties.
Medscape also has strategic relationships with America Online, Inc. and
Women.com Networks, Inc. Under the agreement with America Online, Inc., Medscape
has developed co-branded consumer sites that appear and are promoted through
contextual links and banners on AOL, AOL.com, CompuServe Service, Netscape
Netcenter and Digital City, all of which are AOL properties. The AOL co-branded
sites on the AOL properties were launched in the fourth quarter of 1999 and the
first quarter of 2000. Under the agreement with Women.com, Medscape is the
preferred health content partner for Women.com and provides Women.com's visitors
with health news, feature articles, proprietary health tools and other health
information in a co-branded format.
Medscape was incorporated in New York in March 1996 and commenced operations
in April 1996. Medscape was reincorporated in Delaware in December 1998. In
October of 1998, Medscape acquired Healthcare Communications Group, LLC, which
operated a leading HIV web site. In the first quarter of 1999, Medscape acquired
Bonehome.com, a leading orthopedic site, and CompuRx, Inc., a healthcare market
research company serving pharmaceutical and other healthcare companies.
Medscape's executive offices are located at 134 West 29th Street, New York,
New York, 10001-5399. The telephone number is (212) 760-3100.
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THE MEDSCAPE.COM SITE
PROPRIETARY EDITORIAL CONTENT AND FEATURES
Medscape.com is currently organized into 23 medical specialty sites, ranging
from cardiology to oncology to women's health, making it easier for its members
to access the information most relevant to them. Medscape.com's original,
exclusive and proprietary content and programs, assisting medical professionals
and consumers to keep abreast of medical advances, include:
- NEXT DAY SUMMARIES(SM) of selected presentations at major medical
conferences;
- MEDSCAPE GENERAL MEDICINE, believed to be the only online peer-reviewed
general medical journal;
- CLINICAL MANAGEMENT SERIES, offering interactive practice modules with
state-of the
art treatment information and clinical cases for particular cases, each of
which is
accredited for continuing medical education;
- TREATMENT UPDATES, with authoritative evaluations of significant new
changes in
therapies; and
- EMED JOURNALS, peer-reviewed, electronic medical journals written
exclusively for medscape.com covering a number of important specialty
areas.
Medscape.com also offers an array of proprietary, challenging and
instructional interactive features to test a physician's medical knowledge.
Interactive self-assessment elements include:
- PICTOURS-Registered Trademark-, image-based case challenges testing the
physician's diagnostic skills;
- TODAY'S QUESTION, testing the physician's understanding of recent
developments in the physician's medical specialty; and
- ECG OF THE WEEK, images of cardiograms with case histories testing the
physician's diagnostic skills, supplied by leading cardiologists.
THIRD-PARTY EDITORIAL CONTENT
Medscape believes that Medscape.com contains one of the web's largest
collections of free, peer-reviewed, full-text medical articles and one of the
web's most extensive libraries of continuing medical education accredited
programs. Medscape.com also provides third-party access to the NATIONAL DRUG
DATA FILE, a leading drug and disease database of Hearst Corporation's First
DataBank.
Numerous prestigious medical publishers, universities, hospitals and
professional organizations are part of Medscape.com's strategic content partner
program known as Medscape Publishers' Circle-Registered Trademark-. Through this
program, Medscape.com aggregates, organizes, and places in context content from
over 100 medical journals, textbooks, news services and other publications, and
offers integrated, easy-to-use searching of vast medical databases, including
over nine million abstracts of medical journals available in the National
Library of Medicine's MEDLINE, AIDSLINE and TOXLINE databases. In addition,
through an agreement with Dow Jones & Company, Medscape.com provides free
searching of more than 500 leading medical publications, including the JOURNAL
OF THE AMERICAN MEDICAL ASSOCIATION, the BRITISH MEDICAL JOURNAL, THE LANCET,
and abstracts from the NEW ENGLAND JOURNAL OF MEDICINE. Members can immediately
retrieve online a full-text copy of the article or abstract for a fee.
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NON-MEDICAL CONTENT
Medscape also provides an array of non-medical content on subjects of
particular interest to medical professionals and health-conscious consumers.
MEDSCAPE MONEY & MEDICINE offers personal finance features, including stock
quotes, portfolio tracking and business news, and valuable practice management
features that provide business information that is directly relevant to a
medical practice. Members can also learn about the developments in managed care
in a special MANAGED CARE topic area. The MEDSCAPE HUMOR & MEDICINE section
provides readers with medical jokes, cartoons, DEFUNITIONS, crossword puzzles
and other entertaining features that generate traffic to and increase usage of
Medscape's site.
MEMBER SERVICES
Medscape offers a number of services that complement its high-quality
content offerings and make Medscape.com a preferred professional destination
site, including:
CONTINUING MEDICAL EDUCATION. Approximately half the states require
physicians and selected other medical professionals to certify annually that
they have accumulated a minimum number of continuing medical education hours to
maintain licensure. Medscape.com offers its professional members what it
believes is one of the web's largest libraries of continuing medical education
programs. Medscape.com's extensive continuing medical education programs are
produced in association with entities accredited by the Accreditation Council
for Continuing Medical Education. From the convenience of their home or office
computer, Medscape.com's professional members can obtain continuing medical
education credits by accessing a variety of accredited editorial resources and
programs including online journal articles, NEXT DAY SUMMARIES of medical
conferences, in-depth TREATMENT UPDATES and state-of-the-art CLINICAL MANAGEMENT
SERIES.
MEDICAL OFFICE MANAGEMENT. Through its strategic relationship with National
Data Corporation, Medscape provides seamless web connectivity into NDC's online
clinical information products and EDI services, including claims processing.
PHYSICIAN WEB SITES. Medscape.com offers it members registered as
physicians the opportunity to create home pages for their medical practices that
can be accessed by their patients and the general public. In addition to details
about their practice, including office address, phone number, medical specialty,
types of insurance accepted, hospital affiliations and languages spoken,
Medscape.com's PHYSICIAN WEB SITES permit a physician to offer links to
disease-specific information from Medscape.com as well as the general searching
capability of Medscape.com. Medscape believes these PHYSICIAN WEB SITES will
keep Medscape's high-quality medical information at the center of the
communication between physician and patient, and keep the physician at the
center of the healthcare dialogue. As of December 31, 1999, over 8,500 PHYSICIAN
WEB SITES had been established.
E-COMMERCE AND SERVICES. Through a series of strategic partners, Medscape
offers its audience the opportunity to purchase a variety of goods and services.
The MEDSCAPE MEDBOOKSTORE offers members the opportunity to purchase discounted
medical texts from a collection of over 90,000 titles through its partner
MedSite Publishing Inc. The MEDSCAPE JOB CENTER offers a comprehensive
job-listing/posting service for medical professionals through its partner
NetMed, Inc. The MEDSCAPE DRUGSTORE offers Medscape.com members the ability to
purchase online a wide range of health, beauty and wellness products through
drugstore.com.
COMMUNITY FEATURES. MEDSCAPE MAIL, powered by CommTouch, is useful for
mobile professionals like physicians, who often require email access from
multiple locations, such as their homes, offices, clinics and hospitals or
during travel. Discussion areas on many medical articles and physician-only
discussion groups are also available. Medscape.com's ASK-THE-EXPERT feature
allows members registered as physicians to present interesting cases to leading
experts online for comments.
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MEDSCAPE'S HEALTHCARE COMPANY SERVICES
Medscape.com offers healthcare companies many value-added online services
including:
MEDSCAPE PROFILES. The Internet offers significant advantages over
traditional mail surveys and focus groups in terms of speed and cost savings.
U.S. pharmaceutical and other healthcare companies are estimated to spend as
much as $1 billion annually on custom and syndicated market research. MEDSCAPE
PROFILES, an online market research division, has already successfully piloted
several custom research projects and has recruited a physician panel of over
1,000 from Medscape.com's member base to conduct custom and syndicated online
research quickly and efficiently.
MEDSCAPE MEDPYX. Medscape.com plans to introduce MEDSCAPE MEDPYX as an
educational research program that will assist pharmaceutical companies in better
understanding the physician's knowledge base and prescribing patterns. In 1998,
pharmaceutical company sales representatives conducted more than 59 million
details to office- and hospital-based physicians. Medscape believes that
MEDSCAPE MEDPYX will provide pharmaceutical companies with a cost-effective
method of evaluating and improving their existing detailing activities.
A PROFILE OF CBSHEALTHWATCH.COM
Medscape designed its CBSHealthWatch.com and AOL co-branded consumer sites
to help consumers make better informed healthcare decisions and to simplify
management of their healthcare needs. Medscape's consumer sites provide
personalized, authoritative medical content written for the consumer, access to
its professional content on Medscape.com and interactive personal health
management tools, such as health diaries.
In addition to general health and wellness information, CBSHealthWatch.com
and the AOL co-branded sites offer information organized around specific health
conditions, such as diabetes or asthma. In an effort to simplify the consumer
experience, Medscape includes convenient links to health sites operated by the
consumer's physician, and plans to expand these linkages to cover employers and
health insurers.
RELATIONSHIP WITH CBS CORPORATION
On August 3, 1999, Medscape entered into an agreement with CBS Corporation
under which it will receive approximately $150 million in advertising and
promotion in the United States over a seven-year period. Medscape also was
granted a license to the "CBS" trademark and "Eye" design and selected
health-related news content that, together, were valued at $7 million.
CBSHealthWatch.com is the exclusive healthcare Internet site integrated into
CBS News programming. This integration is being accomplished by CBS News, when
appropriate and at its discretion, directing viewers of CBS News programs to
CBSHealthWatch.com for more information regarding health-related news stories
and features, and by using Medscape story ideas and sources in health stories
developed and broadcast by CBS News.
ORIGINAL AND THIRD-PARTY CONTENT
In addition to general health and wellness information, CBSHealthWatch.com
provides consumers with original and third party news, feature articles and
other information organized around specific health conditions, such as diabetes
or asthma, grouped into "health channels." The site contained 22 such channels
at launch and expanded that number to 39 in the first quarter of 2000. Members
may customize their home page by creating MY HEALTH CHANNELS, with tailored
information from up to three channels.
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Members also have access to three different levels of information not
usually found on consumer health sites: BASIC, ADVANCED and WHAT MY DOCTOR
READS. The third level offers consumers information from the Medscape.com
professional site that is used by their own physicians. It is also a gateway for
consumers to reach all of the extensive content and features Medscape.com
provides to health professionals.
The extensive Library feature on CBSHealthWatch.com offers these sources of
information, including a number that are also found on Medscape's professional
site:
- HEALTH TOPICS A-Z, allowing consumers to access the world of health by
entering a word or phrase, or using the keyword list of common terms;
- DRUG DIRECTORY, for facts on over 10,000 brand name and generic drugs;
- MEDICAL DICTIONARY from Merriam-Webster;
- MEDICAL TEST HANDBOOK from the Yale University School of Medicine;
- MEDLINE, AIDSLINE and TOXLINE, three comprehensive medical databases from
the National Library of Medicine;
- SELF CARE & FIRST AID, providing a search by symptom or condition;
- WHAT MY DOCTOR READS, offering direct access to information used by
medical professionals;
- COMMUNITY ORGANIZATIONS, with contact information on national
organizations, government agencies, medical experts and key groups in
healthcare;
- AUDIO ARCHIVE, including recorded interviews with physicians and their
patients on a wide variety of topics;
- MANAGED CARE GUIDE, with information on this important subject;
- MINI MEDICAL SCHOOL, with courses offered by Emory University; and
- RELATED SITES, to take consumers to other health resources on the web.
INTERACTIVE FEATURES AND TOOLS
CBSHealthWatch.com's easy-to-use interactive HEALTH MANAGER allows
registered members to create and monitor a personal health calendar, log meals,
track appointments, set an exercise plan and track weight and medications. There
are also special features for certain health conditions. For example, diabetics
can track key information like blood sugar readings.
The site also provides a number of "community" features allowing registered
members to communicate directly with medical experts and other individuals with
similar health interests. For example, the ASK AN EXPERT section can be used to
pose a health question or check answers to frequently asked questions. HEALTH
MATES permits members to communicate with one another regularly on health
conditions and interests. IN YOUR OWN WORDS encourages members to share insights
and views with others.
REGISTERED MEMBERS
To utilize all of the features of Medscape.com and CBSHealthWatch.com, users
must register as members. This information enables Medscape to deliver targeted
medical content based on its members' registration profiles. As of December 31,
1999, Medscape.com had over 1,700,000 registered members worldwide, including
over 280,000 members registered as physicians, 860,000 registered as allied
healthcare professionals and 630,000 registered as consumers.
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The registration process enables professional members to choose a home page
tailored to their medical specialty or interest. Accordingly, a cardiologist
accessing Medscape.com is automatically directed to MEDSCAPE CARDIOLOGY, rather
than a more generic home page. Every member, however, regardless of medical
specialty or professional status, has access to the full suite of exclusive,
original and licensed content through a uniform, easy-to-use interface.
To encourage initial use, CBSHealthWatch.com allows visitors to access
selected features without registering as members. Visitors, however, have to
register as members to have access to all the features of CBSHealthWatch.com,
including the interactive programs such as health diaries.
EDITORIAL, DESIGN AND PRODUCTION
Medscape's editorial staff is headed by Dr. George D. Lundberg, Medscape
Editor in Chief, who was formerly Editor of the JOURNAL OF THE AMERICAN MEDICAL
ASSOCIATION for 17 years. As of December 31, 1999, Medscape's editorial, design
and production staff consisted of 82 professionals who are all experienced
medical editors, writers and producers. Medscape intends to significantly
increase its number of medical specialty areas. Medscape has assembled
specialty-specific editorial boards for Medscape.com and has also assembled a
Medscape.com scientific advisory board consisting of 19 of the world's leading
physicians, academicians, clinicians and ethicists, and healthcare experts, who
also serve as the editorial board of MEDSCAPE GENERAL MEDICINE.
Medscape has an easy-to-use interface that incorporates original and
proprietary content written by medical experts with an extensive library of
licensed content and medical databases. Each medical specialty area is headed by
a program director responsible for building and continuously updating that
area's content. Medscape's goal is to be the premier online information resource
in each of its medical specialty areas. To support this effort, Medscape covers
major medical conferences in many specialties with its editors and medical
experts summarizing and reporting on the breaking medical research and news
delivered at these events.
SALES
As of December 31, 1999, Medscape had a direct sales organization of over 35
sales professionals and sales operations staff employees. Medscape generally
seeks to hire individuals with significant experience selling to pharmaceutical,
other healthcare and consumer companies and their advertising agencies.
MARKETING AND PUBLIC RELATIONS
Medscape employs a variety of methods to promote the Medscape brand and to
attract traffic and new members, including advertising on other Internet sites
and in medical journals, pharmaceutical and other healthcare publications, and
other targeted publications. Medscape is currently using the approximately
$150 million in advertising and promotion from CBS to promote Medscape on CBS
media properties, including television, radio and outdoor advertising. Medscape
also is extending the reach of CBSHealthWatch.com through its agreements for
co-branded sites and information with AOL and Women.com.
Medscape also maintains a significant presence at major industry
conferences, trade shows and medical meetings, primarily through the operation
of large exhibits for both the professional and consumer sites. Medscape
supplements these efforts with direct mail campaigns targeted at medical
professionals.
Medscape's professional distribution strategy is designed to have
Medscape.com's medical content be available within major Internet-accessible
healthcare information system platforms like hospital intranets, electronic
medical record systems and physician practice management company intranets.
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This strategy integrates Medscape.com into the daily workflow of their medical
professionals with frequent reminders of and easy access to Medscape's selection
of medical content. Consistent with this strategy, in 1998, Medscape signed a
content distribution agreement with PhyCor, the largest physician practice
management organization in the United States. In August 1999, Medscape entered
into a License and Product Development Agreement with National Data Corporation
under which Medscape is the preferred content supplier to NDC's LYTEC physician
practice management product and an online distributor of some of NDC's other
clinical information products.
Medscape's internal public relations staff oversees a comprehensive public
and investor relations program, which it believes is a key component of its
marketing and brand recognition strategy. Medscape targets key business, medical
and healthcare marketing publications, and encourages their reporters to use
Medscape.com and CBSHealthWatch.com for their medical news and research needs,
in an effort to build both brand awareness and loyalty among news organizations.
INFRASTRUCTURE, OPERATIONS AND TECHNOLOGY
Medscape's business is supported by a reliable, expandable and secure system
platform. Using a combination of proprietary online solutions and commercially
available licensed technologies, Medscape has deployed systems for online
content dissemination, site analysis, and web- and email-based member support.
Medscape has developed a database management and online publication system
to index, retrieve and display information. This system allows for rapid
searching, viewing and distribution of content including text, photos, graphics
and other images. Medscape's hardware and software systems are based on a
distributed processing model that allows applications to be distributed among
multiple parallel servers. Medscape's hardware servers, storage systems,
Internet connections and networks allow its online systems to operate reliably.
Medscape maintains offsite redundant systems and facilities. Medscape has
outsourced its web-hosting operations to a third party facility, Exodus
Communications. This outsourcing provides faster and more reliable connections
to the Internet and enhanced reliability and expandability.
COMPETITION
Medscape faces competition both in attracting visitor traffic and in
generating revenue across all its business lines. Medscape competes with
numerous companies and organizations for the attention of medical professionals
and consumers including traditional off-line media such as print journals,
conferences, continuing medical education programs and symposia. Medscape also
faces significant competition from online information resources. There are
thousands of healthcare-related sites on the Internet. Also, several large
consumer sites offer specialized healthcare channels as part of their general
services. In addition, there are many companies that provide non-Internet based
marketing and advertising services to the healthcare industry. These competitors
include advertising agencies, consulting firms, marketing and communications
companies and contract sales and marketing organizations.
Some of Medscape's current and potential competitors may have competitive
advantages compared to Medscape, including:
- greater resources to devote to the development, promotion and sale of
their services;
- greater financial, technical and marketing resources;
- greater brand recognition and larger marketing budgets; and
- larger customer and user bases.
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Medscape believes that the principal competitive factors in attracting and
retaining members are the depth, breadth and timeliness of services and brand
recognition. Other important factors in attracting and retaining members include
ease of use, quality of service and cost. Medscape believes that the principal
competitive factors that will continue to attract advertisers and sponsors to
Medscape.com and its consumer sites include price, the number of medical
professionals and consumers who use Medscape's web sites, the demographics of
its member base and the creative implementation of advertisement placements.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. There can be no assurance
that Medscape will be able to compete successfully against current and future
competitors or that the competitive pressures Medscape faces will not seriously
harm its business.
SIGNIFICANT CUSTOMERS
Medscape sells advertising and sponsorships, market research and other
services to pharmaceutical, medical device and other healthcare companies, as
well as advertising and sponsorships to consumer products and other
consumer-oriented companies. Medscape also sells products, such as medical
books, to physicians, allied healthcare professionals and consumers.
Medscape's client and revenue base broadened during 1999. In 1998, Medscape
derived approximately 48% of its revenue from three leading pharmaceutical
advertisers and sponsors, of which two accounts were individually greater than
10%. In 1999, no individual client comprised 10% or more of Medscape's revenue.
INTELLECTUAL PROPERTY AND DOMAIN NAMES
Medscape protects its intellectual property through a combination of license
agreements, trademark, service mark, copyright and trade secret laws and other
methods. Medscape obtains the majority of its content under license agreements
with publishers, through assignments or work for hire arrangements with third
parties and from internal staff development. Generally, Medscape's license
agreements are for a period of one to three years and it considers the materials
obtained through these agreements as important to the continued enhancement of
the content on its web site. Medscape currently has no patents or patents
pending for its online services and does not anticipate that patents will become
a significant part of its intellectual property in the foreseeable future.
Medscape also enters into confidentiality agreements with its employees,
consultants, vendors and customers and license agreements with third parties and
it generally seeks to control access to and distribution of its technology,
documentation and other proprietary information.
Medscape currently holds a number of domain names, including the following:
medscape.com, cbshealthwatch.com, cbsmedscape.com, medscape.co.uk, medpulse.com,
medicalogicmedscape.com, and medscapemedicalogic.com. Medscape also has
applications for numerous domain names pending. The legal status of intellectual
property on the Internet is currently subject to various uncertainties. The
current system for registering, allocating and managing domain names has been
the subject of litigation and proposed regulatory reform. Additionally,
legislative proposals have been made by the federal government that would afford
broader protection to owners of databases of information, such as stock quotes.
This protection of databases already exists in the European Union.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which Medscape is a party.
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EMPLOYEES
As of March 28, 2000, Medscape had 231 full-time employees. None of
Medscape's employees is covered by a collective bargaining agreement. Medscape
considers its employee relations to be good.
FACILITIES
Medscape is headquartered in New York, New York, where it leases a total of
approximately 91,600 square feet of office space under numerous leases.
Currently, Medscape has approximately 20,000 square feet of office space at 134
West 29th Street, New York, New York, 10001 under three leases, two that expire
on June 30, 2004, and the third terminating on June 30, 2009. Medscape also
currently occupies 12,200 square feet at 224 West 30th Street, New York, New
York 10001 under two leases for approximately 71,600 square feet. The two leases
terminate on January 31, 2005. Medscape is in the process of renovating the
space at 224 West 30th Street to ensure that it is able to meet its business and
technological needs as it grows. Medscape will relocate its corporate
headquarters to 224 West 30th Street, New York, New York 10001 once the
renovations are complete. Medscape expects to spend approximately $4 million in
2000 on these renovations.
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BUSINESS OF TOTAL EMED
GENERAL
Total eMed is a provider of transcription services, primarily for outpatient
physicians, and a pioneer in the development of web-enabled transcription. Total
eMed's principal service is web-enabled medical transcription featuring a
centralized system by which voice is digitized and transported across dedicated
circuits and the Internet. Total eMed's process connects physicians with their
medical records stored in its clinical database. Physicians and other clinicians
utilizing Total eMed's system can dictate patient encounters and review, edit
and electronically sign completed transactions. Records are then maintained at
its data center for access by the physician or clinician via a secure Internet
browser.
The medical transcription industry is estimated to be a $6.6 billion market.
Industry associations believe that approximately 15% of the market is currently
outsourced and that outsourcing is increasing at a rate of approximately 15% per
year. Total eMed's target outpatient market accounts for approximately 45% of
the overall market. The bulk of the outpatient market is highly fragmented and
served primarily by small local and regional transcription companies. The few
traditional companies offering transcription services on a national level
concentrate almost exclusively on the inpatient hospital market and Total eMed
believes they have less than 10% of the total market among them.
Total eMed believes that the need for accurate, concise, portable, and
accessible medical record keeping has increased dramatically with the
proliferation of healthcare systems and payers, and increased use of home
healthcare and outpatient facilities, each operating independently of each
other. In addition, the HealthCare Financing Administration, which oversees
Medicare and Medicaid, and many private payers require detailed, typed
documentation for reimbursement of medical expenses. The record created through
the transcription process is used as the basis of proof of care for billing
purposes, as well as the historical document showing a patient's healthcare plan
and the legal record of care administered.
Total eMed's system enables high quality, rapid turnaround transcription
service, allowing it to offer its Internet clients a 24-hour turnaround and 98%
quality guarantee. In addition, the online accessibility allows physicians to
access their records from multiple point-of-care locations. While performing
transcription services, Total eMed electronically identifies a variety of
demographic information, then stores that information in separate data fields.
Total eMed is assisting in the development of software that will allow it to
electronically identify clinical information and to create a variety of digital
health records from the clinical and demographic information. These records can
provide significant value to physicians by being accessible to authorized third
parties such as payers and regulators. In addition, as the aggregated
information in the database becomes statistically valid, following the receipt
of appropriate consents and in compliance with law, Total eMed believes that it
will be able to generate revenue by providing a variety of non-patient
identifiable data to physicians, payers and researchers for purposes such as
pricing capitated contracts, quality assurance, clinical research, utilization
information, and other purposes.
As of March 1, 2000, Total eMed served approximately 1050 physicians in 22
clinics located in seven states. Approximately 640 of these physicians currently
utilize Total eMed's centralized data system. The remainder are physicians
associated with Total eMed's two acquisitions and are expected to begin using
the centralized data system by the end of the second quarter of 2000.
Total eMed's principal executive offices are located at 5301 Virginia Way,
Suite 250, Brentwood, Tennessee 37027, and its telephone number is
(615) 234-1300.
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PRODUCTS AND SERVICES
TRANSCRIPTION
Total eMed provides medical transcription services to physicians and other
clinicians, primarily in the outpatient healthcare delivery system. Today's
healthcare system increasingly requires complete, legible, searchable
documentation from such providers. Physicians begin the transcription process by
dictating clinical information into any of several commercially available
recording devices. Traditionally, the recorded information in outpatient
settings is held for pick-up or processing, typed by a medical transcriptionist
and returned individually or in small batches, usually in hard copy. Upon
receiving the copy, the physician frequently makes corrections, requiring
repetition in the process before completion and signature. Under Total eMed's
system, the physician's recorded information is digitized and transmitted to
Total eMed's data center over a frame relay system on dedicated phone lines.
Total eMed's central voice server sends the dictation to a medical
transcriptionist via the Internet. After transcribing the information, the
medical transcriptionist returns the document to the data center, where it is
stored on a database and returned to the physician via web browser, direct
network print, facsimile or email. Total eMed's system provides a means by which
the physician may review the record online, edit it, and affix his or her
signature electronically. For record keeping purposes, the document can be
downloaded into the physician's medical record system or viewed remotely on
Total eMed's database. Total eMed's system enables high quality, rapid
turnaround transcription service, allowing it to offer a 24-hour turnaround and
98% quality guarantee. In addition, the online accessibility allows physicians
to access their records from multiple point of care locations. Total eMed
provides a single source solution for a clinic's entire transcription
requirements.
Total eMed uses a dedicated team for the recruitment of medical
transcriptionists. These recruiters are compensated on an incentive system based
on finding and hiring quality medical transcriptionists. Total eMed employs its
medical transcriptionists and pays them based on the volume of dictation they
transcribe. It provides each full-time medical transcriptionist with benefits,
such as insurance and a 401(k) plan, and with a personal computer on which to
work.
Total eMed intends to expand its services to enable the use of commercially
available Personal Digital Assistants, or PDAs, such as Palm Pilot-TM- and
Cassiopeia-TM-. This expansion to PDAs will enable physicians in smaller clinics
to utilize most of Total eMed's services without the higher fixed costs of a
server/dedicated line system. The physician would dictate into the PDA, which
would upload the dictation directly to Total eMed's central data center. The
information would then be transcribed by a medical transcriptionist, returned to
the national data center, and made available to the physician or the physician's
clinic via a web browser, e-mail or facsimile. Total eMed also intends to make
the PDAs available for physicians in large clinic environments where the device
would interface with local voice servers. Total eMed believes that PDAs will
offer a compact, digital recording option capable of supporting additional
applications such as electronic prescription writing and record review. The PDA
system is scheduled to be rolled-out at a pilot location involving approximately
20 physicians by the end of March 2000.
Total eMed believes that a clinic's overall medical record management
practices significantly impact a provider's perception of the transcription
process. While dictation may be transcribed on time in a high quality manner, it
is imperative that the record be easily accessible when the provider needs it.
Therefore, as part of Total eMed's pre-engagement assessment for a potential
client, it evaluates and makes recommendations on the provider's overall record
keeping process. Total eMed provides medical records management assistance to
its clients, including placing an employee on site to redesign the records
management process and implement desired changes.
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DATA MANAGEMENT
As files are routed through its central data center in Nashville, Total eMed
collects and stores a variety of demographic and clinical information. With the
appropriate consent and in compliance with law, Total eMed intends to facilitate
transmission of the captured electronic data to interested parties. Total eMed
anticipates providing three distinct data management services geared towards
compiling and accessing this information.
First, Total eMed offers transcription archive access to its client
physicians and clinics. In the future, these physicians and clinics will have
the opportunity to receive reports that retrospectively detail their diagnoses,
prescriptions, and medical histories on an aggregated basis. Total eMed believes
that physicians, clinics and practice managers will utilize these reports for
quality control, compliance reports, practice efficiency modeling, marketing
strategies and other vital factors desirable in the current healthcare
environment.
Second, authorized third parties such as payers, managed care organizations
and regulators will be able to access, for a fee, the transcribed documents
through a secure web browser. These parties are already authorized to use this
data but only have access to it through a telephonic and paper audit process.
This proposed service would allow third-party payers to go online to authorize
coverage and reimbursement or simply to verify patient identity. Total eMed
anticipates this service will lead to significant efficiencies and cost savings
for its clients as well as for the third parties.
Third, Total eMed anticipates utilizing data mining technology, after
obtaining the appropriate physician and patient consent and in compliance with
law, to create aggregated anonymous retrospective reports. Total eMed believes
such reports will be of use to academic and government researchers, physician
groups, and pharmaceutical companies. Furthermore, its repository of outpatient
clinical data may be utilized to identify physicians to be included in clinical
trials and can be further accessed to capture clinical research data as trials
occur.
STRATEGY
Total eMed plans to expand its business through internal sales and by the
development of affiliate relationships with other transcription companies.
Internal growth is currently focused on outpatient clinics of at least 20
physicians. Total eMed has created a national sales force of six representatives
that targets such clinics and has hired regional directors of operations and
regional account representatives to oversee the sales process. It plans to hire
additional national account representatives in the current fiscal year. Account
representatives have established physician relationships and generally visit
10-15 medium sized clinics per month.
In order to accommodate the anticipated growth in services, Total eMed is
actively recruiting and hiring additional medical transcriptionists through an
internal recruiting department. At the end of 1999, this department had four
full time recruiters actively identifying and recruiting professional medical
transcriptionists. Unlike other medical transcription companies, Total eMed
directly employs medical transcriptionists rather than hiring them as
independent contractors and provides them with a comprehensive benefits package.
Furthermore, it provides, at no cost to the medical transcriptionist, an
Internet-ready computer.
Another part of Total eMed's strategy is to offer its service platform to
other transcription companies. Total eMed believes that up to 65% of the
outsourced transcription market is served by small, local transcription
companies. Many of these small companies lack the capital and expertise to
maintain state-of-the-art equipment in an increasingly technical market. Under a
Total eMed affiliate arrangement, a local transcription service would direct
physician dictation through Total eMed's data center while allowing the
affiliate's medical transcriptionists to perform the actual transcription.
Physicians served by affiliates would review and approve the medical record in
the same manner as
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other physicians who use Total eMed's services. Total eMed's compensation for
this arrangement would be a transmission charge to the affiliate on a per line
basis. In addition to generating revenue from the transmission charge, Total
eMed believes that such an arrangement would generate revenues through the
provision of other services, such as data management, available to the
physicians served by affiliates.
COMPETITION
Total eMed believes that the primary competitors in its target market of
physicians providing services in outpatient settings are a large number of local
or regional transcription companies. The market in this area is highly
fragmented, with hundreds of different companies providing transcription
services. Total eMed is aware of three publicly held companies, MedQuist,
e-Docs.net and Transcend Services, whose primary service is transcription.
However, each of these three companies provides services primarily for the
hospital, or inpatient, market. Other publicly held companies that provide
transcription services, such as IDX, appear to do so only as a part of their
larger businesses, and again focus primarily on the inpatient market. A number
of privately held companies (such as HealthScribe and Your Office Genie) provide
transcription services, although they, too, appear to focus primarily on the
inpatient market at this time. Any of these companies may in the future compete
directly with Total eMed.
LITIGATION
Total eMed is a defendant in a suit in the United States Federal Court,
Middle District of Tennessee, called MEDQUIST MRC INC. V. JOHN H. DAYANI AND
NETWORK HEALTH SERVICES, INC. Total eMed's former corporate name was Network
Health Services, Inc. The plaintiff alleges that Total eMed tortiously
interfered with plaintiff's prospective economic advantage by interfering with
the relationship between plaintiff and Dr. Dayani, the founder of Total eMed and
at that time a director of plaintiff. The plaintiff seeks all of Total eMed's
profits from its medical transcription business. Total eMed does not believe
that it interfered in any way with the plaintiff's economic relationships and it
intends to defend itself vigorously. See "The MedicaLogic/Total eMed Merger
Agreement--Escrows."
EMPLOYEES
As of January 31, 2000, Total eMed had 489 employees, including 404 medical
transcriptionists. Total eMed is not subject to any collective bargaining
agreements, and it believes that its relationship with employees is good.
FACILITIES
Total eMed leases approximately 4,155 square feet at our principal executive
offices at 5310 Virginia Way, Suite 250, Brentwood, Tennessee 37027. It also
leases approximately 6,000 square feet at its data center at 5259 Harding Place,
Nashville, Tennessee and office space in Albany, New York; Minot, North Dakota;
and in Memphis, Tennessee. Total eMed is in the process of building out a new
26,100 square foot headquarters and national data center in the Cool Springs
area in Franklin, Tennessee, south of Nashville. Total eMed plans to move into
the new facility on or about May 1, 2000.
MONEYPENNY MERGER CORP. AND AQ MERGER CORP.
Moneypenny Merger Corp. and AQ Merger Corp., wholly owned subsidiaries of
MedicaLogic, were formed by MedicaLogic solely for the purpose of effecting the
proposed mergers. Their mailing address is 20500 NW Evergreen Parkway,
Hillsboro, Oregon 97124, and their telephone number is (503) 531-7000.
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DIRECTORS AND EXECUTIVE OFFICERS OF MEDICALOGIC
Shown below are the names, ages and positions of the executive officers and
directors of MedicaLogic.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Mark K. Leavitt........................... 50 Chairman of the Board and Chief Executive
Officer
David C. Moffenbeier...................... 48 President, Secretary and Director
Frank J. Spina............................ 45 Senior Vice President and Chief Financial
Officer
Harvey J. Anderson........................ 36 Chief Operating Officer, General Manager
of Internet Operations
Thomas M. Watson.......................... 50 Senior Vice President, Worldwide Sales and
Professional Services
Bruce M. Fried............................ 49 Director
Ronald H. Kase............................ 41 Director
Neal Moszkowski........................... 34 Director
Mark A. Stevens........................... 39 Director
Ronald R. Taylor.......................... 52 Director
</TABLE>
MARK K. LEAVITT founded MedicaLogic in 1985 and has served as its chairman
of the board and chief executive officer since its inception. From
December 1997 to June 1998, Dr. Leavitt served as a director of Physician
Partners, Inc., a physician practice management company. From 1992 to 1996,
Dr. Leavitt served as a faculty member for St. Vincent Internal Medicine
Practice and concurrently served as medical director and regional information
systems director for Sisters of Providence Health System from 1992 to 1994.
Dr. Leavitt operated a private practice of internal medicine from 1982 to 1992.
Dr. Leavitt received a B.S. from the University of Arizona and an M.S. and a
Ph.D. in electronic engineering from Stanford University. Dr. Leavitt received
an M.D. from the University of Miami and served as a resident in internal
medicine at Oregon Health Sciences University from 1979 to 1982.
DAVID C. MOFFENBEIER is the president of MedicaLogic and served as chief
operating officer until February 2000 and as a director since 1994. From 1993 to
1994, Mr. Moffenbeier served as chairman of the board of directors of Summit
Design Inc., a supplier of software tools for integrated circuits. Previously,
Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and
software for electronic design automation, where he served as a director from
1981 to 1993 and as its chief financial officer from 1981 to 1984, its vice
president of international sales from 1985 to 1988 and its vice president of
worldwide sales from 1989 to 1993. He currently serves on the board of directors
of Providence Good Health Plan, a health care management organization, and North
Pacific Group, Inc., a wholesale distributor of commodities. Mr. Moffenbeier
received a B.A. from Wesleyan University and an M.B.A. from Harvard University.
Mr. Moffenbeier is a certified public accountant.
FRANK J. SPINA was hired by MedicaLogic to serve as its senior vice
president and chief financial officer starting in November 1999. From 1997 to
1999, Mr. Spina served as the chief financial officer for 3D Systems
Corporation, a provider of solid imaging systems. From 1994 to 1997, Mr. Spina
served as vice president and corporate controller of Qualcomm, Inc., a developer
and manufacturer of wireless communication equipment. From 1985 to 1994,
Mr. Spina served in a variety of positions with
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Motorola, Inc., including division controller and group operations controller.
Mr. Spina received his B.A. from Baldwin Wallace College and is a certified
public accountant.
HARVEY J. ANDERSON has served as chief operating officer, senior vice
president, general manager of Internet operations since March 1999. From 1996 to
1999, Mr. Anderson participated in numerous acquisitions and technology
transactions at Netscape Communications Corp., a provider of software, services
and web site resources for the Internet, where he served in various roles
including assistant general counsel. From 1993 to 1996, Mr. Anderson practiced
intellectual property law with McCutchen Doyle Brown & Enersen, LLP and Limbach
and Limbach, LLP, law firms in San Francisco, California. Before 1993, he served
as a network design engineer for Pacific Telesis, a telecommunications company.
Mr. Anderson received a B.S. from Marquette University and a J.D. from the
University of San Francisco School of Law.
THOMAS M. WATSON has served as senior vice president, worldwide sales and
professional services since March 1999. From 1997 to 1999, Mr. Watson served as
vice president, sales. From 1989 to 1997, Mr. Watson served as vice president of
sales at PHAMIS Inc., a leading provider of healthcare information systems
solutions. Mr. Watson received a B.A. from Drexel University.
BRUCE M. FRIED has been a director since 1998. Mr. Fried is a partner and
chair of the health law group at Shaw Pittman, an international law firm based
in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care
Financing Administration's director of the Center for Health Plans and
Providers, where he was responsible for policy development and execution and
operations for the Medicare program. From 1994 to 1995, Mr. Fried was vice
president of federal affairs at FHP International Corporation, then one of the
nation's largest managed care organizations. Mr. Fried received a B.A. and a
J.D. from the University of Florida.
RONALD H. KASE has been a director since July 1994. Mr. Kase joined New
Enterprise Associates, a venture capital investment firm in 1990 and has been a
general partner since May 1995. Mr. Kase serves on the boards of directors of
Data Critical Corporation, a wireless healthcare data products company, and
several privately held information technology and healthcare companies.
Mr. Kase received a B.S. from Purdue University and received an M.B.A. from the
University of Chicago.
NEAL MOSZKOWSKI has been a director since May 1999. Since 1998,
Mr. Moszkowski has served as a partner of Soros Private Equity Partners, LLC, a
private equity investment affiliate of Soros Fund Management, L.L.C. and
currently is an employee of Soros Private Fund Management LLC. Before Soros,
Mr. Moszkowski was an executive director in the principal investment area of
Goldman, Sachs International and a vice president of Goldman, Sachs & Co., which
he joined in 1993. Mr. Moszkowski serves on the board of directors of Integra
Life Sciences Holdings Corporation, a developer and marketer of medical
products, implants and biomaterials, Bluefly, Inc., an off-price apparel
Internet retailer, and several private companies. Mr. Moszkowski earned his B.A.
from Amherst College and an M.B.A. from Stanford University.
MARK A. STEVENS has been a director since 1994. Mr. Stevens joined Sequoia
Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on
the boards of directors of MP3.com, Inc., an online music Internet company,
NVidia Corp., a supplier of graphics processors and software and Terayon
Communication Systems, Inc., a cable modem system supplier, and several
privately held Internet and semiconductor companies. Mr. Stevens received a
B.S.E.E., a B.A. and an M.S. in computer engineering from the University of
Southern California and an M.B.A. from Harvard University.
RONALD R. TAYLOR has been a director since 1995. Since 1998, Mr. Taylor has
been a general partner of Enterprise Partners, a venture capital firm. In 1987,
Mr. Taylor founded Pyxis Corporation, a medical information systems company, and
served as its chairman and chief executive officer until it merged with Cardinal
Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson
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Pharmaceuticals, Inc., a pharmaceutical company, and Cavanaugh's Hospitality
Corporation, a leading owner of full service hotels in the Northwest. He
received a B.A. from the University of Saskatchewan and an M.A. from the
University of California at Irvine.
Executive officers serve at the discretion of the board of directors and
hold office until their successors have been elected and qualified. There are no
family relationships among any of the directors, officers or key employees of
MedicaLogic. Directors are elected at the annual shareholders meeting and hold
office until their successors are elected and qualified.
ADDITIONAL DIRECTORS AND EXECUTIVE OFFICERS
If the MedicaLogic/Medscape merger occurs, the following will become
directors and executive officers of MedicaLogic/Medscape, as indicated below:
<TABLE>
<CAPTION>
PROPOSED
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Paul T. Sheils............................ 45 Director and Vice Chairman of MedicaLogic/
Medscape and President of Medscape
George D. Lundberg, M.D................... 67 Editor-in-Chief
Esther Dyson.............................. 47 Director
Fredric G. Reynolds....................... 48 Director
</TABLE>
PAUL T. SHEILS. Prior to joining Medscape as president, chief executive
officer and director in February 1998, Mr. Sheils was vice president of Dow
Jones Interactive Publishing from 1994 to 1998 and was executive director from
1993 to 1994. Mr. Sheils was responsible for all of Dow Jones' corporate and
consumer online businesses including THE WALL STREET JOURNAL INTERACTIVE
EDITION, the largest subscription-based publication on the web, and Dow Jones
Interactive, an award-winning online business intelligence and research service.
Mr. Sheils holds a B.A. from Williams College and a J.D. from Fordham Law
School.
GEORGE D. LUNDBERG, M.D. Prior to joining Medscape as editor-in-chief in
February 1999, Dr. Lundberg served as editor of the JOURNAL OF THE AMERICAN
MEDICAL ASSOCIATION for 17 years. Dr. Lundberg also served as the
editor-in-chief of SCIENTIFIC INFORMATION AND MULTIMEDIA, a publication of the
American Medical Association, from 1982 until 1999. Dr. Lundberg holds an M.S.
degree from Baylor University and B.S. and M.D. degrees from the University of
Alabama. Dr. Lundberg holds honorary degrees from four U.S. universities.
ESTHER DYSON. Ms. Dyson has been the chairman of EDventure Holdings,
publisher of the newsletter RELEASE 1.0, since 1982. Ms. Dyson is the author of
RELEASE 2.0, an acclaimed book about cyberspace. Ms. Dyson joined the Medscape
board in June 1996. She is also interim chairman of the Internet Corporation for
Assigned Names and Numbers and is a director of three software companies--Accent
Software, Graphisoft and Scala Business Solutions. She also sits on the boards
of directors of Uproar.com, an online game company, and PRT Group, a systems
integrator. Ms. Dyson holds a B.A. from Harvard College.
FREDRIC G. REYNOLDS. Mr. Reynolds has been executive vice president and
chief financial officer of CBS Corporation since December 1997. Earlier,
Mr. Reynolds had served as executive vice president and chief financial officer
of Westinghouse Electric Corporation since February 1994 and, additionally, as
chief financial officer of CBS, Inc., since April 1996. Prior to joining
Westinghouse in 1994, Mr. Reynolds spent 13 years at PepsiCo Inc. in various
financial positions, including senior vice president and chief financial officer
for PepsiCo Foods International, PepsiCo's Frito-Lay unit, and chief financial
officer of several other units, including Kentucky Fried Chicken, Pepsi-Cola
International
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<PAGE>
and Pizza Hut. Mr. Reynolds joined the Medscape board in July 1999.
Mr. Reynolds holds a B.A. from the University of Miami.
If the MedicaLogic/Total eMed merger occurs, the following person will
become directors and executive officers of MedicaLogic, as indicated below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Richard D. Rehm, M.D...................... 54 Director and President of Total eMed
C. Martin Harris, M.D..................... 43 Director
</TABLE>
RICHARD D. REHM, M.D. Since April 1, 1999, Dr. Rehm has been a director and
the president and chief executive officer of Total eMed. From May 1, 1998 to
April 1, 1999, Dr. Rehm served as the chief operating officer of Total eMed.
From 1990 to 1997, Dr. Rehm served as chairman of the board of
OccuSystems, Inc., a company he founded in 1990. From 1978 to 1980, Dr. Rehm
served as program director and acting associate director of the Family Practice
Residency Program for Texas Tech Medical School. Dr. Rehm earned his B.A. and
B.S. from the University of North Dakota and an M.D. from the University of
Texas, Southwestern Medical School.
C. MARTIN HARRIS, M.D. Since July 1999, Dr. Harris has been a director of
Total eMed. Since 1996, Dr. Harris has served as a staff physician at the
Cleveland Clinic Hospital and at the Cleveland Clinic Foundation, as well as the
chief information officer and the chairman of the information technology
division for the Cleveland Clinic Foundation, all in Cleveland, Ohio. From 1987
to 1996, Dr. Harris served as attending physician for the Hospital of the
University of Pennsylvania and as an assistant professor of Medicine at the
University of Pennsylvania School of Medicine where he previously worked as an
instructor of clinical medicine. From 1990 to 1993, Dr. Harris served as the
associate vice-president of information systems and technology at the University
of Pennsylvania Medical Center. Dr. Harris currently serves as a member of the
boards of directors for Care Management Sciences Corporation and United Way
Services. Dr. Harris is a graduate of the University of Pennsylvania with a B.S.
He received his M.D. from the University of Pennsylvania School of Medicine and
received his M.B.A. from the Wharton School of the University of Pennsylvania.
MEDICALOGIC/MEDSCAPE EXECUTIVE COMPENSATION
The following table includes the total compensation paid or accrued, during
the fiscal years ended December 31, 1998 and 1999, for services rendered to
MedicaLogic in all capacities by its chief executive officer and its four other
most highly compensated executive officers whose salary and bonus exceeded
$100,000 in 1999 and were serving as executive officers at the end of 1999. The
table also includes similar information for persons who will become executive
officers of MedicaLogic/Medscape assuming the completion of the mergers
described elsewhere in this document. The individuals named in this table will
subsequently be referred to as the named executive officers.
74
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- LONG TERM COMPENSATION
--------------------------- ------------------------------
OTHER ANNUAL RESTRICTED SECURITIES
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING
POSITION YEAR SALARY($) BONUS ($) ($)(1)(2) AWARDS (#) OPTIONS
- ----------------------------- -------- --------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Leavitt, Chairman of
the Board and Chief
Executive Officer.......... 1999 210,000 100,000 -- 15,000(3) --
1998 208,333 -- -- 15,000(3) --
David C. Moffenbeier,
President.................. 1999 190,000 100,000 -- 15,000(3) --
1998 238,333 50,000 -- 15,000(3) --
Blackford Middleton, Vice
President, Clinical
Informatics................ 1999 160,000 15,000(4) 125,516 7,500(3) --
1998 158,333 15,000(5) 53,621 7,500(3)(6) --
Richard L. Samco, Vice
President and Chief
Technology Officer (7)..... 1999 185,711 -- -- 15,000(3) --
1998 183,333 -- -- 15,000(3) --
Thomas M. Watson, Senior Vice
President, Worldwide Sales
and Professional
Services................... 1999 150,000 107,574 -- 15,000(3)(11) --
1998 150,000 75,559(8) -- 15,000(3) --
Paul T. Sheils, President of
Medscape................... 1999 221,250 75,000 -- -- 104,975(9)
1998 171,750 85,000 -- -- 242,250(9)
Richard D. Rehm, MD,
President of Total eMed.... 1999 211,505 -- -- 100,775(10) 121,057(10)
1998 76,615 -- -- -- --
</TABLE>
- ------------------------
(1) Comprised of commission payments, unless otherwise noted.
(2) See "Long term incentive plans--awards" below.
(3) These shares had been subject to a right of repurchase by MedicaLogic that
has terminated.
(4) Includes $5,000 paid in 2000 for 1999 performance.
(5) Includes $5,000 paid in 1999 for 1998 performance.
(6) Does not include 12,500 shares of restricted stock issued to Mr. Middleton
on July 1, 1998 upon his surrender of 12,500 outstanding options to purchase
common stock. Of these 12,500 shares of restricted stock, 5,556 were not
subject to a right of repurchase, and 6.945 shares were subject to a right
of repurchase by MedicaLogic and are being released from the repurchase
option ratably over a period of 20 months beginning July 1, 1998.
(7) Mr. Samco is on a leave of absence from MedicaLogic.
(8) Includes $20,000 payment for 1997 performance.
75
<PAGE>
(9) Represents shares underlying options granted by Medscape, as converted into
shares of MedicaLogic/Medscape common stock as a result of the .323
conversion ratio in the MedicaLogic/ Medscape merger agreement.
(10) Represents shares underlying shares of restricted stock and options granted
by Total eMed, as converted into shares of MedicaLogic/Medscape common stock
as a result of the .8070438 conversion ratio in the MedicaLogic/Total eMed
merger agreement.
(11) Does not include 75,000 shares of restricted stock issued to Mr. Watson on
July 1, 1998 upon his surrender of 75,000 outstanding options to purchase
common stock. Of these 75,000 shares of restricted stock, 33,334 shares were
not subject to a right of repurchase, and 41,667 were subject to a right of
repurchase by MedicaLogic and have been released from the repurchase option
ratably over a period of 20 months beginning July 1, 1998.
76
<PAGE>
STOCK OPTION GRANTS
The following table contains information concerning the grants of stock
options to the named executive officers in 1999:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE APPRECIATION
FOR
INDIVIDUAL GRANTS(1) OPTION TERM (4)
------------------------------------------------------------------- --------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE OR
NAME AND PRINCIPAL OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
POSITION GRANTED FISCAL YEAR (2) ($/SH) GRANT DATE DATE 5% ($) 10% ($)
- ------------------ ---------- --------------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark K. Leavitt............ -- -- -- -- -- -- --
David C. Moffenbeier....... -- -- -- -- -- -- --
Blackford Middleton........ -- -- -- -- -- -- --
Richard L. Samco........... -- -- -- -- -- -- --
Thomas M. Watson........... -- -- -- -- -- -- --
Paul T. Sheils(3).......... 80,750 7.5% $ 3.096 02/24/1999 02/24/2009 157,223 398,435
24,225 2.3% $30.186 12/16/1999 12/16/2009 459,879 1,165,424
Richard D. Rehm............ 121,057 22% $ 6.431 12/01/1999 12/01/2009 489,606 1,240,757
</TABLE>
- --------------------------
(1) Mr. Sheils' options were granted by Medscape in 1999 and have been adjusted
to reflect the conversion ratio in the MedicaLogic/Medscape merger
agreement. Dr. Rehm's options were granted by Total eMed in 1999 and have
been converted to reflect the conversion ratio in the MedicaLogic/Total eMed
merger agreement.
(2) The percentages in the table above with respect to Mr. Sheils are based on
options to purchase an aggregate of 3,322,287 shares of Medscape common
stock granted by Medscape under its stock option plan in 1999 to employees,
consultants and directors. With respect to Dr. Rehm, the percentage is based
upon options to purchase an aggregate of 681,880 shares of Total eMed common
stock granted by Total eMed in 1999 to employees.
(3) One-third of Mr. Sheils' options vested on the first anniversary of his
employment. The balance of Mr. Sheils' options become exercisable in equal
monthly installments until the third anniversary of his employment. See
"Employment contracts and change in control arrangements" below. Dr. Rehm's
options are fully vested and immediately exercisable.
(4) Potential realizable values are net of exercise price before taxes, and are
based on the assumption that MedicaLogic/Medscape's common stock appreciates
at the annual rate shown, compounded annually, from the date of grant until
the expiration of the ten-year term. These numbers are calculated based on
the requirements of the Securities and Exchange Commission and do not
reflect MedicaLogic/ Medscape's estimate of future stock price growth.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to exercised options
during 1999 and unexercised options held by the named executive officers as of
the end of 1999.
77
<PAGE>
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR END FISCAL YEAR END ($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Leavitt................ -- -- -- -- -- --
David C. Moffenbeier........... -- -- -- -- -- --
Blackford Middleton............ -- -- -- -- -- --
Richard L. Samco............... -- -- -- -- -- --
Paul T. Sheils(1).............. -- -- 148,041 174,958 $3,108,861 $3,674,118
Richard D. Rehm (3)............ -- -- 121,057 -- 1,763,694 --
</TABLE>
- ------------------------
(1) Represents shares underlying options granted by Medscape, as converted into
shares of MedicaLogic/Medscape common stock as a result of the .323
conversion ratio in the MedicaLogic/ Medscape merger agreement.
(2) Based on a market price of $21.00 per share, which was the closing selling
price of MedicaLogic's common stock on the last day of 1999, less the
exercise price payable per share.
(3) Represents shares underlying options granted by Total eMed, as converted
into shares of MedicaLogic/Medscape common stock as a result of the .8070438
conversion ratio in the MedicaLogic/Total eMed merger agreement.
LONG TERM INCENTIVE AWARDS
The following table sets forth information with respect to a long-time
incentive awards to the named executive officers in 1999.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER
PERIOD UNTIL MATURATION
NUMBER OF SHARES (#) OR PAYOUT (1)
-------------------- -----------------------
<S> <C> <C>
Mark K. Leavitt....................................... 15,000 12/31/99
David C. Moffenbeier.................................. 15,000 12/31/99
Blackford Middleton................................... 7,500 12/31/99
Richard L. Samco...................................... 15,000 12/31/99
Thomas M. Watson...................................... 15,000 12/31/99
Paul T. Sheils........................................ -- --
Richard D. Rehm....................................... -- --
</TABLE>
- ------------------------
(1) Shares of restricted stock were subject to MedicaLogic's right of repurchase
if specific performance criteria were not met. All of the performance
criteria were met on or before December 31, 1999 and the shares were
released from the repurchase option. As of December 31, 1999, the named
executive officers beneficially owned 300,750 shares of restricted stock
with an aggregate value of $6,315,750.
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<PAGE>
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
AGREEMENT WITH PAUL T. SHEILS. Under a three-year employment agreement
dated January 26, 1998, Paul T. Sheils became President and Chief Executive
Officer of Medscape on February 16, 1998 at an initial base salary of $195,000.
Mr. Sheils' base salary was increased to $225,000 effective February 16, 1999.
The employment agreement included a $35,000 signing bonus, a 1998 performance
bonus of up to $52,500 based on reaching performance targets, and 1999 and 2000
performance bonuses, the target amounts of which cannot be less than $35,000 per
year and are based on meeting performance targets developed by Medscape's
compensation committee.
The employment agreement also granted Mr. Sheils incentive stock options to
purchase 750,000 shares of Medscape's common stock at $0.172 per share. These
incentive stock options are subject to the provisions of Medscape's stock option
plan and an incentive stock option agreement between Mr. Sheils and Medscape.
One-third of Mr. Sheils' incentive stock options vested on the first anniversary
of his employment and the remaining incentive stock options will vest after that
date in equal monthly installments until the third anniversary of Mr. Sheils'
employment. Regardless of these vesting provisions, the incentive stock options
are 100% exercisable on the date of a "corporate change," which is defined in
the stock option plan.
On February 16, 1999, Mr. Sheils was granted options to purchase an
additional 250,000 shares of Medscape common stock at an exercise price of $1.00
per share and, on December 16, 1999, Mr. Sheils was granted options to purchase
an additional 75,000 shares of Medscape common stock at $9.75 per share.
If Mr. Sheils' employment is terminated for any reason other than his death,
disability or serious misconduct, he may exercise any vested incentive stock
options within 90 days of his termination. However, the incentive stock options
are forfeited if Mr. Sheils is terminated for serious misconduct. Also, if
Mr. Sheils' employment is terminated because of his death or disability,
Mr. Sheils or his estate may exercise any vested incentive stock options within
one year after termination.
Under his employment agreement, Mr. Sheils agreed not to compete with
Medscape and not to solicit its customers or employees for one year after the
termination of his employment, with limited exceptions. However, if he is
terminated without cause, the noncompetition and nonsolicitation restrictions
are limited to six months and the noncompetition restrictions will apply only to
his employment by certain healthcare-oriented web sites. Mr. Sheils is also
entitled to six months' salary if he is terminated without cause, and may
himself terminate the employment agreement for any reason upon 60 days' notice.
In accordance with the terms of the employment agreement, Mr. Sheils was also
elected as a director of Medscape.
AGREEMENT WITH RICHARD D. REHM. Under a two-year employment agreement dated
April 1, 1999, Richard D. Rehm became President and Chief Executive Officer of
Total eMed at an initial base salary of $250,000.
The employment agreement also granted Dr. Rehm 52,780 shares of restricted
Total eMed common stock and, on March 31, 1999, an additional 72,089 shares of
restricted total eMed common stock. The restricted shares are subject to a right
of first refusal of Total eMed to buy the shares from Dr. Rehm upon Dr. Rehm's
receiving a bona fide offer to sell the shares.
On December 1, 1999, Dr. Rehm was granted options to purchase 150,000 shares
of Total eMed common stock at an exercise price of $5.19 per share, all of which
immediately vested.
The employment agreement allows either party to terminate without "cause" by
giving the other party 90 days written notice. In such event, Total eMed has the
option to purchase any Total eMed stock held by Dr. Rehm for its fair market
value, except that if Dr. Rehm terminates his employment, Total eMed may only
repurchase such shares within 90 days after termination. "Cause" is defined as
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<PAGE>
(a) embezzlement, theft, larceny, material fraud or other acts of dishonesty;
(b) material breach of the agreement; (c) conviction of a felony; (d) moral
turpitude; or (e) failure to perform duties.
Under his employment agreement, Dr. Rehm agreed not to solicit Total eMed's
employees and compete with Total eMed for a period of one year following his
termination.
DIRECTOR COMPENSATION
Generally, directors do not receive any cash compensation from MedicaLogic
for their service as members of the board of directors, but directors are
reimbursed for expenses incurred in connection with their attendance at board
and committee meetings. Under MedicaLogic's stock incentive plan, non-employee
directors are granted a one-time option to purchase 30,000 shares of
MedicaLogic's common stock upon initial election to the board. In addition,
MedicaLogic has entered into an arrangement under which it pays Enterprise
Partners, of which Ronald R. Taylor serves as a general partner, $2,000 for each
directors meeting attended by Mr. Taylor. Directors' fees totaling $4,000 have
been paid to Enterprise Partners for Mr. Taylor's attendance at board meetings.
MedicaLogic carries an insurance policy for the protection of its officers and
directors against any liability asserted against them in their official
capacities.
INFORMATION ON THE BOARD OF DIRECTORS AND ITS COMMITTEES
The board of directors has an audit committee and a compensation committee.
The audit committee reviews and makes recommendations to the board of
directors concerning MedicaLogic's internal accounting procedures, reviews and
consults with its independent accountants on the accounting principles and
auditing practices used for its financial statements and makes recommendations
to the board of directors concerning the engagement of independent accountants
and the scope of the audit to be undertaken by the accountants. The current
members of the audit committee are Bruce M. Fried, Neal Moszkowski and
Ronald R. Taylor.
The compensation committee reviews and makes recommendations to the board of
directors concerning the policies, practices and procedures relating to the
compensation and benefits of MedicaLogic's officers and managerial employees.
The compensation committee advises and consults with its officers about
personnel policies. The current members of the compensation committee are
Ronald H. Kase and Mark A. Stevens.
The board of directors held 11 meetings during 1999. The audit committee
held one meeting, and the compensation committee held one meeting. Each current
director attended, in person or by teleconference, at least 75 percent of the
aggregate of (i) the total number of meetings of the board, and (ii) the number
of meetings held by all the committees of the board on which he served.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No member
of the board of directors or the compensation committee serves as a member of
the board of directors or compensation committee of any entity that has one or
more directors serving as an executive officer of MedicaLogic.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1999, there has not been nor is there currently proposed
any transaction or series of similar transactions to which MedicaLogic or any of
its subsidiaries was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer, holder of more than five
percent of the common stock of MedicaLogic or any member of the immediate family
of any of the foregoing persons had or will have a direct or indirect material
interest other than
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<PAGE>
(1) compensation agreements and other arrangements, which are described where
required in "Executive Compensation" and (2) the transactions described below.
MedicaLogic has accepted promissory notes from the following persons in the
amounts listed below as consideration for restricted stock issued to them:
<TABLE>
<CAPTION>
PRINCIPAL NAME AMOUNT OF NOTE DATE OF NOTE
- -------------- -------------- -----------------
<S> <C> <C>
Harvey J. Anderson......................................... $ 385,000 March 31, 1999
Harvey J. Anderson......................................... 66,000 March 31, 1999
Harvey J. Anderson......................................... 750,000 November 18, 1999
Mark K. Leavitt............................................ 60,000 July 1, 1998
Mark K. Leavitt............................................ 66,000 March 31, 1999
Blackford F. Middleton..................................... 159,000 August 11, 1995
Blackford F. Middleton..................................... 50,000 July 1, 1998
Blackford F. Middleton..................................... 30,000 July 1, 1998
Blackford F. Middleton..................................... 33,000 March 31, 1999
David C. Moffenbeier....................................... 60,000 July 1, 1998
David C. Moffenbeier....................................... 66,000 March 31, 1999
Richard L. Samco........................................... 60,000 July 1, 1998
Richard L. Samco........................................... 66,000 March 31, 1999
Frank J. Spina............................................. 1,187,500 October 20, 1999
Thomas M. Watson........................................... 300,000 July 1, 1998
Thomas M. Watson........................................... 60,000 July 1, 1998
Thomas M. Watson........................................... 66,000 March 31, 1999
</TABLE>
All of the above non-negotiable promissory notes accrue interest at an
annual rate of 6% on the unpaid principal balance from the date of the note
until the principal balance is paid in full. Interest is payable quarterly in
arrears. The notes are payable in full 10 years from the date of the loan and
each note can be prepaid without penalty.
MedicaLogic loaned Harvey J. Anderson $103,800 to pay for relocation
expenses in the form of an unsecured promissory note. The promissory note
accrued interest at an annual rate of 6% on the unpaid principal balance from
the date of the note until the principal was paid in full. In September 1999,
MedicaLogic entered into a separate agreement with Mr. Anderson in consideration
of Mr. Anderson relocating to San Francisco, California. MedicaLogic agreed to
reimburse Mr. Anderson $7,930 for improvements to his Portland, Oregon residence
and any shortfall between the sales price on his Portland, Oregon residence and
the original purchase price of $520,000 paid by Mr. Anderson and any transaction
costs not covered by the sales price of this residence, unless the sales price
was greater than the purchase price. MedicaLogic also agreed to forgive the
interest accrued on the unsecured promissory note referred to above, which was
repaid from the proceeds of the sale of the Portland, Oregon residence and to
pay the mortgage payment on Mr. Anderson's residence in Portland, Oregon until
it was sold. In aggregate, MedicaLogic made payments totaling $65,595 on behalf
of Mr. Anderson with respect to his relocation expenses.
In August 1998, MedicaLogic entered into stock purchase agreements with
Enterprise Partners IV Associates, L.P. and Enterprise Partners IV, L.P. for the
issuance of an aggregate of 175,000 shares of its common stock at a price of
$4.00 per share. MedicaLogic also granted an option to purchase 8,000 shares of
its common stock at a price of $4.00 per share to Enterprise Partners IV
Associates, L.P. and granted an option to purchase 92,000 shares of common stock
to Enterprise Partners IV, L.P. The options were exercised on April 14, 1999.
Directors Ronald R. Taylor and Ronald H. Kase are affiliated with the Enterprise
funds.
In connection with MedicaLogic's series J preferred stock financing, it sold
an aggregate of 1,052,632 shares of series J preferred stock in May 1999 to
Sequoia Capital Franchise Fund and
81
<PAGE>
Sequoia Capital Franchise Partners, both of which are affiliates of Mark A.
Stevens, a director of MedicaLogic.
Bruce M. Fried, a member of our board of directors, is a partner in a law
firm retained by MedicaLogic to provide legal counsel about regulatory and
intellectual property issues.
Upon the closing of MedicaLogic's initial public offering in December 1999,
each share of its preferred stock converted into .5 shares of common stock.
82
<PAGE>
PRINCIPAL SHAREHOLDERS OF MEDICALOGIC
The following table presents the beneficial ownership of MedicaLogic common
stock and the ownership percentage as of February 29, 2000 by:
- each person known by MedicaLogic to be the beneficial owner of more than
five percent of the outstanding shares of its common stock;
- each director and named executive officer; and
- all directors and officers as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.
Unless indicated otherwise below, the address for each listed director and
officer is MedicaLogic, Inc., 20500 NW Evergreen Parkway, Hillsboro, Oregon
97124. Except as indicated by footnote, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares of
common stock underlying options held by that person that are exercisable within
60 days of February 29, 2000 but excludes shares of common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
32,418,978 shares of common stock outstanding as of February 29, 2000.
83
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS BENEFICIALLY OWNED CLASS
- ---------------- ------------------ -------------
<S> <C> <C>
ENTITIES ASSOCIATED WITH SEQUOIA FUNDS...................... 2,803,847(1) 8.6%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
NEW ENTERPRISE ASSOCIATES................................... 2,353,596 7.3%
2490 Sand Hill Road
Menlo Park, CA 94025
CONTINENTAL CASUALTY COMPANY................................ 2,000,000 6.2%
CNA Insurance
CNA Plaza
Chicago, IL 60685
QUANTUM INDUSTRIAL PARTNERS LDC............................. 1,568,421 4.8%
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
SFM DOMESTIC INVESTMENT LLC................................. 1,568,421 4.8%
c/o Soros Fund Management LLC
888 Seventh Avenue
New York, NY 10016
MARK A. STEVENS............................................. 2,836,847(2) 8.7%
3000 Sand Hill Rd.,
Bldg. 4, Ste. 280
Menlo Park, CA 94025
RONALD H. KASE.............................................. 2,383,596(3) 7.3%
2490 Sand Hill Road
Menlo Park, CA 94025
MARK K. LEAVITT............................................. 1,267,501(4) 3.9%
RICHARD L. SAMCO............................................ 970,305(5) 3.0%
DAVID C. MOFFENBEIER........................................ 648,952(6) 2.0%
RONALD R. TAYLOR............................................ 558,928(7) 1.7%
Enterprise Partners
7979 Ivanhoe Ave., Ste. 550
La Jolla, CA 92037
BLACKFORD F. MIDDLETON...................................... 105,750(8) *
THOMAS M. WATSON............................................ 105,000 *
BRUCE M. FRIED.............................................. 16,566(9) *
2300 N. Street, NW
Washington, DC 20037
NEAL MOSZKOWSKI............................................. 13,750(10) *
888 Seventh Avenue
Suite 3300
New York, NY 10106
All executive officers and directors as a group (10 8,148,015(11) 25.1%
persons)..................................................
</TABLE>
- ------------------------
* Less than one percent
84
<PAGE>
(1) Includes shares held of record by the following funds:
<TABLE>
<CAPTION>
NUMBER OF SHARES
FUND HELD OF RECORD
- ---- ----------------
<S> <C>
Sequoia Capital Growth Fund................................. 1,726,745
Sequoia Capital VI.......................................... 400,914
Sequoia 1995................................................ 17,624
Sequoia Technology Partners VI.............................. 22,028
Sequoia Technology Partners III............................. 110,219
Sequoia Capital Franchise Fund.............................. 447,369
Sequoia Capital Franchise Partners.......................... 78,948
</TABLE>
(2) Includes 2,803,847 shares of common stock held of record by entities
associated with Sequoia funds, of which Mr. Stevens disclaims beneficial
ownership, except to the extent of his pecuniary interest. See note (1).
Mr. Stevens's relationships to entities associated with Sequoia are
described in the following table:
<TABLE>
<CAPTION>
RELATIONSHIP NAME OF SEQUOIA ENTITY
- ------------ -------------------------------------------------
<S> <C>
General partner Sequoia Capital VI
Sequoia Technology Partners VI
Managing member Sequoia Capital Franchise Fund
Sequoia Capital Franchise Partners
Participates in voting Sequoia Capital Growth Fund
control of shares of Sequoia 1995
MedicaLogic held of Sequoia Technology Partners III
record by these
entities
</TABLE>
The share amount also includes 5,833 shares subject to an option held of record
by Mr. Stevens that is exercisable within 60 days of February 29, 2000.
(3) Includes securities held of record as described in the following table:
<TABLE>
<CAPTION>
HOLDER OF RECORD SECURITIES
- ---------------- -------------------------------------------------
<S> <C>
New Enterprise Associates 2,353,596 shares of common stock Option to
VI, LP Ronald H. Kase purchase 30,000 shares of common stock
</TABLE>
Mr. Kase disclaims beneficial ownership of the shares held of record by New
Enterprise Associates. The option held of record by Mr. Kase is exercisable
within 60 days of February 29, 2000.
(4) Includes shares held of record as described in the following table:
<TABLE>
<CAPTION>
HOLDER OF RECORD NUMBER OF SHARES
- ---------------- ----------------
<S> <C>
Amy Elizabeth Leavitt....................................... 5,000
Trust for Amy Elizabeth Leavitt............................. 85,000
</TABLE>
(5) Includes shares held of record as described in the following table:
<TABLE>
<CAPTION>
HOLDER OF RECORD NUMBER OF SHARES
- ---------------- ----------------
<S> <C>
Courtaney E. Samco.......................................... 6,053
Mark R. Samco............................................... 6,053
</TABLE>
(6) Includes 250,000 shares of common stock held of record by Elizabeth
Moffenbeier.
85
<PAGE>
(7) Includes securities held of record as described on the following table:
<TABLE>
<CAPTION>
HOLDER OF RECORD SECURITIES
- ---------------- -------------------------------------------------
<S> <C>
Entities associated with 475,000 shares of common stock
Enterprise Partners
Ronald R. Taylor Option to purchase 30,000 shares of common stock
Luke Rand Williams 4,000 shares of common stock
Leah Williams Barbieri 4,000 shares of common stock
Tiffany Marie Taylor 4,000 shares of common stock
</TABLE>
Mr. Taylor disclaims beneficial ownership of the shares held of record by
entities associated with Enterprise Partners, except to the extent of his
pecuniary interest. Of these shares, Mr. Taylor has the right to acquire
beneficial ownership of 27,778 at any time. The option held of record by
Mr. Taylor is exercisable within 60 days of February 29, 2000. Luke Rand
Williams, Leah Williams Barbieri and Tiffany Marie Taylor are Mr. Taylor's
children.
(8) Includes shares held of record as described in the following table:
<TABLE>
<CAPTION>
HOLDER OF RECORD NUMBER OF SHARES
- ---------------- ----------------
<S> <C>
Lillian S. Middleton........................................ 2,100
Julia E. Middleton Trust.................................... 2,100
</TABLE>
(9) Includes 11,666 shares subject to an option held of record by Mr. Fried that
is exercisable within 60 days of February 29, 2000.
(10) All of these shares are subject to options that are exercisable within
60 days of February 29, 2000. Mr. Moszkowski is an employee of Soros Private
Funds Management LLC, an affiliate of Quantum Industrial Partners LDC.
Mr. Moszkowski is also a non-managing member of SFM Domestic Investments
LLC. Mr. Moszkowski does not have voting or dispositive power over shares
held of record by Quantum Industrial Partners LDC or SFM Domestic
Investments LLC.
(11) Includes 100,624 shares subject to options that are exercisable within
60 days of February 29, 2000.
86
<PAGE>
PRINCIPAL STOCKHOLDERS OF MEDSCAPE
The following table shows information with respect to beneficial ownership
of Medscape's common stock, as of February 29, 1999, for:
- each person known by Medscape to beneficially own more than 5% of the
common stock;
- each director of Medscape;
- the chief executive officer and each of the four other most highly
compensated executive officers of Medscape for 1999; and
- all directors and executive officers of Medscape as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.
Unless indicated otherwise below, the address for each listed director and
officer is Medscape, Inc., 134 West 29th Street, New York, New York 10001-5399.
Except as indicated by footnote, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares of
common stock underlying options held by that person that are exercisable within
60 days of February 29, 2000, but excludes shares of common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
44,778,271 shares of Medscape common stock outstanding as of February 29, 2000.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
- ------------------------ ---------------- ------------
<S> <C> <C>
CBS Corporation............................................. 14,538,368.0 32.5%
Entities associated with Patricof & Co. Ventures, Inc.(1)... 3,506,062.5 7.8
Paul T. Sheils(2)........................................... 541,667.0 1.2
Jeffrey L. Drezner, M.D., Ph.D.(3).......................... 3,431,817.5 7.7
George Lundberg (4)......................................... 37,500.0 *
Steve Kalin (5)............................................. 89,167.0 *
Marc Butlein(6)............................................. 35,000.0 *
Esther Dyson(7)............................................. 72,262.5 *
Alan J. Patricof(8)......................................... 3,628,978.5 8.1
Carlo A. von Schroeter(9)................................... 1,781,485.0 4.0
Oakleigh Thorne(10)......................................... 1,778,252.5 4.0
Andrew Heyward.............................................. -- *
Fredric G. Reynolds......................................... -- *
All executive officers and directors as a group (15
persons)(11).............................................. 10,854,463.0 24.2%
</TABLE>
- ------------------------
* Less than one percent.
(1) Represents 665,825 shares held in record by APA Excelsior IV, L.P.,
117,502.5 shares held of record by Coutts & Co. Cayman Ltd. c/o APA
Excelsior IV/Offshore, L.P., 12,735 shares held of record by Patricof
Private Investment Club, L.P., 2,632,000 shares held of record by APA
Excelsior Fund and 78,000 shares held of record by Patricof & Co.
Ventures, Inc. APA Excelsior IV Partners, L.P. is the general partner of
Coutts & Co. Cayman Ltd., Patricof Private Investment Club, L.P. and APA
Excelsior IV, L.P. APA Excelsior IV Partners, L.P., has one general partner,
Patricof & Co. Managers, Inc. The sole shareholder of Patricof & Co.
Managers, Inc. is Alan Patricof. Mr. Patricof is also the General Partner of
APA Excelsior Fund and the Chairman of
87
<PAGE>
Patricof & Co. Ventures, Inc. Each of the above funds disclaims beneficial
ownership of any of the shares owned by any other above fund. The address
for Patricof & Co. Ventures, Inc. is c/o Alan J. Patricof, 445 Park Avenue,
New York, NY 10021.
(2) Includes 541,667 shares of common stock issuable upon the exercise of
options exercisable within 60 days of February 29, 2000.
(3) Includes 1,825,435 shares of restricted stock issued pursuant to the terms
of Dr. Drezner's employment agreement.
(4) Includes 37,500 shares of common stock issuable upon exercise of options
exercisable within 60 days of February 29, 2000.
(5) Includes 89,167 shares of common stock issuable upon exercise of options
exercisable within 60 days of February 29, 2000.
(6) Includes 35,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of February 29, 2000.
(7) Includes 7,500 shares of common stock issuable upon exercise of options
exercisable within 60 days of February 29, 2000.
(8) Represents 665,825 shares held in record by APA Excelsior IV, L.P.,
117,502.5 shares held of record by Coutts & Co. Cayman Ltd. c/o APA
Excelsior IV/Offshore, L.P., 12,735 shares held of record by Patricof
Private Investment Club, L.P., 2,632,000 shares held of record by APA
Excelsior Fund, 78,000 shares held of record by Patricof & Co.
Ventures, Inc. and 15,000 shares held of record by Mr. Patricof's sons. Also
includes 107,916 shares of common stock issuable upon exercise of options
exercisable within 60 days of February 29, 2000. Mr. Patricof disclaims
beneficial ownership to the shares held of record by his sons, and disclaims
beneficial ownership of the shares held of record by the above entities
except to the extent of his pecuniary interest. The address for all of the
above is c/o Alan J. Patricof, 445 Park Avenue, New York, NY 10021.
(9) Includes 639,932.5 shares held of record by Weston Presidio Capital II,
L.P., 1,015,980 shares held of record by Weston Presidio Capital III, L.P.
and 50,572.5 shares held of record by WPC Entrepreneur Fund, L.P., for both
of which Mr. von Schroeter is a general partner of the managing partner.
Mr. von Schroeter disclaims beneficial ownership of the shares held of
record by the above entities except to the extent of his pecuniary interest.
(10) Includes 30,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of February 29, 2000. Also includes 1,748,252.5
shares held of record by TBG Information Investors, LLC, for which
Mr. Thorne serves as a manager, Chairman and CEO. Mr. Thorne disclaims
beneficial ownership of the shares held of record by TBG Information
Investors, LLC except to the extent of his pecuniary interest.
(11) Includes 729,583 shares issuable upon the exercise of options exercisable
within 60 days of February 29, 2000.
88
<PAGE>
PRINCIPAL STOCKHOLDERS OF TOTAL EMED, INC.
The table below sets forth, as of February 29, 2000, the number and
percentage of outstanding shares of each class of Total eMed's voting stock
owned by all persons known to Total eMed to be holders of five percent or more
of such securities, by each director, by each of the executive officers of Total
eMed, and by all directors and executive officers of Total eMed as a group.
Unless indicated otherwise below, the address for each listed director and
officer is Total eMed, Inc., 5301 Virginia Way, Suite 250, Brentwood, Tennessee
37027. Except as indicated by footnote, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares of
common stock (i) into which shares of Total eMed's Series A and Series B
preferred stock held by that person are convertible and (ii) underlying options
held by that person that are exercisable within 60 days of February 29, 2000,
but excludes shares of common stock underlying preferred stock or options held
by any other person. Percentage of beneficial ownership is based on 2,797,790
shares of common stock outstanding as of February 29, 2000.
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------ ------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAMES AND ADDRESSES SHARES PERCENT SHARES(1) PERCENT SHARES(2) PERCENT
- ------------------- ---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
John H. Dayani.................... 1,487,480 53.2% -- -- -- --
Winfield C. Dunn.................. 178,505 6.4% -- -- -- --
Richard D. Rehm................... 699,795(4) 23.7% -- -- -- --
Kelly Gill........................ 35,000(5) 1.2% -- -- -- --
Ted S. MacDonald.................. 178,505 6.4% -- -- -- --
Joseph Jay Cannon................. 178,505 6.4% -- -- -- --
Ross M. Posner.................... 963,000(6) 25.6% 192,600(7) 44.3% -- --
257 East Main Street, Suite 300
Barrington, IL 60020
David Malm........................ 1,961,502(8) 41.2% -- -- 6,987(9) 49.9%
500 Boylston Street
Boston, MA 02116-3740
Scott D. Steele................... 1,961,502(11) 41.2% -- -- 6,987(12) 49.9%
320 Park Avenue, 28(th) Floor
New York, NY 10022
Pat Crecine....................... 50,000 1.8% -- -- -- --
Martin Harris..................... 255,190(14) 8.4% 51,038(15) 11.7% -- --
9500 Euclid Avenue
Cleveland, Ohio 44195
Ridge Capital Fund, L.P........... 963,000(6) 25.6% 192,600 44.3% -- --
257 East Main Street, Suite 300
Barrington, IL 60020
Estate of Thomas F. Frist, Sr..... 250,000(16) 8.2% 50,000 11.5% -- --
102 Woodmont Blvd., Suite 205
Nashville, TN 37205
Walker Healthcare Investments, 250,380(17) 8.2% 50,076 11.5% -- --
L.P...............................
6(th) and Tyler Street, Suite 1400
Amarillo, TX 79101
<CAPTION>
SERIES C
PREFERED STOCK
------------------------
NUMBER
OF
NAMES AND ADDRESSES SHARES(3) PERCENT
- ------------------- --------- --------
<S> <C> <C>
John H. Dayani.................... -- --
Winfield C. Dunn.................. -- --
Richard D. Rehm................... -- --
Kelly Gill........................ --
Ted S. MacDonald.................. -- --
Joseph Jay Cannon................. -- --
Ross M. Posner.................... -- --
257 East Main Street, Suite 300
Barrington, IL 60020
David Malm........................ 5,988(10) 49.9%
500 Boylston Street
Boston, MA 02116-3740
Scott D. Steele................... 5,988(13) 49.9%
320 Park Avenue, 28(th) Floor
New York, NY 10022
Pat Crecine....................... -- --
Martin Harris..................... -- --
9500 Euclid Avenue
Cleveland, Ohio 44195
Ridge Capital Fund, L.P........... -- --
257 East Main Street, Suite 300
Barrington, IL 60020
Estate of Thomas F. Frist, Sr..... -- --
102 Woodmont Blvd., Suite 205
Nashville, TN 37205
Walker Healthcare Investments, -- --
L.P...............................
6(th) and Tyler Street, Suite 1400
Amarillo, TX 79101
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------ ------------------------
NUMBER NUMBER NUMBER
OF OF OF
NAMES AND ADDRESSES SHARES PERCENT SHARES(1) PERCENT SHARES(2) PERCENT
- ------------------- ---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Cleveland Clinic Foundation....... 255,190(14) 8.4% 51,038 11.7% -- --
9500 Euclid Avenue
Cleveland, Ohio 44195
EF Private Equity Partners........ 1,961,502(11) 41.2% -- -- 6,987 49.9%
(Americas) LP
Electra Fleming, Inc.
320 Park Avenue, 28(th) Floor
New York, NY 10022
Halpern Denny Fund II, L.P........ 1,961,502(8) 41.2% -- -- 6,987 49.9%
500 Boylston Street
Boston, MA 02116-3740
All directors and officers as a 7,948,984(18) 97.8% 243,638(19) 56.0% 13,974(20) 99.8%
group.............................
(11 persons)
<CAPTION>
SERIES C
PREFERED STOCK
------------------------
NUMBER
OF
NAMES AND ADDRESSES SHARES(3) PERCENT
- ------------------- --------- --------
<S> <C> <C>
Cleveland Clinic Foundation....... -- --
9500 Euclid Avenue
Cleveland, Ohio 44195
EF Private Equity Partners........ 5,988 49.9%
(Americas) LP
Electra Fleming, Inc.
320 Park Avenue, 28(th) Floor
New York, NY 10022
Halpern Denny Fund II, L.P........ 5,988 49.9%
500 Boylston Street
Boston, MA 02116-3740
All directors and officers as a 11,976(21) 99.8%
group.............................
(11 persons)
</TABLE>
- ------------------------------
(1) Based on 435,000 shares of Series A preferred stock outstanding as of
February 29, 2000. Pursuant to the terms of the merger agreement all
shares of Series A preferred stock will be converted into shares of common
stock immediately prior to the effective time of the merger.
(2) Based on 14,000 shares of Series B preferred stock outstanding as of
February 29, 2000. Pursuant to the terms of the merger agreement all
shares of Series B preferred stock will be converted into shares of common
stock immediately prior to the effective time of the merger.
(3) Based on 12,000 shares of Series C preferred stock outstanding as of
February 29, 2000.
(4) Includes options to purchase 150,000 shares of common stock.
(5) Includes options to purchase 35,000 shares of common stock.
(6) Includes 963,000 shares of common stock receivable by Ridge Capital Fund,
L.P. upon conversion of 192,600 shares of Series A preferred stock.
Mr. Posner is a director of Total eMed and is a principal of Ridge Capital
Fund, L.P. Mr. Posner disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
(7) Includes 192,600 shares of Series A preferred stock owned by Ridge Capital
Fund, L.P., of which Mr. Posner is a principal. Mr. Posner disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(8) Includes 1,961,502 shares of common stock receivable by Halpern Denny Fund
II, L.P. upon conversion of 6,987 shares of Series B preferred stock.
Mr. Malm is a Director of Total eMed and is a principal of Halpern Denny
Fund II, L.P. Mr. Malm disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
(9) Includes 6,987 shares of Series B preferred stock owned by Halpern Denny
Fund II, L.P., of which Mr. Malm is a principal. Mr. Malm disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(10) Includes 5,988 shares of Series C preferred stock owned by Halpern Denny
Fund II, L.P., of which Mr. Malm is a principal. Mr. Malm disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(11) Includes 1,961,502 shares of common stock receivable by EF Private Equity
Partners (Americas) L.P. upon the conversion of 6,987 shares of Series B
preferred stock. Mr. Steele is a director of Total eMed and is a
principal of EF Private Equity Partners (Americas) L.P. Mr. Steele
disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest therein.
(12) Includes 6,987 shares of Series B preferred stock owned by EF Private
Equity Partners (Americas) L.P., of which Mr. Steele is a principal.
Mr. Steele disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(13) Includes 5,988 shares of Series C preferred stock owned by EF Private
Equity Partners (Americas) L.P., of which Mr. Steele is a principal.
Mr. Steele disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(14) Includes 255,190 shares of common stock receivable by the Cleveland
Clinic Foundation upon conversion of 51,038 shares of Series A preferred
stock. Dr. Harris is a Director of Total eMed and is the Chief
Information Officer of the Cleveland
90
<PAGE>
Clinic Foundation. Dr. Harris disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein.
(15) Includes 51,038 shares of Series A preferred stock owned by the Cleveland
Clinic Foundation, of which Dr. Harris is a principal. Dr. Harris
disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest therein.
(16) Includes 250,000 shares of common stock receivable by the Estate of
Thomas F. Frist, Sr. upon conversion of 50,000 shares of Series A
preferred stock.
(17) Includes 250,380 shares of common stock receivable by Walker Healthcare
Investments, L.P. upon conversion of 50,076 shares of Series A preferred
stock.
(18) Includes (i) options to purchase 185,000 shares of common stock
(ii) 1,218,190 shares of common stock receivable by Ridge Capital Fund,
L.P. and the Cleveland Clinic Foundation upon the conversion of 243,638
shares of Series A preferred stock, and (iii) 3,923,004 shares of common
stock receivable by EF Private Equity Partners (Americas) L.P. and
Halpern Denny Fund II, L.P upon the conversion of 13,974 shares of
Series B preferred stock.
(19) Includes 192,600 shares of Series A preferred stock owned by Ridge
Capital Fund, L.P. and 51,038 shares of Series A preferred stock owned by
the Cleveland Clinic Foundation.
(20) Includes 6,987 shares of Series B preferred stock owned by each of EF
Private Equity Partners (Americas) L.P. and Halpern Denny Fund II, L.P.
(21) Includes 5,988 shares of Series C preferred stock owned by each of EF
Private Equity Partners (Americas) L.P. and Halpern Denny Fund II, L.P.
91
<PAGE>
MEDICALOGIC SPECIAL MEETING
This document is being furnished to shareholders of MedicaLogic as part of
the solicitation of proxies by the MedicaLogic board of directors for use at a
special meeting of shareholders to be held on May 10, 2000 at 8:00 a.m. local
time, at the company's headquarters located at 20500 NW Evergreen Parkway,
Hillsboro, Oregon. This document and the enclosed form of proxy are first being
mailed to shareholders of MedicaLogic on or about April 6, 2000.
The purposes of the MedicaLogic special meeting are:
- to consider and vote on a proposal to approve the issuance of MedicaLogic
common stock under the MedicaLogic/Medscape merger agreement;
- to consider and vote on a proposal to approve the issuance of MedicaLogic
common stock under the MedicaLogic/Total eMed merger agreement;
- to consider and vote on a proposal to amend our 1999 restated articles of
incorporation to change our corporate name to
"MedicaLogic/Medscape, Inc." if the MedicaLogic/Medscape merger is
approved; and
- to transact other business related to that proposal that may properly come
before the MedicaLogic special meeting.
A form of proxy for use at the MedicaLogic special meeting accompanies each copy
of this document mailed to holders of MedicaLogic common stock.
The mergers are subject to a number of conditions, including the receipt of
required regulatory and shareholder approvals. See "Background of the
Mergers--Regulatory approvals."
As of February 21, 2000, directors and executive officers of MedicaLogic and
their affiliates beneficially owned approximately 8,145,723 shares of
MedicaLogic common stock, or approximately 25.1% of the shares of MedicaLogic
common stock outstanding on that date. Shareholders owning 34.9% of the
outstanding MedicaLogic common stock as of February 21, 2000 have agreed to vote
in favor of each of the mergers.
RECOMMENDATIONS OF THE MEDICALOGIC BOARD
The MedicaLogic board unanimously approved the merger agreements and the
amendment to the stock incentive plan. The MedicaLogic board believes the
transactions contemplated by the merger agreements are advisable and in the best
interests of the shareholders of MedicaLogic. Accordingly, the MedicaLogic board
unanimously recommends that MedicaLogic shareholders vote:
- FOR the issuance of MedicaLogic common stock in the MedicaLogic/Medscape
merger;
- FOR the issuance of MedicaLogic common stock in the MedicaLogic/Total eMed
merger; and
- FOR the amendment to the articles of incorporation.
In making the determination to approve the merger agreements, the MedicaLogic
board considered the opinions of Donaldson, Lufkin & Jenrette Securities
Corporation, MedicaLogic's financial advisor, that as of February 21, 2000 the
ratio to be applied in the exchange of common stock in the MedicaLogic/ Medscape
merger was fair from a financial point of view to MedicaLogic and that the ratio
to be applied in the exchange of common stock in the MedicaLogic/Total eMed
merger was fair from a financial point of view to MedicaLogic. See "Background
of the Mergers--Reasons of MedicaLogic for the mergers."
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SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
The MedicaLogic board has fixed the close of business on March 31, 2000 as
the record date to determine the shareholders entitled to receive notice of and
to vote at the MedicaLogic special meeting. Each holder of MedicaLogic common
stock on the MedicaLogic record date is entitled to one vote per share held on
all matters properly presented at the MedicaLogic special meeting. The presence,
in person or by proxy, of a majority of the outstanding shares of common stock
entitled to be voted at the MedicaLogic special meeting is necessary to
constitute a quorum for the transaction of business. The issuance of shares of
MedicaLogic common stock under the merger agreements and the amendment to the
articles of incorporation each requires the approval of a majority of votes cast
on the proposal, provided a quorum is present.
Proxies for shares of MedicaLogic common stock may be submitted by
completing and mailing the enclosed proxy card that accompanies this document.
To submit a proxy, holders of MedicaLogic common stock should complete, sign,
date and mail the proxy card in accordance with the instructions set forth on
the card.
If an executed proxy card is returned and the shareholder has explicitly
abstained from voting on any matter, the shares represented by the proxy will be
considered present at the MedicaLogic special meeting for purposes of
determining a quorum and will count as votes cast on the matter but will not
count as votes cast in favor of any proposal and, therefore, will have the same
effect as a vote against the proposal. Broker non-votes will be counted for
purposes of determining whether a quorum exists at the MedicaLogic special
meeting, but will not be considered to have been voted on any proposal.
If the enclosed proxy card is properly executed and returned to MedicaLogic
in time to be voted at the MedicaLogic special meeting, the shares represented
by it will be voted in accordance with the instructions marked on it. EXECUTED
PROXIES WITHOUT INSTRUCTIONS WILL BE VOTED "FOR" EACH OF THE MERGER PROPOSALS,
AND "FOR" THE AMENDMENT TO THE ARTICLES OF INCORPORATION. If any other business
is properly brought before the MedicaLogic special meeting, including:
- a motion to adjourn or postpone the meeting to another time or place for
the purpose of soliciting additional proxies in favor of the approval of
one or both of the merger proposals; or
- to permit the dissemination of information regarding material developments
relating to the merger proposals or otherwise germane to the MedicaLogic
special meeting,
one or more of the persons named in the proxy card will vote the shares
represented by the proxy upon these matters as determined in their discretion.
If the MedicaLogic special meeting is adjourned for any reason, the approval
of one or both of the merger proposals and the amendment of the articles of
incorporation may be considered and voted upon by shareholders at the subsequent
reconvened meeting. All proxies will be voted in the same manner as they would
have been voted at the original meeting, except for any proxies that have been
properly withdrawn or revoked.
A proxy may be revoked by:
- filing with the Secretary of MedicaLogic, at or before the vote at the
MedicaLogic special meeting, a written notice of revocation dated after
the date of the proxy;
- signing a later proxy relating to the same shares and delivering it to the
Secretary of MedicaLogic before the MedicaLogic special meeting; or
- attending the MedicaLogic special meeting and voting in person.
Attendance at the MedicaLogic special meeting, however, will not in and of
itself constitute a revocation of a proxy. All written notices of revocation and
other communications about revocation of
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MedicaLogic proxies should be addressed to MedicaLogic, 20500 NW Evergreen
Parkway, Hillsboro, Oregon 97124, Attention: David C. Moffenbeier, or hand
delivered to the Secretary at or before the taking of the vote at the
MedicaLogic special meeting.
The cost of soliciting proxies for the MedicaLogic special meeting will be
borne by MedicaLogic. The cost of preparing and mailing this document, however,
will be borne equally by MedicaLogic and Medscape. In addition to soliciting
proxies by mail, proxies may be solicited personally or by telephone, facsimile,
or other means of communications by directors, officers and employees of
MedicaLogic. These persons will not be specifically compensated for these
activities, but they may be reimbursed for reasonable out-of-pocket expenses in
connection with this solicitation. Arrangements also will be made with brokerage
firms and other custodians, nominees and fiduciaries to forward solicitation
materials to the beneficial owners of shares held of record by these persons.
MedicaLogic will reimburse these brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
with this solicitation.
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MEDSCAPE SPECIAL MEETING
This document is being furnished to stockholders of Medscape as part of the
solicitation of proxies by the Medscape board of directors for use at a special
meeting of stockholders to be held on May 15, 2000 at 9:30 a.m. local time, at
CBS Corporation, Studio 19, 19(th) Floor, 51 W. 52(nd) Street, New York, New
York 10019.
The purposes of the Medscape special meeting are:
- to consider and vote on the proposal to approve the MedicaLogic/Medscape
merger agreement; and
- to transact other business related to that proposal that may properly come
before the Medscape special meeting.
A form of proxy for use at the Medscape special meeting accompanies each copy of
this document mailed to holders of Medscape common stock.
RECOMMENDATION OF THE MEDSCAPE BOARD
The Medscape board unanimously approved and adopted the MedicaLogic/Medscape
merger agreement. The Medscape board believes the transactions contemplated by
the merger agreement are advisable and in the best interests of Medscape and its
stockholders. Accordingly, the Medscape board unanimously recommends Medscape
stockholders vote FOR approval and adoption of the MedicaLogic/Medscape merger
agreement. For a discussion of the factors the Medscape board considered in
making this recommendation, see "Background of the Mergers--Reasons of Medscape
for the MedicaLogic/Medscape merger."
RECORD DATE AND VOTE REQUIRED
The Medscape board has fixed the close of business on April 14, 2000 as the
record date to determine the stockholders entitled to receive notice of and to
vote at the Medscape special meeting. Each holder of Medscape common stock on
the Medscape record date is entitled to one vote per share held on all matters
properly presented at the Medscape special meeting. The presence, in person or
by proxy, of the holders of a majority of the outstanding shares of Medscape
common stock entitled to vote is necessary to constitute a quorum for the
transaction of business at the Medscape special meeting. Approval of the merger
agreement requires the affirmative vote of the holders of a majority of the
outstanding shares of Medscape common stock.
As of February 29, 2000, directors and executive officers of Medscape and
their affiliates owned approximately 10,854,463 shares of Medscape common stock,
or approximately 24.3% of its then outstanding common shares. These executive
officers and directors have indicated that they will vote for approval of the
MedicaLogic/Medscape merger agreement. In addition, stockholders owning a total
of 18,044,430 Medscape common shares as of February 21, 2000, or approximately
40.3% of Medscape's then outstanding common stock, including CBS Corporation and
Patricof & Co. Ventures, Inc. and affiliates of Patricof & Co. Ventures, Inc.,
have entered into voting agreements under which they have agreed to vote their
shares for the approval of the MedicaLogic/Medscape merger agreement.
VOTING OF PROXIES
Proxies for shares of Medscape common stock may be submitted by completing
and mailing the enclosed proxy card that accompanies this document. To submit a
proxy, holders of Medscape common stock should complete, sign, date and mail the
proxy card in accordance with the instructions set forth on the card.
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If an executed proxy card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by the proxy will be
considered present at the Medscape special meeting for purposes of determining a
quorum and will count as votes cast on the matter but will not count as votes
cast in favor of any proposal and, therefore, will have the same effect as a
vote against the proposal.
If the enclosed proxy card is properly executed and returned to Medscape in
time to be voted at the Medscape special meeting, the shares represented by it
will be voted in accordance with the instructions marked on it. EXECUTED PROXIES
WITHOUT INSTRUCTIONS WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE
MEDICALOGIC/MEDSCAPE MERGER AGREEMENT. Although the Medscape board knows of no
business to be presented at the special meeting other than that described in
this document, if any other business is so presented, including:
- a motion to adjourn or postpone the meeting to another time or place for
the purpose of soliciting additional proxies in favor of the approval and
adoption of the merger agreement; or
- to permit the dissemination of information regarding material developments
relating to the merger proposal or otherwise germane to the Medscape
special meeting,
one or more of the persons named in the proxy card will vote the shares
represented by the proxy upon these matters as determined in their discretion.
If the Medscape special meeting is adjourned for any reason, the approval
and adoption of the merger agreement may be considered and voted upon by
stockholders at the subsequent reconvened meeting. Assuming a new record date is
not required, all proxies will be voted in the same manner as they would have
been voted at the original meeting, except for any proxies that have been
properly withdrawn or revoked.
REVOKING PROXIES
A proxy may be revoked by:
- filing with the Secretary of Medscape, at or before the vote at the
Medscape special meeting, a written notice of revocation dated after the
date of the proxy;
- signing a later proxy relating to the same shares and delivering it to the
Secretary of Medscape before the Medscape special meeting; or
- attending the Medscape special meeting and voting in person.
Attendance at the Medscape special meeting, however, will not in and of itself
constitute a revocation of a proxy. All written notices of revocation and other
communications about revocation of Medscape proxies should be addressed to
Medscape, 134 West 29(th) Street, New York, New York 10001-5399, Attention: Mark
E. Boulding, or hand delivered to the Secretary at or before the taking of the
vote at the Medscape special meeting.
SOLICITATION OF PROXIES
The cost of soliciting proxies for the Medscape special meeting will be
borne by Medscape. The cost of preparing and mailing this document, however,
will be borne equally by Medscape and MedicaLogic. In addition to soliciting
proxies by mail, proxies may be solicited personally or by telephone, facsimile,
or other means of communications by directors, officers and employees of
Medscape. These persons will not be specifically compensated for these
activities, but they may be reimbursed for reasonable out-of-pocket expenses in
connection with this solicitation. Arrangements also will be made with brokerage
firms and other custodians, nominees and fiduciaries to forward solicitation
materials to the beneficial owners of shares held of record by these persons.
Medscape will
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reimburse these brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection with this
solicitation.
MEDSCAPE STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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TOTAL EMED SPECIAL MEETING
This document is being furnished to stockholders of Total eMed as part of
the solicitation of proxies by the Total eMed board of directors for use at a
special meeting of stockholders to be held on May 10, 2000 at 10:00 a.m. local
time, at Total eMed's headquarters, 5301 Virginia Way, Suite 250, Brentwood,
Tennessee 37027.
The purposes of the Total eMed special meeting are:
- to consider and vote on the proposal to approve the MedicaLogic/Total eMed
merger agreement;
- to transact other business related to that proposal that may properly come
before the Total eMed special meeting.
A form of proxy for use at the Total eMed special meeting accompanies each copy
of this document mailed to holders of Total eMed common stock.
RECOMMENDATION OF THE TOTAL EMED BOARD
The Total eMed board unanimously approved and adopted the MedicaLogic/Total
eMed merger agreement. The Total eMed board believes the transactions
contemplated by the merger agreement are advisable and in the best interests of
Total eMed and its stockholders. Accordingly, the Total eMed board unanimously
recommends Total eMed stockholders vote FOR approval and adoption of the
MedicaLogic/Total eMed merger agreement. For a discussion of the factors the
Total eMed board considered in making this recommendation, see "Background of
the Mergers--Reasons of Total eMed for the MedicaLogic/Total eMed merger."
RECORD DATE AND VOTE REQUIRED
The Total eMed board has fixed the close of business on April 5, 2000 as the
record date to determine the stockholders entitled to receive notice of and to
vote at the Total eMed special meeting. Each holder of Total eMed common stock
on the Total eMed record date is entitled to one vote per share held on all
matters properly presented at the Total eMed special meeting, and each holder of
Total eMed Series A and B preferred stock on the Total eMed record date is
entitled to one vote per share held on all matters properly presented at the
Total eMed special meeting. Each share of Series C preferred stock is entitled
to one vote on the merger proposal only. As of the close of business on the
Total eMed record date, the following shares of Total eMed capital stock were
outstanding:
- 2,797,790 shares of Total eMed common stock were outstanding and entitled
to vote, held by approximately nine holders of record;
- 2,176,000 shares of Total eMed Series A preferred stock (on an
as-converted-into-common-stock-basis) were outstanding and entitled to
vote, held by approximately 24 holders of record;
- 3,930,563 shares of Total eMed Series B preferred stock (on an
as-converted-into-common-stock basis) were outstanding and entitled to
vote, held by three holders of record;
- 12,000 shares of Total eMed Series C preferred stock were outstanding and
entitled to vote, held by three holders of record.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Total eMed capital stock entitled to vote and a majority
of the outstanding shares of each series of Total eMed preferred stock entitled
to vote is necessary to constitute a quorum for the transaction of business at
the Total eMed special meeting. Approval of the MedicaLogic/Total eMed merger
agreement requires the affirmative vote of the holders of a majority of the
total votes represented by the outstanding shares of Total eMed common stock and
Series A and Series B preferred stock, voting
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together as a single class, and a majority of Series B and Series C preferred
stock (each voting separately as a class) on the record date.
As of February 22, 2000, directors and executive officers of Total eMed and
their affiliates owned 2,544,285 shares of Total eMed common stock, 261,743
shares of Total eMed Series A preferred stock, 13,973,077 shares of Total eMed
Series B preferred stock, and 11,976.923 shares of Total eMed Series C preferred
stock (representing 91% of the outstanding Series B preferred stock, and 99.8%
of the outstanding Series C preferred stock). In addition, stockholders owning a
total of 2,265,780 shares of Total eMed common stock, 261,743 shares of Total
eMed Series A preferred stock, 13,973.077 shares of Total eMed Series B
preferred stock, and 11,976.923 shares of Total eMed Series C preferred stock
(representing 81% of the outstanding common stock, 60% of the outstanding
Series A preferred stock, 99.8% of the outstanding Series B preferred stock, and
99.8% of the outstanding Series C preferred stock) have entered into voting
agreements under which they have agreed to vote their shares for the approval of
the merger.
VOTING OF PROXIES
Proxies for shares of Total eMed common stock and Total eMed preferred stock
may be submitted by completing and mailing the enclosed proxy card that
accompanies this document. To submit a proxy, holders of Total eMed common stock
or Total eMed preferred stock should complete, sign, date and mail the proxy
card in accordance with the instructions set forth on the card.
If an executed proxy card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by the proxy will be
considered present at the Total eMed special meeting for purposes of determining
a quorum and will count as votes cast on the matter but will not count as votes
cast in favor of any proposal and, therefore, will have the same effect as a
vote against the proposal.
If the enclosed proxy card is properly executed and returned to Total eMed
in time to be voted at the Total eMed special meeting, the shares represented by
it will be voted in accordance with the instructions marked on it. EXECUTED
PROXIES WITHOUT INSTRUCTIONS WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT. Although the Total eMed board knows of no business to be
presented at the special meeting other than that described in this document, if
any other business is so presented, including:
- a motion to adjourn or postpone the meeting to another time or place for
the purpose of soliciting additional proxies in favor of the approval and
adoption of the merger agreement; or
- to permit the dissemination of information regarding material developments
relating to the merger proposal or otherwise germane to the Total eMed
special meeting;
one or more of the persons named in the proxy card will vote the shares
represented by the proxy upon these matters as determined in their discretion.
If the Total eMed special meeting is adjourned for any reason, the approval
and adoption of the merger agreement may be considered and voted upon by
stockholders at the subsequent reconvened meeting. Assuming a new record date is
not required, all proxies will be voted in the same manner as they would have
been voted at the original meeting, except for any proxies that have been
properly withdrawn or revoked.
REVOKING PROXIES
A proxy may be revoked by:
- filing with the Secretary of Total eMed, at or before the vote at the
Total eMed special meeting, a written notice of revocation dated after the
date of the proxy;
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- signing a later proxy relating to the same shares and delivering it to the
Secretary of Total eMed before the Total eMed special meeting; or
- attending the Total eMed special meeting and voting in person.
Attendance at the Total eMed special meeting, however, will not in and of itself
constitute a revocation of a proxy. All written notices of revocation and other
communications about revocation of Total eMed proxies should be addressed to
Total eMed, 5301 Virginia Way, Suite 250, Brentwood, Tennessee 37027, Attention:
Ted S. MacDonald, or hand delivered to the Secretary at or before the taking of
the vote at the Total eMed special meeting.
SOLICITATION OF PROXIES
The cost of soliciting proxies for the Total eMed special meeting will be
borne by Total eMed. The cost of preparing and mailing this document, however,
will be borne equally by MedicaLogic and Medscape. In addition to soliciting
proxies by mail, proxies may be solicited personally or by telephone, facsimile,
or other means of communications by directors, officers and employees of Total
eMed. These persons will not be specifically compensated for these activities,
but they may be reimbursed for reasonable out-of-pocket expenses in connection
with this solicitation. Arrangements also will be made with brokerage firms and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of shares held of record by these persons. Total eMed will
reimburse these brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection with this
solicitation.
TOTAL EMED STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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BACKGROUND OF THE MERGERS
MEDICALOGIC/MEDSCAPE MERGER
During 1999, MedicaLogic concluded that the development of healthcare
consumer and physician web sites would accelerate the adoption of its
Internet-based electronic medical records products. During the summer and fall
of 1999, MedicaLogic and Medscape discussed and began negotiating a potential
strategic relationship between the companies pursuant to which Medscape would
license its healthcare content to MedicaLogic and some areas of Medscape's web
sites would be co-branded with MedicaLogic and its products. On December 9,
1999, Mr. Cameron Lewis, the Vice President, Internet Marketing and e-Commerce
Strategies of MedicaLogic, and Dr. Jeffrey L. Drezner, the Executive Vice
President of Medscape, met at MedicaLogic's offices in San Francisco, California
to further review the terms of a potential strategic relationship that would
create a point-of-care channel for physicians. After that meeting,
representatives of MedicaLogic and Medscape continued to work on a potential
agreement setting forth the terms of such a strategic relationship.
On January 13, 2000, Mr. Lewis, Dr. Drezner, Mr. Mark E. Boulding,
Medscape's General Counsel and Vice President of Regulatory Affairs, and
Ms. MaryBeth Dougherty, Medscape's Director of Business Development, met in Las
Vegas, Nevada to discuss further this strategic relationship. During this
meeting, the participants began to explore the possibility of a more substantive
partnership or business combination between the companies. Mr. Paul Sheils, the
President and Chief Executive Officer of Medscape, and Mr. Steven R. Kalin,
Medscape's Chief Operating Officer and Chief Financial Officer, met the
following day to continue these discussions at MedicaLogic's office in San
Francisco, California with Dr. Mark K. Leavitt, MedicaLogic's Chairman and Chief
Executive Officer, Mr. David C. Moffenbeier, MedicaLogic's President,
Mr. Harvey J. Anderson, MedicaLogic's Chief Operating Officer and General
Manager of Internet Operations and Mr. Lewis.
On January 26, 2000, Dr. Leavitt and Mr. Moffenbeier met with Mr. Sheils,
Mr. Kalin and other members of Medscape's senior management at Medscape's
offices in New York, New York to discuss the merits of a merger between
MedicaLogic and Medscape. On January 28, 2000, MedicaLogic and Medscape signed a
Mutual Non-disclosure Agreement with respect to a possible merger.
On February 3, 2000, in MedicaLogic's offices in San Francisco, California,
Mr. Sheils made a presentation to the board of directors of MedicaLogic
regarding Medscape's business and the possible benefits of combining Medscape
with MedicaLogic. During that meeting and following Mr. Sheil's presentation,
the board of directors of MedicaLogic authorized its management to commence
negotiations of a merger of MedicaLogic and Medscape.
On February 9, 2000, in the offices of Medscape in New York, New York, the
board of directors of Medscape met to discuss MedicaLogic's business and the
possible benefits of combining Medscape with MedicaLogic. During that meeting,
the board of directors of Medscape authorized its management to commence
negotiations of a merger of MedicaLogic and Medscape.
On February 16, 2000, Medscape's board of directors held a special meeting
in the offices of Mr. Alan Patricof, Medscape's Chairman of the Board, in New
York, New York. At this meeting, Dr. Leavitt, Mr. Moffenbeier, Mr. Anderson and
Mr. Lewis made a presentation to the board of directors regarding a possible
business combination between MedicaLogic and Medscape. Mr. Sheils and other
members of Medscape's senior management team, as well as Medscape's financial
advisors, were present to discuss terms of the proposed business combination. At
this meeting, the parties agreed to an outline for a possible combination of the
two companies. It was agreed that a potential combination between MedicaLogic
and Medscape should be structured as a merger. The parties also discussed the
terms of a possible merger and the timing of and structure of due diligence
investigations by the respective companies and the preparation and negotiation
of definitive merger documents.
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On February 17 and 18, 2000, representatives of MedicaLogic, including
representatives of Stoel Rives, LLP, MedicaLogic's counsel, conducted a due
diligence investigation of Medscape at the New York, New York offices of
Patterson, Belknap, Webb & Tyler LLP, Medscape's counsel. Also on those days,
representatives of Medscape, including representatives of Patterson Belknap,
conducted a due diligence investigation of MedicaLogic at the Portland, Oregon
offices of Stoel Rives. Also on those days, Stoel Rives prepared drafts of the
definitive merger documents and distributed those drafts to Medscape and its
representatives.
On February 17, 18 and 19, 2000, senior executives and selected management
teams of both companies conducted on-site business due diligence at Medscape's
offices in New York, New York, and at MedicaLogic's offices in Portland, Oregon
and San Francisco, California. On February 18 and 19, representatives of
Medscape conducted business due diligence at Total eMed's offices in Brentwood,
Tennessee.
On February 18, 2000, MedicaLogic's board of directors held a special
meeting to discuss the proposed business combination with Medscape. At this
meeting, MedicaLogic's senior management and financial and legal advisors
presented to the board the principal terms of the proposed combination with
Medscape that was under discussion and the status of business, financial and
legal due diligence of the transaction.
On February 18, 19, 20 and 21, 2000, senior executives of both companies and
their respective legal and financial advisors met in New York, New York to
continue due diligence and the process of negotiating the terms of the
transaction, including the MedicaLogic/Medscape merger agreement. In addition,
during this period representatives of MedicaLogic and Medscape negotiated with
CBS a voting agreement pursuant to which CBS would agree to vote its Medscape
shares in favor of the contemplated merger and MedicaLogic would afford CBS
preemptive rights to maintain its percentage ownership interest in
MedicaLogic/Medscape after the merger and the right to designate one director on
the MedicaLogic/Medscape board so long as CBS continued to own five percent of
the outstanding stock. In addition, during this period it was discussed that
Dr. Leavitt would become Chairman and Chief Executive Officer of
MedicaLogic/Medscape, Mr. Sheils would become Vice Chairman of
MedicaLogic/Medscape and President of the Medscape division of the combined
companies, and George D. Lundberg, M.D., would become Editor-in-Chief of
MedicaLogic/Medscape. See "The MedicaLogic/Medscape Merger Agreement--Agreement
with CBS."
On February 21, 2000, MedicaLogic's board of directors held a special
meeting at which the board reviewed with its senior management and financial and
legal advisors the results of the negotiations with Medscape. At this meeting,
representatives of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
MedicaLogic's financial advisor, presented DLJ's financial analysis of the
proposed transaction and expressed its opinion that the exchange ratio provided
for by the merger agreement was fair from a financial point of view to
MedicaLogic. MedicaLogic's board reviewed a draft of the merger agreement and
posed questions to representatives of Stoel Rives regarding the document and the
terms of the transaction. Following discussions, MedicaLogic's board approved
the merger, the merger agreement and related agreements, and the issuance of
shares to Medscape stockholders in the transaction. MedicaLogic's board
determined to recommend to the MedicaLogic shareholders its approval of the
issuance of shares in the MedicaLogic/Medscape merger.
At the Medscape board meeting held on the afternoon of February 21, 2000,
Medscape senior management, representatives of Patterson Belknap and
representatives of Lazard Freres & Co. LLC ("Lazard"), Medscape's financial
advisor, discussed the results of the negotiations with MedicaLogic and the
terms of the proposed merger agreement and the voting agreements. At this
meeting, representatives of Lazard presented an analysis of the financial terms
of the proposed merger and expressed their opinion that the exchange ratio was
fair to the holders of Medscape stock from a financial point of view. In
addition, the Medscape board of directors reviewed a draft of the merger
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agreement and representatives of Patterson Belknap answered questions from the
board of directors regarding the document. Following these presentations and
other discussions, the Medscape board approved by unanimous vote the terms of
the merger and the merger agreement substantially in the form presented.
MEDICALOGIC/TOTAL EMED MERGER
In July 1999, the board of directors of Total eMed reviewed that company's
development and prospects and determined that it should shift its focus from
growth through acquisition to growth through internal development. To pursue
this strategy, the Total eMed board determined that it would need to obtain
significant equity financing during the first quarter of 2000 or partner with
another business.
On November 22, 1999, Dr. John Dayani, the founder and Executive Chairman of
Total eMed, Dr. Richard Rehm, Total eMed's President and Chief Executive
Officer, and Mr. Ted S. MacDonald, the Chief Financial Officer of Total eMed,
met with Mr. Harvey J. Anderson, MedicaLogic's Chief Operating Officer and
General Manager of Internet Operations, and Mr. Cameron Lewis, the Vice
President, Internet Marketing and e-Commerce Strategies of MedicaLogic, to
discuss the possibility of establishing a relationship to co-market MedicaLogic
and Total eMed's products. During that meeting, the parties also discussed the
possible benefits that might result from a combination of the two companies'
businesses.
On December 6, 2000, Dr. Dayani, Dr. Rehm, Mr. Alex Poston, Total eMed's
Chief Information Officer, and Mr. Patrick Walker, the Vice President of New
Business for Total eMed, met with Mr. Anderson and Mr. Lewis, to learn more
about each other's company and business, and discussed the possibility of
merging the two companies.
On January 4, 2000, Total eMed engaged Credit Suisse First Boston to advise
it about analyzing and negotiating a possible merger with MedicaLogic and to
explore other alternatives for the company.
On January 19, 2000, Mr. David C. Moffenbeier, MedicaLogic's President,
Mr. Anderson and Mr. Guy E. Field, MedicaLogic's Vice President and Treasurer,
met in Nashville, Tennessee with Dr. Dayani, Dr. Rehm and other representatives
of Total eMed senior management to discuss terms of a possible business
combination between MedicaLogic and Medscape. At this meeting, the parties
agreed to an outline for a possible combination of the two companies.
On February 2, 2000, Dr. Dayani and Dr. Rehm, other representatives of Total
eMed senior management and representatives of Credit Suisse First Boston met in
San Francisco, California with Dr. Mark K. Leavitt, MedicaLogic's Chairman and
Chief Executive Officer, Mr. Moffenbeier, other representatives of Total eMed
senior management and representatives of DLJ, MedicaLogic's financial advisor,
to evaluate further each company's business and strategy and discuss the terms
of a possible merger and the timing and structure of the contemplated
transaction.
On February 3, 2000, in MedicaLogic's offices in San Francisco, California,
Drs. Dayani and Rehm made a presentation to the board of directors of
MedicaLogic regarding Total eMed's business and the possible benefits of
combining Total eMed with MedicaLogic. During that meeting and following this
presentation, the board of directors of MedicaLogic authorized its management to
commence negotiations of a merger of MedicaLogic and Total eMed. Later in the
day on February 3, 2000, Mr. Moffenbeier, Mr. Anderson, Dr. Dayani and Dr. Rehm
met for dinner to discuss further the terms of a possible business merger.
On February 8 and 9, 2000, representatives of Total eMed, including
representatives of Harwell Howard Hyne Gabbert & Manner, P.C., Total eMed's
counsel, and representatives of Credit Suisse First Boston, Total eMed's
financial advisor, conducted a due diligence investigation of MedicaLogic at the
Portland, Oregon offices of Stoel Rives. On February 9 and 10, 2000,
representatives of
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MedicaLogic, including representatives of Stoel Rives and representatives of
DLJ, conducted a due diligence investigation of Total eMed at the Nashville,
Tennessee offices of Harwell Howard Hyne Gabbert & Manner. Also on those days,
Stoel Rives prepared drafts of the definitive merger documents and distributed
those drafts to Total eMed and its representatives.
On February 15, 16 and 17, 2000, senior executives of both companies and
their respective legal and financial advisors met in Portland, Oregon to
negotiate and work to finalize the MedicaLogic/Total eMed merger agreement and
other documents evidencing the various arrangements.
On February 18, 2000, MedicaLogic's board of directors held a special
meeting to discuss the proposed business combination with Total eMed. At this
meeting, MedicaLogic's senior management and financial and legal advisors
presented to the board the principal terms of the proposed combination with
Total eMed that was under discussion and the status of business, financial and
legal due diligence of the transaction.
At the Total eMed board meeting held on the afternoon of February 20, 2000,
Total eMed senior management and representatives of Harwell Howard Hyne
Gabbert & Manner and Credit Suisse First Boston discussed the results of the
negotiations with MedicaLogic and the terms of the proposed merger agreement and
the voting agreements. In addition, the Total eMed board of directors reviewed a
draft of the merger agreement and a representative from Harwell Howard Hyne
Gabbert & Manner answered questions regarding the document from the board of
directors. Credit Suisse First Boston discussed the consideration to be received
by the Total eMed stockholders. Following these presentations and other
discussions, the Total eMed board approved by unanimous vote the terms of the
MedicaLogic/Total eMed merger and the merger agreement substantially in the form
presented, and determined to recommend to the Total eMed stockholders approval
of the merger.
On February 21, 2000, MedicaLogic's board of directors held a special
meeting of the board at which the board reviewed with its senior management and
financial and legal advisors the results of the negotiations with Total eMed. At
this meeting, representatives of DLJ presented DLJ's financial analysis of the
proposed transaction and expressed its opinion that the exchange ratio provided
for by the merger agreement was fair from a financial point of view to
MedicaLogic. MedicaLogic's board reviewed a draft of the merger agreement and
posed questions to representatives of Stoel Rives, regarding the document and
the terms of the transaction. Following discussions, MedicaLogic's board
approved the merger, the merger agreement, related agreements, and the issuance
of shares to Total eMed stockholders in the transaction. MedicaLogic's board
determined to recommend to the MedicaLogic shareholders their approval of the
issuance of shares in the MedicaLogic/Total eMed merger.
JOINT REASONS FOR THE MERGERS
MedicaLogic's, Medscape's and Total eMed's board of directors have
determined that the mergers are fair to and in the best interests of the
stockholders of their respective companies. While each of Medscape's and Total
eMed's boards of directors approved and recommended stockholder approval of only
its company's merger with MedicaLogic, in the course of their respective
deliberations the boards of all three companies identified potential mutual
benefits of the combination of the three companies, including the following:
- the combination of MedicaLogic's online health record products and
services, Total eMed's online web-enabled medical transcription services
and Medscape's physician and consumer web sites will enable
MedicaLogic/Medscape to move decisively toward its goal of offering a
comprehensive Internet Health Services Center that connects physicians,
patients and other healthcare stakeholders through the Internet;
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- the combination will broaden each company's offerings of Internet-based
healthcare products and services;
- the combination of three providers of online products and services for
physicians will enable MedicaLogic/Medscape to achieve increased
penetration of the physician market;
- the combination will allow the combined company to have diversified
revenue sources; and
- the merger will create a strong combined management team.
REASONS OF MEDICALOGIC FOR THE MERGERS
MEDSCAPE
At its meeting held February 21, 2000, the MedicaLogic board of directors
determined that the MedicaLogic/Medscape merger was in the best interests of
MedicaLogic and determined to recommend that the shareholders approve the
proposal relating to the merger. The decision of the board was based upon
several potential benefits of the merger, including the following, not
necessarily in order of relative significance:
- PRESENTATIONS TO THE BOARD. The board considered presentations made by
management at the February 21, 2000 meeting of the MedicaLogic board, and
the written opinion of DLJ to the effect that, as of February 21, 2000 and
based on and subject to the assumptions, limitations and qualifications
contained in DLJ's written opinion, the ratio to be applied in the
exchange of common stock in the MedicaLogic/Medscape merger was fair from
a financial point of view to MedicaLogic. This opinion was considered
together with the financial and other analyses presented to the
MedicaLogic board by DLJ. A description of the DLJ opinion and the
material financial analyses considered by DLJ in connection with its
opinion are set forth below under "--Opinions of MedicaLogic financial
advisor regarding the mergers."
- EXPANSION OF PHYSICIAN PRODUCT AND SERVICE OFFERINGS. MedicaLogic focuses
on tools to assist the physician in his or her clinical activities, as
opposed to administrative and business activities. On the physician's
desktop, one typically finds two distinct stacks of documents: patient
charts and medical journals. To date, MedicaLogic's physician-oriented
offerings have focused solely on applications that create and access the
online equivalent of the chart. The Medscape web site provides the online
equivalent of medical journals, as well as an array of other interactive
programs and services for physicians and other healthcare professionals.
Together, the MedicaLogic and Medscape offerings provide a single-vendor
solution for the physician's clinical information needs. In addition,
MedicaLogic intends to integrate these offerings to provide a high level
of clinical decision support, by delivering relevant clinical reference
material from the Medscape literature archive, precisely at the moment of
prescribing or order entry by the physician.
- ACCELERATION OF PHYSICIAN ADOPTION OF MEDICALOGIC OFFERINGS.While online
health record applications provide substantial benefits to the physician,
they require a certain degree of commitment and investment to adopt. In
contrast, the Medscape web site can be utilized simply by directing a web
browser to the appropriate URL, requiring practically no commitment or
time investment. MedicaLogic believes that the combined content of the
MedicaLogic and Medscape web sites will provide an array of offerings that
match the interest and commitment levels of a much broader range of
physician customers.
- EXPANSION OF CONSUMER HEALTHCARE OFFERING. MedicaLogic has developed a
consumer healthcare offering, 98point6.com, that allows consumers to
access their online health records, communicate with their physicians,
request medication refills, and perform other transactions related to
their healthcare. While this is a highly attractive offering to a
healthcare consumer, MedicaLogic has
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not had the resources or media relationships required to create and
promote its own editorial content for the consumer. Medscape has just
launched a major consumer healthcare site, CBSHealthWatch.com, and has a
major partnership with CBS under which Medscape will receive $150 million
in advertising over seven years. This offering is completely complementary
to the online health record access services developed by MedicaLogic, and
MedicaLogic believes that the combined offerings can compete successfully
with the other entities pursuing this market.
- EXTENSION OF PHYSICIAN MARKETING REACH. To date, MedicaLogic has marketed
and sold its online health record products and services to physicians
primarily through a direct sales force, participation at physician
conventions and limited advertising in physician journals and magazines.
Because MedicaLogic's newest online health record product can be
downloaded directly over the Internet, online marketing represents a
promising medium for promotion of the product and, therefore, MedicaLogic
has sought marketing partnerships with those web sites that have
substantial physician traffic. However, this goal has proven difficult to
achieve in some cases, as these web sites consider MedicaLogic to be a
potential competitor. The combination of MedicaLogic and Medscape is
expected to extend MedicaLogic's marketing reach to Medscape's 280,000
physician and 860,000 allied health professional members.
- EXPANSION OF STRATEGIC PARTNERSHIPS. A combination with Medscape would add
a number of strategic partnerships which are believed to be of
significance in increasing the ability of MedicaLogic to reach its target
markets. Medscape has partnerships in place with CBS, AOL and NDC.
- ACCELERATION OF REVENUE STREAMS. MedicaLogic's primary sources of revenues
are anticipated to be license and subscription fees for its online health
record applications. A combination with Medscape would be expected to
increase the average revenues from subscriptions in the near term and
contribute to the achievement of profitability for the combined company.
The foregoing discussion of the information and factors considered by the
MedicaLogic board is not intended to be exhaustive but is believed to include
all material factors considered by the board. In view of the complexity and wide
variety of information and factors, both positive and negative, considered by
the MedicaLogic board, it did not find it practical to quantify, rank or
otherwise assign relative or specific weights to the factors considered. In
addition, the MedicaLogic board did not reach any specific conclusion with
respect to each of the factors considered, or any aspect of any particular
factor, but, rather, conducted an overall analysis of the factors described
above, including discussions with MedicaLogic's management and legal, financial
and accounting advisors. In considering the factors described above, individual
members of the MedicaLogic board may have given different weight to different
factors. The MedicaLogic board considered all these factors as a whole and
believed the factors supported its determination to approve the merger. After
taking into consideration all of the factors set forth above, MedicaLogic's
board concluded that the MedicaLogic/Medscape merger was fair to, and in the
best interests, of MedicaLogic and that MedicaLogic should proceed with the
merger.
The MedicaLogic board of directors has unanimously approved the
MedicaLogic/Medscape merger agreement and has determined that the
MedicaLogic/Medscape merger is fair to, and in the best interest of, MedicaLogic
and its shareholders. THE MEDICALOGIC BOARD UNANIMOUSLY RECOMMENDS A VOTE IN
FAVOR OF ISSUANCE OF MEDICALOGIC COMMON STOCK IN THE MERGER.
TOTAL EMED
At its meeting held February 21, 2000, the MedicaLogic board of directors
determined that the MedicaLogic/Total eMed merger was in the best interests of
MedicaLogic and determined to
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recommend that the shareholders approve the proposal relating to the merger. The
decision of the board was based upon several potential benefits of the merger,
including the following, not necessarily in order of relative significance:
- PRESENTATIONS TO THE BOARD. The board considered presentations made by
management at the February 21, 2000 meeting of the MedicaLogic board, and
the written opinion of DLJ to the effect that as of February 21, 2000 and
based on and subject to the assumptions, limitations and qualifications
contained in DLJ's written opinion, the ratio to be applied in the
exchange of common stock in the MedicaLogic/Total eMed merger was fair
from a financial point of view to MedicaLogic. This opinion was considered
together with the financial and other analyses presented to the
MedicaLogic board. A description of the opinion and the material financial
analyses considered by DLJ in connection with its opinion are set forth
below under "--Opinions of MedicaLogic financial advisor regarding the
mergers."
- EXPANSION OF PHYSICIAN PRODUCT AND SERVICE OFFERINGS, AND ACCELERATION OF
PHYSICIAN ADOPTION. Total eMed provides web-enabled transcription service,
with voice capture by either telephone or handheld device, and return of
finished notes via the Internet. It is estimated that approximately
two-thirds of U.S. physicians currently use dictation and transcription to
create their notes. MedicaLogic believes that the addition of dictation as
an alternative input vehicle for the online health record will
significantly decrease the amount of physician behavioral change required
for the adoption of MedicaLogic's products and services. In addition,
MedicaLogic intends to offer a hybrid solution, in which physicians can
freely mix point-and-click entry with dictation, even within the same
note, choosing the tool that is most comfortable and efficient for each
element of documentation. MedicaLogic believes that the increased breadth
of input mechanisms will substantially accelerate physician adoption of
MedicaLogic's products and services.
- EXPANSION OF CUSTOMER BASE. Since beginning operations in November 1998,
Total eMed has approximately 1,000 physicians using its web-enabled
transcription services and has a much larger backlog of business awaiting
implementation. These customers include recognized and influential
practices that are expected to be valuable as reference sites for the
combined company's solutions.
- ACCELERATION OF REVENUE STREAMS. MedicaLogic's primary sources of revenues
are anticipated to be license and subscription fees for its online health
record applications. A combination with Total eMed would be expected to
increase the average revenues from subscriptions in the near term and
contribute to the achievement of profitability for the combined company.
The foregoing discussion of the information and factors considered by the
MedicaLogic board is not intended to be exhaustive but is believed to include
all material factors considered by the board. In view of the complexity and wide
variety of information and factors, both positive and negative, considered by
the MedicaLogic board, it did not find it practical to quantify, rank or
otherwise assign relative or specific weights to the factors considered. In
addition, the MedicaLogic board did not reach any specific conclusion with
respect to each of the factors considered, or any aspect of any particular
factor, but, rather, conducted an overall analysis of the factors described
above, including discussions with MedicaLogic's management and legal, financial
and accounting advisors. In considering the factors described above, individual
members of the MedicaLogic board may have given different weight to different
factors. The MedicaLogic board considered all these factors as a whole and
believed the factors supported its determination to approve the acquisition.
After taking into consideration all of the factors set forth above,
MedicaLogic's board concluded that the MedicaLogic/Total eMed merger was fair
to, and in the best interests, of MedicaLogic and that MedicaLogic should
proceed with the merger.
The MedicaLogic board of directors has unanimously approved the
MedicaLogic/Total eMed merger agreement and has determined that the
MedicaLogic/Total eMed merger is fair to, and in the
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best interest of, MedicaLogic and its shareholders. THE MEDICALOGIC BOARD
UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THE ISSUANCE OF MEDICALOGIC COMMON
STOCK IN THE MEDICALOGIC/TOTAL EMED MERGER.
OPINIONS OF MEDICALOGIC FINANCIAL ADVISOR REGARDING THE MERGERS
MEDICALOGIC/MEDSCAPE MERGER
The board of directors of MedicaLogic engaged DLJ to act as its financial
advisor in connection with the MedicaLogic/Medscape merger. On February 21,
2000, DLJ rendered an oral opinion to MedicaLogic's board of directors,
subsequently confirmed in writing as of the same date, to the effect that, as of
that date, and based upon and subject to the assumptions, limitations and
qualifications set forth in the written opinion, the ratio to be applied in the
exchange of common stock in the MedicaLogic/Medscape merger was fair, from a
financial point of view, to MedicaLogic.
THE FULL TEXT OF THIS DLJ OPINION IS INCLUDED AS APPENDIX C TO THIS JOINT
PROXY STATEMENT/ PROSPECTUS. MEDICALOGIC'S SHAREHOLDERS ARE URGED TO READ DLJ'S
OPINION CAREFULLY AND IN ITS ENTIRETY FOR THE PROCEDURES FOLLOWED, ASSUMPTIONS
MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN IN
ARRIVING AT SUCH OPINION. DLJ'S OPINION WAS PREPARED FOR AND ADDRESSED TO
MEDICALOGIC'S BOARD OF DIRECTORS AND ONLY ADDRESSES THE FAIRNESS TO MEDICALOGIC,
FROM A FINANCIAL POINT OF VIEW, OF THE CONVERSION RATIO AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY SHAREHOLDER OF MEDICALOGIC OR TO ANY STOCKHOLDER OF
MEDSCAPE AS TO HOW SUCH SHAREHOLDER OR STOCKHOLDER SHOULD VOTE AT THE
MEDICALOGIC SPECIAL MEETING OR AT THE MEDSCAPE SPECIAL MEETING, RESPECTIVELY.
MedicaLogic selected DLJ to render an opinion in connection with the merger
based upon DLJ's qualifications, expertise and reputation, including the fact
that DLJ, as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
DLJ was not retained as an advisor or agent to MedicaLogic's shareholders or
any person other than MedicaLogic. DLJ's opinion does not constitute an opinion
as to the price at which MedicaLogic's common stock and Medscape's common stock
will actually trade at any time. The conversion ratio was determined through
negotiations between MedicaLogic and Medscape. MedicaLogic did not impose any
restrictions or limitations upon DLJ regarding the investigations made or the
procedures followed by DLJ in rendering its opinion. In arriving at its opinion,
DLJ, among other things:
- reviewed a draft of the MedicaLogic/Medscape merger agreement dated
February 19, 2000 and the exhibits thereto, and assumed that the final
form of the document would not vary in any respect that would be material
to its analysis;
- reviewed financial and other information that was publicly available that
DLJ deemed relevant relating to MedicaLogic, Medscape and the industries
in which they operate;
- reviewed information furnished to it by MedicaLogic and Medscape,
including information provided during discussions with their respective
managements and financial projections and other information relating to
the business, operations, financial condition and prospects of each of
MedicaLogic and Medscape;
- compared certain financial and securities data of each of MedicaLogic and
Medscape with various other companies whose securities are traded in
public markets;
- reviewed prices paid in and the financial terms of certain other business
combinations; and
- conducted such other financial studies, analyses and investigations as DLJ
deemed appropriate for purposes of rendering its opinion.
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In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by MedicaLogic and Medscape or
their respective representatives, or that was otherwise reviewed by it. DLJ also
assumed that MedicaLogic is not aware of any information prepared by it or its
other advisors that might be material to DLJ's opinion that has not been made
available to DLJ. In particular, DLJ relied upon the estimates of the management
of MedicaLogic of the operating synergies achievable as a result of the merger
and upon its discussions of synergies with the management of Medscape. With
respect to the financial projections and other information relating to the
prospects of MedicaLogic and Medscape supplied to it, DLJ relied on
representations that the projections and the other information were reasonably
prepared on bases that reflect the best currently available estimates and good
faith judgments of the respective managements of MedicaLogic and Medscape as to
the likely future financial performance of MedicaLogic and Medscape,
respectively. DLJ's analyses were based upon financial projections of Medscape
prepared by Medscape for the period beginning January 1, 2000 and ending
December 31, 2002 and supplied to DLJ and the guidance provided by Medscape
management with respect to the trends in expected operating results of Medscape
for the period beginning January 1, 2003 and ending December 31, 2004, and the
financial projections of MedicaLogic supplied to DLJ and the adjusted
projections of Medscape for the period beginning January 1, 2000 and ending
December 31, 2002 and the projections for Medscape for the period beginning
January 1, 2003 and ending December 31, 2004 prepared by management of
MedicaLogic. DLJ expressed no opinion with respect to such financial projections
or the assumptions on which they were based, nor did DLJ assume responsibility
for making any independent evaluation of the assets or liabilities of
MedicaLogic or Medscape or any independent verification of any information it
reviewed. DLJ also did not assume any responsibility for making any independent
investigation of any legal matters affecting MedicaLogic or Medscape and assumed
the correctness of all legal advice given to each of them and to MedicaLogic's
board of directors, including advice as to the tax consequences of the merger.
DLJ's opinion was necessarily based upon economic, market, financial and
other conditions as they existed on the date of the opinion, and on the
information made available to it as of the date of its opinion. DLJ states in
its opinion that, although subsequent developments may affect its opinion, DLJ
does not have any obligation to update, revise or reaffirm its opinion as a
result of changes in such conditions or otherwise.
SUMMARY OF FINANCIAL ANALYSES PERFORMED BY DLJ
The following is a summary of the analyses performed by DLJ in connection
with DLJ providing its written opinion and included in the presentation to the
MedicaLogic board of directors on February 21, 2000.
DLJ performed each of the analyses described below in order to provide a
different perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support its opinion as to the
fairness from a financial point of view. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of the analyses taken as a whole. DLJ's
conclusions also involved significant elements of judgment and qualitative
analyses. In addition, even though the separate analyses are summarized below,
DLJ believes that these analyses cannot be viewed in isolation and must be
considered as a whole.
You should read the information presented in the tables together with the
accompanying text.
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HISTORICAL EXCHANGE RATIO ANALYSIS
DLJ reviewed the daily closing prices of MedicaLogic common stock and
Medscape common stock to determine a hypothetical exchange ratio based upon the
market prices of MedicaLogic's common stock and Medscape's common stock. DLJ
analyzed the implied exchange ratio between MedicaLogic's common stock and
Medscape's common stock for the most recent trading date prior to the delivery
of the fairness opinion, the one, five and ten trading days prior to such date
and the average for the last week, two weeks, four weeks and eight weeks. DLJ
performed this analysis to compare the 0.323x conversion ratio pursuant to the
MedicaLogic/Medscape merger agreement with the exchange ratios between
MedicaLogic's common stock and Medscape's common stock prevailing in the open
market and to determine the magnitude of the premium being paid by MedicaLogic
in the merger. The analysis showed:
<TABLE>
<CAPTION>
IMPLIED
TIME PERIOD (PRECEDING FEBRUARY 18, 2000) EXCHANGE RATIO
- ----------------------------------------- --------------
<S> <C>
Current..................................................... 0.234x
One trading day prior....................................... 0.214x
Five trading days prior..................................... 0.285x
Ten trading days prior...................................... 0.344x
Prior week average.......................................... 0.268x
Prior two weeks average..................................... 0.294x
Prior four weeks average.................................... 0.315x
Prior eight weeks average................................... 0.358x
</TABLE>
The exchange ratio analysis resulted in implied exchange ratios which ranged
from 0.214x to 0.358x for the time periods indicated above and from 0.214x to
0.482x for all dates since the initial public offering of MedicaLogic, as
compared to the conversion ratio in the merger of 0.323x.
DISCOUNTED CASH FLOW ANALYSIS
DLJ performed a discounted cash flow analysis of MedicaLogic on a
stand-alone basis and Medscape on a stand-alone basis with synergies to evaluate
the exchange ratio. In conducting its analysis, DLJ relied on certain
assumptions, financial projections and other information provided by the
management of MedicaLogic and Medscape, respectively. These analyses were based
upon (i) financial projections of Medscape for the period beginning January 1,
2000 and ending December 31, 2002 prepared by the management of Medscape, as
adjusted by the management of MedicaLogic, (ii) financial projections of
Medscape for the period beginning January 1, 2003 and ending December 31, 2004
prepared by the management of MedicaLogic based upon guidance provided by
management of Medscape with respect to trends in Medscape's operating results
for such period, (iii) financial projections of MedicaLogic for the period
beginning January 1, 2000 and ending December 31, 2004 prepared by management of
MedicaLogic, and (iv) projected synergies attributable to the merger for the
five-year period ending December 31, 2004, developed by MedicaLogic management
based on discussions with Medscape management and as further revised downward by
DLJ.
DLJ performed discounted cash flow analyses of the projected after-tax cash
flows of MedicaLogic and Medscape on a stand-alone basis for the five-year
period ending December 31, 2004 using this information as well as projected
synergies attributable to the merger. This analysis consisted of adding the
discounted present value of the projected future cash flows during the five-year
period and the discounted present value of the terminal value at the end of the
five-year period for MedicaLogic and Medscape on a stand-alone basis,
respectively. The terminal value is the hypothetical approximation of the value
of an enterprise's cash flows beyond the end of the forecast period. DLJ
performed this analysis to compare the 0.323x conversion ratio in the merger
with the implied exchange ratios derived
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from comparing discounted cash flows of MedicaLogic and Medscape for the
five-year period and to determine the magnitude of the premium being paid by
MedicaLogic in the merger.
For Medscape, cash flows were calculated as the after-tax earnings of
Medscape, including projected synergies attributable to the merger, plus
depreciation and amortization, plus the additional non-cash marketing expenses
resulting from Medscape's CBS and NDC contracts, plus deferred taxes, minus
projected capital expenditures and net of changes in working capital. For
MedicaLogic, cash flows were calculated as the after-tax operating earnings of
MedicaLogic, plus depreciation and amortization, plus deferred taxes, minus
projected capital expenditures and net of changes in working capital. In the
case of Medscape, DLJ used weighted average cost of capital discount rates
ranging from 20% to 30% and calculated the terminal value by applying EBITDA
multiples ranging from 15.0x to 20.0x to the projected EBITDA for Medscape for
the fiscal year ending December 31, 2004. In the case of MedicaLogic, DLJ used
weighted average cost of capital discount rates ranging from 25% to 35% and
calculated the terminal value by applying EBITDA multiples ranging from 15.0x to
20.0x to the projected EBITDA for MedicaLogic for the fiscal year ending
December 31, 2004. In addition, DLJ used projected synergies attributable to the
merger increasing from zero for the fiscal year ending December 31, 2000 to
$50.4 million for the fiscal year ending December 31, 2004.
Assuming a terminal EBITDA multiple of 17.5x, a Medscape discount rate of
25% and a MedicaLogic discount rate ranging from 25% to 35%, the discounted cash
flow analyses resulted in implied exchange ratios which ranged from 0.511x to
0.769x, as compared to the conversion ratio in the merger of 0.323x.
RELATIVE CONTRIBUTION ANALYSIS
DLJ analyzed the relative contributions of MedicaLogic and Medscape to the
combined company for each of the fiscal years from 2000 through 2003, calculated
both with and without synergies attributable to the merger. The analysis was
done relative to projected revenue, projected EBITDA excluding non-cash
marketing expenses resulting from Medscape's CBS and NDC contracts, and
projected adjusted EBITDA including non-cash marketing expenses resulting from
Medscape's CBS and NDC contracts. EBITDA is earnings before interest, taxes,
depreciation and amortization. DLJ performed this analysis to compare the 0.323x
conversion ratio in the merger with the implied exchange ratios derived from
comparing the projected contributions by each of MedicaLogic and Medscape to the
combined company during each of the fiscal years ending December 31, 2000
through 2003. The analysis showed:
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<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
--------------------------------------------
2000 2001 2002 2003
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NO SYNERGIES
Medscape's revenue as a percentage of the combined
company................................................ 43.0% 38.5% 36.2% 32.2%
Implied exchange ratio................................... 0.505x 0.419x 0.379x 0.318x
Medscape's EBITDA as a percentage of the combined
company................................................ NA NA 33.6% 34.0%
Implied exchange ratio................................... NA NA 0.339x 0.344x
Medscape's adjusted EBITDA as a percentage of the
combined company....................................... NA NA 2.9% 20.5%
Implied exchange ratio................................... NA NA 0.020x 0.173x
WITH SYNERGIES
Medscape's revenue as a percentage of the combined
company................................................ 43.0% 43.0% 41.3% 37.3%
Implied exchange ratio................................... 0.505x 0.505x 0.471x 0.397x
Medscape's EBITDA as a percentage of the combined
company................................................ NA NA 51.9% 47.8%
Implied exchange ratio................................... NA NA 0.722x 0.612x
Medscape's adjusted EBITDA as a percentage of the
combined company....................................... NA NA 37.6% 39.7%
Implied exchange ratio................................... NA NA 0.403x 0.440x
</TABLE>
DLJ noted that after giving effect to the projected synergies attributable
to the merger, the analysis resulted in implied exchange ratios ranging from
0.397x to 0.722x, as compared to the conversion ratio of 0.323x in the merger.
The results of the relative contribution analysis are not necessarily indicative
of the relative contributions that the companies may actually make to the
combined company.
COMPARABLE COMPANIES ANALYSIS
No other company utilized in DLJ's analysis of comparable publicly traded
companies is identical to Medscape. Accordingly, this analysis necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of Medscape and other factors that could
affect the public trading value of Medscape or any comparable company included
in such analysis. Mathematical analysis, such as determining the median, is not
in itself a meaningful method of using comparable company data. DLJ performed
this analysis in order to compare the ratio of Medscape's equity value to its
revenue using a February 18, 2000 market valuation to those of comparable
companies at February 18, 2000. Equity value is the market value of common
equity.
DLJ analyzed the operating performance of Medscape relative to three
companies deemed by DLJ to be reasonably comparable to Medscape. These companies
were:
adam.com, Inc.
drkoop.com, Inc.
Mediconsult.com, Inc.
DLJ examined certain publicly available financial data of the comparable
companies including equity value as multiples of the projected revenue for the
calendar years 2000 and 2001. Projected financial information used with respect
to the comparable companies was estimated based on the most recent and
comprehensive research reports publicly available for each company as of
February 18, 2000.
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DLJ performed this analysis to compare the 0.323x conversion ratio in the
merger with the implied exchange ratios based upon the trading multiples of
companies comparable to Medscape. The analysis showed:
<TABLE>
<CAPTION>
MEDIAN INDUSTRY IMPLIED
EQUITY VALUE/ MULTIPLE EXCHANGE RATIO
- ------------- --------------- --------------
<S> <C> <C>
Calendar year 2000 revenue...................... 10.1x 0.134x
Calendar year 2001 revenue...................... 4.9x 0.153x
</TABLE>
The comparable company analysis resulted in implied exchange ratios that
ranged from 0.134x to 0.153x, as compared to the conversion ratio in the merger
of 0.323x.
COMPARABLE MERGERS AND ACQUISITIONS TRANSACTION ANALYSIS
DLJ performed a comparable mergers and acquisitions transaction analysis of
MedicaLogic and Medscape to evaluate the conversion ratio in the merger. Using
publicly available information, DLJ analyzed the consideration paid in two
selected merger and acquisition transactions:
<TABLE>
<CAPTION>
ACQUIROR TARGET
- -------- ------
<S> <C>
Healtheon/WebMD Corporation OnHealth Network Company
Synetic, Inc. Medical Manager Corporation
</TABLE>
For each transaction, DLJ calculated the multiple of the consideration paid
in relation to the acquired company's projected one and two year forward
revenues. DLJ used this information together with its subjective judgment to
develop a range of multiples that were then applied to Medscape's projected
revenue for 2001. The analysis showed:
<TABLE>
<CAPTION>
EQUITY VALUE/ MULTIPLE RANGE IMPLIED EXCHANGE RATIO
- ------------- ------------------ ----------------------
<S> <C> <C>
CY 2001 Revenue............................ 8.0x-10.0x 0.245x-0.307x
</TABLE>
The comparable transaction analysis resulted in implied exchange ratios that
ranged from 0.245x to 0.307x, as compared to the conversion ratio in the merger
of 0.323x.
The summary set forth above is not a complete description of the analyses
performed by DLJ, but describes, in summary form, the material elements of the
analyses made by DLJ in arriving at DLJ's opinion. The preparation of a fairness
opinion involves determinations about the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily summarized.
DLJ's conclusions involved significant elements of judgment and qualitative
analyses as well as financial and quantitative analyses. DLJ did not place
particular reliance or weight on any individual factor, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, DLJ believes that its
analyses must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation process
underlying its opinion.
In performing its analyses, DLJ made numerous assumptions regarding industry
performance, general business, financial, economic and market conditions and
other matters. Many of these matters are beyond the control of MedicaLogic and
Medscape. No company or transaction used in the analyses is directly comparable
to MedicaLogic or Medscape or the contemplated transaction. In addition,
mathematical analysis, such as determining the mean or median, is not in itself
a meaningful method of using selected company or transaction data. Analyses
relating to the value of businesses or securities are not appraisals and do not
reflect the prices at which the businesses or securities can actually be
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sold. The analyses performed by DLJ do not indicate actual values or future
results. These may be significantly more or less favorable than suggested by the
analyses. MedicaLogic, Medscape and DLJ do not assume responsibility if future
results are materially different from those projected.
Pursuant to the terms of an engagement letter dated February 7, 2000,
MedicaLogic agreed:
(a) to pay DLJ a fee of:
(1) $1.5 million upon notification that DLJ was prepared to deliver its
opinion; and
(2) $6.5 million, less any amount paid pursuant to clause (1), payable in
cash promptly upon consummation of a business combination between
MedicaLogic and Medscape in one or a series of transactions, by
merger, consolidation, or any other business combination, by purchase
involving all or a substantial amount of the business, securities or
assets of Medscape or otherwise;
(b) to reimburse DLJ for all of its reasonable out-of-pocket expenses,
including the reasonable fees and expenses of counsel;
(c) to indemnify DLJ for liabilities and expenses arising out of a
transaction, including liabilities under federal securities laws; and
(d) to pay DLJ a fee equal to 25%, but in no event more than $6.5 million,
of any break-up or similar fee or profit received by MedicaLogic in
connection with the termination of the MedicaLogic/Medscape merger
agreement.
The terms of the fee arrangement with DLJ, which DLJ and MedicaLogic believe
are customary in transactions of this nature, were negotiated at arm's-length
between MedicaLogic and DLJ. MedicaLogic's board of directors was aware of the
fee arrangement, including the fact that a significant portion of the aggregate
fee payable to DLJ is contingent upon consummation of the merger.
DLJ has performed investment banking services for MedicaLogic and Medscape
in the past and has been compensated for those services. In particular, DLJ lead
managed MedicaLogic's initial public offering in December 1999 and lead managed
Medscape's initial public offering in September 1999. In addition, DLJ was
retained as financial advisor by Medscape in connection with, among other
things, potential acquisitions by Medscape or a potential sale of Medscape. This
financial advisory agreement was terminated in November 1999. However, certain
provisions of this agreement survived the termination. In consideration of the
release of Medscape from these provisions, DLJ entered into an agreement with
Medscape pursuant to which DLJ became entitled to compensation, a portion of
which is payable upon the earlier of a sale of Medscape or December 31, 2000.
MEDICALOGIC/TOTAL EMED MERGER
The board of directors of MedicaLogic engaged DLJ to act as its financial
advisor in connection with the MedicaLogic/Total eMed merger. On February 21,
2000, DLJ rendered an oral opinion to MedicaLogic's board of directors,
subsequently confirmed in writing as of the same date, to the effect that, as of
that date, and based upon and subject to the assumptions, limitations and
qualifications set forth in the written opinion, the conversion ratio to be
applied in the exchange of common stock in the MedicaLogic/Total eMed merger was
fair, from a financial point of view, to MedicaLogic.
THE FULL TEXT OF THIS DLJ OPINION IS INCLUDED AS APPENDIX D TO THIS JOINT
PROXY STATMENT/ PROSPECTUS. MEDICALOGIC'S SHAREHOLDERS ARE URGED TO READ DLJ'S
OPINION CAREFULLY AND IN ITS ENTIRETY FOR THE PROCEDURES FOLLOWED, ASSUMPTIONS
MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN IN
ARRIVING AT SUCH OPINION. DLJ'S OPINION WAS PREPARED FOR AND ADDRESSED TO
MEDICALOGIC'S BOARD OF DIRECTORS AND ONLY ADDRESSES THE FAIRNESS TO MEDICALOGIC,
FROM A FINANCIAL POINT OF VIEW, OF THE CONVERSION RATIO AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY SHAREHOLDER OF
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MEDICALOGIC OR TO ANY STOCKHOLDER OF TOTAL EMED AS TO HOW SUCH SHAREHOLDER OR
STOCKHOLDER SHOULD VOTE AT THE MEDICALOGIC SPECIAL MEETING OR THE TOTAL EMED
SPECIAL MEETING, RESPECTIVELY.
MedicaLogic selected DLJ to render an opinion in connection with the merger
based upon DLJ's qualifications, expertise and reputation, including the fact
that DLJ, as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
DLJ was not retained as an advisor or agent to MedicaLogic's shareholders or
any person other than MedicaLogic. DLJ's opinion does not constitute an opinion
as to the price at which MedicaLogic's common stock will actually trade at any
time. The conversion ratio was determined through arm's-length negotiations
between MedicaLogic and Total eMed. MedicaLogic did not impose any restrictions
or limitations upon DLJ regarding the investigations made or the procedures
followed by DLJ in rendering its opinion. In arriving at its opinion, DLJ, among
other things:
- reviewed a draft of the merger agreement dated February 17, 2000 and the
exhibits thereto, and assumed that the final form of the document would
not vary in any respect that would be material to its analysis;
- reviewed financial and other information that was publicly available that
DLJ deemed relevant relating to MedicaLogic, Total eMed and the industries
in which they operate;
- reviewed information furnished to it by MedicaLogic and Total eMed,
including information provided during discussions with their respective
managements and financial projections and other information relating to
the business, operations, financial condition and prospects of each of
MedicaLogic and Total eMed;
- compared certain financial and securities data of MedicaLogic and certain
financial data of Total eMed with various other companies whose securities
are traded in public markets;
- reviewed prices paid in and the financial terms of certain other business
combinations; and
- conducted such other financial studies, analyses and investigations as DLJ
deemed appropriate for purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by MedicaLogic and Total eMed or
their respective representatives, or that was otherwise reviewed by it. DLJ also
assumed that MedicaLogic was not aware of any information prepared by it or its
other advisors that might be material to DLJ's opinion that had not been made
available to DLJ. With respect to the financial projections of MedicaLogic and
Total eMed supplied to it, DLJ relied on representations that these projections
and the other information were reasonably prepared on bases that reflect the
best currently available estimates and good faith judgments of the respective
managements of MedicaLogic and Total eMed as to the likely future financial
performance of MedicaLogic and Total eMed, respectively. DLJ's analyses were
based upon financial projections of Total eMed for the period beginning
January 1, 2000 and ending December 31, 2004 prepared by the management of Total
eMed, as adjusted by the management of MedicaLogic, and financial projections of
MedicaLogic for the period beginning January 1, 2000 and ending December 31,
2004 prepared by management of MedicaLogic. DLJ expressed no opinion with
respect to such financial projections or the assumptions on which they were
based, nor did DLJ assume responsibility for making any independent evaluation
of the assets or liabilities of MedicaLogic or Total eMed or making any
independent verification of any information it reviewed. DLJ also did not assume
any responsibility for making any independent investigation of any legal matters
affecting MedicaLogic or Total eMed and
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assumed the correctness of all legal advice given to each of them and to
MedicaLogic's board of directors including advice as to the tax consequences of
the merger.
DLJ's opinion was necessarily based upon economic, market, financial and
other conditions as they existed on the date of the opinion. DLJ states in its
opinion that, although subsequent developments may affect its opinion, DLJ does
not have any obligation to update, revise or reaffirm its opinion as a result of
changes in such conditions or otherwise.
SUMMARY OF FINANCIAL ANALYSES PERFORMED BY DLJ
The following is a summary of the analyses performed by DLJ in connection
with DLJ providing its written opinion and included in the presentation to the
MedicaLogic board of directors on February 21, 2000.
DLJ performed each of the analyses described below in order to provide a
different perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support its opinion as to the
fairness from a financial point of view. Rather, in reaching its conclusion, DLJ
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of the analyses taken as a whole. DLJ's
conclusions also involved significant elements of judgment and qualitative
analyses. In addition, even though the separate analyses are summarized below,
DLJ believes that these analyses cannot be viewed in isolation and must be
considered as a whole.
You should read the information presented in the tables together with the
accompanying text.
COMPARABLE COMPANIES ANALYSIS
No other company utilized in DLJ's analysis of comparable publicly traded
companies is identical to Total eMed. Accordingly, this analysis necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of Total eMed and other factors that
could affect the public trading value of Total eMed, were it a public company,
or any comparable company included in such analysis. Mathematical analysis, such
as determining the median, is not in itself a meaningful method of using
comparable company data. DLJ performed this analysis in order to determine Total
eMed's ownership percentage in the combined company based on Total eMed's
enterprise value implied by enterprise value multiples of projected revenues at
which the comparable companies traded, using a February 17, 2000 market
valuation. Enterprise value is the market value of common equity, plus book
value of total debt and preferred stock, less cash.
DLJ analyzed the operating performance of Total eMed relative to companies
within two sectors of the healthcare market, healthcare information technology,
or HCIT, and eHealth. The first group consisted of the following eight HCIT
companies:
Cerner Corporation
Eclipsys Corporation
IDX Systems Corporation
Infocure Corp.
MedQuist Inc.
National Data Corporation
Quadramed Corp.
Shared Medical Systems Corp.
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The second group consisted of the following three eHealth companies:
Allscripts, Inc.
The TriZetto Group, Inc.
MedicaLogic, Inc.
DLJ examined certain publicly available financial data of the comparable
companies, including enterprise value as multiples of their projected revenue
for the calendar years 2000 and 2001. Projected financial information used with
respect to the comparable companies was estimated based on the most recent and
comprehensive research reports publicly available for each company as of
February 17, 2000. The HCIT multiple range used for 2001 was a 25% discount to
the assumed 2000 multiple range of 1.9x to 2.3x, which range itself was based on
a median enterprise value multiple of 2000 projected revenue of 2.1x. DLJ
assumed a discount of 25% based on its subjective judgment because public
information was not available for projected 2001 revenues for these HCIT
companies. The analysis showed:
<TABLE>
<CAPTION>
ENTERPRISE VALUE / 2001 REVENUE
- --------------------------------------------
HCIT MULTIPLE EHEALTH MULTIPLE IMPLIED EQUITY VALUE IMPLIED OWNERSHIP
- --------------------- ---------------- -------------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
1.4x01.7x 14.2x-16.1x $380.5-$442.0 18.3%-20.6%
</TABLE>
The comparable company analysis resulted in implied ownership for Total eMed
in the combined company ranging from 18.3% to 20.6%, compared to Total eMed's
ownership of 19.4% in the combined company, calculated on a diluted basis,
implied by the conversion ratio in the merger.
COMPARABLE MERGER AND ACQUISITION TRANSACTIONS ANALYSIS
DLJ performed a comparable merger and acquisition transactions analysis of
MedicaLogic and Total eMed to evaluate Total eMed's ownership percentage in the
combined company implied by enterprise value multiples of projected revenues at
which such comparable merger and acquisition transactions have occurred. Using
publicly available information, DLJ analyzed the consideration paid for selected
merger and acquisition transactions in the HCIT sector and the eHealth sector.
The HCIT sector analysis included the following 17 selected merger and
acquisition transactions:
<TABLE>
<CAPTION>
ACQUIROR TARGET
- -------- ------
<S> <C>
Synetic, Inc. Medical Manager Corporation
Quintiles Transnational Corporation Envoy Corporation
QuadraMed Corporation The Compucare Company
Affiliated Computer Services, Inc. BRC Holdings, Inc.
McKesson Corporation HBO & Company
Eclipsys Corporation Transition Systems, Inc.
Transition Systems, Inc. HealthVISION, Inc.
HBO & Company Imnet Systems, Inc.
HBO & Company Access Health Inc.
QuadraMed Corporation Medicus Systems Corporation
HBO & Company National Health Enhancement Services,
Inc.
HBO & Company HPR, Inc.
Misys plc Medic Computer Systems, Inc.
IDX Systems, Inc. Phamis, Inc.
HBO & Company Enterprise Systems
HBO & Company AMISYS Managed Care Systems, Inc.
Cardinal Health, Inc. Pyxis Corporation
</TABLE>
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The eHealth sector analysis included the following two selected merger and
acquisition transactions:
<TABLE>
<CAPTION>
ACQUIROR TARGET
- -------- ------
<S> <C>
Healtheon/WebMD Corporation CareInsite, Inc.
Healtheon/WebMD Corporation MedE America Corporation
</TABLE>
DLJ calculated the multiples of the consideration paid in relation to the
acquired companies' projected one and two year forward revenues (in the case of
the transactions in the eHealth sector only) and multiples of the consideration
paid in relation to the acquired companies' revenues for the latest twelve month
period prior to the announcement of the acquisition (in the case of transactions
in the HCIT sector and the eHealth sector). DLJ then used its subjective
judgment to develop a range of enterprise value multiples of 2000 and 2001
revenues to be applied to Total eMed's projected revenues. The analysis showed:
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUE
ENTERPRISE VALUE / REVENUE (IN MILLIONS) IMPLIED OWNERSHIP
-------------------------- -------------------- -----------------
<S> <C> <C> <C>
Calendar 2000........ 15.0x-20.0x $ 427-$569 20.1%-25.1%
Calendar 2001........ 10.0x-15.0x $988-$1,482 36.8%-46.6%
</TABLE>
The merger and acquisition transactions analysis resulted in implied
ownership for Total eMed in the combined company, on a diluted basis, ranging
from 20.1% to 25.1% based on calendar 2000 projected financial results. The
merger and acquisition transactions analysis resulted in implied ownership for
Total eMed in the combined company, on a diluted basis, ranging from 36.8% to
46.6% based on calendar 2001 projected financial results. These ranges compare
to Total eMed's ownership of 19.4% in the combined company, calculated on a
diluted basis, implied by the conversion ratio in the merger.
DISCOUNTED CASH FLOW ANALYSIS
DLJ performed a discounted cash flow analysis of MedicaLogic on a
stand-alone basis and Total eMed on a stand-alone basis to evaluate Total eMed's
ownership percentage in the combined company. In conducting its analysis, DLJ
relied on certain assumptions, financial projections and other information
provided by MedicaLogic and Total eMed management. The analysis was based upon
financial projections of Total eMed for the period beginning January 1, 2000 and
ending December 31, 2004 prepared by the management of Total eMed, as adjusted
by the management of MedicaLogic, and financial projections of MedicaLogic for
the period beginning January 1, 2000 and ending December 31, 2004 prepared by
management of MedicaLogic.
Using this information, DLJ performed discounted cash flow analyses of the
projected after-tax cash flows of MedicaLogic and Total eMed on a stand-alone
basis for the five-year period ending December 31, 2004. This analysis consisted
of adding the discounted present value of the projected future cash flows and
the discounted present value of the terminal value at the end of the five-year
period for MedicaLogic and Total eMed each on a stand-alone basis. The terminal
value is the hypothetical approximation of the value of an enterprise's cash
flows beyond the end of the forecast period. Cash flows were calculated as
after-tax operating earnings, plus depreciation and amortization, plus deferred
taxes, minus projected capital expenditures and net of changes in working
capital.
In the case of Total eMed, DLJ used weighted average cost of capital
discount rates ranging from 30% to 40% and calculated the terminal value by
applying EBITDA multiples ranging from 10.0x to 15.0x to the projected EBITDA
for Total eMed for the year ending December 31, 2004. In the case of
MedicaLogic, DLJ used weighted average cost of capital discount rates ranging
from 25% to 35% and calculated the terminal value by applying EBITDA multiples
ranging from 15.0x to 20.0x to the
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projected EBITDA for MedicaLogic for the year ending December 31, 2004. EBITDA
is earnings before interest, taxes, depreciation and amortization.
Assuming a terminal multiple of 12.5x for Medscape and 17.5x for
MedicaLogic, the discounted cash flow analyses resulted in implied Total eMed
ownership percentages ranging from 35.6% to 54.9%, as compared to Total eMed's
ownership of 19.4%, in the combined company, calculated on a diluted basis,
implied by the conversion ratio in the merger.
RELATIVE CONTRIBUTION ANALYSIS
DLJ analyzed the relative contributions of MedicaLogic and Total eMed to the
combined company for each of the fiscal years from 2000 through 2003. The
analysis was done relative to projected revenue, gross profit, and EBITDA. The
analysis showed:
<TABLE>
<CAPTION>
2000 2001 2002 2003
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total eMed's revenue as a percentage of the combined
company................................................... 39.4% 50.4% 51.0% 44.4%
Total eMed's gross profit as a percentage of the combined
company................................................... NM 27.0 38.7 38.1
Total eMed's EBITDA as a percentage of the combined
company................................................... NM NM 60.4 56.0
</TABLE>
The analysis resulted in relative contribution of Total eMed to the combined
company ranging between 27.0% to 60.4% during each of the fiscal years ending
December 31, 2000 through 2003. The MedicaLogic shares, including shares
underlying options with adjustment for cash exercise of the options, to be
issued in the merger will represent approximately 19.4% of MedicaLogic's
outstanding common shares after the merger. The results of the relative
contribution analysis are not necessarily indicative of the relative
contributions that the companies may actually make to the combined company.
The summary set forth above is not a complete description of the analyses
performed by DLJ, but describes, in summary form, the material elements of the
analyses made by DLJ in arriving at DLJ's opinion. The preparation of a fairness
opinion involves determinations about the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances, and, therefore, such an opinion is not readily summarized.
DLJ's conclusions involved significant elements of judgment and qualitative
analyses as well as financial and quantitative analyses. DLJ did not place
particular reliance or weight on any individual factor, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, DLJ believes that its
analyses must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation process
underlying its opinion.
In performing its analyses, DLJ made numerous assumptions regarding industry
performance, general business, financial, economic and market conditions and
other matters. Many of these matters are beyond the control of MedicaLogic and
Total eMed. No company or transaction used in the analyses is directly
comparable to MedicaLogic or Total eMed or the contemplated transaction. In
addition, mathematical analysis, such as determining the mean or median, is not
in itself a meaningful method of using selected company or transaction data.
Analyses relating to the value of businesses or securities are not appraisals
and do not reflect the prices at which the businesses or securities can actually
be sold. The analyses performed by DLJ do not indicate actual values or future
results. These may be significantly more or less favorable than suggested by the
analyses. MedicaLogic, Total eMed and DLJ do not assume responsibility if future
results are materially different from those projected.
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Pursuant to the terms of an engagement letter dated February 3, 2000,
MedicaLogic agreed:
(a) to pay DLJ a fee of:
(1) $850,000 upon notification that DLJ was prepared to deliver its
opinion; and
(2) $2.0 million, less any amount paid pursuant to clause (1), payable in
cash promptly upon consummation of a business combination between
MedicaLogic and Total eMed in one or a series of transactions, by
merger, consolidation, or any other business combination, by purchase
involving all or a substantial amount of the business, securities or
assets of Total eMed or otherwise:
(b) to reimburse DLJ for all of its reasonable out-of-pocket expenses,
including the reasonable fees and expenses of counsel;
(c) to indemnify DLJ for liabilities and expenses arising out of a
transaction, including liabilities under federal securities laws; and
(d) to pay DLJ a fee equal to 25%, but in no event more than $2.0 million,
of any break-up or similar fee or profit received by MedicaLogic in
connection with the termination of the MedicaLogic/Total eMed merger
agreement.
The terms of the fee arrangement with DLJ, which DLJ and MedicaLogic believe
are customary in transactions of this nature, were negotiated at arm's-length
between MedicaLogic and DLJ. MedicaLogic's board of directors was aware of the
fee arrangement, including the fact that a significant portion of the aggregate
fee payable to DLJ is contingent upon consummation of the merger.
DLJ has performed investment banking services for MedicaLogic in the past
and has been compensated for those services, including lead managing
MedicaLogic's December 1999 initial public offering. Employees of DLJ, including
certain employees who have advised MedicaLogic in connection with the merger,
own in the aggregate less than 1% of the outstanding common stock of Total eMed
on a fully diluted basis.
REASONS OF MEDSCAPE FOR THE MEDICALOGIC/MEDSCAPE MERGER
The Medscape board of directors carefully considered the terms of the
MedicaLogic/Medscape merger and believes that the merger serves the best
interests of Medscape and its stockholders. As a result, the Medscape board
declared that entering into the merger agreement was advisable, unanimously
approved the merger agreement and now unanimously recommends that the Medscape
stockholders vote "FOR" the proposal to approve the merger. The decisions of the
board of directors of Medscape were based upon several potential benefits of the
merger, including the following, which are listed in no particular order of
importance:
- the presentations made by Paul T. Sheils and other members of Medscape's
senior management and representatives of Patterson Belknap and Lazard at
the February 21, 2000 special meeting of the Medscape board of directors,
and the opinion of Lazard that, as of February 21, 2000 and based on and
subject to the matters reviewed with the Medscape board, the proposed
conversion ratio in the MedicaLogic/Medscape merger was fair from a
financial point of view, to the Medscape stockholders. This opinion was
considered together with the financial and other analyses presented to the
Medscape board by Lazard. A description of the opinion and the material
financial analyses considered by Lazard in connection with its opinion are
set forth below under "--Opinion of Medscape financial advisor regarding
the MedicaLogic/Medscape merger."
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- the merger will advance Medscape's goal of putting its content and
services at the point of care in the physician's daily workflow, which is
expected to increase the usage of Medscape's products and services;
- the merger will diversify Medscape's revenue stream, in particular
allowing Medscape to participate in clinical revenues such as
prescriptions;
- the merger will create a business of sufficient size to enable the
combined companies to compete more effectively against larger companies in
the healthcare industry;
- the merger will result in a larger company with increased access to the
equity markets;
- Medscape, MedicaLogic and Total eMed share similar types of customers,
namely healthcare professionals, and the merger provides the combined
entity with the opportunity to capitalize on the parties' respective
existing relationships with customers in order to cross-market their
respective products and services; and
- the combined entity will have greater leverage with pharmaceutical
companies and other potential sponsors and strategic partners.
INTERESTS OF MEMBERS OF MEDSCAPE'S BOARD OF DIRECTORS AND MANAGEMENT IN THE
MEDICALOGIC/MEDSCAPE MERGER
When considering the recommendation of the Medscape board, you should be
aware that the Medscape directors and officers identified below have interests
in the merger that are different from, or are in addition to, yours.
Three members of the Medscape board of directors, to be nominated by
Medscape, will become members of the MedicaLogic board as of the effective time
of the merger. The three will be Paul T. Sheils, Frederic G. Reynolds and Esther
Dyson.
Under Medscape's existing plans, stock options covering 627,950 shares of
Medscape common stock outstanding as of February 21, 2000, that had not yet
become exercisable would become fully vested and exercisable as of the effective
time of the merger. Under the merger agreement, all outstanding Medscape stock
options and warrants will be converted into options and warrants to purchase
MedicaLogic stock at the conversion rate. Based upon options outstanding as of
February 21, 2000, options to purchase 428,681 shares of Medscape common stock
held by directors and executive officers of Medscape would become fully vested
and exercisable at the effective time of the merger as follows:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS OPTIONS EXERCISE PRICE
- -------------------------------- -------- --------------
<S> <C> <C>
Alan Patricof......................................... 11,806 $0.144
Esther Dyson.......................................... 3,125 0.144
Marc Butlein.......................................... 12,500 0.172
Oakleigh Thorne....................................... 17,500 0.172
Peter Frishauf........................................ 3,125 0.144
Paul T. Sheils........................................ 250,000 0.172
Steven Kalin.......................................... 130,625 0.344
</TABLE>
Under the merger agreement, MedicaLogic has agreed to indemnify the officers
and directors of Medscape, for a period of six years from the effective time of
the merger, for all actions taken prior to the effective time of the merger to
the extent authorized in Medscape's certificate and bylaws in effect prior to
the merger. For a period of three years from the effective date of the merger,
MedicaLogic has also agreed to maintain officer and director liability coverage,
with respect to claims arising from facts or events that occurred prior to the
effective time of the merger, for the benefit of the present or
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former officers and directors of Medscape as of the effective time of the merger
in such amounts and on such terms that are no less beneficial to the officers
and directors than the coverage maintained by Medscape prior to the merger,
provided that MedicaLogic is not obligated to expend for such insurance any
amount in excess of 150% of the aggregate premiums payable by Medscape and its
subsidiaries in 1999 for such purpose.
If the MedicaLogic/Medscape merger occurs, MedicaLogic has agreed to name
Paul T. Sheils, Medscape's President and Chief Executive Officer, as Vice
Chairman of MedicaLogic/Medscape.
If the MedicaLogic/Medscape merger occurs, MedicaLogic/Medscape will appoint
George D. Lundberg, M.D., Medscape's current Editor-in-Chief, as the
Editor-in-Chief of MedicaLogic/Medscape.
As a result of the interests described above, these directors and officers
may be more likely to vote to approve the merger agreement than if they did not
have these interests.
OPINION OF MEDSCAPE FINANCIAL ADVISOR REGARDING THE MEDICALOGIC/MEDSCAPE MERGER
Under a letter agreement, dated December 16, 1999, Medscape retained Lazard
to act as its financial advisor. As part of this engagement, Medscape requested
that Lazard evaluate the fairness of the conversion ratio in the
MedicaLogic/Medscape merger from a financial point of view to the holders of
Medscape common stock. On February 21, 2000, at a special meeting of the
Medscape board of directors, Lazard delivered its oral opinion that, as of that
date, the conversion ratio was fair from a financial point of view to the
holders of Medscape common stock. Lazard later confirmed its oral opinion by
delivering a written opinion dated February 21, 2000, which stated the
considerations and assumptions upon which its opinion was based.
THE FULL TEXT OF THE OPINION DATED FEBRUARY 21, 2000, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
SCOPE OF THE REVIEW UNDERTAKEN BY LAZARD IN RENDERING ITS OPINION, IS ATTACHED
AS APPENDIX E TO THIS JOINT PROXY STATEMENT/PROSPECTUS. LAZARD'S WRITTEN OPINION
IS FOR THE BENEFIT OF MEDSCAPE'S BOARD OF DIRECTORS AND ONLY ADDRESSES THE
FAIRNESS OF THE CONVERSION RATIO FROM A FINANCIAL POINT OF VIEW AS OF THE DATE
OF THE OPINION. LAZARD' S WRITTEN OPINION DOES NOT CONSTITUTE A RECOMMENDATION
THAT MEDSCAPE PURSUE THE MEDICALOGIC/ MEDSCAPE MERGER OR THAT ANY STOCKHOLDER
VOTE IN FAVOR OF THE MERGER AT THE MEDSCAPE SPECIAL MEETING. THE FOLLOWING IS
ONLY A SUMMARY OF THE LAZARD OPINION. MEDSCAPE STOCKHOLDERS ARE URGED TO READ
THE ENTIRE OPINION.
In arriving at its opinion, Lazard, among other things:
- reviewed and analyzed the financial terms and conditions of the merger
agreement;
- reviewed and analyzed certain historical business and financial
information relating to Medscape and MedicaLogic;
- reviewed and analyzed various financial forecasts and other data provided
to Lazard by Medscape and MedicaLogic relating to their respective
businesses;
- held discussions with members of the senior managements of Medscape and
MedicaLogic with respect to the businesses and prospects of Medscape and
MedicaLogic, respectively, the strategic objectives of each, and possible
benefits which might be realized following the MedicaLogic/ Medscape
merger;
- reviewed and analyzed public information with respect to certain other
companies in lines of businesses that Lazard believes to be generally
comparable to the businesses of Medscape and MedicaLogic;
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- reviewed and analyzed the financial terms of certain business combinations
involving companies in lines of businesses that Lazard believes to be
generally comparable to those of Medscape and MedicaLogic, and in other
industries generally;
- reviewed and analyzed the historical stock prices and trading volumes of
Medscape's and MedicaLogic's common stock;
- reviewed and analyzed Medscape's and MedicaLogic's senior managements'
view of the pro forma impact of the merger on the revenues and earnings
before goodwill of MedicaLogic; and
- conducted such other financial studies, analyses and investigations that
Lazard deemed appropriate.
Lazard relied upon the accuracy and completeness of the foregoing
information, and did not assume any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of Medscape or MedicaLogic, or concerning the
solvency or fair value of either of the foregoing entities. With respect to
financial forecasts, Lazard assumed that they were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of
management of Medscape and MedicaLogic as to the future financial performance of
Medscape and MedicaLogic, respectively. Lazard expressed no view as to such
forecasts or the assumptions on which they were based. In addition, Lazard did
not express any view with regard to Medscape's underlying business decision to
effect the MedicaLogic/Medscape merger.
Lazard's opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and information made available to Lazard as of
February 21, 2000. Lazard also assumed that the MedicaLogic/Medscape merger
would be consummated in accordance with the terms described in the merger
agreement, without any waiver of any material terms or conditions by Medscape,
and that the merger will be treated as a tax-free reorganization and/or
exchange, each pursuant to the Internal Revenue Code of 1986. In addition,
Lazard assumed that obtaining the necessary regulatory approvals for the merger
would not have an adverse effect on Medscape or MedicaLogic or the contemplated
benefits to be derived from the merger.
Lazard did not express any opinion as to the price at which the shares of
MedicaLogic common stock will actually trade at any time. Lazard was not asked
to investigate, and Lazard's opinion did not address, any other alternative
transactions which may have been available to Medscape. Lazard did not address
the relative merits of the MedicaLogic/Medscape merger or other business
strategies considered by Medscape's board of directors.
Lazard opinion pertains to the fairness of the conversion ratio, from a
financial point of view, to the holders of Medscape common stock only and does
not depend on whether the Total eMed merger is completed. Lazard, in rendering
its opinion, did not analyze the relative merits of the MedicaLogic/ Total eMed
merger agreement or the effects of the MedicaLogic/Total eMed merger agreement
and the MedicaLogic/Total eMed merger on (i) Medscape or its stockholders,
(ii) the fairness of the conversion ratio, from a financial point of view, to
Medscape or to its stockholders or (iii) the contemplated benefits to be derived
from the MedicaLogic/Medscape merger.
The following is a brief summary of the material financial analyses
performed by Lazard in preparing its opinion:
TRANSACTION CONTRIBUTION ANALYSIS. Lazard analyzed the contribution of
Medscape to the 1999 revenue, the fourth quarter of 1999 revenue and estimated
2000, 2001 and 2002 revenue and 2002 EBITDA of the combined company. Lazard
performed this analysis on financial information of each company including
analyst consensus projections, management projections and management projections
for MedicaLogic as adjusted by Medscape's management. Lazard did not take into
account any
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transaction or one-time merger-related costs, integration costs or restructuring
charges that may result from the merger. The analysis indicated the following:
<TABLE>
<CAPTION>
ANALYST ADJUSTED
CONSENSUS MANAGEMENT MANAGEMENT
PROJECTIONS PROJECTIONS PROJECTIONS
----------- ----------- -----------
<S> <C> <C> <C>
Calendar Year 1999 Revenues................................ 36.0% 36.0% 36.0%
Fourth Quarter 1999 Revenues............................... 37.8% 37.8% 37.8%
Calendar Year 2000 Revenues................................ 45.7% 44.1% 46.2%
Calendar Year 2001 Revenues................................ 40.1% 39.0% 41.1%
Calendar Year 2002 Revenues................................ 37.7% 36.6% 38.5%
Calendar Year 2002 EBITDA.................................. 7.8% 11.3% 7.7%
</TABLE>
These results compared to an implied fully-diluted ownership of Medscape in the
combined MedicaLogic/Medscape entity of 31.8%.
HISTORICAL CONVERSION RATIO ANALYSIS. Lazard reviewed the relationship
between the daily closing prices of Medscape common stock and MedicaLogic Common
Stock during the period beginning on the day after MedicaLogic's initial public
offering on December 9, 1999 through February 18, 2000. Implied historical
conversion ratios for this analysis were determined by dividing the price per
share of Medscape common stock by the price per share of MedicaLogic common
stock over the relevant period. The following compares the conversion ratio in
the MedicaLogic/Medscape merger with the high, low and current (as of
February 18, 2000) of these implied historical conversion ratios:
<TABLE>
<S> <C>
High........................................................ 0.490
Low......................................................... 0.215
Current (as of February 18, 2000)........................... 0.234
Merger conversion ratio..................................... 0.323
</TABLE>
Lazard also reviewed the implied conversion ratios of the weighted average
prices of Medscape and MedicaLogic over certain periods. The following compares
the conversion ratio in the merger with these implied conversion ratios:
<TABLE>
<S> <C>
Prior 5 trading days........................................ 0.279
Prior 10 trading days....................................... 0.264
Prior 20 trading days....................................... 0.304
Prior 30 trading days....................................... 0.342
Since MedicaLogic IPO....................................... 0.428
Merger conversion ratio..................................... 0.323
</TABLE>
PREMIUMS ANALYSIS. Lazard also compared the premium of Medscape's share
price implied by the conversion ratio to the share price of Medscape on selected
days to the relevant premiums paid in six eHealth precedent transactions and
seven internet content precedent transactions. The six eHealth precedent
transactions included:
- Healtheon WebMD Corporation/OnHealth Network Company (February 16, 2000)
- Healtheon WebMD Corporation/Medical Manager Corporation (February 14,
2000)
- Healtheon WebMD Corporation/CareInsite, Inc. (February 14, 2000)
- Synetic/Medical Manager Corporation (May 17, 1999)
- Healtheon WebMD Corporation/MedE America Corporation (April 21, 1999)
- Quintiles Transnational Corp./ENVOY Corporation (December 16, 1998)
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The seven internet content precedent transactions included:
- RoweCom Inc./NewsEDGE Corporation (December 17, 1999)
- Walt Disney Company/Infoseek Corporation (July 12, 1999)
- NBC/Xoom.com, Inc. (May 10, 1999)
- Yahoo! Inc./Broadcast.Com Inc. (April 1, 1999)
- America Online, Inc./MovieFone, Inc. (February 1, 1999)
- Yahoo! Inc./GeoCities (January 27, 1999)
- At Home Corporation/Excite, Inc. (January 19, 1999)
For purposes of this analysis, Lazard used Medscape's closing prices on
February 18, 2000, February 11, 2000 and January 18, 2000 and Medscape's highest
trading price excluding the week following Medscape's initial public offering.
Lazard also used the closing stock prices of the other companies one day, one
week, one month and the fifty-two week high prior to the announcement of the
given transaction. For the six eHealth and seven internet content precedent
transactions, the range of mean premiums paid resulted in an equity value per
share reference range for Medscape of $10.59 to $21.38. Based on MedicaLogic's
closing price on February 18, 2000, this corresponds to a range of conversion
ratios of 0.209x to 0.422x.
DISCOUNTED CASH FLOW ANALYSIS. Lazard derived an equity value per share
reference range for Medscape and MedicaLogic by performing a discounted cash
flow analysis, based on analyst consensus projections, management projections,
and adjusted management projections for the calendar years 2000 through 2002. A
discounted cash flow analysis determines the net present value of the projected
free cash flows of a company or business segment. As part of its analysis,
Lazard assumed, among other things, discount rates of 30% to 50% and revenue
exit multiples of 12.0x to 18.0x for Medscape and 15.0x to 35.0x for
MedicaLogic. Lazard's analysis resulted in an equity value per share reference
range for Medscape of $8.95 to $22.46 per share, and an equity value per share
reference range for MedicaLogic of $22.91 to $102.57 per share. The range of per
share values for Medscape based on MedicaLogic's closing price on February 18,
2000 and the conversion ratios of 0.219x to 0.391x derived from this analysis is
$11.10 to $19.82 per share.
PRECEDENT TRANSACTIONS ANALYSIS. Lazard derived an implied equity value per
share reference range for Medscape by performing a precedent transactions
analysis, based on analyst consensus and management projections. A precedent
transactions analysis provides a valuation range based on, among other things,
the purchase prices paid in transactions involving peer companies in the same or
similar industries as the company or business segment analyzed. Using publicly
available information, Lazard reviewed the purchase prices and implied
transaction value multiples paid or proposed to be paid in three eHealth content
transactions and twelve internet content transactions. The three eHealth content
transactions reviewed included:
- Healtheon WebMD Corporation/OnHealth Network Company (February 16, 2000)
- Mediconsult.com, Inc./Physicians' Online, Inc. (September 7, 1999)
- Healtheon Corporation/WebMD, Inc. (May 20, 1999)
The twelve internet content transactions reviewed included:
- eMusic.com Inc./Tunes.com Inc. (November 30, 1999)
- Lycos, Inc./Gamesville.com (November 23, 1999)
- Excite At Home/Bluemountain.com (October 25, 1999)
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- Homestore.com, Inc./Homefair.com (October 12, 1999)
- Ticketmaster Online-CitySearch, Inc./Microsoft Corp.-MSN Sidewalk
(July 19, 1999)
- NBC/Snap.com LLC (May 10, 1999)
- NBC/Xoom.com, Inc. (May 10, 1999)
- Getty Images, Inc./art.com Inc. (May 5, 1999)
- Yahoo! Inc./Broadcast.Com Inc. (May 1, 1999)
- America Online, Inc./MovieFone, Inc. (February 1, 1999)
- Yahoo! Inc./GeoCities (January 28, 1999)
- At Home Corporation/Excite, Inc. (January 19, 1999)
Lazard compared the transaction values implied by the purchase prices in the
selected transactions as multiples of, among other things, latest twelve month,
one fiscal year forward, and two fiscal years forward revenues. All multiples
were based upon financial information available at the announcement date of the
relevant transaction. The range of revenue multiples for the eHealth content
precedent transactions was 8.8x to 82.3x, and the range of revenue multiples for
the internet content precedent transactions was 8.3x to 50.4x. These multiples
resulted in a combined mean implied equity value per share reference range for
Medscape of approximately $10.84 to $22.62 per share, which corresponds to a
range of conversion ratios of 0.214x to 0.446x.
No company, transaction or business used in the precedent transactions
analysis is identical to Medscape, MedicaLogic or the combined entity following
the merger. As a result, you cannot analyze the results above solely from a
mathematical perspective. Rather, you need to consider the differences in
financial and operating characteristics of the companies and other factors that
could affect the acquisition, public trading or other values of these companies,
the precedent transactions or the business segment, company or transaction to
which they are being compared.
COMPARABLE COMPANIES ANALYSIS. Lazard derived an implied equity value per
share reference range for Medscape by performing a comparable companies
analysis, based on analyst consensus and management projections. A comparable
companies analysis provides a valuation range based on, among other things, the
enterprise values of peer companies in the same or similar industries as the
company or business segment analyzed. Using publicly available information,
Lazard reviewed the enterprise values and implied revenue multiples of six
eHealth content companies and fifty-seven internet content companies. The six
eHealth content companies reviewed included:
- adam.com
- drkoop.com, Inc.
- HealthGate Data Corp.
- HealthCentral.com
- Mediconsult.com, Inc.
- OnHealth Network Company
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The fifty-seven internet content companies reviewed included companies in the
following categories:
- Financial Information (Multex.com Inc., Marketwatch.com, Inc.,
TheStreet.com, Inc., etc.)
- Publishing (Infospace.com, Inc., TMP Worldwide Inc., Internet.com
Corporation, etc.)
- Thin Portals (CNET Networks, Inc., GoTo.com, Inc., Go2Net, Inc., etc.)
- Online Music (MP3.com, Inc., Liquid Audio, Inc., Audible, Inc., etc.)
- Targeted Demographics (Starmedia Network, Inc., El Sitio, Inc., Student
Advantage, Inc., etc.)
- Mass Portals (America Online, Inc., Yahoo! Inc., Lycos, Inc., and Go.com)
Lazard compared the enterprise values of the comparable eHealth content and
internet content companies as multiples of, among other things, last quarter
annualized, calendar year 2000, and calendar year 2001 revenues. The range of
selected revenue multiples for the eHealth content companies was 5.7x to 26.4x,
and the range of selected revenue multiples for the internet content companies
was 7.6x to 25.5x. These multiples resulted in a combined mean implied equity
value per share reference range for Medscape of approximately $6.63 to $10.05
per share, which corresponds to a range of conversion ratios of 0.131x to
0.198x.
No company, transaction or business used in the comparable companies
analysis is identical to Medscape, MedicaLogic or the combined entity following
the merger. As a result, you cannot analyze the results above solely from a
mathematical perspective. Rather, you need to consider the differences in
financial and operating characteristics of the companies and other factors that
could affect the acquisition, public trading or other values of these companies,
the precedent transactions or the business segment, company or transaction to
which they are being compared.
PRO FORMA MERGER ANALYSIS. Lazard analyzed the potential pro forma
financial effects resulting from the merger on, among other things,
MedicaLogic's projected revenues for the calendar years 2000 to 2002 and the
estimated earning per share, excluding goodwill, for the calendar year 2002. The
estimated financial data used in this analysis were based on analyst projections
and management projections. The results of the analysis suggested that the
merger could be accretive to MedicaLogic's projected revenues for the calendar
years 2000 to 2002 by 7.2% to 24.7% and dilutive to MedicaLogic's earnings per
share, excluding goodwill, in calendar year 2002, without including any revenue
enhancements, one-time merger-related costs, integration costs or restructuring
charges, by 31.5% to 40.6%. The actual results achieved by the combined company
may vary from the projected results and the variations could be significant.
Lazard performed its financial and comparative analyses solely for the
purpose of providing its opinion to the Medscape board of directors that the
conversion ratio is fair from a financial point of view to the holders of
Medscape's common stock. The summary of these analyses is not a complete
description of the analyses performed by Lazard. Preparing a fairness opinion is
a complex analytic process and is not readily susceptible to partial analysis or
summary description. Lazard believes that its analyses must be considered as a
whole. Selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying the analyses and its opinion.
In its analyses, Lazard made numerous assumptions with respect to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Medscape and MedicaLogic.
The estimates contained in these analyses and the valuation ranges resulting
from any particular analysis do not necessarily indicate actual values or
predict future results or values, which may be significantly more or less
favorable than those suggested by these analyses. In addition, analyses relating
to the value of the businesses or securities are not appraisals and do not
reflect the prices at which the businesses or securities may actually be sold or
the prices at which their securities may trade. As a result, these analyses and
estimates are inherently subject to substantial uncertainty.
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Under the terms of Lazard's engagement, Medscape has agreed to pay Lazard a
fee of approximately $3.9 million (a portion of which is represented by the
warrant described below) for the services provided in connection with the
merger, a substantial portion of which is contingent upon the closing of the
merger. Lazard is also the holder of 56,250 shares of Medscape common stock and
a warrant to purchase 100,000 shares of Medscape common stock. Medscape has
agreed to reimburse Lazard for all expenses incurred in connection with its
engagement on an actual cost basis, including travel costs and the reasonable
fees of outside counsel and other professional advisors, and to indemnify Lazard
and related persons against liabilities, including liabilities under the federal
securities laws, arising out of Lazard's engagement.
Lazard is an internationally recognized investment banking firm and was
selected by Medscape based on Lazard's experience and expertise with respect to
merger and acquisition transactions and Lazard's familiarity with Medscape and
its business. Lazard regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions.
REASONS OF TOTAL EMED FOR THE MEDICALOGIC/TOTAL EMED MERGER
In mid-1999, Total eMed began to explore potential options that would
increase Total eMed's penetration in the healthcare community and increase the
liquidity of its stockholders. The three primary mechanisms by which Total eMed
contemplated accomplishing these goals were an initial public offering, another
round of private equity financing and a merger with or sale to an appropriate
partner company.
Although the Total eMed board of directors targeted the latter half of 2000
for an initial public offering, Total eMed began to receive expressions of
interest from various companies regarding a sale or merger, two of which
progressed to the due diligence phase during the latter part of 1999. Total eMed
engaged an investment banker during the first week of January 2000 to formally
receive and investigate these opportunities. One of the offers was from
MedicaLogic.
The Total eMed board of directors believes that the terms of the merger with
MedicaLogic are fair to, and in the best interests of, Total eMed and its
stockholders. Accordingly, at a meeting held on February 20, 2000, the Total
eMed board of directors unanimously approved the merger agreement and
recommended its approval and adoption by the stockholders to Total eMed.
In reaching the decision to approve the merger agreement and recommend its
approval to the stockholders, the Total eMed board of directors considered a
number of factors, including the information presented to it by Total eMed's
management, financial advisors and legal advisors, and discussed the factors
associated with the transaction. Without assigning any relative specific weights
to the factors, the Total eMed board of directors considered the following
material factors:
- the financial terms of the merger, as the transaction is anticipated to
provide Total eMed stockholders with MedicaLogic common stock that fairly
values Total eMed's stock based on a number of factors, including the
amount of capital invested by Total eMed's stockholders, Total eMed's
current and projected revenues and senior management's belief as to the
value of Total eMed;
- the MedicaLogic proposal compares favorably to the other merger/sale
presented to Total eMed, and to the estimated value of Total eMed's stock
assuming Total eMed were to undergo an initial public offering during the
same time period in which the transaction is expected to close;
- the overall terms of the merger, including, among other things, the
treatment of the merger as a tax-free exchange of Total eMed capital stock
for MedicaLogic common stock for federal income tax purposes, the fixed
number of shares of MedicaLogic common stock which will allow Total eMed
stockholders to share in any potential increases in the price of
MedicaLogic common stock, and the size of the break-up fee payable to
total eMed stockholders in certain circumstances;
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- historical and prospective information regarding the business of Total
eMed, its results of operations, financial condition and operation and
acquisition prospects as an independent entity;
- the relative interests of Total eMed and MedicaLogic shareholders in the
equity of the combined company;
- the merger will provide the liquidity needed to allow certain Total eMed
stockholders to reduce the size of their investment and is expected to
provide continuing stockholders an investment in a full-service provider
of healthcare data and record management services using Internet
application with the flexibility and resources required to respond to
numerous opportunities in the Internet healthcare industry;
- the likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay; and
- the strategic benefits of affiliation with two leaders in the Internet
healthcare field, including the opportunity to realize certain synergies
and economies of scale, increase efficiencies of operation to the benefit
of stockholders and customers and develop new products and services.
The board of directors of Total eMed considered certain factors which may be
characterized as countervailing considerations and risks, including, but not
limited to:
- the recent high trading price of MedicaLogic common stock and the risk
that it may decline prior to closing or following the announcement of the
merger;
- the inherent risks and difficulties involved in integrating the businesses
of three independent companies;
- the requirement that a significant percentage of the merger consideration
payable to total eMed stockholders is required to be held in escrow to
protect MedicaLogic against certain potential liabilities; and
- other risks described under "Risk Factors."
The foregoing discussion of the information and factors considered and the
weighing of Total eMed's board of directors is not intended to be exhaustive. In
reaching the determination to approve and recommend approval and adoption of the
merger agreement, in view of the wide variety of factors considered in
connection with its evaluation thereof, the board of directors of Total eMed did
not assign any relative or specific weights to the foregoing or other factors,
and individual directors may have given different weights to the various
factors. The terms of the merger were the result of arm's-length negotiations
between representatives of Total eMed and representatives of MedicaLogic. Based
upon the consideration of the foregoing factors, the Total eMed board of
directors unanimously approved the merger agreement and the transactions
contemplated thereby as being in the best interests of Total eMed and its
stockholders. Each member of the Total eMed board of directors has agreed to
vote his shares of Total eMed common stock in favor of the merger.
TOTAL EMED'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TOTAL EMED
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
INTERESTS OF MEMBERS OF TOTAL EMED'S BOARD OF DIRECTORS AND MANAGEMENT IN THE
MEDICALOGIC/TOTAL EMED MERGER
When considering the recommendation of the Total eMed board, you should be
aware that the Total eMed directors and officers identified below have interests
in the merger that are different from, or are in addition to, yours.
Two members of the Total eMed board of directors, to be nominated by Total
eMed, will become members of the MedicaLogic board as of the effective time of
the merger. Richard D. Rehm will be one of the directors, and Total eMed has not
yet selected the other nominee.
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The following Total eMed officers have employment agreements that will
remain in place following the merger: Dr. Dayani, Kelly Gill and Ted S.
MacDonald. If Dr. Dayani's employment is terminated for certain reasons within
one year of the merger (which is a "change in control" under his agreement), he
is entitled to receive a payment equal to 200% of his base salary plus an amount
equal to the excise tax, if any, under the Internal Revenue Code incurred by him
by reason of payments under the employment agreement. If the employment of
Mr. MacDonald is terminated or his job duties or salary changed without his
consent and within one year of the merger (which is a "change in control" under
his employment agreement), then all of his restricted stock becomes
unrestricted.
MedicaLogic and Dr. Rehm have expressed their intent to either enter into a
new employment agreement or to renegotiate certain terms of Dr. Rehm's current
employment agreement. The parties have not yet engaged in substantive
discussions about the new terms.
The Total eMed options that will be converted into options in
MedicaLogic/Medscape, including those held by Dr. Rehm and Mr. Gill, as well as
the MedicaLogic/Medscape shares that will be received by the holders of the
Total eMed Series C preferred stock, including those held by entities affiliated
with directors Malm and Steele, are not subject to the escrow provisions of the
MedicaLogic/ Total eMed merger agreement.
Under the MedicaLogic/Total eMed merger agreement, MedicaLogic has agreed to
indemnify the officers and directors of Total eMed, for a period of six years
from the effective time of the merger, for all actions taken prior to the
effective time of the merger to the extent authorized in Total eMed's
certificate and bylaws in effect prior to the merger. For a period of six years
from the effective date of the merger, MedicaLogic has agreed to maintain
officer and director liability coverage, with respect to claims arising from
facts or events that occurred prior to the effective time of the merger, for the
benefit of the present or former officers and directors of Total eMed as of the
effective time of the merger in such amounts and on such terms that are no less
beneficial to the officers and directors than the coverage maintained by Total
eMed prior to the merger.
As a result of the interests described above, these directors and officers
may be more likely to vote to approve the merger agreement than if they did not
have these interests.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The following discussion summarizes the material federal income tax
considerations of the MedicaLogic/Medscape merger and the MedicaLogic/Total eMed
merger that are generally applicable to holders of MedicaLogic stock.
LIMITATIONS. This discussion is based upon the Internal Revenue Code of
1986, as amended, the regulations promulgated under the Code, Internal Revenue
Service and other administrative rulings, and judicial authority in effect as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Any change could affect the continuing validity of this discussion.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO MEDICALOGIC
SHAREHOLDERS. Holders of MedicaLogic common stock will not recognize any gain
or loss for United States federal income tax purposes as a result of the merger.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO MEDICALOGIC, MEDSCAPE,
MONEYPENNY MERGER CORP., TOTAL EMED AND AQ MERGER CORP. None of MedicaLogic,
Medscape, Moneypenny Merger Corp., Total eMed, or AQ Merger Corp. will recognize
gain or loss for United States federal income tax purposes as a result of the
mergers.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the
Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade
Commission must review transactions such as the mergers. The mergers will also
be reviewed by state antitrust authorities. The government agencies
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conducting these reviews will determine whether the mergers comply with
antitrust laws. The Hart-Scott-Rodino Act requires that we and certain of our
stockholders notify these federal agencies of the mergers. We must wait for at
least 30 days after we file these notifications before we can complete the
mergers.
At any time before or after the mergers become effective, the Antitrust
Division, the Federal Trade Commission, state antitrust authorities or a private
person or entity could seek to enjoin either or both of the mergers or to cause
MedicaLogic, Medscape or Total eMed to divest certain assets. Under the merger
agreements, the obligation of MedicaLogic, Medscape and Total eMed to complete
their respective mergers is conditioned on:
- the termination of the waiting period; and
- the absence of any injunction against the merger on antitrust or other
grounds.
A challenge to either merger could be made and, if such a challenge is made,
MedicaLogic, Medscape and Total eMed may not prevail.
Other than the approvals described in this document, we are not aware of any
other significant government or regulatory approvals that we need to obtain to
complete the mergers. If we discover that other approvals are required, we will
seek to obtain them. If any approval or action is needed, however, we may not be
able to obtain it. Even if we could obtain the approval, conditions may be
placed on it that would cause us to abandon the mergers.
APPRAISAL RIGHTS
SHAREHOLDERS OF MEDICALOGIC. Under Oregon law, MedicaLogic shareholders
will not have any appraisal rights or dissenters' rights.
STOCKHOLDERS OF MEDSCAPE. Under Delaware law, Medscape shareholders will
not have any appraisal or dissenters' rights.
STOCKHOLDERS OF TOTAL EMED. Under Delaware law, Total eMed stockholders may
have appraisal rights with respect to the MedicaLogic/Total eMed merger. Under
Section 262 of the Delaware General Corporation Law ("DGCL") minority
stockholders who do not wish to accept the merger consideration have the right
to seek an appraisal of the fair value of their shares of in the Delaware Court
of Chancery. Minority stockholders wishing to assert this right must make a
written demand for the appraisal of their shares on or before May 10, 2000, the
date of the Total eMed special meeting. The demand must reasonably inform Total
eMed of the identity of the stockholder making the demand as well as the
intention of the stockholder to demand an appraisal of the fair value of the
shares held by such stockholder.
For purposes of making an appraisal, the address of Total eMed is:
Total eMed, Inc.
5301 Virginia Way, Suite 250
Brentwood, Tennessee 37027
Attention: Ted S. MacDonald
Only a holder of record of shares of Total eMed capital stock, or a person
duly authorized and explicitly purporting to act on such holder's behalf, is
entitled to assert an appraisal right for the shares of Total eMed capital stock
registered in such holder's name. Beneficial owners that are not record holders
and that wish to exercise appraisal rights are advised to consult promptly with
the appropriate record holders as to the timely exercise of appraisal rights. A
record holder, such as a broker, that holds shares of Total eMed capital stock
as a nominee for others, may exercise appraisal rights with respect to the
shares of Total eMed capital stock held for one or more beneficial owners, while
not exercising such rights for other beneficial owners. In such a case, the
written demand should set forth the number of shares of Total eMed capital stock
as to which the demand is made. Where no shares of
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capital stock are expressly mentioned, the demand will be presumed to cover all
shares held in the name of such record holder.
A demand for the appraisal of shares of Total eMed capital stock owned of
record by two or more joint holders must identify and be signed by all of the
holders. A demand for appraisal signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity must so identify the persons signing the
demand.
Total eMed stockholders electing to exercise their appraisal rights under
Section 262 of the DGCL must not vote for approval of the MedicaLogic/Total eMed
merger. If a Total eMed stockholder returns a signed proxy but does not specify
a vote against approval of the MedicaLogic/Total eMed merger or a direction to
abstain, the proxy will be voted for approval of the MedicaLogic/Total eMed
merger, which will have the effect of waiving that stockholder's appraisal
rights.
An appraisal demand may be withdrawn by a Total eMed stockholder within
60 days after the effective time of the MedicaLogic/Total eMed merger, or
thereafter with the approval of Total eMed. Upon withdrawal of an appraisal
demand, the Total eMed stockholder will be entitled to receive the merger
consideration.
Within 120 days after the effective time of the MedicaLogic/Total eMed
merger, Total eMed and any Total eMed stockholder that has properly demanded an
appraisal and that has not withdrawn such demand as provided above and Total
eMed each has the right to file in the Delaware Chancery Court a petition
demanding a determination of the fair value of the shares of Total eMed capital
stock held by all of the dissenting stockholders. If, within the 120-day period,
no petition shall have been filed as provided above, all rights to appraisal
will cease and all of the dissenting stockholders will become entitled to
receive the merger consideration. Total eMed is not obligated to file such a
petition. Any dissenting stockholder is entitled, within the 120-day period and
upon written request to Total eMed, to receive from Total eMed a statement
setting forth the aggregate number of shares of Total eMed capital stock with
respect to which demands for appraisal have been received and the aggregate
number of dissenting stockholders.
Upon the filing of a petition, the Delaware Chancery Court may order that
notice of the time and place fixed for the hearing on the petition be mailed to
Total eMed and all of the dissenting stockholders, and be published at least one
week before the day of the hearing in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as may be
determined by the court. The costs relating to these notices will be borne by
Total eMed.
If a hearing on the petition is held, the Delaware Chancery Court is
empowered to determine which dissenting stockholders are entitled to an
appraisal of their shares of their certificates representing shares of Total
eMed capital stock for notation thereon of the pendency of the appraisal
proceedings, and the court is empowered to dismiss the proceedings as to any
dissenting stockholder who does not comply with this request. Accordingly,
dissenting stockholders are cautioned to retain their stock certificates pending
resolution of the appraisal proceedings.
After determination of the dissenting stockholders entitled to an appraisal,
the Delaware Chancery Court will appraise the shares of Total eMed capital stock
held by such dissenting stockholders at their fair value as of the effective
time, exclusive of any element of value arising from the accomplishment or
expectation of the MedicaLogic/Total eMed merger. When the value is so
determined, the court will direct the payment by Total eMed of such value, with
interest thereon if the court so determines, to the dissenting stockholders
entitled to receive the same, upon surrender to Total eMed by such dissenting
stockholders of the certificates representing such shares.
In determining fair value, the Delaware Chancery Court will take into
account all relevant factors. In WEINBERGER V. UPO, INC., the Delaware Supreme
Court stated that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered, and that "fair price obviously
requires consideration of all
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relevant factors involving the value of a company." The Delaware Supreme Court
stated that, in making this determination of fair value, the Delaware Chancery
Court must consider market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which could be ascertained as
of the date of the merger that throw any light on future prospects of the merged
corporation. In addition, the Delaware Supreme Court stated that elements of
future value "which are known or susceptible of proof as of the day of the
merger and not the product of speculation" may be considered. The value so
determined could be more than, less than, or equal to the merger consideration.
The Delaware Chancery Court may also, on application, assess costs among the
parties as the court deems equitable and order all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and fees
and expenses of experts, to be charged pro rata against the value of all shares
entitled to appraisal. Determinations by the Delaware Chancery Court are subject
to appellate review by the Delaware Supreme Court.
Dissenting stockholders generally are permitted to participate in the
appraisal proceedings. No appraisal proceedings in the Delaware Chancery Court
shall be dismissed as to any dissenting stockholder without the approval of the
court, and this approval may be conditioned upon terms which the court deems
just.
The foregoing description is not, and does not purport to be, a complete
summary of the applicable provisions of Section 262 of the DGCL and is qualified
in its entirety by reference to the text of Section 262, which is set forth in
Appendix F. Any Total eMed stockholder considering demanding an appraisal is
advised to consult legal counsel.
THIS DOCUMENT CONSTITUTES THE NOTICE TO TOTAL EMED STOCKHOLDERS REQUIRED BY
SECTION 262(D) OF THE DELAWARE GENERAL CORPORATION LAW. THIS DOCUMENT WILL BE
MAILED TO TOTAL EMED STOCKHOLDERS ON OR ABOUT APRIL 10, 2000 AND, THEREFORE,
TOTAL EMED STOCKHOLDERS WHO WISH TO EXERCISE APPRAISAL RIGHTS HAVE UNTIL
MAY 10, 2000, THE DATE OF THE TOTAL EMED SPECIAL MEETING, TO MAKE A WRITTEN
DEMAND FOR PAYMENT OF THE FAIR VALUE OF THEIR SHARES OF TOTAL EMED CAPITAL
STOCK.
NASDAQ LISTING OF MEDICALOGIC COMMON STOCK
MedicaLogic/Medscape common stock will be listed on the Nasdaq National
Market after the mergers.
FEDERAL SECURITIES LAW CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
All shares of MedicaLogic/Medscape common stock received by Medscape or
Total eMed stockholders in connection with the mergers will be freely
transferable, except that shares received by persons who are deemed to be
"affiliates" (as that term is defined under the Securities Act of 1933) of
Medscape or Total eMed before the relevant merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act of 1933 (or Rule 144, in the case of persons who become affiliates of
MedicaLogic/Medscape) or as otherwise permitted under the Securities Act of
1933. Persons who may be deemed to be affiliates of Medscape or Total eMed
generally include individuals or entities that control, are controlled by, or
are under common control with, Medscape or Total eMed, and may include certain
officers and directors as well as principal stockholders of Medscape or Total
eMed.
This document does not cover resales of MedicaLogic/Medscape common stock
received by the Medscape or Total eMed stockholders in connection with the
respective mergers, and no person is authorized to make any use of this document
for any resale.
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THE MEDICALOGIC/MEDSCAPE MERGER AGREEMENT
THE MERGER
The MedicaLogic/Medscape merger agreement provides for the merger of a newly
formed subsidiary of MedicaLogic, Moneypenny Merger Corp., with and into
Medscape. As a result of the merger, Medscape will be the surviving corporation
and will be a wholly owned subsidiary of MedicaLogic.
The completion of the merger will take effect on the third business day
following the date when the last of the conditions to the merger is fulfilled or
waived or at any other mutually agreed time and date. On the closing of the
merger, MedicaLogic and Medscape will cause a certificate of merger to be filed
with the Secretary of State of Delaware. At that time, or at such other time as
the parties may agree upon in writing pursuant to applicable law, the merger
will become effective.
MERGER CONSIDERATION
At the effective time of the MedicaLogic/Medscape merger, each share of
Medscape common stock outstanding immediately before the effective time will be
converted into the right to receive .323 shares of MedicaLogic common stock.
At the effective time of the MedicaLogic/Medscape merger, each outstanding
Medscape option or warrant to purchase the number of shares of Medscape common
stock will be converted into options or warrants, as the case may be, to
purchase shares of MedicaLogic common stock equal to the product (rounded to the
nearest whole number) of (x) the number of shares of Medscape common stock
subject to such option or warrant immediately before the effective time of the
merger multiplied by (y) .323. All other terms and conditions of the converted
Medscape options and warrants will remain the same.
EXCHANGE OF CERTIFICATES FOR SHARES
Promptly after the effective time of the MedicaLogic/Medscape merger, the
transfer agent, Chase Mellon Shareholder Services, will mail to each record
holder of outstanding certificates that immediately before the effective time
represented shares of Medscape common stock:
- instructions for exchanging the Medscape certificates for the merger
consideration.
On surrender to the exchange agent of a Medscape certificate, together with any
other required documents, the holder of the Medscape certificate will be
entitled to receive the merger consideration and the Medscape certificate will
be canceled.
If the exchange of certificates representing shares of Medscape common stock
is to be made to a person other than the person in whose name the surrendered
Medscape certificate is registered;
- the Medscape certificate must be properly endorsed or otherwise in proper
form for transfer; and
- the person requesting the exchange must have paid any required transfer
and other taxes.
After the effective time of the MedicaLogic/Medscape merger and until
properly surrendered, each Medscape certificate will represent only the right to
receive the merger consideration.
HOLDERS OF MEDSCAPE COMMON STOCK SHOULD NOT FORWARD MEDSCAPE CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. HOLDERS OF
MEDSCAPE COMMON STOCK SHOULD NOT RETURN MEDSCAPE CERTIFICATES WITH THE ENCLOSED
PROXY.
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REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties by
each of us relating to the following:
- corporate organization and similar corporate matters;
- authorization, execution, delivery, performance and enforceability of the
merger agreement and related matters;
- required filings with government agencies;
- the absence of any material adverse consequences as a result of entering
into the merger agreement;
- the accuracy of reports and financial statements filed with the SEC;
- subsidiaries and joint ventures;
- tax matters;
- the status of permits and licenses;
- the delivery of fairness opinions by financial advisors;
- brokers' and finders' fees;
- the absence of material changes to our businesses since a recent date;
- capital structure;
- the absence of any adverse material suits, claims or proceedings and other
litigation;
- compliance with agreements;
- employee and labor matters;
- employee benefits;
- the absence of any undisclosed liabilities;
- the existence of relationships between us and our directors and officers;
- absence of powers of attorney or other restrictions;
- the required vote of stockholders;
- intellectual property; and
- the nonexistence of other agreements to sell our company or its assets.
CONTINUATION OF BUSINESS PENDING THE MERGER
We each have agreed that during the period from the date of the merger
agreement until the closing of the merger, we will:
- carry on our businesses in the ordinary and usual manner; and
- maintain our existing relations with customers, suppliers, employees and
business associates.
We each have also agreed that during the period from the date of the merger
agreement until the closing of the merger, we will not:
- split, combine or reclassify our outstanding common stock or change our
authorized capitalization;
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- declare or pay any dividend or other distribution; or
- change our accounting methods unless required to do so by changes in
generally accepted accounting principles.
In addition, Medscape has agreed that in this period it will not:
- issue or sell any capital stock or rights to acquire capital stock, other
than pursuant to options issued in the ordinary course consistent with
past practice or pursuant to its outstanding warrants;
- redeem, purchase or acquire any of its capital stock;
- with some exceptions, incur, assume or guarantee additional debt;
- enter into new agreements or modify existing agreements with its officers
or employees to increase compensation or benefits, except as previously
disclosed to MedicaLogic; or
- authorize capital expenditures other than in the ordinary course of
business, form any subsidiaries, other than certain non-U.S. subsidiaries,
or make any acquisitions of or investments in assets or stock of any other
person or entity, except as previously disclosed to MedicaLogic.
MedicaLogic also has agreed to:
- propose and recommend to its shareholders that its articles of
incorporation be amended to change its corporate name to
"MedicaLogic/Medscape, Inc.;"
- notify each Medscape optionholder in writing that his or her option has
been converted into an option to purchase MedicaLogic common stock after
the merger;
- for six years from the closing, indemnify the officers and directors of
Medscape for all actions taken prior to the merger to the extent
authorized in Medscape's charter documents, and for a period of three
years from the closing, maintain officer and director liability coverage,
with respect to claims arising from facts or events that occurred prior to
closing, in amounts and on terms that are no less beneficial to the
officers and directors of MedicaLogic than the coverage maintained by
Medscape prior to the merger, provided that in no event is MedicaLogic
obligated to expend in order to maintain or procure liability coverage an
amount per annum in excess of 150% of the aggregate premiums payable by
Medscape and its subsidiaries in 1999 for such purpose;
- cause three nominees of Medscape to be elected to the MedicaLogic board
and fix the size of the MedicaLogic board at not more than 11 members; and
- appoint George D. Lundberg, M.D., as Editor-in-Chief of MedicaLogic
effective on the closing of the merger.
MedicaLogic also agreed not to consent to any amendment of the
MedicaLogic/Total eMed merger agreement or waive any provision thereof that
would be materially adverse to Medscape or its stockholders. However,
MedicaLogic is not required to consummate the MedicaLogic/Total eMed merger.
NO SOLICITATION
Medscape has agreed it will not encourage, initiate or solicit any proposal
concerning a merger, consolidation, sale of a substantial amount of its assets
or similar transaction. The merger agreement further provides that Medscape will
not have any discussions with any organization concerning such a proposal or
withdraw the recommendation of its board of directors unless the Medscape board
determines in good faith (i) after receipt of a written opinion of outside
counsel, that the action is
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necessary in order for its directors to comply with their respective fiduciary
obligations, and (ii) after consultation with its financial advisors, that the
transaction is reasonably likely to be completed and, if completed, would result
in a transaction superior to the merger. Medscape has also agreed to notify
MedicaLogic promptly of any proposals it may receive and to keep MedicaLogic
informed of all developments relating to any proposal.
MedicaLogic has agreed that it will not encourage, initiate or solicit any
proposal concerning a "change of control" of MedicaLogic, and that it will
notify Medscape of any such proposal and keep Medscape appropriately informed of
the status of any such proposal. A change of control is defined to include
(i) any person becoming a beneficial owner of securities of MedicaLogic
representing 50% or more of the combined voting power of its outstanding capital
stock, (ii) shareholders of MedicaLogic approving a merger or consolidation of
MedicaLogic with any other company where the former shareholders of MedicaLogic
do not own at least 50% of the combined voting power of the surviving or
resulting corporation or (iii) MedicaLogic selling 50% or more of its assets to
a buyer that is not a subsidiary of MedicaLogic. However, nothing in the merger
agreement prohibits MedicaLogic from providing information in response to any
proposal or offer of this kind, engaging in negotiations or discussions with any
person who has made a proposal or offer, or entering into or consummating any
such transaction.
AGREEMENT WITH CBS
In the MedicaLogic/Medscape merger agreement, MedicaLogic also agreed to
provide CBS Corporation:
- the right to designate one director to the MedicaLogic/Medscape board so
long as CBS Corporation beneficially owns five percent or more of the
MedicaLogic/Medscape common stock outstanding after the mergers (without
giving effect to any reduction due to events other than the sale of shares
by CBS Corporation); and
- rights providing the economic equivalent of the rights CBS Corporation has
under an agreement with Medscape, which in effect will give participation
rights to CBS Corporation enabling it to maintain its percentage ownership
of MedicaLogic/Medscape after the mergers.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MEDICALOGIC/MEDSCAPE MERGER
The following is a general description of the material United States federal
income tax consequences of the MedicaLogic/Medscape merger to holders of
Medscape capital stock. This summary is based upon the opinion of counsel to be
delivered by Patterson, Belknap, Webb & Tyler LLP. The opinion, which is based
on certain factual assumptions and on representations made by Medscape,
MedicaLogic and Moneypenny Merger Corp. and subject to certain limitations and
qualifications noted in the opinion, sets forth the opinion that the
MedicaLogic/Medscape merger will constitute a "reorganization" within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended.
Medscape stockholders should be aware that this discussion does not address
all federal income tax considerations that may be relevant to particular
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Internal Revenue Code, who are foreign persons, or who
acquired their shares in connection with stock option or stock purchase plans or
in other compensatory transactions. In addition, the following discussion does
not address the tax consequences of transactions effectuated prior to or after
the merger (whether or not such transactions are in connection with the merger),
including without limitation, transactions in which shares of Medscape capital
stock are acquired or shares of MedicaLogic common stock are disposed of.
Further, no foreign, state or local tax considerations are addressed herein.
ACCORDINGLY, MEDSCAPE STOCKHOLDERS ARE URGED TO CONSULT THEIR
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OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES. THE TAX
CONSEQUENCES OF THE MERGER WITH RESPECT TO A GIVEN STOCKHOLDER DEPEND ON THAT
PARTICULAR STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES.
The following discussion is based on counsel's interpretation of the Code,
applicable United States Treasury regulations, judicial authority, and
administrative rulings and practice, all as of the date hereof. The Internal
Revenue Service is not precluded from asserting a contrary position. In
addition, there can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the accuracy
of the statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the merger to MedicaLogic, Medscape and their respective
stockholders.
Subject to the limitations and qualifications referred to herein,
qualification of the MedicaLogic/ Medscape merger as a reorganization will
generally result in the following federal income tax consequences:
- No gain or loss will be recognized by holders of Medscape capital stock
upon their receipt in the merger of MedicaLogic common stock (except to
the extent of cash received in lieu of a fractional share thereof) solely
in exchange for Medscape capital stock;
- The aggregate tax basis of the MedicaLogic common stock received in the
merger will be the same as the aggregate tax basis of Medscape capital
stock surrendered in exchange therefor (excluding any basis allocable to
Medscape capital stock for which cash is received in lieu of fractional
shares of MedicaLogic common stock);
- The holding period of the MedicaLogic common stock received in the merger
will include the period for which the Medscape capital stock surrendered
in exchange therefor was held, provided that the Medscape capital stock is
held as a capital asset at the effective time of the merger;
- Cash payments in lieu of a fractional share will be treated as if a
fractional share of MedicaLogic common stock had been issued in the merger
and then redeemed by MedicaLogic. A Medscape stockholder receiving such
cash will generally recognize gain or loss upon such payment equal to the
difference (if any) between such stockholder's basis in the fractional
share and the amount of cash received; and
- MedicaLogic and Medscape will not recognize material amounts of gain
solely as a result of the merger.
The parties are not requesting a ruling from the IRS in connection with the
MedicaLogic/ Medscape merger. However, Medscape will receive a tax opinion to
the effect that, for federal income tax purposes, the merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The opinion is
intended to be used by MedicaLogic and Medscape for the purpose of supporting
the adequacy and accuracy of the discussion of federal income tax consequences
as they relate to the merger of Medscape and Moneypenny Merger Corp., a wholly
owned subsidiary of MedicaLogic, contained in this Joint Proxy
Statement/Prospectus, and to support the federal income tax reporting position
with respect to the characterization of the merger as a reorganization.
The opinion neither binds the IRS nor precludes the IRS from adopting a
contrary position. The opinion is subject to certain assumptions and
qualifications and based on the truth and accuracy of certain representations
made by MedicaLogic and Medscape and stockholders of Medscape, including
representations in certificates to be delivered to counsel by the respective
managements of MedicaLogic and Medscape and certain stockholders of Medscape. Of
particular importance will be certain assumptions and representations relating
to the "continuity of interest" requirement.
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To satisfy the continuity of interest requirement, Medscape stockholders
must not, pursuant to a plan or intent existing at or prior to the merger,
dispose of or transfer so much of either (i) their Medscape capital stock in
anticipation of the merger or (ii) the MedicaLogic common stock to be received
in the merger (collectively, "Planned Dispositions"), to related persons (as
defined in Treasury Regulation Section 1.368-1(e)(3)) of MedicaLogic such that
the Medscape stockholders, as a group, would no longer have a significant equity
interest in the Medscape business being conducted by MedicaLogic (or a
subsidiary thereof) after the merger. Planned Dispositions include, among other
things, shares disposed of pursuant to the exercise of dissenters' rights.
Medscape stockholders will generally be regarded as having a significant equity
interest as long as the MedicaLogic common stock received in the merger (after
taking into account Planned Dispositions), in the aggregate, represents a
substantial portion of the entire consideration received by the Medscape
stockholders in the merger. If the continuity of interest requirement is not
satisfied, the merger would not be treated as a reorganization.
Even if the MedicaLogic/Medscape merger qualifies as a reorganization, a
recipient of shares of MedicaLogic common stock would recognize gain to the
extent that such shares were considered to be received in exchange for services
or property (other than solely Medscape capital stock). All or a portion of such
gain may be taxable as ordinary income. In addition, gain would have to be
recognized to the extent that a Medscape stockholder was treated as receiving
(directly or indirectly) consideration other than MedicaLogic common stock in
exchange for the stockholder's Medscape capital stock. Such other consideration
is generally referred to as "boot."
Medscape stockholders will be required to attach a statement to their
federal income tax returns for the taxable year of the merger that contains the
information listed in Treasury Regulation section 1.368-3(b). Such statement
must include the stockholder's cost or other basis in the stockholder's Medscape
capital stock and a statement regarding the amount of MedicaLogic common stock
and other consideration, if any, received.
A successful IRS challenge to the reorganization status of the merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in a Medscape stockholder recognizing gain or loss with respect to
each share of Medscape capital stock surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
effective time of the merger of the MedicaLogic common stock received in
exchange therefor. In such event, a stockholder's aggregate basis in the
MedicaLogic common stock so received would equal its fair market value and his
holding period for such stock would begin the day after the merger.
CONDITIONS TO OUR OBLIGATIONS TO COMPLETE THE MERGER
Our obligations to complete the MedicaLogic/Medscape merger are subject to
the following conditions:
- all required filings or consents shall have been made or obtained;
- Medscape stockholders shall have approved the merger agreement, and the
MedicaLogic shareholders shall have approved the issuance of MedicaLogic
common stock in the merger;
- no law or ruling shall have been enacted or entered that prohibits the
completion of the merger; and
- the shares of MedicaLogic common stock to be issued to Medscape
stockholders shall have been registered under the Securities Act of 1933
and shall have been listed on the Nasdaq National Market.
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ADDITIONAL CONDITIONS TO OBLIGATIONS OF MEDICALOGIC AND MONEYPENNY MERGER CORP.
The obligations of MedicaLogic and Moneypenny Merger Corp. to complete the
merger are subject to the following additional conditions:
- the representations and warranties of Medscape subject to a materiality
qualifier shall be true and correct in all respects, and the other
representations and warranties of Medscape shall be true and correct in
all respects (except where the failure would not have a material adverse
effect on Medscape), in each case as of the merger closing date;
- Medscape shall have performed and complied with all material obligations
and agreements required to be performed or complied with at or before the
merger closing date; and
- no material adverse change or the discovery of a condition or event that
could reasonably be expected to cause a material adverse change in the
business, properties, financial condition or results of operations of
Medscape shall have occurred since December 31, 1998, other than changes
permitted by the merger agreement.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF MEDSCAPE
Medscape's obligation to complete the merger is subject to the following
additional conditions:
- the representations and warranties of MedicaLogic subject to a materiality
qualifier shall be true and correct in all respects, and the other
representations and warranties of MedicaLogic shall be true and correct in
all respects (except where the failure would not have a material adverse
effect on MedicaLogic), in each case as of the merger closing date;
- MedicaLogic shall have performed and complied with all material
obligations and agreements required to be performed and complied with at
or before the merger closing date; and
- no material adverse change or the discovery of a condition or event that
could reasonably be expected to cause a material adverse change in the
business, properties, financial condition or results of operations of
MedicaLogic and its subsidiaries shall have occurred since September 30,
1999 other than changes permitted by the merger agreement.
TERMINATION
The merger agreement may be terminated and the merger may be abandoned prior
to the effective time by:
- our mutual consent;
- either of us if:
- the merger is not completed on or before August 31, 2000,
- any order permanently prohibiting completion of the merger has become
final and nonappealable, or
- the required approvals of shareholders have not been obtained by reason
of the failure to obtain the required vote at a duly held meeting of
shareholders;
- Medscape if:
- MedicaLogic has materially breached any representation, warranty,
covenant or agreement that is not cured,
- MedicaLogic or its representatives breach its covenant not to encourage,
initiate or solicit a change of control transaction, or
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- MedicaLogic's board withdraws or modifies in a manner adverse to Medscape
its recommendation of the issuance of MedicaLogic stock in the merger, or
fails to reaffirm such recommendation upon the request of Medscape; or
- MedicaLogic if:
- Medscape materially breaches a representation, warranty, covenant or
agreement that is not cured,
- Medscape or its representatives breach its covenant not to encourage,
initiate or solicit a merger, consolidation or sale of a substantial
amount of its assets, or
- Medscape's board withdraws or modifies in a manner adverse to MedicaLogic
its recommendation of the merger.
TERMINATION FEES AND EXPENSES
The merger agreement provides that Medscape will pay a $30,000,000
termination fee to MedicaLogic if any of the following occurs:
- the merger agreement is terminated by MedicaLogic because the Medscape
board withdraws or modifies in a manner adverse to MedicaLogic its
recommendation of the merger, fails to reaffirm its recommendation upon
MedicaLogic's request, or recommends or takes no position with respect to
an alternative merger or similar transaction in any communication to the
stockholders of Medscape;
- a tender offer or exchange offer relating to Medscape stock has been
commenced and Medscape does not promptly thereafter send its stockholders
a statement recommending rejection of that tender offer or exchange offer;
- there has been a material breach by Medscape of any representation,
warranty or covenant in the merger agreement that is not cured, but if the
breach is non-intentional, Medscape will be obligated to pay only the
actual out-of-pocket expenses incurred by MedicaLogic;
- the merger agreement is terminated by MedicaLogic because of a breach of
Medscape's covenant not to encourage, initiate or solicit an alternative
merger or similar transaction;
- prior to the Medscape special meeting an alternative merger or similar
transaction becomes known to Medscape's stockholders and thereafter the
merger agreement is terminated because the required approval of the
stockholders of Medscape has not been obtained upon a vote at the special
meeting; or
- the merger agreement is terminated because the required approval of the
stockholders of Medscape has not been obtained upon a vote at the special
meeting and, within twelve months, Medscape enters into an agreement with
any person with respect to a merger or similar transaction or such a
transaction is consummated.
The merger agreement also provides that MedicaLogic will pay a $30,000,000
termination fee to Medscape if any of the following occurs:
- the merger agreement is terminated by Medscape because the MedicaLogic
board withdraws or modifies in a manner adverse to Medscape its
recommendation of the issuance of MedicaLogic stock in the merger or fails
to reaffirm such recommendation upon Medscape's request;
- there has been a material breach by MedicaLogic of any representation,
warranty or covenant in the merger agreement that is not cured, but if the
breach is non-intentional, MedicaLogic will be obligated to pay only the
actual out-of-pocket expenses incurred by Medscape;
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- the merger agreement is terminated by Medscape because of a breach of
MedicaLogic's covenant not to encourage, initiate or solicit a change of
control transaction; or
- the merger agreement is terminated because the required approval of the
shareholders of MedicaLogic has not been obtained upon a vote at the
special meeting.
AMENDMENTS AND WAIVER
The merger agreement may be modified or amended only by our written
agreement. A party may waive its rights under the merger agreement only in
writing.
VOTING AGREEMENTS
As an inducement to MedicaLogic to enter into the merger agreement, certain
stockholders of Medscape owning a total of 18,044,430 shares of the Medscape
common stock as of February 21, 2000 (which represented 40.3% of the outstanding
shares as of that date) have entered into voting agreements with MedicaLogic.
Under these voting agreements, these individuals have agreed to vote all shares
of Medscape common stock owned by them in favor of the merger and, if
applicable, give consents with respect to those shares. The agreement covers
those shares plus any other shares purchased or acquired since the effective
date of the voting agreements. In addition, these individuals have given
MedicaLogic an irrevocable proxy for the shares of Medscape common stock held by
them to vote those shares in favor of the MedicaLogic/Medscape merger.
Similarly, as an inducement to Medscape to enter into the merger agreement,
certain stockholders of MedicaLogic owning a total of 11,303,937 shares of the
MedicaLogic common stock as of February 21, 2000 (which represented 34.9% of the
outstanding shares as of that date) have entered into voting agreements with
Medscape. The agreement covers those shares plus any other shares purchased or
acquired since the effective date of the voting agreements. In addition, these
individuals have given Medscape an irrevocable proxy for the shares of
MedicaLogic common stock held by them to vote these shares in favor of the
MedicaLogic/Medscape merger.
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THE MEDICALOGIC/TOTAL EMED MERGER AGREEMENT
THE MERGER
The merger agreement provides for the merger of a newly formed subsidiary of
MedicaLogic, AQ Merger Corp., with and into Total eMed. As a result of the
merger, Total eMed will be the surviving corporation and will be a wholly owned
subsidiary of MedicaLogic.
The completion of the merger will take place on the third business day
following the date when the last of the conditions to the merger is fulfilled or
waived, or at any other mutually agreed time and date. On the closing of the
merger, MedicaLogic and Total eMed will cause a certificate of merger to be
filed with the Secretary of State of the State of Delaware. At that time, or at
any other time that the parties may agree upon in writing pursuant to applicable
law, the merger will become effective.
MERGER CONSIDERATION
At the effective time of the merger, each share of Total eMed common stock
(or common equivalent) outstanding immediately before the effective time will be
converted into the right to receive .8070438 shares of MedicaLogic common stock.
This conversion ratio was determined by dividing the aggregate of 8,000,000
shares of common stock of MedicaLogic to be issued in the merger by the sum on
the date of the merger agreement of:
- the total number of shares of common stock of Total eMed issued and
outstanding;
- the total number of shares of common stock of Total eMed issuable upon the
conversion of all issued and outstanding shares of Series A and Series B
preferred stock of Total eMed;
- the total number of shares of common stock of Total eMed issuable upon the
exercise of all outstanding options, warrants and other rights to purchase
or acquire shares of common stock of Total eMed; and
- the total number of shares of common stock into which Total eMed's
Series C preferred stock are deemed to have been converted. MedicaLogic
will not issue any fractional shares. Instead, a Total eMed stockholder
will receive a check in the amount equal to the closing price per share of
MedicaLogic common stock on the trading day immediately preceding the
effective time of the merger multiplied by the fractional share the
stockholder would have otherwise received in the merger.
At the effective time of the merger, each outstanding option to purchase
shares of Total eMed common stock will be converted into an option to purchase
shares of MedicaLogic common stock. The number of shares and exercise price of
each such option will be adjusted based on the conversion ratio in the merger
agreement. All other terms and conditions of the converted Total eMed options
will remain the same.
EXCHANGE OF CERTIFICATES FOR SHARES
Promptly after the effective time of the merger, the transfer agent, Chase
Mellon Shareholder Services, will mail to each record holder of shares of Total
eMed capital stock that have been converted into MedicaLogic common stock:
- instructions for exchanging the Total eMed certificates for certificates
representing the merger consideration.
On surrender to the exchange agent of a certificate for shares of Total eMed
capital stock, together with any other required documents, the holder of the
Total eMed certificate will be issued a certificate for shares of MedicaLogic
common stock representing the holder's share of the merger consideration, and
the Total eMed certificate will be canceled.
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If the exchange of certificates representing shares of Total eMed capital
stock is to be made to a person other than the person in whose name the
surrendered Total eMed certificate is registered:
- the Total eMed certificate must be properly endorsed or otherwise in
proper form for transfer; and
- the person requesting the exchange must have paid any required transfer
and other taxes.
After the effective time of the merger and until properly surrendered, each
Total eMed certificate will represent only the right to receive the merger
consideration.
HOLDERS OF TOTAL EMED CAPITAL STOCK SHOULD NOT FORWARD TOTAL EMED
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
HOLDERS OF TOTAL EMED CAPITAL STOCK SHOULD NOT RETURN TOTAL EMED CERTIFICATES
WITH THE ENCLOSED PROXY.
ESCROWS
CONTRACT ESCROW FUND
The merger agreement provides that the holders of Total eMed capital stock
will be deemed to have received and deposited with an escrow agent five percent
of the total number of shares of MedicaLogic common stock to be received by the
holders of Total eMed capital stock pursuant to the agreement. This contract
escrow fund commences immediately following the effective time of the merger and
terminates at 5:00 p.m., Pacific time, on the fifth business day after delivery
by Total eMed to MedicaLogic of its audited financial statements for the year
ending December 31, 2000; provided, however, that a portion of the escrow shares
necessary to satisfy any unsatisfied claims specified in any officer's
certificate delivered to the escrow agent prior to termination of the escrow
period will remain in the escrow until those claims have been resolved.
The escrowed shares will be available as security against any loss claims,
deficiencies, obligations, cost and expenses, liability or other damage,
including reasonable attorneys' fees, to the extent of the amount of such loss,
expense, liability or other damage that MedicaLogic or its affiliates incur as a
result of any inaccuracy or breach by Total eMed of any representation or
warranty contained in the merger agreement that occurs or becomes known during
the escrow period. The escrow agent will hold and safeguard the escrow shares
and deliver to the former Total eMed stockholders that number of escrow shares
in the contract escrow fund in excess of any shares which may be required to
satisfy any unsatisfied claim made by MedicaLogic prior to the expiration of the
escrow period. As soon as any such claim has been resolved, the escrow agent
will deliver to the former Total eMed stockholders all of the escrow shares
remaining in the contract escrow fund and not required to satisfy any such
claim.
MedicaLogic may not receive any shares from the contract escrow fund unless
and until officer's certificates identifying damages the aggregate amount of
which exceeds $1,000,000 have been delivered to the escrow agent by MedicaLogic
as provided by the agreement and such amount is determined to be payable, in
which case MedicaLogic will receive shares of MedicaLogic common stock from the
contract escrow fund equal in value to the full amount of damages identified in
such certificates. Breach of Total eMed's capitalization, intellectual property
and tax representations and certain earn-out claims are not subject to the
$1,000,000 threshold.
LITIGATION ESCROW FUND
The merger agreement also provides that the holders of Total eMed capital
stock will be deemed to have received and deposited with an escrow agent shares
of MedicaLogic common stock whose market value equals $21,000,000 based on the
average closing price of MedicaLogic common stock for the ten full trading days
immediately preceding the effective time of the merger. The escrow shares will
be available as security against any loss, claims, deficiencies, obligations,
costs and expenses, liability or
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other damage, including reasonable attorneys' fees, to the extent of the amount
of such loss, expense, liability or other damage that MedicaLogic or any of its
affiliates incurs as a result of, whether by way of settlement, arbitration,
adjudication or other quasi-judicial proceeding, a lawsuit filed against Total
eMed and its founder.
MedicaLogic may not receive any shares from the litigation escrow fund for
litigation expenses unless and until officer's certificates identifying
litigation expenses, the aggregate amount of which exceeds $1,000,000, have been
delivered to the escrow agent by MedicaLogic as provided by the agreement and
such amount is determined to be payable, in which case MedicaLogic will receive
shares of MedicaLogic common stock from the litigation escrow fund equal in
value to the full amount of the litigation expenses identified in such
certificates. The escrow agent will hold and safeguard the escrow shares and
deliver to the former Total eMed stockholders the number of escrow shares in the
litigation escrow fund in excess of any shares which may be required to satisfy
an amount agreed to in any settlement or awarded in arbitration, adjudication or
other quasi-judicial proceeding.
In the event of a final settlement or arbitration award, or the entry of a
final order in any adjudication of the litigation, the escrow agent will deliver
to MedicaLogic the number of shares equal to the amount of the liability divided
by the closing price per share of MedicaLogic common stock on the date that
settlement, award or order becomes final. Prior to any settlement, arbitration
or final adjudication of the litigation, MedicaLogic will consider in good faith
any facts or circumstances with respect to litigation, including the market
value of the shares in the litigation escrow fund, that would allow a partial
distribution of the shares to the former stockholders of Total eMed. The right
to receive shares from the litigation escrow fund is MedicaLogic's sole and
exclusive remedy with respect to litigation.
ESCROW AGENT
The merger agreement sets forth the duties of West Coast Trust, as escrow
agent, which include:
- the safeguard of the escrow shares during the escrow period;
- the voting of the escrow shares in accordance with the instructions
received from the beneficial owners of such shares; and
- the delivery at the expiration of the escrow period of all escrow shares
in excess of any shares which may be subject to any unsatisfied claim made
by MedicaLogic to the beneficial owners of such shares.
The merger agreement also provides that MedicaLogic will pay all of the escrow
agent's fees and expenses incurred in the ordinary course of performing its
duties under the agreement.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MEDICALOGIC/TOTAL
EMED MERGER
The following discussion summarizes the material federal income tax
considerations of the MedicaLogic/Total eMed merger that are generally
applicable to holders of Total eMed capital stock. This summary is based upon
the opinion of counsel to be delivered by Harwell Howard Hyne Gabbert & Manner,
P.C. The tax opinion, which is based on certain assumptions and subject to
certain limitations and qualifications noted in the opinion, sets forth the
opinion that the merger will constitute a "reorganization" within the meaning of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
Total eMed stockholders should be aware that this discussion does not
address all federal income tax considerations that may be relevant to particular
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, or who acquired their shares in
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connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of transactions effectuated prior to or after the merger (whether
or not such transactions are in connection with the merger), including without
limitation, transactions in which shares of Total eMed capital stock are
acquired or shares of MedicaLogic common stock are disposed of. Furthermore, no
foreign, state or local tax considerations are addressed herein. ACCORDINGLY,
TOTAL EMED STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES. THE TAX CONSEQUENCES OF THE MERGER WITH
RESPECT TO A GIVEN STOCKHOLDER DEPEND ON THAT PARTICULAR STOCKHOLDER'S
INDIVIDUAL CIRCUMSTANCES.
The following discussion is based on counsel's interpretation of the Code,
applicable United States Treasury regulations, judicial authority, and
administrative rulings and practice, all as of the date hereof. The IRS is not
precluded from asserting a contrary position. In addition, there can be no
assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger to
MedicaLogic, Total eMed and their respective stockholders.
Subject to the limitations and qualifications referred to herein,
qualification of the merger as a reorganization will generally result in the
following federal income tax consequences:
- No gain or loss will be recognized by holders of Total eMed capital stock
upon their receipt in the merger of MedicaLogic/Medscape common stock
(except to the extent of cash received in lieu of a fractional share
thereof) solely in exchange for Total eMed capital stock;
- The aggregate tax basis of the MedicaLogic/Medscape common stock received
in the merger will be the same as the aggregate tax basis of Total eMed
capital stock surrendered in exchange therefor (excluding any basis
allocable to Total eMed capital stock for which cash is received in lieu
of fractional shares of MedicaLogic/Medscape common stock);
- The holding period of the MedicaLogic/Medscape common stock received in
the merger will include the period for which the Total eMed capital stock
surrendered in exchange therefor was held, provided that the Total eMed
capital stock is held as a capital asset at the time of the merger;
- A stockholder who exercises dissenters' rights with respect to a share of
Total eMed capital stock and receives payment for such share in cash will
generally recognize gain or loss for federal income tax purposes, measured
by the difference between the holder's basis in such share and the amount
of cash received, provided that the payment is neither essentially
equivalent to a dividend within the meaning of Section 302 of the Code nor
has the effect of a distribution of a dividend within the meaning of
Section 356(a)(2) of the Code. A sale of Total eMed capital stock pursuant
to an exercise of dissenters' rights will generally not be such a dividend
if, as a result of such exercise, the stockholder exercising dissenters'
rights owns no shares of MedicaLogic/Medscape common stock (either
actually or constructively within the meaning of Section 318 of the Code).
If, however, a stockholder's sale for cash of Total eMed capital stock
pursuant to an exercise of dissenters' rights is dividend, then such
stockholder will generally recognize income for federal income tax
purposes in an amount up to the entire amount of cash so received;
- Cash payments in lieu of a fractional share will be treated as if a
fractional share of MedicaLogic/Medscape common stock had been issued in
the merger and then redeemed by MedicaLogic/Medscape. A Total eMed
stockholder receiving such cash will generally recognize gain or loss upon
such payment equal to the difference (if any) between such stockholder's
basis in the fractional share and the amount of cash received; and
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- MedicaLogic and Total eMed will not recognize material amounts of gain
solely as a result of the merger.
Neither MedicaLogic or Total eMed are requesting a ruling from the IRS in
connection with the merger. However, Total eMed will receive a tax opinion to
the effect that, for federal income tax purposes, the merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The tax opinion
is intended to be used by MedicaLogic and Total eMed for the purpose of
supporting the adequacy and accuracy of the discussion of federal income tax
consequences as they relate to the merger of Total eMed and AQ Merger Corp., a
wholly owned subsidiary of MedicaLogic, contained in this Joint Proxy
Statement/Prospectus, and to support the federal income tax reporting position
with respect to the characterization of the merger as a reorganization.
The tax opinion neither binds the IRS nor precludes the IRS from adopting a
contrary position. The tax opinion is subject to certain assumptions and
qualifications and based on the truth and accuracy of certain representations
made by MedicaLogic and Total eMed and stockholders of Total eMed, including
representations in certificates to be delivered to counsel by the respective
managements of MedicaLogic and Total eMed and certain stockholders of Total
eMed. Of particular importance will be certain assumptions and representations
relating to the "continuity of interest" requirement.
To satisfy the continuity of interest requirement, Total eMed stockholders
must not, pursuant to a plan or intent existing at or prior to the merger,
dispose of or transfer so much of either (i) their Total eMed capital stock in
anticipation of the merger or (ii) the MedicaLogic common stock to be received
in the merger, to related persons (as defined in Treasury Regulation
Section 1.368-1(e)(3)) of MedicaLogic such that the Total eMed stockholders, as
a group, would no longer have a significant equity interest in the Total eMed
business being conducted by MedicaLogic (or a subsidiary thereof) after the
merger. Such types of dispositions or transfers include, among other things,
shares disposed of pursuant to the exercise of dissenters' rights. Total eMed
stockholders will generally be regarded as having a significant equity interest
as long as the MedicaLogic common stock received in the merger (after taking
into account any such dispositions), in the aggregate, represents a substantial
portion of the entire consideration received by the Total eMed stockholders in
the merger. If the continuity of interest requirement is not satisfied, the
merger would not be treated as a reorganization.
Even if the merger qualifies as a reorganization, a recipient of shares of
MedicaLogic/Medscape common stock would recognize gain to the extent that such
shares were considered to be received in exchange for services or property
(other than solely Total eMed capital stock). All or a portion of such gain may
be taxable as ordinary income. In addition, gain would have to be recognized to
the extent that a Total eMed stockholder was treated as receiving (directly or
indirectly) consideration other than MedicaLogic/Medscape common stock in
exchange for the stockholder's Total eMed capital stock. Such other
consideration is generally referred to as "boot."
Total eMed stockholders will be required to attach a statement to their
federal income tax returns for the taxable year of the merger that contains the
information listed in Treasury Regulation section 1.368-3(b). Such statement
must include the stockholder's tax basis in the stockholder's Total eMed capital
stock and a statement regarding the amount of MedicaLogic/Medscape common stock
and other consideration, if any, received.
A successful IRS challenge to the reorganization status of the merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in a Total eMed stockholder recognizing gain or loss with respect
to each share of Total eMed capital stock surrendered equal to the difference
between the stockholder's basis in such share and the fair market value, as of
the effective time of the merger, of the MedicaLogic/Medscape common stock
received in exchange therefor. In such event, a stockholder's aggregate basis in
the MedicaLogic/Medscape common stock so received
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would equal its fair market value and his holding period for such stock would
begin the day after the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties by
each of us relating to the following:
- corporate organization and similar corporate matters;
- authorization, execution, delivery, performance and enforceability of the
merger agreement and related matters;
- required filings with government agencies;
- the absence of any material adverse consequences as a result of entering
into the merger agreement;
- the accuracy of reports, information and financial statements;
- tax matters;
- brokers' and finders' fees;
- the absence of material changes to our businesses since the end of our
most recent fiscal years;
- capital structure;
- the absence of any adverse material suits, claims or proceedings and other
litigation;
- the absence of any undisclosed liabilities;
- the existence of relationships between us and our directors, officers and
stockholders;
- absence of powers of attorney or other restrictions;
- the absence of required consents and approvals of governmental agencies
and third parties; and
- intellectual property.
The merger agreement also contains additional customary representations and
warranties of Total eMed relating to the following:
- material contracts and commitments;
- ownership of real property and material assets;
- compliance with agreements;
- environmental matters;
- employee and labor matters;
- employee benefits;
- insurance matters;
- the required vote of stockholders;
- subsidiaries and joint ventures;
- the status of permits and licenses; and
- the nonexistence of other agreements to sell Total eMed or its assets.
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CONTINUATION OF BUSINESS PENDING THE MERGER
Total eMed has agreed that during the period from the date of the merger
agreement until the closing of the merger, it will not:
- redeem, purchase or acquire any of its capital stock;
- declare or pay any dividend or other distribution;
- issue or sell any capital stock or rights to acquire capital stock;
- amend its charter documents;
- with some exceptions, incur, assume or guarantee additional debt;
- make any tax election;
- enter into new agreements or modify existing agreements with its officers
or management employees to increase compensation or benefits;
- split, combine or reclassify its outstanding common stock or change its
authorized capitalization;
- enter into any transaction or commitment or modify any contract, except
those contemplated by the merger agreement or those that are made in the
ordinary course of business and that do not exceed $25,000;
- transfer, lease, license, guarantee, sell, mortgage, pledge, encumber or
dispose of any property or assets or incur or modify any liability other
than in the ordinary and usual course of business;
- authorize capital expenditures other than in the ordinary course of
business;
- change its accounting methods unless required to do so by changes in
generally accepted accounting principles;
- form any subsidiaries;
- make any acquisitions of or investments in assets or stock of any other
person or entity; and
- permit any insurance policy naming Total eMed as a beneficiary to be
canceled, terminated or renewed without providing notice in advance to
MedicaLogic.
MedicaLogic also has agreed to:
- notify each Total eMed optionholder in writing that his or her option has
been converted into an option to purchase MedicaLogic common stock after
the merger;
- cause two persons designated by Total eMed, reasonably acceptable to
MedicaLogic, to be elected or appointed to the MedicaLogic board;
- submit to Nasdaq a listing application for the common stock to be issued
in the merger and obtain approval of the listing;
- for six years from the closing, indemnify and provide director and officer
liability insurance for Total eMed's officers and directors for all
actions taken before the merger in accordance with Total eMed's charter
documents to the same extent maintained by Total eMed before the merger;
- amend its charter documents that materially and adversely affect the
rights of holders of its common stock;
- declare or pay any dividend; and
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- pay a $6,000,000 fee to Total eMed if the shareholders of MedicaLogic do
not approve the merger.
NO SOLICITATION
Total eMed has agreed it will not engage in or facilitate any proposal
concerning a merger, consolidation, sale of all or substantially all of its
assets or similar transaction. The merger agreement further provides that Total
eMed will not have any discussions with any organization concerning such a
proposal. Total eMed has agreed to notify MedicaLogic promptly of any proposals
it may receive and to keep MedicaLogic informed of all developments relating to
any proposal.
CONDITIONS TO OUR OBLIGATIONS TO COMPLETE THE MERGER
Our obligations to complete the merger are subject to the following
conditions:
- all required regulatory filings or consents shall have been made or
obtained;
- Total eMed stockholders shall have approved the merger agreement, and the
MedicaLogic shareholders shall have approved the issuance of MedicaLogic
common stock in the merger;
- no order, injunction, law or ruling shall have been enacted or entered
that prohibits the completion of the merger; and
- the shares of MedicaLogic common stock to be issued to Total eMed
stockholders shall have been registered under the Securities Act of 1933
and shall have been listed on the Nasdaq National Market system.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF MEDICALOGIC AND AQ MERGER CORP.
The obligations of MedicaLogic and AQ Merger Corp. to complete the merger
are subject to the following additional conditions:
- The representations and warranties of Total eMed subject to a materiality
qualifier shall be true and correct in all respects, and the other
representations and warranties of Total eMed shall be true and correct in
all respects (except where the failure would not have a material adverse
effect on Total eMed), in each case as of the merger closing date, and
Total eMed shall have performed and complied with all material obligations
and agreements required to be performed or complied with at or before the
merger closing date;
- If requested by MedicaLogic, certain shareholders shall have entered into
an agreement with MedicaLogic's underwriters that they will not sell or
transfer any securities of MedicaLogic before June 7, 2000;
- No material adverse change or the discovery of a condition or event that
could reasonably be expected to cause a material adverse change in the
business, properties, financial condition or results of operations of
Total eMed shall have occurred since December 31, 1999, other than changes
permitted by the merger agreement;
- Not more than ten percent of the outstanding shares of Total eMed common
stock are dissenting shares with respect to the merger;
- Immediately prior to the effective time of the merger, all of the
outstanding shares of Total eMed preferred stock have been converted or
deemed to be converted in Total eMed common stock; and
- MedicaLogic has received an opinion from Total eMed's legal counsel in the
form required by the merger agreement.
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ADDITIONAL CONDITIONS TO OBLIGATIONS OF TOTAL EMED
Total eMed's obligation to complete the merger is subject to the following
additional conditions:
- The representations and warranties of MedicaLogic subject to a materiality
qualifier shall be true and correct in all respects, and the other
representatives and warranties of MedicaLogic shall be true and correct in
all respects (except where the failure would not have a material adverse
effect on MedicaLogic), in each case as of the merger closing, and
MedicaLogic shall have performed and complied with all material
obligations and agreements required to be performed and complied with at
or before the merger closing date;
- No material adverse change or the discovery of a condition or event that
could reasonably be expected to cause a material adverse change in the
business, properties, financial condition or results of operations of
MedicaLogic and its subsidiaries shall have occurred since September 30,
1999 other than changes permitted by the merger agreement;
- Total eMed shall have received closing certificates from executive
officers of MedicaLogic and AQ Merger Corp.; and
- Total eMed shall have received an opinion from MedicaLogic's legal counsel
in the form required by the merger agreement.
TERMINATION
The merger agreement may be terminated and the merger may be abandoned prior
to the effective time by:
- our mutual consent;
- either of us if:
- the merger is not completed on or before July 31, 2000; or
- any order permanently prohibiting completion of the merger has become
final and nonappealable;
- Total eMed if:
- MedicaLogic has materially breached any representation, warranty,
covenant or agreement that is not cured; or
- MedicaLogic if:
- Total eMed materially breaches a representation, warranty, covenant or
agreement that is not cured.
AMENDMENTS AND WAIVER
The merger agreement may be modified or amended only by our written
agreement. A party may waive its rights under the merger agreement only in
writing.
VOTING AGREEMENTS
As an inducement to MedicaLogic to enter into the merger agreement, certain
stockholders of Total eMed have entered into voting agreements with MedicaLogic.
See "Total eMed Special Meeting--Record date and vote required." Under these
voting agreements, these stockholders have agreed to vote all shares of Total
eMed common stock owned by them in favor of the merger and, if applicable, give
consents with respect to those shares. The agreement covers those shares plus
any other shares purchased or acquired since the effective date of the voting
agreements. In addition, these
151
<PAGE>
stockholders have given MedicaLogic an irrevocable proxy for the shares of Total
eMed common stock held by them to vote those shares in favor of the merger. In
addition, except in limited situations, these stockholders have agreed not to
dispose of the shares of Total eMed common stock held by them until we complete
the merger or terminate the merger agreement. These stockholders have also
agreed that at MedicaLogic's request they will enter into an agreement with
MedicaLogic's underwriters that they will not sell or transfer any MedicaLogic
securities before June 7, 2000.
As an inducement to Total eMed to enter into the merger agreement, certain
shareholders of MedicaLogic have entered into voting agreements with Total eMed.
See "MedicaLogic special meeting." Under these voting agreements, these
shareholders have agreed to vote all shares of MedicaLogic common stock owned by
them in favor of the merger and, if applicable, give consents with respect to
those shares. The agreement covers those shares plus any other shares purchased
or acquired since the effective date of the voting agreements. In addition,
these shareholders have given Total eMed an irrevocable proxy for shares of
MedicaLogic common stock held by them to vote these shares in favor of the
merger. In addition, except in limited situations, these shareholders have
agreed not to dispose of the shares of MedicaLogic common stock held by them
until we complete the merger or terminate the merger agreement.
152
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the combination of MedicaLogic, Medscape and Total eMed using the
purchase accounting method. The unaudited pro forma condensed combined balance
sheet assumes the mergers took place on December 31, 1999 and combines
MedicaLogic's, Medscape's and Total eMed's historical balance sheets at that
date.
The unaudited pro forma condensed combined statements of operations assume
that the mergers took place as of the beginning of 1999 and combine the
consolidated historical statements of operations of MedicaLogic, Medscape and
Total eMed for the year ended December 31, 1999.
The unaudited pro forma condensed combined statements of operations are not
necessarily indicative of operating results which would have been achieved had
the mergers been completed as of the beginning of the period and should not be
construed as representative of future operations. The pro forma adjustments are
based on available information and assumptions that are believed to be
reasonable under the circumstances.
These unaudited pro forma condensed combined consolidated financial
statements should be read in conjunction with the respective audited
consolidated historical financial statements and the accompanying notes of
MedicaLogic, Medscape and Total eMed which are contained in this document.
The MedicaLogic pro forma condensed combined financial statements are based
upon information set forth in this document and assumptions included in the
accompanying notes. After completion of the mergers, MedicaLogic anticipates
completion of the valuations and other studies of the significant assets,
liabilities and business operations of Medscape and Total eMed. Using this
information, MedicaLogic will make a final purchase price allocation between
tangible assets and liabilities, identifiable intangible assets and goodwill.
The impact of these changes, principally affecting intangible assets and related
amortization, could be material.
If the mergers are approved, the mergers will be accounted for using the
purchase method of accounting. Accordingly, MedicaLogic's cost to acquire
Medscape calculated to be $781 million and the cost to acquire Total eMed
calculated to be $369 million will be allocated to the assets acquired and
liabilities assumed according to their respective fair values, with the excess
purchase price being allocated to goodwill. As noted above, the final allocation
of the purchase price is dependent upon valuations and other studies that are
not yet complete. Accordingly, the purchase price allocation adjustments made in
connection with the development of the MedicaLogic pro forma statements are
preliminary and have been made solely for the purpose of developing MedicaLogic
pro forma condensed combined statements.
For the Medscape merger the excess of purchase price over tangible and
intangible assets acquired is being amortized over three years at a rate of
$172 million per year. MedicaLogic believes that a three-year life is responsive
to the rapid rate of change in the Internet industry and is consistent with
other recent mergers of a comparable nature.
For the Total eMed merger, the excess of purchase price over net tangible
and intangible assets is being amortized over five years at a rate of
$69 million per year. MedicaLogic believes that a five-year life is responsive
to the rapid rate of change in the electronic transcription industry and is
consistent with other recent mergers of a comparable nature.
153
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------
PRO FORMA
----------------------------
MEDICALOGIC MEDSCAPE TOTAL EMED ADJUSTMENTS COMBINED
----------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and short-term investments......... $138,856 $ 40,819 $16,002 $ (36)(B) $ 195,641
Accounts receivable, net................ 6,473 5,946 1,616 14,035
Prepaid expenses and current assets..... 4,515 15,256 88 19,859
-------- -------- ------- --------- ----------
Total current assets.................... 149,844 62,021 17,706 (36) 229,535
Property and equipment, net............. 13,087 7,568 4,201 24,856
Other assets, net....................... 435 3,156 42 3,633
Intangible assets....................... -- 10,338 928 (11,266)(D) 59,500
59,500 (B)
Goodwill................................ 4,988 2,252 1,005 863,367 (B) 868,355
(2,252)(D)
(1,005)(D)
-------- -------- ------- --------- ----------
Total assets.......................... $168,354 $ 85,335 $23,882 $ 908,308 $1,185,879
======== ======== ======= ========= ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Accounts payable and other accrued
liabilities........................... $ 8,277 $ 9,567 $ 1,913 $ 9,469 (A) $ 29,226
Deferred revenue........................ 3,269 1,580 -- 4,849
Other................................... 2,432 -- 83 2,515
-------- -------- ------- --------- ----------
Total current liabilities............. 13,978 11,147 1,996 9,469 36,590
Long-term liabilities................... 4,536 -- 17 4,553
-------- -------- ------- --------- ----------
Total liabilities..................... 18,514 11,147 2,013 9,469 41,143
-------- -------- ------- --------- ----------
Commitments and contingencies...........
Redeemable preferred stock.............. -- -- 5,817 (5,817)(C) --
Shareholders' equity:
Preferred stock......................... 25,545 (25,545)(C) --
Common stock and additional paid in
capital............................... 229,724 266,643 261 (266,904)(C) 1,370,104
773,938 (A)
366,442 (A)
Common stock notes receivable........... (11,788) (628) 628 (C) (11,788)
Deferred stock compensation............. (4,570) (7,984) -- 7,984 (C) (4,570)
Treasury stock.......................... -- (3) -- 3 (C) --
Contribution of services................ -- (145,224) -- (145,224)
Warrants................................ -- 6,840 (6,840)(C)
Unrealized loss on investment
securities............................ -- (36) -- 36 (C) --
Stock receivables....................... -- -- (260) (260)
Accumulated deficit..................... (63,526) (45,420) (9,494) 54,914 (C) (63,526)
-------- -------- ------- --------- ----------
Total shareholders' equity............ 149,840 74,188 16,052 904,656 1,144,736
-------- -------- ------- --------- ----------
Total liabilities, redeemable
preferred stock and shareholders'
equity.............................. $168,354 $ 85,335 $23,882 $ 908,308 $1,185,879
======== ======== ======= ========= ==========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ON
PAGE 156.
154
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
PRO FORMA
------------------------------
MEDICALOGIC MEDSCAPE TOTAL EMED ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 19,717 $ 11,156 $ 4,598 $ 35,471
--------- ---------- --------- ------------
Operating expenses:
Cost of revenues........... 7,932 12,967 5,913 26,812
Marketing and sales........ 20,817 26,944 443 48,204
Research and development... 11,946 -- -- 11,946
General and
administrative........... 3,728 6,048 3,942 13,718
Deferred stock compensation
expenses................. 370 2,101 -- 2,471
Depreciation and
amortization............. 2,481 857 987 $ (222)(c) 4,103
Goodwill amortization...... 1,527 153 44 274,371 (a) 275,898
(197)(c)
--------- ---------- --------- --------- ------------
Total operating
expenses............... 48,801 49,070 11,329 273,952 383,152
--------- ---------- --------- --------- ------------
Operating loss............... (29,084) (37,914) (6,731) (273,952) (347,681)
Other income (expense)....... 1,431 1,203 218 2,852
--------- ---------- --------- --------- ------------
Net loss..................... (27,653) (36,711) (6,513) (273,952) (344,829)
Preferred stock accretion.... 334 -- 1,370 (1,370)(d) 334
--------- ---------- --------- --------- ------------
Net loss attributable to
common shareholders........ $ (27,987) $ (36,711) $ (7,883) $(272,582) $ (345,163)
========= ========== ========= ========= ============
Net loss per share:
Basic and diluted.......... $ (3.07) $ (1.89) $ (3.39) $ (11.14)
========= ========== ========= ============
Shares used in computing net
loss per share:
Basic and diluted.......... 9,107,613 19,400,443 2,325,205 30,990,929 (b)
========= ========== ========= ============
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ON
PAGE 156.
155
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the MedicaLogic/ Medscape merger and the MedicaLogic/Total eMed merger, and
gives effect to certain reclassifications to conform the presentation of the
historical operations of the merged companies.
The total estimated purchase price of the transaction has been allocated on
a preliminary basis to assets and liabilities based on management's estimate of
their fair values. The total cost to acquire Medscape in subject to change, to
the extent that the number of shares of Medscape common stock to be acquired
will not be fixed until the effective date of the merger. A change in total cost
will result in a corresponding change in goodwill and related amortization
expense. The excess of the purchase price over the fair value of the net assets
acquired has been allocated to goodwill and other intangible assets. These
allocations are subject to change pending the completion of the final analysis
of the total purchase price and fair values of the assets acquired and the
liabilities assumed. The impact of such changes could be material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of December 31, 1999 have been calculated as if the mergers occurred on
December 31, 1999. The adjustments to the unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999 have been
calculated as if the mergers occurred on January 1, 1999. The adjustments are as
follows:
A. To reflect the acquisition of all of the outstanding capital stock of
Medscape and Total eMed by exchanging shares of MedicaLogic/Medscape common
stock in exchange for each share of Medscape and Total eMed capital stock for a
total estimated combined purchase price of approximately $1.1 billion. The
purchase consideration consists of the issuance of an estimated 21.9 million
shares of MedicaLogic/Medscape common stock with a fair value of approximately
$1.0 billion and the assumption of options and warrants to purchase 5.1 million
shares of MedicaLogic/Medscape common stock with a fair value of approximately
$131.6 million and other related merger costs of approximately $9.4 million in
investment banking, legal, accounting and regulatory filing fees.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
MEDSCAPE TOTAL EMED
--------------------------- --------------------------- TOTAL
EQUIVALENT EQUIVALENT MEDICALOGIC/ AGGREGATE FAIR
SHARES FAIR VALUE SHARES FAIR VALUE MEDSCAPE SHARES VALUE
---------- -------------- ---------- -------------- --------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Shares................... 14,431,687 $665,301 7,451,629 $343,520 21,883,316 $1,008,821
Stock Options............ 1,847,836 72,047 548,371 22,922 2,396,207 94,969
Warrants................. 2,751,503 36,590 -- -- 2,751,503 36,590
---------- --------- ----------
Total Shares............. 19,031,026 8,000,000 27,031,026
========== ========= ==========
Merger Costs............. 7,131 2,338 9.469
-------- -------- ----------
$781,069 $368,780 $1,149,849
======== ======== ==========
</TABLE>
The estimated fair value of the common stock to be issued is based on the
average closing price of MedicaLogic's common stock for the five days prior and
subsequent to the days the mergers were announced, which was $46.10. The
estimated fair value of the options and warrants to be assumed is based on the
Black-Scholes model using the following assumptions:
Expected lives of three to seven years.
Expected volatility factor of 1.0.
156
<PAGE>
Risk-free interest rate of 5.875%.
Expected dividend rate of 0%.
B. To reflect the excess purchase price of approximately $863.4 million over
the fair value of net tangible assets acquired as goodwill and other intangible
assets.
The purchase price is allocated to the assets and liabilities based on
preliminary fair values as follows (in thousands):
<TABLE>
<CAPTION>
MEDSCAPE TOTAL EMED
-------- ----------
<S> <C> <C>
Assets acquired:
Current assets........................................ $ 61,985 $ 17,705
Property and equipment................................ 7,568 4,201
Intangibles........................................... 56,800 2,700
Contribution of services.............................. 145,224 --
Goodwill.............................................. 517,483 345,884
Other assets.......................................... 3,156 42
Stock subscription receivable......................... -- 260
Less liabilities assumed................................ (11,147) (2,012)
-------- --------
Purchase price........................................ $781,069 $368,780
======== ========
</TABLE>
C. To reflect the elimination of the historical stockholders' equity
accounts of Medscape and Total eMed.
D. To reflect the elimination of goodwill and other intangible assets on the
balance sheets of Medscape and Total eMed as of the merger date.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1999, assume the mergers occurred as
of January 1, 1999 are as follows:
(a) To reflect the amortization of goodwill and other intangible assets
resulting from the mergers. The goodwill and other intangible assets are being
amortized over periods of approximately one and one-half to five years.
Currently, management does not anticipate that any significant value will be
attributed to purchased in-process research and development.
<TABLE>
<CAPTION>
MEDSCAPE TOTAL EMED TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
New amortization expense related to application of purchase
method of accounting related to intangibles and
goodwill.................................................. $204,294 $70,077 $274,371
======== ======= ========
</TABLE>
(b) Basic and diluted net loss per share have been adjusted to reflect the
issuance of approximately 16.5 million shares of MedicaLogic/Medscape common
stock, as if the shares had been outstanding for the entire periods presented.
The effect of stock options and warrants of Medscape and Total eMed assumed in
the mergers have not been included as their inclusion would be anti-dilutive.
(c) To reflect the following amortization adjustments for the year ended
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
MEDSCAPE TOTAL EMED TOTAL
-------- ---------- --------
<S> <C> <C> <C>
Elimination of historical amortization--Goodwill............ $(153) $ (44) $(197)
Elimination of historical amortization--Intangibles......... -- (222) (222)
</TABLE>
157
<PAGE>
(d) To reflect the reversal of accretion on redeemable preferred stock that
is forfeited by redeemable preferred stockholders upon voting for and
consummation of the MedicaLogic/Total eMed merger.
(e) MedicaLogic expects to record charges to operations subsequent to the
purchase transaction to reflect the combination of the two companies. These
charges are yet to be estimated and will consist primarily of severance costs
related to the termination of certain employees. This charge is not reflected in
the pro forma combined condensed financial information.
158
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect
to the combination of MedicaLogic and Medscape. The unaudited pro forma combined
balance sheet assumes the merger took place on December 31, 1999 and combines
MedicaLogic's and Medscape's historical balance sheets at that date.
The unaudited pro forma combined statements of operations assume that the
merger took place as of the beginning of 1999 and combine the consolidated
historical statements of operations of MedicaLogic and Medscape for the year
ended December 31, 1999.
The unaudited pro forma combined statements of operations are not
necessarily indicative of operating results which would have been achieved had
the merger been completed as of the beginning of the period and should not be
construed as representative of future operations.
These unaudited pro forma combined consolidated financial statements should
be read in conjunction with the respective audited consolidated historical
financial statements and the accompanying notes of MedicaLogic and Medscape
which are contained in this document.
159
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------
PRO FORMA
---------------------------
MEDICALOGIC MEDSCAPE ADJUSTMENTS COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and short-term investments................ $138,856 $ 40,819 $ (36)(B) $ 179,639
Accounts receivable, net....................... 6,473 5,946 12,419
Prepaid expenses and current assets............ 4,515 15,256 19,771
-------- -------- -------- ---------
Total current assets......................... 149,844 62,021 (36) 211,829
Property and equipment, net.................... 13,087 7,568 20,655
Other assets, net.............................. 435 3,156 3,591
Intangible assets.............................. -- 10,338 (10,338)(D) 56,800
56,800 (B)
Goodwill....................................... 4,988 2,252 517,483 (B) 522,471
(2,252)(D)
-------- -------- -------- ---------
Total assets............................... $168,354 $ 85,335 $561,657 $ 815,346
======== ======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other accrued
liabilities.................................. $ 8,277 $ 9,567 $ 7,131 (A) $ 24,975
Deferred revenue............................... 3,269 1,580 4,849
Other.......................................... 2,432 -- 2,432
-------- -------- -------- ---------
Total current liabilities.................... 13,978 11,147 7,131 32,256
Long term liabilities.......................... 4,536 -- 4,536
-------- -------- -------- ---------
Total liabilities............................ 18,514 11,147 7,131 36,792
-------- -------- -------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock................................... 229,724 266,643 (266,643)(C) 1,003,662
773,938 (A)
Common stock notes receivable.................. (11,788) (628) 628 (C) (11,788)
Deferred stock compensation.................... (4,570) (7,984) 7,984 (C) (4,570)
Treasury stock................................. -- (3) 3 (C) --
Contribution of services....................... -- (145,224) (145,224)
Warrants....................................... -- 6,840 (6,840)(C)
Unrealized loss on investment securities....... -- (36) 36 (C) --
Accumulated deficit............................ (63,526) (45,420) 45,420 (63,526)
-------- -------- -------- ---------
Total shareholders' equity................... 149,840 74,188 554,526 778,554
-------- -------- -------- ---------
Total liabilities and shareholders' equity... $168,354 $ 85,335 $561,657 $ 815,346
======== ======== ======== =========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ON
PAGE 162.
160
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
PRO FORMA
----------------------------
MEDICALOGIC MEDSCAPE ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................. $ 19,717 $ 11,156 $ 30,873
---------- ----------- -----------
Operating expenses:
Cost of revenues....................... 7,932 12,967 20,899
Marketing and sales.................... 20,817 26,944 47,761
Research and development............... 11,946 -- 11,946
General and administrative............. 3,728 6,048 9,776
Deferred stock compensation expenses... 370 2,101 2,471
Depreciation and amortization.......... 2,481 857 3,338
Goodwill amortization.................. 1,527 153 $ 204,294 (a) 205,821
(153)(c)
---------- ----------- --------- -----------
Total operating expenses............. 48,801 49,070 204,141 302,012
---------- ----------- --------- -----------
Operating loss....................... (29,084) (37,914) (204,141) (271,139)
Other income (expense)................... 1,431 1,203 2,634
---------- ----------- --------- -----------
Net loss................................. (27,653) (36,711) (204,141) (268,505)
Preferred stock accretion................ 334 -- 334
---------- ----------- --------- -----------
Net loss attributable to common
shareholders........................... $ (27,987) $ (36,711) $(204,141) $ (268,839)
========== =========== ========= ===========
Net loss per share:
Basic and diluted...................... $ (3.07) $ (1.89) $ (11.42)
========== =========== ===========
Shares used in computing net loss per
share:
Basic and diluted...................... 9,107,613 19,400,443 23,539,300(b)
========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ON
PAGE 162.
161
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the MedicaLogic/ Medscape merger and gives effect to certain reclassifications
financial statements to conform the presentation of the historical operations of
the merged companies.
The total estimated purchase price of the transaction has been allocated on
a preliminary basis to assets and liabilities based on management's estimate of
their fair values. The excess of the purchase price over the fair value of the
net assets acquired has been allocated to goodwill and other intangible assets.
These allocations are subject to change pending the completion of the final
analysis of the total purchase price and fair values of the assets acquired and
the liabilities assumed. The impact of such changes could be material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of December 31, 1999 have been calculated as if the merger occurred on
December 31, 1999. The adjustments to the unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999 have been
calculated as if the merger occurred on January 1, 1999. The adjustments are as
follows:
A. To reflect the acquisition of all the outstanding capital stock by
Medscape by exchanging shares of MedicaLogic/Medscape common stock in exchange
for each share of Medscape capital stock for a total estimated combined purchase
price of approximately $781 million. The purchase consideration consists of the
issuance of an estimated 14.4 million shares of MedicaLogic/Medscape common
stock with a fair value of approximately $665.3 million and the assumption of
options and warrants to purchase approximately 4.6 million shares of
MedicaLogic/Medscape common stock with a fair value of approximately
$108.6 million and other related merger costs of approximately $7.1 million in
investment banking, legal, accounting and regulatory filing fees.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
MEDSCAPE
----------------------------------
EQUIVALENT SHARES FAIR VALUE
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Shares.......................................... 14,431,687 $665,301
Stock options................................... 1,847,836 72,047
Warrants........................................ 2,751,503 36,590
----------
Total shares.................................... 19,031,026
==========
Merger costs.................................... 7,131
--------
$781,069
========
</TABLE>
The estimated fair value of the common stock to be issued is based on the
average closing price of MedicaLogic's common stock for the five days prior and
subsequent to the days the merger was announced, which was $46.10. The estimated
fair value of the options and warrants to be assumed is based on the
Black-Scholes model using the following assumptions:
Expected lives of three years.
Expected volatility factor of 1.0.
Risk-free interest rate of 5.875%.
Expected dividend rate of 0%.
B. To reflect of the excess purchase price of approximately $517 million
over the fair value of net tangible assets as goodwill.
162
<PAGE>
The purchase price is allocated to the assets and liabilities of Medscape
based on preliminary fair values as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired:
Current assets............................................ $ 61,985
Property and equipment.................................... 7,568
Other assets.............................................. 3,156
Contribution of services.................................. 145,224
Goodwill.................................................. 517,483
Intangibles............................................... 56,800
Less liabilities assumed.................................... (11,147)
--------
Purchase price............................................ $781,069
========
</TABLE>
C. To reflect the elimination of the historical stockholders' equity
accounts of Medscape.
D. To reflect the elimination of goodwill and other intangible assets on the
balance sheets of Medscape as of the acquisition date.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1999, assume the merger occurred as
of January 1, 1999 are as follows:
(a) To reflect the amortization of goodwill and other intangible assets
resulting from the merger. Intangibles, consist of customer lists, workforce and
trademarks. The goodwill and other intangible assets are being amortized over
periods of approximately one and one-half to five years. Currently, management
does not anticipate that any significant value will be attributed to purchased
in-process research and development.
(b) Basic and diluted net loss per share have been adjusted to reflect the
issuance of approximately 14.5 million shares of MedicaLogic/Medscape common
stock, as if the shares had been outstanding for the entire period. The effect
of stock options and warrants of Medscape, assumed in the merger has not been
included as their inclusion would be anti-dilutive.
(c) To reflect the following amortization adjustments for the year ended
December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Elimination of historical amortization...................... $153
====
</TABLE>
(d) MedicaLogic expects to record charges to operations subsequent to the
purchase transaction to reflect the combination of the two companies. These
charges are yet to be estimated and will consist primarily of severance costs
related to the termination of certain employees. This charge is not reflected in
the pro forma combined condensed financial information.
163
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect
to the combination of MedicaLogic and Total eMed using the purchase accounting
method. The unaudited pro forma combined balance sheet assumes the merger took
place on December 31, 1999 and combines MedicaLogic's and Total eMed's
historical balance sheets at that date.
The unaudited pro forma combined statements of operations assume that the
merger took place as of the beginning of 1999 and combine the consolidated
historical statements of operations of MedicaLogic and Total eMed for the year
ended December 31, 1999.
The unaudited pro forma combined statements of operations are not
necessarily indicative of operating results which would have been achieved had
the merger been completed as of the beginning of the period and should not be
construed as representative of future operations.
These unaudited pro forma combined consolidated financial statements should
be read in conjunction with the respective audited consolidated historical
financial statements and the accompanying notes of MedicaLogic and Total eMed
which are contained in this document.
164
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------
PRO FORMA
--------------------------
MEDICALOGIC TOTAL EMED ADJUSTMENTS COMBINED
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and short-term investments............... $138,856 $16,002 $154,858
Accounts receivable, net...................... 6,473 1,616 8,089
Prepaid expenses and current assets........... 4,515 88 4,603
-------- ------- --------
Total current assets........................ 149,844 17,706 167,550
Property and equipment, net................... 13,087 4,201 17,288
Other assets, net............................. 435 42 477
Intangible assets............................. -- 928 $ 2,700 (B) 2,700
(928)(D)
Goodwill...................................... 4,988 1,005 345,884 (B) 350,872
(1,005)(D)
-------- ------- -------- --------
Total assets................................ $168,354 $23,882 $346,651 $538,887
======== ======= ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Accounts payable and other accrued
liabilities................................. $ 8,277 $ 1,913 $ 2,338 (A) $ 12,528
Deferred revenue.............................. 3,269 -- 3,269
Other......................................... 2,432 83 2,515
-------- ------- -------- --------
Total current liabilities................... 13,978 1,996 2,338 18,312
Long-term liabilities......................... 4,536 17 4,553
-------- ------- -------- --------
Total liabilities........................... 18,514 2,013 2,338 22,865
-------- ------- -------- --------
Commitments and contingencies
Redeemable preferred stock.................... -- 5,817 (5,817)(C) --
Shareholders' equity:
Preferred stock............................... -- 25,545 (25,545)(C) --
Common stock and additional paid in capital... 229,724 261 (261)(C) 596,166
366,442 (A)
Common stock notes receivable................. (11,788) -- (11,788)
Deferred stock compensation................... (4,570) -- (4,570)
Stock receivables............................. -- (260) (260)
Accumulated deficit........................... (63,526) (9,494) 9,494 (D) (63,526)
-------- ------- -------- --------
Total shareholders' equity.................. 149,840 16,052 350,130 516,022
-------- ------- -------- --------
Total liabilities, redeemable preferred
stock and shareholders' equity............ $168,354 $23,882 $346,651 $538,886
======== ======= ======== ========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ON
PAGE 167.
165
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
PRO FORMA
-----------------------------
MEDICALOGIC TOTAL EMED ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................... $ 19,717 $ 4,598 $ 24,315
---------- ---------- -----------
Operating expenses:
Cost of revenues......................... 7,932 5,913 13,845
Marketing and sales...................... 20,817 443 21,260
Research and development................. 11,946 -- 11,946
General and administrative............... 3,728 3,942 7,670
Deferred stock compensation.............. 370 -- 370
Depreciation and amortization............ 2,481 987 $ (222)(c) 3,246
Goodwill amortization.................... 1,527 44 70,077 (a)
(44)(c) 71,604
---------- ---------- -------- -----------
Total operating expenses............... 48,801 11,329 69,811 129,941
---------- ---------- -------- -----------
Operating loss......................... (29,084) (6,731) (69,811) (105,626)
Other income (expense):.................... 1,431 218 1,649
---------- ---------- -------- -----------
Net loss................................... (27,653) (6,513) (69,811) (103,977)
Preferred stock accretion.................. (334) (1,370) 1,370 (e) (334)
---------- ---------- -------- -----------
Net loss attributable to common
shareholders............................. $ (27,987) $ (7,883) $(68,411) $ (104,311)
========== ========== ======== ===========
Net loss per share:
Basic and diluted........................ $ (3.07) $ (3.39) $ (6.30)
========== ========== ======== ===========
Shares used in computing net loss per
share:
Basic and diluted........................ 9,107,613 2,325,205 16,559,242 (b)
========== ========== ======== ===========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ON
PAGE 167.
166
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the MedicaLogic/Total eMed merger and gives effect to certain reclassifications
to conform the presentation of the historical operations of the merged
companies.
The total estimated purchase price of the transaction has been allocated on
a preliminary basis to assets and liabilities based on management's estimate of
their fair values. The excess of the purchase price over the fair value of the
net assets acquired has been allocated to goodwill and other intangible assets.
These allocations are subject to change pending the completion of the final
analysis of the total purchase price and fair values of the assets acquired and
the liabilities assumed. The impact of such changes could be material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of December 31, 1999 have been calculated as if the merger occurred on
December 31, 1999. The adjustments to the unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999 have been
calculated as if the merger occurred on January 1, 1999. The adjustments are as
follows:
A. To reflect the acquisition of all of the outstanding capital stock of
Total eMed by exchanging shares of MedicaLogic/Medscape common stock in exchange
for each share of Total eMed capital stock for a total estimated combined
purchase price of approximately $369 million. The purchase consideration
consists of the issuance of an estimated 7.5 million shares of
MedicaLogic/Medscape common stock with a fair value of approximately
$343.5 million and the assumption of options to purchase .5 million shares of
MedicaLogic common stock with a fair value of approximately $22.9 million and
other related merger costs of approximately $2.3 million for investment banking,
legal, accounting and regulatory filing fees.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
TOTAL EMED
----------------------------------
EQUIVALENT SHARES FAIR VALUE
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Shares.......................................... 7,451,629 $343,520
Stock options................................... 548,371 22,922
Total shares.................................... 8,000,000
========= ========
Merger costs.................................... 2,338 $368,780
========= ========
</TABLE>
The estimated fair value of the common stock to be issued is based on the
average closing price of MedicaLogic's common stock for the five days prior and
subsequent to the days the merger was announced, which was $46.10. The estimated
fair value of the options to be assumed is based on the Black-Scholes model
using the following assumptions:
- Expected lives of three years.
- Expected volatility factor of 1.0.
- Risk-free interest rate of 5.875%.
- Expected dividend rate of 0%.
B. Recognition of the excess purchase price of approximately $346 million
over the fair value of net tangible assets acquired, have been recorded as
goodwill.
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<PAGE>
The purchase price is allocated to the assets and liabilities of Total eMed
based on preliminary fair values as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired:
Current assets............................................ $ 17,705
Property and equipment.................................... 4,201
Other assets.............................................. 42
Intangibles............................................... 2,700
Goodwill.................................................. 345,884
Stock subscription receivable............................. 260
--------
370,792
Less liabilities assumed.................................... (2,012)
--------
Purchase price............................................ $368,780
========
</TABLE>
C. To reflect the elimination of the historical stockholders' equity
accounts of Total eMed.
D. To reflect the elimination of goodwill and other intangible assets on the
balance sheet of Total eMed as of the acquisition date.
The adjustments to the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999, assuming the merger occurred as
of January 1, 1999 are as follows:
(a) To reflect the amortization of goodwill and other intangible assets
resulting from the merger. Intangibles consist of the workforce and customer
list. The goodwill and other intangible assets are being amortized over
periods of approximately three to five years. Currently, management does not
anticipate that any significant value will be attributed to purchased
in-process research and development.
(b) Basic and diluted net loss per share have been adjusted to reflect
the issuance of approximately 7.5 million shares of MedicaLogic/Medscape
common stock, as if the shares had been outstanding for the entire periods
presented. The effect of stock options of Total eMed assumed in the merger
has not been included as their inclusion would be anti-dilutive.
(c) To reflect the following amortization adjustments for the year ended
December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Elimination of historical intangible amortization........... $(222)
=====
Elimination of amortization expense related to goodwill..... $ (44)
=====
</TABLE>
(d) MedicaLogic expects to record charges to operations subsequent to
the purchase transaction to reflect the combination of the two companies.
These charges are yet to be estimated. This charge is not reflected in the
pro forma combined condensed financial information.
(e) To reflect the reversal of accretion on redeemable preferred stock
that is forfeited by redeemable preferred stockholders upon voting for and
consummation of the MedicaLogic/Total eMed merger.
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<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
MedicaLogic completed its initial public offering on December 10, 1999.
MedicaLogic's common stock is listed on the Nasdaq National Market under the
trading symbol MDLI. The table below sets forth, for the calendar quarters
indicated, the reported high and low closing sale prices of MedicaLogic common
stock as reported on the Nasdaq National Market, in each case based on published
financial sources:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
Fourth Quarter.......................................... $ 28.25 $ 20.69
2000
First Quarter........................................... $ 51.00 $ 13.38
------- -------
</TABLE>
On March 31, 2000, the most recent practicable date before the date of this
document, the closing price on the National Market was $17.38 per share of
MedicaLogic common stock. Shareholders are urged to obtain current market
quotations before making any decision with respect to the merger.
Medscape completed its initial public offering on September 27, 1999.
Medscape's common stock is listed on the Nasdaq National Market under the
trading symbol MSCP. The table below sets forth, for the calendar quarters
indicated, the reported high and low closing sale prices of Medscape common
stock as reported on the Nasdaq National Market, in each case based on published
financial sources:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
Fourth Quarter............................................ $12.13 $8.47
2000
First Quarter............................................. $13.38 $4.88
------ -----
</TABLE>
On March 31, 2000, the most recent practicable date before the date of this
document, the closing price on the Nasdaq National Market was $5.34 per share of
Medscape common stock. Shareholders are urged to obtain current market
quotations before making any decision with respect to the merger.
None of MedicaLogic, Medscape or Total eMed has ever paid any cash
dividends. After the merger is completed, MedicaLogic intends to retain earnings
to finance the expansion of the business. Any future dividends will be at the
discretion of the MedicaLogic board and will be determined after consideration
of factors such as MedicaLogic's earnings, financial condition, cash flows from
operations, current and anticipated cash needs and expansion plans and any
restrictions that may be imposed under MedicaLogic's current and future credit
facilities.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF MEDICALOGIC, MEDSCAPE AND TOTAL EMED
GENERAL
This section of the document describes several differences between the
rights of holders of MedicaLogic common stock, Medscape common stock and Total
eMed common stock. Although we believe the description covers the material
differences between these rights, this summary may not contain all of the
information that is important to you.
The Delaware General Corporation Law and Medscape's certificate of
incorporation and bylaws govern the rights of Medscape's stockholders. The
Delaware General Corporation Law and Total eMed's certificate of incorporation
and bylaws govern the rights of Total eMed's stockholders. Upon completion of
the merger, both Medscape and Total eMed stockholders will become shareholders
of MedicaLogic. The Oregon Business Corporation Act and MedicaLogic's articles
of incorporation and
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<PAGE>
bylaws will govern the rights of Medscape and Total eMed stockholders who become
MedicaLogic shareholders.
NUMBER OF DIRECTORS
The MedicaLogic board is composed of between seven and nine directors, as
fixed by the MedicaLogic board. The MedicaLogic board now consists of seven
directors. In connection with the MedicaLogic/Medscape merger, MedicaLogic has
agreed to fix its board at no more than 11 members.
The number of directors of the Medscape board shall be fixed by resolution
duly adopted from time to time by the Medscape board. The Medscape board now
consists of 10 directors.
The size of the Total eMed board is between one and ten directors, as
determined from time to time by the Total eMed board. The Total eMed board now
consists of eight directors.
CLASSIFIED BOARD OF DIRECTORS
Oregon law provides that a corporation's board of directors may be divided
into two or three groups with staggered terms of office. The MedicaLogic board
is divided into three classes serving for three-year terms. At each annual
meeting, one class is elected to a three-year term.
The classified board provisions may have the effect of lengthening the time
required for a third party to acquire control of MedicaLogic through a proxy
contest or the election of a majority of the board of directors and may deter
any potential unfriendly offers or other efforts to obtain control of
MedicaLogic. These provisions could deprive you of opportunities to realize a
premium for your shares and could make removal of incumbent directors more
difficult. At the same time, these provisions may have the effect of inducing
any third parties seeking control of MedicaLogic to negotiate terms acceptable
to the board of directors. In addition, the provisions regulating removal of
directors, which are described below, will make the removal of any director more
difficult, even if you believe removal is in your best interests. Since these
provisions make the removal of directors more difficult, they increase the
likelihood that incumbent directors will retain their position and, since the
board has the power to retain and discharge management, could perpetuate
incumbent management.
Delaware law provides that a corporation's board of directors may be divided
into up to three classes with staggered terms of office. The Medscape board is
divided into three classes with staggered terms of office. One class is elected
each year at the annual meeting of stockholders. The Total eMed board is not
classified. Its directors are elected each year at the annual meeting of
stockholders.
REMOVAL OF DIRECTORS
Under Oregon law, shareholders may remove a director with or without cause
unless the articles of incorporation provide that shareholders may remove
directors only for cause. Shareholders may remove a director only at a meeting
of the shareholders called for the purpose of removing the director, and the
meeting notice must state that a purpose of the meeting is the removal of a
director. MedicaLogic's articles provide for the removal of any director or the
entire board at any time, but only for cause or by the affirmative vote of the
holders of 75% or more of the voting power of the outstanding shares of capital
stock of MedicaLogic entitled to vote generally in the election of directors
cast at a meeting of the shareholders called for that purpose.
Under Delaware law, directors may be removed by the holders of a majority of
the shares then entitled to vote at an election of directors. The Medscape
bylaws provide that any director may be removed, either with or without cause,
at any time by a majority of the shares entitled to vote at an annual meeting or
at a special meeting of the stockholders called for the purpose.
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The Total eMed bylaws provide that one or more directors may be removed,
with cause, by the holders of a majority of the shares then entitled to vote at
an election of directors or by a majority of the entire board of directors. A
director may only be removed at a meeting called for the purpose of removing him
or her.
VACANCIES ON THE BOARD OF DIRECTORS
Oregon law provides that, unless the articles of incorporation provide
otherwise, shareholders or the directors then in office, even though fewer than
necessary to form a quorum of the board of directors, may fill a vacancy in the
board of directors. The MedicaLogic articles do not address vacancies. A
director elected to fill a vacancy serves until the next annual meeting of
shareholders and until the director's successor is elected and qualified.
Delaware law provides that, unless a corporation's certificate of
incorporation or bylaws provide otherwise, a majority of the directors then in
office, although less than a quorum, or a sole remaining director may, fill
vacancies and newly created directorships resulting from any increase in the
authorized number of directors. The Medscape bylaws provide that any vacancy in
the board of directors caused by death, resignation, removal (whether or not for
cause), disqualification, an increase in the number of directors or any other
cause may be filled by the majority vote of the remaining directors of Medscape
at the next annual meeting, any regular meeting or any special meeting called
for such purpose. The Total eMed bylaws provide that any vacancy occurring in
the Total eMed board of directors due to the removal, with or without cause, or
an increase in the number of directors may be filled by a majority of the
remaining members of Total eMed's board or the stockholders. Vacancies may be
filled by a majority of the directors then in office, even if less than a
quorum. A director so elected serves until the next annual meeting of
stockholders and until the director's successor is elected and qualified.
SHAREHOLDER ACTION BY WRITTEN CONSENT
Oregon law provides that shareholders may take any action required or
permitted to be taken at a shareholders' meeting without a meeting if the action
is taken by all the shareholders entitled to vote on the action. The action must
be evidenced by one or more written consents:
- describing the action taken;
- signed by all the shareholders entitled to vote on the action; and
- delivered to the corporation.
Delaware law provides that, unless otherwise provided in the certificate of
incorporation, the stockholders may take any action required or permitted to be
taken at any annual or special meeting without a meeting, without prior notice
and without a vote, if a written consent or consents setting forth the action
taken is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting. Both the Medscape and the Total eMed bylaws provide that
stockholder action may be taken without a meeting, without prior notice and
without a vote if a consent in writing is signed by the holders of outstanding
stock having not less than the minimum number of votes necessary to authorize or
take such action at a meeting.
AMENDMENTS OF CERTIFICATE/ARTICLES OF INCORPORATION
Oregon law provides that, in order to amend a corporation's articles of
incorporation, the board of directors must first adopt a resolution setting
forth the proposed amendment and directing that it be submitted to the
shareholders. The proposed amendment must then be submitted to a vote at a
meeting of shareholders. The articles of incorporation may be amended if a
quorum exists and the
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<PAGE>
votes cast favoring the amendment exceed the votes cast opposing the amendment,
unless the amendment would create dissenters' rights, in which case a majority
of the votes entitled to be cast is required for approval. Supermajority voting
requirements may be imposed by the articles of incorporation, or by the board of
directors with respect to any proposed amendment. The MedicaLogic articles
contain a supermajority provision, requiring the vote of not less than 75% of
the outstanding voting power, with respect to amending the provisions of the
articles relating to removal of directors and the provisions of the MedicaLogic
bylaws relating to notice of shareholder business, board nominations, and the
number and term of directors, except that these bylaw provisions may also be
amended by the MedicaLogic board. See "--Removal of directors" above and
"--Notice of shareholders' proposals/nominations of directors" below.
Delaware law provides that a corporation's certificate of incorporation may
be amended upon adoption by the board of directors of a resolution setting forth
the proposed amendment and declaring its advisability, followed by the favorable
vote of the holders of a majority of the outstanding stock entitled to vote on
the amendment. Delaware law also provides that a certificate of incorporation
may require a greater vote than would otherwise be required by Delaware law. The
Medscape certificate does not contain supermajority provisions with respect to
amendments.
Total eMed's certificate of incorporation requires the affirmative vote of
at least 75% of the issued and outstanding stock having voting power, voting
together as a single class, to amend, adopt, or repeal certain of its
provisions. In addition, certain provisions relating to the Total eMed preferred
stock can only be amended by the affirmative vote of two-thirds of the voting
power of the affected series of preferred stock.
AMENDMENT OF BYLAWS
Under Oregon law, either the board of directors or the shareholders may
amend or repeal the corporation's bylaws unless the articles of incorporation
reserve the power to amend the bylaws exclusively to the shareholders in whole
or in part, or the shareholders, in amending or repealing a particular bylaw,
provide expressly that the board of directors may not amend or repeal that
bylaw. The MedicaLogic bylaws provide that the MedicaLogic board or the
MedicaLogic shareholders may amend or repeal the bylaws or adopt new bylaws.
However, as noted above, the MedicaLogic articles provide that provisions in the
bylaws relating to notice of shareholder business, board nominations, and the
number and term of directors may be amended only by the MedicaLogic board or a
vote of not less than 75% of the outstanding voting power.
Under Delaware law, the power to adopt, alter and repeal the bylaws is
vested in the stockholders unless the certificate of incorporation vests such
power in the directors. Vesting such power in the directors does not divest the
stockholders of power to adopt, alter or repeal the bylaws. Both the Medscape
and the Total eMed bylaws provide that the board of directors may amend or
repeal the bylaws. However, Total eMed's agreement with the holders of its
Series B and C preferred stock prevent its bylaws from being amended without the
affirmative vote of the holders of at least 50% of such preferred stock.
NOTICE OF SHAREHOLDERS' PROPOSALS/NOMINATIONS OF DIRECTORS
Under the MedicaLogic bylaws, for shareholders to properly introduce
business at the annual meeting of shareholders, a shareholder must give timely
notice of the proposal in a proper written form to MedicaLogic's corporate
secretary. To be timely, a shareholder's notice to the secretary must be
delivered to MedicaLogic's principal executive office not less than 90 nor more
than 120 days before the first anniversary of the date of the proxy statement
for the preceding year's annual meeting.
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<PAGE>
Generally, the MedicaLogic bylaws require that a shareholder's notice
include:
- as to any other business that the shareholder proposes to bring before the
meeting, a brief description of the business, the reasons for conducting
the business and any material interest of the shareholder in the business;
and
- the name and address of the shareholder giving notice and the class and
number of shares of MedicaLogic that the shareholder owns or is entitled
to vote.
The MedicaLogic bylaws permit shareholders to nominate persons for election
to the MedicaLogic board of directors at any annual meeting of the shareholders
or any special meeting held for the purpose of electing directors. Any
shareholder who intends to make a nomination at the annual or special meeting
must deliver a notice to the corporate secretary of MedicaLogic setting forth:
- as to each nominee whom the shareholder proposes to nominate for election
or reelection as a director, any information concerning the nominee that
would be required, under the rules of the SEC, in a proxy statement
soliciting proxies for the election of the nominee; and
- as to the shareholder giving the notice:
- the name and address of the shareholder; and
- the class and number of shares of capital stock of MedicaLogic that are
beneficially owned by the shareholder.
A written consent of each proposed nominee to serving as a director if elected
must accompany the notice. To be timely, any notice made for the purpose of
nominating a director at an annual meeting must meet the same timeliness
requirements as described above for providing advance notice of business to be
transacted at a shareholder's meeting. To be timely, a notice made for the
purpose of nominating a director at a special meeting must be made not later
than 10 days following the public announcement of the meeting.
The Medscape bylaws are silent as to notice of shareholder's proposals and
nominations of directors.
Under the Total eMed bylaws, for stockholders to properly introduce business
at an annual or special meeting, a stockholder of record on the date of
determining stockholders entitled to vote at the annual or special meeting must
give timely notice of the proposal in a proper written form to Total eMed's
corporate secretary, as provided in Total eMed's bylaws. To be timely, a
stockholder's notice to the secretary must be delivered to or mailed and
received at Total eMed's principal executive offices not less than 60 days
before the first anniversary date of the written notice of the preceding year's
annual meeting. However, the notice may not be given more than 90 days before an
annual meeting of stockholders.
The Total eMed bylaws require that a stockholder's notice include the
following:
- as to any other business that the stockholder proposes to bring before the
meeting, a full description of the business;
- the name and address of the stockholder proposing to bring such business
before the meeting and the reasons for conducting such business;
- the class and number of shares of Total eMed held by such stockholder;
- any financial interest of the stockholder in such proposal; and
- if any item of the business involves a nomination for director, all
information regarding each nominee that would be required in a definitive
proxy statement filed with the SEC pursuant to Section 14 of the
Securities Exchange Act of 1934.
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CALLING OF SPECIAL MEETING OF SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN
CONSENT
Oregon law provides that a special meeting of shareholders may be called by:
- the board of directors;
- the holders of 10% or more of the votes entitled to be cast on any issue
proposed to be considered at the special meeting; or
- by persons specified in the articles of incorporation or bylaws.
The MedicaLogic bylaws also provide that special meetings of the
shareholders, for any purposes, may be called by the chief executive officer or
the board of directors.
Delaware law provides that special meetings of stockholders may be called by
a corporation's board of directors or by persons authorized by the corporation's
certificate of incorporation or bylaws. The Medscape bylaws provide that special
meetings of stockholders may be called at any time by the board of directors,
the chairman of the board or the president. The Total eMed bylaws provide that
special meetings of stockholders may only be called by the board of directors or
by one or more stockholders holding shares in the aggregate entitled to cast not
less than 10% of the votes at that meeting.
TRANSACTIONS WITH INTERESTED SHAREHOLDERS
Both Oregon and Delaware have statutes that may have the effect of delaying
or discouraging a hostile takeover of a corporation.
BUSINESS COMBINATION STATUTES. The Oregon Business Corporation Act contains
a business combination statute, and it applies to MedicaLogic. Delaware's
business combination statute is contained in Section 203 of the Delaware General
Corporation Law and applies to both Medscape and Total eMed. Both the Oregon
business combination statute and the Delaware business combination statute, with
few exceptions, prohibit some business combinations between a corporation and an
"interested stockholder" during the three-year period after the interested
stockholder achieved a specified level of ownership. An "interested stockholder"
is one who owns 15% or more of a corporation's voting securities. Although the
Oregon business combination statute generally replicates Delaware's business
combination statute, the Oregon statute omits a significant provision dealing
with competitive bidding contests for corporate control. Section 203(b)(6) of
the Delaware General Corporation Law generally relieves a bidder from the
restrictions of the business combination statute if the board of directors has
approved or not opposed a combination with a competing bidder. The basic policy
behind Section 203(b)(6) is that once the board of directors has decided to sell
the corporation or a majority of its assets or has approved, or not opposed, a
tender or exchange offer for 50% or more of the corporation's outstanding stock,
the stockholders of the corporation are benefitted by the promotion of bidding
contests. Section 203(b)(6) allows a bidder who announces a transaction
subsequent to the public announcement of a management-approved transaction and
prior to the completion or abandonment of the approved transaction to be free of
the requirements of Section 203.
THE OREGON CONTROL SHARE ACT. Oregon has enacted a control share statute
that is contained in the Oregon Business Corporation Act. The Oregon Control
Share Act provides that "control shares" of a corporation acquired in a control
share acquisition have no voting rights except as granted by the shareholders of
the corporation. "Control shares" are shares which, when added to shares then
owned or controlled by a shareholder, increase the shareholder's control of
voting power above one of three thresholds:
- more than one-fifth;
- more than one-third; or
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<PAGE>
- more than one-half of the outstanding voting power of the corporation.
A majority of the votes cast by holders of shares entitled to vote, excluding
shares voted or controlled by the acquiring person and officers and directors,
must approve voting rights for shares acquired in a control share acquisition.
However, no such approval is required for gifts or other transactions not
involving consideration, for a merger to which the corporation is a party, or
other transactions described in the Oregon Control Share Act.
Submission for shareholder consideration of a resolution to grant voting
rights to control shares must be preceded by the filing with the corporation of
a statement by the acquiring person providing certain specified information. If
the acquiring person requests a special meeting of shareholders when it delivers
its statement and submits an undertaking to pay the corporation's expenses, the
corporation shall call a special meeting to consider solely the voting rights to
be accorded the voting shares acquired in the control share acquisition, not
later than 10 days from the date of receipt of the acquiring person statement.
Unless the acquiring person agrees otherwise in writing, the special meeting of
shareholders shall be held no sooner than 30 days and no later than 50 days
after receipt by the corporation of the acquiring person's statement. If no
request for a special meeting of shareholders is made in the acquiring person's
statement, the board of directors shall present to the next annual or special
meeting of shareholders occurring more than 60 days after the filing of the
acquiring person's statement, the voting rights to be accorded the voting shares
acquired in the control share acquisition.
Unless otherwise provided in a corporation's articles of incorporation or
bylaws, if control shares acquired in a control share acquisition are accorded
full voting rights and the acquiring person has acquired a majority of all
voting power of the corporation, the shareholders of the corporation, other than
the acquiring person, have dissenters' rights and shall be entitled to obtain
the fair value of the holder's shares. "Fair value" means a value not less than
the highest price paid per share by the acquiring person in the control share
acquisition.
The MedicaLogic articles of incorporation and bylaws contain no provisions
with respect to control shares.
The Delaware General Corporation Law contains no provisions comparable to
the Oregon Control Share Act.
DISSENTERS' AND APPRAISAL RIGHTS
Under Oregon law, shareholders that otherwise would be entitled to exercise
dissenters' rights do not have these rights if the stock affected is listed on a
national securities exchange or is a national market system security.
MedicaLogic common stock is a national market system security.
Under Delaware law, appraisal rights are available only in connection with
statutory mergers or consolidations. Even in these cases, unless the certificate
of incorporation otherwise provides, Delaware law does not recognize dissenters'
rights for any class or series of stock which is either listed on a national
securities exchange or held of record by more than 2,000 shareholders, except
that appraisal rights are available for holders of stock who, by the terms of
the merger or consolidation, are required to accept anything except:
- stock of the corporation surviving or resulting from the merger or
consolidation;
- shares which at the effective time of the merger or consolidation are
either listed on a national securities exchange or held of record by more
than 2,000 shareholders;
- cash in lieu of fractional shares of stock described in the foregoing
clauses; or
- any combination of stock and cash in lieu of fractional shares described
in the foregoing clauses.
175
<PAGE>
CONSIDERATION OF OTHER CONSTITUENCIES
Oregon law provides that the directors of a corporation, when evaluating any
tender offer or exchange offer made by a third party, a third party's proposal
of merger or consolidation, or a third party's offer to acquire all or
substantially all of the assets of the corporation, may, in determining what
they believe to be in the best interests of the corporation, give due
consideration to the following:
- the social, legal and economic effects on employees, customers and
suppliers of the corporation and on the communities and geographical areas
in which the corporation and its subsidiaries operate;
- the economy of the state and nation;
- the long-term as well as short-term interests of the corporation and its
shareholders, including the possibility that these interests may be best
served by the continued independence of the corporation; and
- other relevant factors.
The Delaware General Corporation Law does not contain provisions relating to
the ability of a board of directors to consider the impact of constituencies
other than stockholders.
LIABILITY OF DIRECTORS
Both Oregon law and Delaware law allow charter documents to eliminate or
limit the personal liability of directors. Under Oregon law, a corporation's
articles of incorporation may not eliminate or limit the liability of the
director for:
- any breach of the director's duty of loyalty to the corporation or
shareholders;
- acts or omission not in good faith or which involve intentional misconduct
or a knowing violation of law;
- any unlawful distribution as defined under the Oregon Business Corporation
Act; or
- any transaction from which the director derived an improper personal
benefit.
Delaware law prohibits reducing director liability under the following
circumstances:
- where a director has breached the duty of loyalty to the corporation or
its stockholders;
- where a director has engaged in acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law;
- where a director has engaged in willful or negligent violation of the
provisions of the Delaware General Corporation Law regarding payment of
dividends or a corporation's purchase or redemption of its own shares of
capital stock; or
- where the director has derived an improper personal benefit in a
transaction.
The MedicaLogic articles of incorporation, the Medscape certificate of
incorporation and the Total eMed certificate of incorporation provide for the
limitation or elimination of liability of directors to the fullest extent
permitted by law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Oregon law and Delaware law contain similar provisions with respect to the
indemnification of directors, officers, employees and agents of a corporation.
Both Oregon and Delaware require indemnification of present or former directors
and officers if they are wholly successful on the merits or otherwise. Delaware
law, however, requires indemnification if a present or former director or
officer
176
<PAGE>
is wholly successful on the merits, or otherwise, as to one or more, but less
than all, claims or issues in a proceeding. Thus, under Delaware law, these
indemnitees may be entitled to partial indemnification even if he or she is
found liable for one or more counts of an action if one or more of the other
counts is dismissed. Under Oregon law a person is not entitled to mandatory
indemnification unless he or she is wholly successful on the merits, or
otherwise, in the defense of a proceeding.
The MedicaLogic articles of incorporation and bylaws provide for mandatory
indemnification to the fullest extent permitted by law of each present or former
director, officer, employee or agent of MedicaLogic or fiduciary of its employee
benefits plans, as defined by the Employment Retirement Income Security Act of
1974. This indemnity covers all reasonable expenses incurred by that person in
connection with any action, suit, or proceeding to which such person is made, or
threatened to be made, a party by reason of the fact that the person is or was a
director or fiduciary of an employee benefit plan of MedicaLogic or at the
request of MedicaLogic acted in a similar capacity with regard to any other
enterprise.
The Medscape bylaws provide for mandatory to the full extent permitted by
the laws of the State of Delaware indemnification of all directors and officers
whom it has the power to indemnify pursuant thereto.
The Total eMed bylaws provide for mandatory indemnification to the fullest
extent permitted by law of each director or officer or person who has served at
the request of Total eMed's board, president or chief executive officer as a
director or officer of another corporation. Total eMed may indemnify and advance
expenses to any employee or agent who is not a director or officer.
PAYMENT OF DIVIDENDS
Under the Oregon Business Corporation Act, the board of directors of a
corporation may authorize and the corporation may make distributions to
shareholders only if after giving effect to the distribution:
- the corporation would be able to pay its debts as they become due in the
usual course of business; and
- the corporation's total assets would at least equal the sum of the total
liabilities plus, unless the corporation's articles of incorporation
permit otherwise, the amount that would be needed if the corporation were
to be dissolved at the time of the distribution to satisfy the
preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution.
Under Delaware law, dividends may be paid by a corporation either out of the
corporation's excess of net assets over stated capital, or surplus, or, if there
is no surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Directors may not declare and pay
dividends out of such net profits if the amount of capital of the corporation is
less than the aggregate amount of capital represented by the issued and
outstanding stock of all classes having preference upon the distribution of
assets.
TRANSACTIONS WITH OFFICERS OR DIRECTORS
Under the Oregon Business Corporation Act, a conflict of interest
transaction is not voidable by a corporation solely because of a director's
interest in the transaction if:
- the material facts of the transaction and the director's interest were
disclosed or known to the board of directors or to a committee of the
board of directors and the board or committee authorized, approved or
ratified the transaction;
177
<PAGE>
- the material facts of the transaction and the director's interest were
disclosed or known to the shareholders entitled to vote and they
authorized, approved or ratified the transaction; or
- the transaction was fair to the corporation.
A conflict of interest transaction is "authorized, approved or ratified" by
the board or a board committee if it receives the affirmative vote of a majority
of directors on the board or on the committee who have no direct or indirect
interest in the transaction. If a majority of the directors who have no direct
or indirect interest in the transaction vote to authorize, approve, or ratify
the transaction, a quorum is deemed present at that board or board committee
meeting for the purpose of taking such action.
Delaware law provides that contracts or transactions between a corporation
and one or more of its officers or directors or an entity in which they have an
interest is not void or voidable solely because of such interest or the
participation of the director or officer in a meeting of the board or a
committee which authorizes the contract or transaction if:
- the material facts about the relationship or interest and the contract or
transaction are disclosed or are known to the board or the committee, and
the board or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of disinterested
directors, even though the disinterested directors be less than a quorum;
- the material facts about the relationship or interest and the contract or
transaction are disclosed or are known to the stockholders entitled to
vote, and the contract or transaction is specifically approved in good
faith by a vote of the stockholders; or
- the contract or transaction is fair as to the corporation as of the time
it is authorized, approved or ratified by the board of directors, a
committee of the board or the stockholders.
SHAREHOLDERS' SUITS
Under Oregon law, a shareholder of an Oregon corporation may institute a
lawsuit against one or more directors, either on his own behalf or derivatively
on behalf of the corporation. A shareholder's derivative complaint must include
details of any demand made on the board of directors, or the reason or reasons
why a demand was not made. The board of directors may conduct an investigation
of any action. No discontinuance or settlement of the proceeding may occur
without court approval.
Under Delaware law, a stockholder of a Delaware corporation may bring a
derivative action on behalf of the corporation. The stockholder's derivative
complaint must include a statement that the plaintiff was a stockholder of the
corporation at the time of the transaction of which the stockholder complaint or
that the stockholder's stock thereafter devolved upon the stockholder by
operation of law. Actions against officers, directors or stockholders for any
debt of the corporation shall not be brought until judgment is obtained therefor
against the corporation and execution thereon returned unsatisfied.
178
<PAGE>
AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION TO CHANGE
MEDICALOGIC'S CORPORATE NAME TO MEDICALOGIC/MEDSCAPE, INC.
Under the MedicaLogic/Medscape merger agreement, MedicaLogic agreed to
propose and recommend to its shareholders that its articles of incorporation be
amended to change its corporate name to "MedicaLogic/Medscape, Inc." The
MedicaLogic board of directors believes that this name will better reflect the
breadth and character of the business after the completion of the mergers. A
copy of the proposed amendment is attached as Appendix H.
The MedicaLogic board recommends that the proposal providing for a change of
the corporate name to "MedicaLogic/Medscape, Inc." be approved subject to
approval of the MedicaLogic/Medscape merger. If a quorum is present at the
special meeting, this proposal will be approved if the votes cast in favor of
the proposal exceed the votes cast against the proposal. Accordingly,
abstentions and broker non-votes will have no effect on the results of the vote.
The proxies will be voted for or against the proposal, or as an abstention, in
accordance with the instructions specified on the proxy form. If no instructions
are given, proxies will be voted FOR approval of the proposal.
LEGAL MATTERS
The validity of the shares of MedicaLogic common stock to be issued in the
mergers will be passed upon for MedicaLogic by Stoel Rives LLP. Stoel Rives LLP
holds a warrant to purchase 10,000 shares of MedicaLogic's common stock at an
exercise price of $6.50 a share. Partners and employees of Stoel Rives LLP
beneficially own an aggregate of 47,000 shares of MedicaLogic's common stock.
EXPERTS
The consolidated financial statements of MedicaLogic, Inc. and subsidiaries
as of December 31, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 1999 have been included in this Joint Proxy
Statement/Prospectus in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere in this Joint Proxy Statement/Prospectus and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Medscape, Inc. as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 included in this Joint Proxy Statement/ Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of said firm given
upon their authority as experts in accounting and auditing.
The financial statements of Healthcare Communications Group, LLC as of and
for the period ended October 27, 1998 and as of and for the year ended
December 31, 1997 included in this Joint Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of said firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Total eMed included in this Joint
Proxy Statement/ Prospectus for the year ended December 31, 1999 and the period
from March 4, 1998 (inception) to December 31, 1998 have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
The pro forma financial information included or referred to in this document
has been prepared by and is the responsibility of the management of MedicaLogic,
Medscape, and Total eMed respectively. None of KPMG LLP, Deloitte & Touche LLP
and Arthur Andersen LLP has examined or compiled the accompanying pro forma
financial information and, accordingly, KPMG LLP, Deloitte & Touche LLP and
Arthur Andersen LLP do not express an opinion or any other form of assurance
with
179
<PAGE>
respect to this information. The KPMG LLP, Deloitte & Touche LLP and Arthur
Andersen LLP reports included in this document relate to the historical
financial statements of MedicaLogic, Medscape and Total eMed, respectively; they
do not extend to the pro forma financial information and should not be read to
do so.
OTHER MATTERS
As of the date of this document, none of the MedicaLogic board, the Medscape
board nor the Total eMed board knows of any matters that will be presented for
consideration at the MedicaLogic special meeting, the Medscape special meeting
or the Total eMed special meeting other than as described in this document. If
any other matters properly come before either of these meetings or any
adjournments or postponements of the meetings and are voted upon, the enclosed
proxies will be deemed to confer discretionary authority on the individuals
named as proxies to vote the shares represented by the proxies as to any of
these matters. The persons named as proxies intend to vote or not to vote in
accordance with the recommendations of the respective managements of
MedicaLogic, and Medscape, or Total eMed as applicable.
WHERE YOU CAN FIND MORE INFORMATION
MedicaLogic and Medscape file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov."
MedicaLogic filed a registration statement on Form S-4 to register with the
SEC the MedicaLogic common stock to be issued to Medscape and Total eMed
stockholders in the mergers. This document is a part of that registration
statement and constitutes a prospectus of MedicaLogic in addition to being a
proxy statement of MedicaLogic, Medscape, and Total eMed for the special
meetings. As allowed by SEC rules, this document does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement.
MedicaLogic has supplied all information contained or incorporated by
reference in this document relating to MedicaLogic, Medscape has supplied all
information relating to Medscape and Total eMed has supplied all information
relating to Total eMed.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT TO VOTE
ON THE MERGER. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS
DATED APRIL 3, 2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS DOCUMENT IS ACCURATE AS OF ANY DATE OTHER THAN APRIL 3, 2000, AND NEITHER
THE MAILING OF THE DOCUMENT TO SHAREHOLDERS NOR THE ISSUANCE OF MEDICALOGIC
COMMON STOCK IN THE MERGERS SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
180
<PAGE>
MEDICALOGIC, INC./MEDSCAPE, INC./TOTAL EMED, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
MedicaLogic, Inc.--Consolidated Financial Statements:
Independent Auditors' Report............................ F-2
Consolidated Balance Sheets............................. F-3
Consolidated Statements of Operations................... F-4
Consolidated Statements of Shareholders' Equity
(Deficit)................................................... F-5
Consolidated Statements of Cash Flows................... F-6
Notes to Consolidated Financial Statements.............. F-7
Medscape, Inc.--Consolidated Financial Statements:
Independent Auditors' Report............................ F-27
Consolidated Balance Sheets............................. F-28
Consolidated Statements of Operations................... F-29
Consolidated Statements of Changes in Stockholders'
(Deficiency) Equity......................................... F-30
Consolidated Statements of Cash Flows................... F-34
Notes to Consolidated Financial Statements.............. F-35
Healthcare Communications Group, LLC--Financial Statements:
Independent Auditors' Report............................ F-50
Balance Sheets.......................................... F-51
Statements of Operations................................ F-52
Statements of Members' Capital (Deficiency in
Capital).................................................... F-53
Statements of Cash Flows................................ F-54
Notes to Financial Statements........................... F-55
Total eMed, Inc.--Consolidated Financial Statements:
Report of Independent Public Accountants................ F-58
Consolidated Balance Sheets............................. F-59
Consolidated Statements of Operations................... F-60
Consolidated Statements of Changes In Stockholders'
Equity (Deficit)............................................ F-61
Consolidated Statements of Cash Flows................... F-62
Notes to Consolidated Financial Statements.............. F-63
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MedicaLogic, Inc.:
We have audited the accompanying consolidated balance sheets of
MedicaLogic, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of MedicaLogic's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
MedicaLogic, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Portland, Oregon
February 4, 2000
F-2
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,718 $110,320
Short-term investments.................................... 7,030 28,536
Accounts receivable, net.................................. 10,084 6,473
Prepaid expenses and other current assets................. 545 4,515
-------- --------
Total current assets.................................... 22,377 149,844
Property and equipment, net................................. 1,804 13,087
Other assets................................................ 127 5,423
-------- --------
Total assets............................................ $ 24,308 $168,354
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 557 $ 5,638
Accrued and other liabilities............................. 2,286 2,639
Deferred revenue.......................................... 2,701 3,269
Long term liabilities, current portion.................... 742 2,432
-------- --------
Total current liabilities............................... 6,286 13,978
Long term liabilities, net of current portion............... 679 2,233
Deferred revenue, long-term................................. -- 1,627
Other long term liabilities................................. -- 676
-------- --------
Total liabilities....................................... 6,965 18,514
Convertible redeemable preferred stock; 50,000,000 shares
authorized; aggregate liquidation preference $0 at
December 31, 1999; issued and outstanding 21,524,545, and
0, at December 31, 1998 and 1999, respectively............ 49,782 --
-------- --------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 7,127,556 and 32,364,391 shares
at December 31, 1998 and 1999, respectively............. 5,139 229,724
Common stock notes receivable............................. (2,039) (11,788)
Deferred stock compensation............................... -- (4,570)
Accumulated deficit....................................... (35,539) (63,526)
-------- --------
Total shareholders' equity (deficit).................... (32,439) 149,840
-------- --------
Total liabilities, redeemable preferred stock and
shareholders' equity (deficit)........................ $ 24,308 $168,354
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Licenses.................................................. $ 7,617 $ 10,410 $ 12,261
Service and support....................................... 5,190 5,750 7,456
--------- --------- ---------
Total revenues.......................................... 12,807 16,160 19,717
Operating expenses:
Cost of licenses.......................................... 1,702 939 1,163
Cost of service and support............................... 6,054 5,815 7,171
Marketing and sales....................................... 7,681 7,882 21,740
Research and development.................................. 7,047 8,071 13,260
General and administrative................................ 1,315 1,151 5,467
--------- --------- ---------
Total operating expenses................................ 23,799 23,858 48,801
--------- --------- ---------
Operating loss.......................................... (10,992) (7,698) (29,084)
Other income (expense):
Interest expense.......................................... (240) (187) (292)
Interest income........................................... 617 707 1,876
Other, net................................................ (55) 143 (153)
--------- --------- ---------
Total other income...................................... 322 663 1,431
--------- --------- ---------
Loss before income taxes................................ (10,670) (7,035) (27,653)
Provision for income taxes.................................. -- -- --
--------- --------- ---------
Net loss................................................ (10,670) (7,035) (27,653)
Accretion of preferred stock redemption preference.......... (149) (197) (334)
--------- --------- ---------
Net loss attributed to common shareholders.................. $ (10,819) $ (7,232) $ (27,987)
========= ========= =========
Net loss per share:
basic and diluted......................................... $ (1.64) $ (1.06) $ (3.07)
========= ========= =========
Weighted average shares:
basic and diluted......................................... 6,579,980 6,807,091 9,107,613
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL COMMON STOCK SHAREHOLDERS'
--------------------- STOCK NOTES DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
---------- -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................... 6,613,862 $ 3,108 $ (937) $ -- $(17,488) $(15,317)
Issuance of common stock in exchange for
services..................................... 14,350 51 -- -- -- 51
Options exercised.............................. 26,068 43 -- -- -- 43
Interest accrued on common stock notes
receivable................................... -- -- (51) -- -- (51)
Accretion of preferred stock redemption
notice....................................... -- -- -- -- (149) (149)
Net loss....................................... -- -- -- -- (10,670) (10,670)
---------- -------- -------- ------- -------- --------
Balance at December 31, 1997................... 6,654,280 3,202 (988) -- (28,307) (26,093)
Issuance of common stock for acquisition....... 13,750 55 -- -- -- 55
Issuance of common stock for cash.............. 175,000 700 -- -- -- 700
Issuance of restricted common stock in exchange
for promissory notes......................... 250,000 1,000 (1,000) -- -- --
Non-cash stock compensation.................... -- 110 -- -- -- 110
Options exercised.............................. 34,526 72 -- -- -- 72
Interest accrued on common stock notes
receivable................................... -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference................................... -- -- -- -- (197) (197)
Net loss....................................... -- -- -- -- (7,035) (7,035)
---------- -------- -------- ------- -------- --------
Balance at December 31, 1998................... 7,127,556 5,139 (2,039) -- (35,539) (32,439)
Issuance of common stock for acquisition....... 750,000 3,300 -- -- -- 3,300
Conversion of redeemable preferred stock to
common stock................................. 15,950,747 97,874 -- -- -- 97,874
Issuance of restricted common stock in exchange
for promissory notes......................... 1,247,500 9,229 (9,229) -- -- --
Issuance of common stock in exchange for
services..................................... 65,750 1,314 (195) (194) -- 925
Issuance of common stock for commission........ 172,763 1,987 -- -- -- 1,987
Warrants exercised............................. 22,500 13 -- -- -- 13
Options exercised.............................. 242,575 869 -- -- -- 869
Stock compensation expense..................... -- 986 -- -- -- 986
Interest accrued on common stock notes
receivable................................... -- -- (325) -- -- (325)
Deferred compensation related to stock
options...................................... -- 4,746 -- (4,746) -- --
Amortization of deferred compensation related
to stock options............................. -- -- -- 370 -- 370
Issuance of common stock, net of offering
costs........................................ 6,785,000 104,267 -- -- -- 104,267
Accretion of preferred stock redemption
preference................................... -- -- -- -- (334) (334)
Net loss....................................... -- -- -- -- (27,653) (27,653)
---------- -------- -------- ------- -------- --------
Balance at December 31, 1999................... 32,364,391 $229,724 $(11,788) $(4,570) $(63,526) $149,840
========== ======== ======== ======= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,670) $ (7,035) $(27,653)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization........................... 1,464 1,537 4,077
Stock compensation and other non cash expenses.......... 51 110 4,961
Provisions for doubtful accounts........................ 829 756 505
Loss (gain) on disposition of assets.................... 14 (2) (76)
Other non-cash income................................... (51) (51) (325)
Changes in assets and liabilities:
Accounts receivable................................... (3,630) (3,177) 3,106
Prepaid expenses and other current assets............. (133) (239) (4,024)
Other assets.......................................... (35) -- 202
Accounts payable...................................... (906) (110) 4,123
Accrued and other liabilities......................... 1,314 99 259
Deferred revenue...................................... 113 1,305 2,195
-------- -------- --------
Net cash used by operating activities............... (11,640) (6,807) (12,650)
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed assets................................. (525) (1,280) (12,525)
Purchase of business...................................... -- (12) (2,117)
Proceeds from sale of fixed assets........................ -- 6 18
Purchases of short-term investments....................... (15,261) (28,248) (52,994)
Proceeds from maturities of short-term investments........ 8,145 28,334 31,211
Issuance of long-term notes receivable.................... -- -- (200)
-------- -------- --------
Net cash used by investing activities............... (7,641) (1,200) (36,607)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............. 6,775 6,794 47,758
Net proceeds from issuance of common stock................ 43 772 105,229
Proceeds from issuance of notes payable................... -- 1,264 3,069
Principal payments under capital lease.................... (1,264) (879) (394)
Principal payments under note obligations................. -- (150) (803)
-------- -------- --------
Net cash provided by financing activities........... 5,554 7,801 154,859
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (13,727) (206) 105,602
Cash and cash equivalents at beginning of period............ 18,651 4,924 4,718
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 4,924 $ 4,718 $110,320
======== ======== ========
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable.............................................. $ -- $ 1,000 $ 9,424
Issuance of common stock for purchase of a business....... -- 55 3,300
Assets acquired or exchanged under capital leases......... 593 62 1,371
Accretion of preferred stock redemption preference........ 149 197 334
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) COMPANY
MedicaLogic, Inc. and subsidiaries (MedicaLogic) develops, markets and
supports electronic medical record software used by physicians at the point of
care, throughout the U.S.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MedicaLogic and its subsidiaries. All significant intercompany transactions and
balances have been eliminated. Operations of business acquired and accounted for
as purchases are consolidated as of the date of acquisition.
(c) USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets, liabilities
and contingencies at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
For purposes of these statements, MedicaLogic considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
(e) SHORT-TERM INVESTMENTS
Short-term investments include various corporate debt instruments and have
been classified as available-for-sale securities according to the requirements
of Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES at December 31, 1998 and 1999.
Short-term investments are carried at amortized cost, which approximates market
value. At December 31, 1999, contractual maturities of short-term investments
ranged from one hundred eleven to two hundred ninety-six days.
(f) CONCENTRATION OF CREDIT RISK
The Company invests its cash, cash equivalents and short-term investments
with financial institutions with high credit standing and, by policy, limits the
amounts invested with any one institution, type of security and issuer.
The Company sells its products to customers, ranging from individual
doctors, small to large medical groups, and medical institutions. The Company
performs ongoing credit evaluations of its customers' financial condition and
limits the amount of credit extended as deemed appropriate, but generally
requires no collateral. The Company maintains reserves for estimated credit
losses and, to date, such losses have been within management's expectations.
F-7
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$1,360 and $529 at December 31, 1998 and 1999. The following table presents a
roll forward of the allowance for doubtful accounts for the indicated periods:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Balance--beginning of period........................ $ 165 $ 852 $ 1,360
Provision........................................... 829 756 505
Charge offs......................................... (142) (248) (284)
Recoveries.......................................... -- -- (1,052)
----- ------ -------
Balance--end of period.............................. $ 852 $1,360 $ 529
===== ====== =======
</TABLE>
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the lower of the present value of minimum lease
payments at the beginning of the lease term or fair value of the leased assets
at the inception of the lease. The cost of repairs and maintenance is expensed
as incurred.
Depreciation on furniture, equipment and leasehold improvements is
calculated on a straight-line basis over the estimated useful lives of the
assets, five years for furniture and two to three years for equipment. Property
and equipment held under capital leases are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the asset.
Amortization of leasehold improvements is recognized over the shorter of the
life of the improvement or the remaining life of the lease using the
straight-line method.
As required by SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF 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 the assets may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows of the operation to which the assets relate, to the
carrying amount including associated intangible assets of the operation. If the
operation is determined to be unable to recover the carrying amount of its
assets, then intangible assets are written down first, followed by the other
long-lived assets of the operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets.
(i) GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair
value of the tangible and intangible assets acquired in various acquisitions.
Goodwill costs are being amortized on a straight-line basis, over periods
ranging from two to four years. Amortization expense for the years ended
December 31, 1997, 1998 and 1999 was $-0-, $34 and $1,527. Accumulated
amortization at
F-8
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1998 and 1999 was $34 and $1,561. Recoverability of goodwill is
periodically reviewed for impairment.
(j) SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for according to the
requirements of Statement of Financial Accounting Standards No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED.
Under the standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To date, the period between achieving technological feasibility
and the general availability of the software has been short; therefore, software
development costs qualifying for capitalization have been immaterial. As such,
MedicaLogic has not capitalized any software development costs and charged all
costs to research and development expense.
(k) REVENUE RECOGNITION
MedicaLogic has adopted SOP 97-2, as amended by SOP 98-4 and 98-9 beginning
January 1, 1998. MedicaLogic's revenue policy before December 31, 1997 complied
with the preceding authoritative guidance provided by SOP No. 91-1, SOFTWARE
REVENUE RECOGNITION.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on vendor
specific objective evidence ("VSOE") of the relative fair values of each element
in the arrangement. MedicaLogic has established sufficient VSOE to ascribe a
value to consulting services and post-contract customer support based on the
price charged when these elements are sold separately. Accordingly, license
revenue is recorded under the residual method. Under the residual method,
revenue is recognized as follows:
(1) The total fair value of undelivered elements, as indicated by VSOE, is
deferred and subsequently recognized according to the requirements of SOP
92-2.
(2) The difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the
delivered elements.
MedicaLogic recognizes revenue from license fees generally when a signed
agreement has been obtained, the delivery of the product has occurred, the fee
is fixed and determinable and collectibility of the license fee is probable.
Term based licenses from Logician Enterprise and Logician Internet products will
be recognized on a subscription basis. Subscription revenue which is billed in
advance will be recognized over the period earned, normally one month.
Support revenue consists of fees for maintenance and customer support
services. Fees for maintenance and customer support service, conveying the right
to obtain upgrades, when and if available, are generally paid in advance and
revenue is recognized ratably over the term of the agreement.
Services revenue generally consists of consulting, training and integration
fees. These services are typically billed separately from the license fees and
are recognized as the related services are performed.
F-9
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) INCOME TAXES
MedicaLogic accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the future
tax consequences of differences between the tax basis of assets and liabilities
and their financial reporting amounts at each year-end.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that include the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
(m) STOCK-BASED EMPLOYEE COMPENSATION
MedicaLogic has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for employee
stock options and similar equity instruments. As is permitted under SFAS
No. 123, MedicaLogic has elected to continue to account for its stock-based
compensation plans in accordance with APB Opinion No. 25 under which no
compensation for stock options is recognized for stock awards granted at or
above fair market value and provides the pro forma disclosures as prescribed by
SFAS No. 123.
(n) ADVERTISING
MedicaLogic expenses costs of advertising when the costs are incurred.
Advertising expense was approximately $836, $896 and $1,473 for the years ended
December 31, 1997, 1998 and 1999.
(o) NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, EARNINGS
PER SHARE. SFAS No. 128 which provides that basic net income (loss) per share
and diluted net income (loss) per share are to be computed using the weighted
average number of common shares outstanding. Weighted average number of common
shares outstanding does not include the shares of restricted stock subject to
repurchase summarized below. Diluted net income per share includes the effect of
potentially dilutive common shares. The following potential common shares have
been excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been anti-dilutive:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Shares issuable under stock options and
warrants.................................... 915,284 1,129,724 2,069,303
Shares of restricted stock subject to
repurchase.................................. 54,561 75,945 1,211,328
</TABLE>
(p) COMPREHENSIVE LOSS
MedicaLogic has no material components of other comprehensive loss so the
comprehensive loss is the same as net loss for all periods presented.
F-10
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(q) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable approximate fair value due to the
short-term nature of these instruments. The carrying amounts of capital leases
and notes payable approximate fair value as the stated interest rates reflect
current market rates. Fair value estimates are made at a specific point in time,
based on relevant market information about the financial instrument when
available. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(r) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Internal use software development costs are accounted for according to the
requirements of SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary
project stage are expensed as incurred and costs incurred in the application and
development stage, which meet the capitalization criteria, are capitalized and
amortized on a straight-line basis over five years, the estimated useful life of
the asset.
(s) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of MedicaLogic's revenues each year are generated from
the development and release to market of computer software products. In the
extremely competitive environment in which MedicaLogic operates, these product
generating, development and marketing processes are uncertain and complex,
requiring accurate prediction of market trends and demand as well as successful
management of various development risks inherent in these products. In light of
these dependencies, it is possible that failure to successfully manage a
significant product introduction could have a severe impact on MedicaLogic's
growth and results of operations.
(2) ACQUISITIONS
On January 5, 1998, MedicaLogic paid $12 in cash and issued 13,750 shares of
common stock valued at $4.00 per share to acquire intangible assets of Health
Outcome Technologies, Inc. This acquisition was accounted for as a purchase and
results of operations for the acquired company are included only from the date
of acquisition forward. In connection with this acquisition, MedicaLogic
recorded goodwill of $67, which is being amortized over two years, the estimated
economic life of the goodwill.
In January 1999, MedicaLogic acquired PrimaCis Health Information
Technology, Inc., a Delaware corporation. This acquisition was accounted for as
a purchase and the results of operations for the acquired Company are included
only from the date of acquisition forward. The total purchase price, including
acquisition costs, was $6,453 and consisted of $2,100 in cash, the assumption of
$1,053 in liabilities and the issuance of 750,000 shares of common stock at an
estimated fair value of $4.40 per share.
The purchase accounting allocations resulted in goodwill of approximately
$6,500, which is amortized on a straight-line basis over a four year period.
F-11
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) ACQUISITIONS (CONTINUED)
The pro forma results shown below assume the PrimaCis acquisition occurred
as of the beginning of 1998.
<TABLE>
<S> <C>
Revenues.................................................... $ 16,408
Net loss.................................................... (11,278)
Basic and diluted net loss per share........................ (1.49)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred had the acquisition been in effect for the 1998 period. The pro
forma statement of operations data for the year ended December 31, 1999 have not
been presented as the results of operations presented for MedicaLogic during
this period include PrimaCis' operating results. In addition, they are not
intended to be a projection of the future results that may be achieved from the
combined operations.
In connection with the acquisition of PrimaCis, MedicaLogic entered into a
separate agreement with a customer of PrimaCis under which MedicaLogic received
a purchase order for 1,500 licenses. MedicaLogic delivered 500 licenses to this
customer on March 31, 1999 and delivered 1,000 licenses to this customer on
June 17, 1999 under a standard license agreement. An element of this agreement
represents a discount on future sales. Therefore, $1,890 of the license revenue
representing this element has been deferred. Revenue from this element will be
recognized as sales are completed in accordance with the terms of the separate
agreement discussed below or, if earlier, on the expiration of the agreement. In
addition, MedicaLogic is performing training and implementation services on a
time and materials basis to the customer.
As part of a separate agreement, if the customer or any third party in the
Houston, Texas area purchases additional licenses from MedicaLogic, MedicaLogic
is obligated to issue shares of common stock to this customer having a then fair
market value of 50% of the price of the subsequent licenses, up to $12 million
of stock. This agreement expires on December 31, 2002. MedicaLogic has issued
172,763 shares of common stock in connection with sales to third parties in the
Houston, Texas area and recorded commission expense of $1,987 during the year
ended December 31, 1999.
(3) BALANCE SHEET COMPONENTS
(a) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Furniture and equipment................................... $ 4,565 $16,576
Leasehold improvements.................................... 1,267 1,519
------- -------
5,832 18,095
Less accumulated depreciation and amortization............ (4,028) (5,008)
------- -------
$ 1,804 $13,087
======= =======
</TABLE>
F-12
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) BALANCE SHEET COMPONENTS (CONTINUED)
(b) ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Royalties................................................... $ 843 $1,735
Payroll and related liabilities............................. 627 488
Litigation accruals......................................... 488 100
Other....................................................... 328 316
------ ------
$2,286 $2,639
====== ======
</TABLE>
(4) LONG TERM LIABILITIES
(a) LEASES
MedicaLogic leases office furniture and equipment under long-term capital
leases, which expire over the next two years. At December 31, 1998 and 1999, the
net book value of leased furniture and equipment included in property and
equipment was $307 and $1,368.
MedicaLogic also leases its office facilities under non-cancelable operating
lease agreements.
Future minimum lease payments under non-cancelable operating leases and the
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
2000.................................................... $ 730 $ 2,925
2001.................................................... 838 3,109
2002.................................................... -- 3,117
2003.................................................... -- 3,242
2004.................................................... -- 3,325
Years after 2004........................................ -- 13,915
------ -------
Total minimum lease payments.......................... 1,568 $29,633
=======
Less amount representing interest....................... (282)
------
Present value of net minimum capital lease payments... 1,286
Less current portion of capital leases.................. (562)
------
Non-current portion of capital leases................. $ 724
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled
approximately $611, $1,073 and $1,591.
F-13
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LONG TERM LIABILITIES (CONTINUED)
On May 12, 1999 MedicaLogic entered into a ten year operating lease
agreement for office space. The lease requires a letter of credit in lieu of a
cash security deposit in the amount of $1,750. Also in connection with this
lease, MedicaLogic granted options to the lessor to purchase up to 25,000 shares
of common stock, at a price of $6.50 per share. The lessor is required to
exercise the option within three years of MedicaLogic's initial public offering.
The fair value of the options to be issued to the lessor was determined by
applying the Black-Scholes methodology using the commitment date of the lease
for performance of the lessor as the measurement date. The per share weighted
average fair market value was $4.79 on the date of grant, with the following
weighted average assumptions: Risk-free interest rate of 5.75%, expected
dividend yield -0-%, a three year term, an expected volatility of 100%. The fair
value of $120 is being amortized over the lease period.
(b) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Note payable, monthly principal and interest payments of $1;
interest at 11% per year; final payment due December 31,
2008; unsecured........................................... $ 70 $ 66
Note payable, monthly principal and interest payments of $3;
interest at 11% per year; final payment due November 30,
1999; unsecured........................................... 37 --
Notes payable, under term facility, monthly principal and
interest payments of $47; interest at two-year treasury
constant maturities plus 5% per year, 10.4% as of December
31, 1998 and 9.53% at December 31, 1999; maturing between
September 2000 and September 2001; secured by equipment
purchased................................................. 1,007 525
Notes payable under term facility, monthly principal and
interest payments of $25; interest at a two-year treasury
constant maturities plus 5% per year; 9.45% at December
31, 1999; maturing between March 2001 and September 2001;
secured by equipment purchased............................ -- 758
Note payable under term facility, quarterly principal and
interest payments of $38; interest at 7.96% per year;
final payment due April 2001; secured by equipment
purchased................................................. -- 307
Notes payable under term facility, monthly principal and
interest payments of $25; interest at a two-year treasury
constant maturities plus 5% per year; 9.45% at December
31, 1999; maturing between October 2001 and October 2002;
secured by equipment purchased............................ -- 1,723
------ ------
1,114 3,379
Less current portion of notes payable....................... 527 1,870
------ ------
$ 587 $1,509
====== ======
</TABLE>
F-14
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LONG TERM LIABILITIES (CONTINUED)
MedicaLogic has a $3,300 term loan facility to finance the purchase of new
capital equipment. At December 31, 1999 no amounts were available under this
facility.
Future maturities are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000...................................................... $1,870
2001...................................................... 1,326
2002...................................................... 136
2003...................................................... 8
2004...................................................... 8
Years after 2004.......................................... 31
------
Total................................................... $3,379
======
</TABLE>
F-15
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) CONVERTIBLE REDEEMABLE PREFERRED STOCK
Prior to December 9, 1999, MedicaLogic had authorized several series of
convertible redeemable preferred stock. The title, carrying amount, and number
of shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
Series A, $1.00 liquidation preference; issued and
outstanding 5,750,001 and 0 at December 31, 1998 and
1999...................................................... $ 5,745 $ --
Series A-1, $10.00 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999............. -- --
Series C, $2.25 liquidation preference; issued and
outstanding 7,012,637 and 0 shares at December 31, 1998
and 1999.................................................. 15,767 --
Series C-1, $22.50 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999............. -- --
Series E, $3.15 liquidation preference; 4,761,907 and 0
shares issued and outstanding at December 31, 1998 and
1999...................................................... 14,694 --
Series E-1, $31.50 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999............. -- --
Series F, $3.40 liquidation preference; 4,000,000 and 0
shares issued and outstanding at December 31, 1998 and
1999...................................................... 13,576 --
Series F-1, $34.00 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999............. -- --
Series I, $3.80 liquidation preference; no shares issued and
outstanding at December 31, 1998 and 1999................. -- --
Series I-1, $38.00 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999............. -- --
Series J, $4.75 liquidation preference; 0 shares issued and
outstanding at December 31, 1998 and 1999................. -- --
Series J-1, $47.50 liquidation preference; no shares issued
and outstanding at December 31, 1998 and 1999............. -- --
------- ---------
Total convertible redeemable preferred Stock................ $49,782 $ --
======= =========
</TABLE>
All outstanding preferred stock was converted into common stock upon the
effectiveness of the registration statement on December 9, 1999. The terms for
each series of preferred stock were similar and are summarized below:
DIVIDENDS
Preferred shareholders are entitled to receive dividends when and if
declared by the board of directors at an annual rate of $.10 and $1 per share
for series A and A-1, $.225 and $2.25 per share for series C and C-1, $.315,
$3.15 for series E and E-1, $.340 and $3.40 for series F and F-1, and $.380 and
$3.80 for series I and I-1, and $0.475 and $4.75 for series J and J-1. The right
to receive dividends on preferred stock is not cumulative and no right to
receive dividends accrues to holders of the preferred
F-16
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
stock in the event the board of directors does not declare dividends. No
dividends may be declared or paid on common stock until all declared dividends
on preferred stock have been paid. As of December 31, 1999 no dividends had been
declared or paid.
LIQUIDATION PREFERENCES
Upon dissolution, liquidation or winding up of the affairs of MedicaLogic,
either voluntarily or involuntarily, the preferred shareholders receive
preference in liquidation over the common shareholders of MedicaLogic. The
liquidation value for each outstanding share is $1 and $10 for series A and A-1,
$2.25 and $22.50 for series C and C-1. $3.15 and $31.50 for series E and E-1,
$3.40 and $34.00 for series F and F-1. $3.80 and $38.00 for series I and I-1,
and $4.75 and $47.50 for series J and J-1, adjusted for any stock dividends. The
holders of series E and E-1, series F and F-1, series I and I-1 and series J and
J-1, on a parity basis among these series, are entitled to receive their
liquidation value before and in preference to any distribution to the holders of
series A and A-1 and series C and C-1 preferred stock. The holders of series C
and C-1 preferred stock are entitled to receive their liquidation value before
and in preference to any distribution to the holders of series A and A-1.
REDEMPTION
The preferred stock is subject to mandatory redemption features following
the affirmative vote of a majority of the outstanding shares of the preferred
stock, effective no earlier than December 31, 2001. Upon the majority vote of
the outstanding shares, MedicaLogic is required to redeem all of the then
outstanding preferred stock or an amount determined by MedicaLogic for which
funds are available for redemption. The per share redemption price for each
series of preferred stock is equal to its per share liquidation value.
In the event of a redemption of only a portion of the total outstanding
preferred stock, MedicaLogic is required to redeem series E and E-1, series F
and F-1, series I and I-1 and series J and J-1 before and in preference to the
holders of series A and A-1 and series C and C-1 preferred stock. In addition,
the holders of series C and C-1 will have preference over the holders of
series A and A-1 preferred stock.
VOTING
The holder of each share of each series of preferred stock is entitled to
the number of votes the holder would be entitled to if the shares of preferred
stock were converted to common stock.
CONVERSION
Two shares of preferred stock is voluntarily convertible into one share of
common stock at any time after the date of issuance at a rate that equals the
original issue price divided by the conversion price at the time in effect,
subject to adjustments specified in the purchase agreements. Automatic
conversion to common stock at the then effective conversion rate will occur for
series A, A-1, C, C-1, E and E-1, following the effectiveness of a registration
statement under the Securities Act of 1933 in
F-17
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
which the aggregate price to the public equals or exceeds $7,500,000 and in
which the public offering price of common stock equals or exceeds $10 per share.
The public offering price of MedicaLogic's common stock that will trigger
automatic conversion of the series F and F-1, the series I and I-1 and series J
and J-1 preferred stock is $10.80, $11.58 and $10.80 per share.
(6) SHAREHOLDERS' EQUITY
(a) SHAREHOLDERS' AGREEMENT
MedicaLogic and its shareholders had an agreement that includes restrictions
on the purchase and sale of MedicaLogic's stock. Except as expressly provided,
no shareholder was allowed to transfer ownership of stock without the prior
written consent of the other shareholders that are party to the agreement. These
restrictions lapsed upon the effectiveness of a registration of common stock
under the Securities Act of 1933 and the consummation of the sale of common
stock under that registration statement on December 9, 1999.
The shareholders agreement also contained a right of first refusal which
gives MedicaLogic the right, but not the obligation, to buy back shares under
specified conditions. The acquisition price is equal to the fair value of the
shares to be purchased.
(b) STOCK INCENTIVE PLAN
On February 9, 1993, MedicaLogic adopted a stock incentive plan which
allowed for the issuance of 2,247,192 shares of common stock. Under the 1996
stock incentive plan, adopted December 31, 1996, together with the 1993 stock
incentive plan, 500,000 shares of common stock were reserved for issuance. The
1996 plan was amended in 1998 to reserve an additional 350,000 shares of common
stock for issuance. On April 30, 1999, MedicaLogic's 1996 plan was amended to
reserve a additional 1,900,000 shares of common stock, bringing the total under
the plans to 4,997,192. In September 1999 MedicaLogic adopted the 1999 stock
incentive plan, which authorizes the issuance of 2,000,000 shares, bringing the
total to 6,997,192. Under the terms of the plans, the board of directors is
authorized to grant incentive stock options, non-statutory stock options and to
sell restricted stock to employees or others providing services or benefits to
MedicaLogic. The plans also allow granting of stock bonuses, stock appreciation
rights, and other forms of stock based incentives. The 1999 plan provides for
the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 for the granting to employees
and consultants of nonstatutory stock options and for the issuance of stock
bonuses, restricted stock and stock appreciation rights. Unless terminated
earlier, the 1999 plan will terminate automatically in September 2009.
The stock incentive plans are administered by the board of directors. The
board has the power to determine the terms of the options or rights granted,
including the exercise price, the number of shares subject to each option or
right, the character of the grant, the exercisability of the grant and the form
of consideration payable upon exercise of options. The board of directors may
delegate administration of the stock incentive plans to a committee.
In March 1998, MedicaLogic extended the term of all outstanding options from
five years to ten years, which constituted a new measurement date. The fair
value of the stock as determined by the
F-18
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
board of directors on the date the change was effective was $4.00 per share.
121,025 of these options had exercise prices ranging from $1.60 to $2.00 per
share and were fully vested. For these outstanding options, MedicaLogic recorded
a compensation charge of $110 in connection with this change in option terms.
The compensation expense was calculated by taking the difference between the
original grant price and the fair value on the new measurement date.
The exercise price of incentive stock options must not be less than the fair
market value of the common stock at the date of the grant or, in the case of
incentive stock options issued to holders of more than 10% of the outstanding
common stock, 110% of the fair market value. The maximum term of incentive stock
options is 10 years, or five years in the case of 10% shareholders. The
aggregate fair market value, on the date of the grant, of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000.
Options granted under the stock incentive plans are generally
nontransferable and, unless otherwise determined by the board of directors, must
be exercised during the period of the option holder's employment or service with
MedicaLogic or within 90 days of termination of employment or service.
The stock incentive plans provide that if MedicaLogic merges with or into
another corporation, or MedicaLogic sells substantially all of our assets, each
outstanding option will be assumed by the successor corporation.
The per share weighted average fair market value, as determined by applying
the Black-Scholes option pricing model to stock options granted under the plans
during 1997, 1998 and 1999 was $2.90, $3.44 and $5.02 on the date of grant, with
the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1977 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.5% 6.0% 5.875%
Expected dividend yield......................... 0% 0% 0%
Years of expected life.......................... 4 7 7
Expected volatility............................. 100% 100% 100%
</TABLE>
MedicaLogic continues to apply APB Opinion No. 25 in accounting for the
plans and compensation cost is generally not recognized for its stock options in
the financial statements. The effect on MedicaLogic's net loss, had MedicaLogic
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss........................................ $(10,819) $(7,232) $(27,987)
Proforma net loss............................... $(11,921) $(8.342) $(30,895)
Net loss per share.............................. (1.64) (1.06) (3.07)
Proforma net loss per share..................... (1.78) (1.21) (3.39)
</TABLE>
F-19
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
Transactions involving the plans are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding, December 31, 1996............... 504,070 3.08
Granted.............................................. 536,475 4.00
Exercised............................................ (26,068) 1.64
Forfeited............................................ (40,462) 3.90
--------- -----
Options outstanding, December 31, 1997............... 974,015 3.68
Granted.............................................. 480,493 4.10
Exercised............................................ (34,526) 2.10
Forfeited............................................ (206,576) 3.98
--------- -----
Options outstanding, December 31, 1998............... 1,213,406 3.80
Granted.............................................. 2,363,950 8.18
Exercised............................................ (242,575) 3.61
Forfeited............................................ (80,9050) 4.51
--------- -----
Options outstanding, December 31, 1999............... 3,253,876 $6.98
========= =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------------
NUMBER OF AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICE 1999 LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1.60- 2.00 63,225 3.20 1.82 63,225 1.82
4.00- 4.40 1,177,003 7.85 4.12 780,296 4.05
6.50- 6.50 894,198 9.14 6.50 166,325 6.50
9.50-10.00 768,750 9.79 9.61 9,055 9.66
13.00-13.00 350,700 9.03 13.00 25,000 13.00
--------- ---- ----- --------- -----
1.60-13.00 3,253,876 8.70 6.98 1,043,901 4.57
</TABLE>
At December 31, 1999, 396,550 shares were available for grant.
MedicaLogic has recorded deferred stock compensation expense of $4,746 at
December 31, 1999. This deferred stock compensation expense is based on the
difference between the deemed fair market value of common stock and the exercise
price of the option or stock on the grant date. Deferred compensation is being
amortized over the vesting period of the options, which is generally three
years. MedicaLogic recognized expense of $370 in the twelve-month period ended
December 31, 1999 related to these grants.
F-20
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
(c) STOCK WARRANTS
In 1994, MedicaLogic entered into a stock purchase warrant agreement with
Indius, Inc. Under the agreement, MedicaLogic issued Indius warrants to purchase
up to 22,500 shares of common stock at $.62 per share, conditioned on Indius
meeting specified software development and licensing requirements. These
warrants were exercised in March 1999.
(d) RESTRICTED STOCK PURCHASE AGREEMENTS
As of December 31, 1999, MedicaLogic had sold 2,175,750 shares of common
stock at prices ranging from $4.00 to $13.00 to senior management of
MedicaLogic. These shares were sold under agreements which allow MedicaLogic, at
its option, to repurchase these shares at the original sale price. Under the
repurchase agreements associated with 1,958,250 of these shares, the shares
subject to repurchase are reduced in equal increments over 36 months from the
original vesting dates which range from February 28, 1996 to December 6, 2002.
At December 31, 1998 and 1999 there were 141,530 and 1,211,328 shares
outstanding that were eligible for repurchase. MedicaLogic has accepted
promissory notes totalling $11,194 of principal amounts at December 31, 1999
from its officers in consideration for the restricted stock discussed above.
These notes accrue interest at 6% per year and are payable in full 10 years from
the date of the loan. Of these shares of common stock 217,500 have been released
from MedicaLogic's repurchase rights as key business performance criteria have
been met. In connection with these stock issuances, MedicaLogic recorded
compensation expense of $986 for the period ended December 31, 1999.
(e) SHARES ISSUED FOR SERVICES
During 1997, MedicaLogic issued 14,350 shares of common stock valued at $57,
in exchange for contracted engineering services by an independent third-party.
During 1999, MedicaLogic issued 65,750 shares of common stock valued at
$1,314 for public relations consulting, recruitment services, and contracted
engineering services by independent third-parties. 104,212 shares of preferred
stock were issued to the three principals of an investment group as a commission
in conjunction with the series J preferred stock issuance. The preferred shares
were valued at $990. The Company issued 20,000 shares of common shares at a
price of $6.50 for legal services. The fair value of the shares was offset
against the proceeds of the Initial Public Offering. A warrant was issued for
10,000 shares of common stock at a price of $6.50 for legal services. The fair
value of the warrant issued was determined by applying the Black-Scholes
methodology using the commitment date for performance as the measurement date.
The per share weighted average fair market value was $13.60 on the date of
grant, with the following weighted average assumptions: Risk-free interest rate
of 5.75%, expected dividend yield of 0%, a two-year term and an expected
volatility of 100%. The fair value of $136 was netted against the proceeds of
the Initial Public Offering.
The above common shares or options were valued using the fair value as
determined by the board of directors. Preferred shares were valued using sales
to unrelated third parties. All shares or warrants to issue shares were fully
vested on the date of issuance and were awarded for past services. The
measurement date for determining the fair value of the equity instrument was the
date of the completion of the performance.
F-21
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
(f) EMPLOYEE STOCK PURCHASE PLAN
The board of directors has adopted and the shareholders have approved an
employee stock purchase plan, or ESPP, for the benefit of MedicaLogic's
employees. A total of 1,000,000 shares are reserved for issuance under the ESPP.
Except as described below, all full-time employees of MedicaLogic and
designated subsidiaries of MedicaLogic are eligible to participate in the ESPP.
Any employee who would, after a purchase of shares in an offering under the
plan, own or be considered to own five percent or more of the voting power or
value of all classes of stock of MedicaLogic, or any parent or subsidiary of
MedicaLogic, is ineligible to participate in an offering.
Except for the first offering period, offering periods are one year long and
are divided into two six-month purchase periods. The first offering period will
begin on December 9, 1999, will run for approximately two years, and will be
divided into four purchase periods. On the first day of each offering period,
known as the offering date, each eligible employee is automatically granted an
option to purchase shares of MedicaLogic's common stock. That option will be
automatically exercised on the last day of each purchase period during the
offering. The last day of a purchase period is known as a purchase date. No
employee may purchase more than 10,000 shares or accrue the right to purchase
shares at a rate that exceeds $25,000 of fair market value, as determined on the
offering date, for each calendar year that the option is outstanding. Each
eligible employee may elect to participate in the ESPP by filing a subscription
and payroll deduction authorization. Shares may be purchased under the ESPP only
through payroll deductions of not more than 15 percent of an employee's total
compensation. On each purchase date, the amounts withheld will be applied to
purchase shares for the employee from MedicaLogic. The purchase price will be
the lesser of 85 percent of the fair market value of MedicaLogic's common stock:
on the offering date; or
on the purchase date.
The ESPP is administered by the board of directors. The board of directors
may adopt rules and regulations for the operation of the ESPP, adopt forms for
use in connection with the ESPP, decide any question of interpretation of the
ESPP or rights arising under the ESPP and generally supervise the administration
of the ESPP. MedicaLogic pays all expenses of the ESPP other than commissions on
sales of shares for employees' accounts by the custodian.
An independent custodian maintains the records under the ESPP. Shares
purchased by employees under the ESPP are delivered to and held by the custodian
on behalf of the employees. By appropriate instructions from an employee, all or
part of the shares may be sold or transferred into the employee's own name and
delivered to the employee.
The board of directors may amend the ESPP, except that increases in the
number of reserved shares, other than adjustments authorized by the ESPP, or
decreases in the purchase price of shares offered under the ESPP require
shareholder approval. The board of directors may terminate the ESPP at any time.
F-22
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) INCOME TAXES
MedicaLogic incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1997, 1998 and 1999. As such, there
was no current or deferred tax provision for these periods.
The actual income tax expense differs from the expected tax expense, which
is computed by applying the U.S. federal corporate income tax rate of 34% to net
loss before income taxes, as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed expected income tax benefit.... (34.0)% (34.0)% (34.0)%
Increase (reduction) in income tax
expense (benefit) resulting from:
State income tax benefit.............. (4.3) (4.3) (4.1)
Increase in valuation allowance....... 43.8 44.7 37.8
Research and development credits...... (3.1) (8.3) (2.2)
Other................................. (2.4) 1.9 2.5
----- ----- -----
Income tax expense................ --% --% --%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Furniture and equipment due to differences in
depreciation........................................ $ 229 $ --
Net operating loss and research and experimentation
credit carryforwards................................ 14,169 24,588
Allowance for doubtful accounts....................... 234 203
Other accruals........................................ 215 487
-------- --------
Gross deferred tax assets........................... 14,847 25,278
Less valuation allowance.............................. (14,559) (25,084)
-------- --------
Net deferred tax assets............................. 288 194
-------- --------
Deferred tax liabilities:
Change in method of accounting........................ (280) (54)
Other................................................. (8) (140)
-------- --------
Net deferred tax liabilities........................ (288) (194)
-------- --------
Net deferred tax assets and liabilities............. $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was approximately $14,559 and $25,084. The net change in the total
valuation allowance for the years ending December 31, 1997, 1998 and 1999 was an
increase of approximately $4,668, $3,153 and $10,525.
F-23
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) INCOME TAXES (CONTINUED)
At December 31, 1999, MedicaLogic has available federal and state net
operating loss carryforwards for tax purposes of approximately $59,598 and
research and experimentation credits of approximately $1,973 which expire
through 2019. Approximately $7,100 of the net operating losses are subject to
annual utilization limitation due to ownership changes in prior years.
(9) COMMITMENTS AND CONTINGENCIES
In September 1999, MedicaLogic entered into a license agreement with L&H
Applications USA, Inc. L&H has granted to MedicaLogic a non-exclusive,
non-transferable license to incorporate L&H's product into MedicaLogic's
Logician family of products. MedicaLogic made a non-refundable pre-payment of
royalty fees of $1,100 in December 1999. MedicaLogic is required to make
additional minimum payments of $230 and $795 for the years ended December 31,
2000 and 2001.
In 1999, MedicaLogic agreed to issue common stock to a customer at fair
market value up to $12,000, contingent upon sales of additional licenses to the
customer and to third parties in the customer's geographic area. This
consideration is for allowing MedicaLogic to use this customer as a reference
site. MedicaLogic has issued 172,763 shares of common stock with an estimated
fair value of $11.50 per share to this customer as of December 31, 1999.
MedicaLogic has recorded the expense associated with this grant as a component
of marketing and sales expense. The stock agreement expires December 31, 2002.
MedicaLogic is involved in various claims and legal actions in the normal
course of business. The most significant of these are described below.
MedicaLogic was the defendant in a suit at December 31, 1998 arising out of
an alleged breach of contract with a channel partner. MedicaLogic accrued $250
at December 31, 1997 and 1998. This suit was settled in April 1999, and the
terms of the settlement are confidential. MedicaLogic was also the defendant at
December 31, 1998 in a suit filed by a customer. This suit was a counter-claim
to a breach of contract MedicaLogic had filed. The suit sought a refund of
amounts paid to MedicaLogic for the product. MedicaLogic accrued $125 at
December 31, 1998. This suit was settled in July 1999 for $120 including legal
fees.
At December 31, 1999 MedicaLogic was a defendant in an action relating to a
patent infringement claim. The plaintiff was seeking unspecified damages. On
January 26, 2000 the plaintiff agreed to dismiss, without prejudice. The action
and a dismissal order was entered by the court. The costs associated with
litigation and settlement of the litigation have been recorded as a component of
general and administrative expense.
In the opinion of management, the ultimate disposition of outstanding claims
and legal actions will not have a material effect on MedicaLogic's consolidated
financial position, results of operations or liquidity.
(10) SEGMENT INFORMATION
MedicaLogic derives its revenue from a single operating segment, electronic
medical records, and the service and support related to these products.
F-24
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) SEGMENT INFORMATION (CONTINUED)
GEOGRAPHIC INFORMATION
MedicaLogic operates solely within the United States and to date has derived
all of its revenue from within the United States.
MAJOR CUSTOMERS
In 1997, MedicaLogic derived greater than 10% of its revenue from
VHA, Inc., a distribution partner, $2,700, and from Wake Forest Baptist Medical
Center, $1,600.
In 1998, MedicaLogic derived greater than 10% of its revenue from
VHA, Inc., $3,400. MedicaLogic had accounts receivable from this customer
representing approximately 20% of trade accounts receivable at December 31,
1998.
In 1999, MedicaLogic derived 10% or greater of its revenue from Baylor
College of Medicine, $3,087 and Texas Childrens Hospital, $2,470. MedicaLogic
had accounts receivable from these customers representing approximately 28% of
trade accounts receivable at December 31, 1999.
(11) 401(k) PLAN
MedicaLogic sponsors a 401(k) deferred savings plan for all employees.
Employees become eligible to participate in the plan upon employment. Employees
may contribute up to 15% of their pay to the plan, subject to the limitation of
$10 by the Internal Revenue Code. All employee contributions vest immediately.
MedicaLogic has not made any matching contributions but does pay administrative
costs for the plan. These costs were not significant for any period presented.
(12) RELATED PARTY TRANSACTIONS
MedicaLogic has accepted promissory notes aggregating $11,800 of principal
and interest amount at December 31, 1999 from its officers in consideration for
restricted stock issued. These notes accrue interest at 6% per year and are
payable in full 10 years from the date of the loan. MedicaLogic also has loaned
an officer approximately $104 to help pay for relocation expenses, under an
unsecured promissory note, which bears interest at 6% per year. The note is
payable in full on the earlier to occur of the sale of his residence located in
Portland, Oregon, the termination of his employment, or July 1, 2001. The note
is prepayable in full without penalty.
In September 1999, MedicaLogic entered into an agreement with an officer in
consideration of relocating to San Francisco, California. MedicaLogic agreed to
reimburse this officer $8 for improvements to his Portland, Oregon residence and
any shortfall between the sales price on his Portland, Oregon residence and the
original purchase price of $520 paid by this officer and any transaction costs
not covered by the sales price of this residence, unless the sales price is
greater than the purchase price. MedicaLogic also agreed to forgive the interest
accrued on the unsecured promissory note referred to above, which will be repaid
from the proceeds of the sale of the Portland, Oregon residence and to pay the
mortgage payment on the officer's residence in Portland, Oregon until it is
sold. In December 1999 the residence sold, and $36 of relocation expense was
recognized and $104 was recorded as payment against the note.
F-25
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
In August 1998, MedicaLogic entered into stock purchase agreements with two
entities that are affiliated with two directors of MedicaLogic. These agreements
were for the issuance of 175,000 shares of common stock at a price of $4.00 per
share. Options for 100,000 shares of common stock were also granted to these
entities with a fair value using the Black-Scholes methodology of $113. These
stock options were exercised by these entities for an additional 100,000 shares
of common stock in April 1999.
In May 1999, MedicaLogic sold an aggregate of 1,052,632 shares of series J
preferred stock to two entities that are affiliated with a director of
MedicaLogic.
A member of MedicaLogic's board of directors is a partner in a law firm
retained by MedicaLogic to provide legal counsel.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly results of operations for
1998 and 1999. This unaudited information has been prepared on the same basis as
the audited consolidated financial statements. This table includes all
adjustments, consisting only of normal recurring adjustments, that are
considered necessary for a fair presentation of MedicaLogic's financial position
and results of operations for the quarters presented.
<TABLE>
<CAPTION>
1999 QUARTER ENDED
- ---- ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues.......................... $ 2,997 $ 4,088 $ 6,017 $ 6,615
Operating expenses................ $ 6,634 $ 8,681 $13,344 $ 20,192
Net loss.......................... $(3,426) $(4,337) $(6,802) $(13,088)
</TABLE>
<TABLE>
<CAPTION>
1999 QUARTER ENDED
- ---- ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues.......................... $ 2,811 $ 3,848 $ 4,100 $5,401
Operating expenses................ $ 5,485 $ 5,847 $ 5,993 $6,533
Net loss.......................... $(2,638) $(1,860) $(1,749) $ (788)
</TABLE>
(14) SUBSEQUENT EVENTS (UNAUDITED)
On February 22, 2000 MedicaLogic, Inc. and Medscape, Inc. announced an
agreement to merge and MedicaLogic, Inc. announced an agreement to acquire Total
eMed, Inc. Medscape shareholders will receive 0.323 shares of MedicaLogic common
stock for each share of Medscape and Total eMed shareholders will receive
8 million shares of MedicaLogic common stock for all of their outstanding shares
and options. The new company will be known initially as MedicaLogic/Medscape.
The transaction will become effective upon approval by the shareholders of the
companies and the satisfaction of certain conditions.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Medscape, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Medscape, Inc. and its subsidiary ("Medscape") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in stockholders'
(deficiency) equity, and cash flows for the years ended December 31, 1999, 1998
and 1997. These consolidated financial statements are the responsibility of
Medscape's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Medscape at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the years ended December 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
F-27
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 4,456 $ 1,595
Investment securities, available for sale................. 36,363 --
Accounts receivable....................................... 5,946 1,350
Prepaid marketing......................................... 12,000 --
Prepaid expenses and other assets......................... 3,256 93
--------- -------
Total current assets.................................... 62,021 3,038
Fixed assets--net........................................... 7,568 380
Intangible assets--net...................................... 12,590 2,456
Investment in Softwatch..................................... 3,156 --
--------- -------
Total assets............................................ $ 85,335 $ 5,874
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 9,567 $ 871
Deferred revenue.......................................... 1,580 799
--------- -------
Total current liabilities............................... 11,147 1,670
--------- -------
Stockholders' Equity:
Common stock, par value $.01; 100,000,000 shares
authorized, 44,680,144 issued and 44,661,094 outstanding
at December 31, 1999.................................... 447 --
Common stock, Class A--par value $.01; 15,000,000 Shares
authorized, 1,079,000 issued and outstanding at December
31, 1998; 0 issued and outstanding at December 31,
1999.................................................... -- 11
Common stock, Class B--par value $.01; 15,000,000 Shares
authorized, 5,792,318 issued and outstanding at December
31, 1998; 0 issued and outstanding at December 31,
1999.................................................... -- 58
Preferred stock, undesignated--par value $.01; 5,000,000
shares authorized; 0 shares authorized December 31,
1998; 0 shares issued and outstanding December 31,
1999....................................................
Preferred stock, Series A--par value $.01; 1,000,000
shares authorized, 788,200 shares issued and outstanding
at December 31, 1998; 0 issued and outstanding at
December 31, 1999....................................... -- 8
Preferred stock, Series C--par value $.01; 4,000,000
shares authorized, 2,410,760 issued and outstanding at
December 31, 1998; 0 issued and outstanding at
December 31, 1999....................................... -- 24
Additional paid-in capital.................................. 266,196 14,158
Warrants.................................................... 6,840 --
Deferred stock compensation................................. (7,984) (715)
Contribution of services.................................... (145,224) --
Treasury stock.............................................. (3) (3)
Notes receivable............................................ (628) (628)
Accumulated other comprehensive loss........................ (36) --
Accumulated deficit......................................... (45,420) (8,709)
--------- -------
Total stockholders' equity.............................. 74,188 4,204
--------- -------
Total liabilities and stockholders' equity.............. $ 85,335 $ 5,874
========= =======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Revenue.................................................... $ 11,156 $ 3,069 $ 1,522
---------- --------- ---------
Operating expenses:
Editorial, production, content and technology (excludes
stock based compensation expense of $166 in 1999 and
$26 in 1998 included below)............................ 12,967 2,694 1,967
Sales and marketing (excludes stock based compensation
expense of $83 in 1999 included below)................. 26,944 2,520 1,397
General and administrative (excludes stock based
compensation expense of $1,852 in 1999 and $223 in 1998
included below)........................................ 6,048 1,469 1,450
Depreciation and amortization............................ 1,010 287 160
Stock based compensation................................. 2,101 249 --
---------- --------- ---------
Total Operating Expenses............................... 49,070 7,219 4,974
---------- --------- ---------
Loss from operations....................................... (37,914) (4,150) (3,452)
Interest expense (income)................................ (1,203) (249) 12
Net loss................................................... $ (36,711) $ (3,901) $ (3,464)
========== ========= =========
Basic net loss per share................................... $ (1.89) $ (1.07) $ (1.26)
========== ========= =========
Weighted average number of shares of common stock
Outstanding.............................................. 19,400,443 3,636,558 2,750,552
========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
-------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997........................ 1,079,000 $10,790 1,627,000 $16,270 -- --
Issuance of Series B preferred stock............ -- -- -- -- -- --
Conversion of preferred stock................... -- -- -- -- -- --
Issuance of series C preferred stock............ -- -- -- -- -- --
Exercise of stock options....................... -- -- 99,645 995 -- --
Contributed capital............................. -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
--------- ------- --------- ------- --- ----
Balance, December 31, 1997...................... 1,079,000 10,790 1,726,645 17,265 -- --
Purchase of treasury stock...................... -- -- -- -- -- --
Options issued to nonemployees.................. -- -- -- -- -- --
Deferred stock compensation related to issuance
of options.................................... -- -- -- -- -- --
Issuance of series C preferred stock............ -- -- -- -- -- --
Issuance of Class B common stock
(acquisition)................................. -- -- 3,650,870 36,510 -- --
Exercise of stock options....................... -- -- 414,803 4,148 -- --
Amortization of deferred stock compensation..... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
--------- ------- --------- ------- --- ----
Balance, December 31, 1998...................... 1,079,000 $10,790 5,792,318 $57,923 -- $ --
========= ======= ========= ======= === ====
<CAPTION>
UNDESIGNATED SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997........................ -- -- 788,200 $7,882 -- --
Issuance of Series B preferred stock............ -- -- -- -- 123,974 1,240
Conversion of preferred stock................... -- -- -- -- (123,974) (1,240)
Issuance of series C preferred stock............ -- -- -- -- -- --
Exercise of stock options....................... -- -- -- -- -- --
Contributed capital............................. -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
--- ---- ------- ------ -------- -------
Balance, December 31, 1997...................... -- -- 788,200 7,882 -- --
Purchase of treasury stock...................... -- -- -- -- -- --
Options issued to nonemployees.................. -- -- -- -- -- --
Deferred stock compensation related to issuance
of options.................................... -- -- -- -- -- --
Issuance of series C preferred stock............ -- -- -- -- -- --
Issuance of Class B common stock
(acquisition)................................. -- -- -- -- -- --
Exercise of stock options....................... -- -- -- -- -- --
Amortization of deferred stock compensation..... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
--- ---- ------- ------ -------- -------
Balance, December 31, 1998...................... -- $ -- 788,200 $7,882 -- $ --
=== ==== ======= ====== ======== =======
<CAPTION>
SERIES C
PREFERRED STOCK
--------------------
SHARES AMOUNT
--------- --------
<S> <C> <C>
Balance, January 1, 1997........................ -- --
Issuance of Series B preferred stock............ -- --
Conversion of preferred stock................... 326,087 3,261
Issuance of series C preferred stock............ 1,152,272 11,523
Exercise of stock options....................... -- --
Contributed capital............................. -- --
Net loss........................................ -- --
--------- -------
Balance, December 31, 1997...................... 1,478,359 14,784
Purchase of treasury stock...................... -- --
Options issued to nonemployees.................. -- --
Deferred stock compensation related to issuance
of options.................................... -- --
Issuance of series C preferred stock............ 932,401 9,324
Issuance of Class B common stock
(acquisition)................................. -- --
Exercise of stock options....................... -- --
Amortization of deferred stock compensation..... -- --
Net loss........................................ -- --
--------- -------
Balance, December 31, 1998...................... 2,410,760 $24,108
========= =======
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SERIES D
PREFERRED STOCK ADDITIONAL DEFERRED
------------------- PAID-IN CONTRIBUTION STOCK NOTES
SHARES AMOUNT CAPITAL WARRANTS OF SERVICES COMPENSATION RECEIVABLE
-------- -------- ----------- -------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997......... -- -- $ 15,301 -- -- -- --
Issuance of series B preferred
stock........................ -- -- 1,498,760 -- -- -- --
Conversion of preferred
stock........................ -- -- (2,021) -- -- -- --
Issuance of series C preferred
stock........................ -- -- 5,288,924 -- -- -- --
Exercise of stock options...... -- -- 3,078 -- -- -- --
Contributed capital............ -- -- 642,364 -- -- -- --
Net loss....................... -- -- -- -- -- -- --
--- ---- ----------- ---- --- --------- ---------
Balance, December 31, 1997....... -- -- 7,446,406 -- -- -- --
Purchase of treasury stock..... -- -- -- -- -- -- --
Options issued to
nonemployees................. -- -- 65,000 -- -- -- --
Deferred stock compensation
related to issuance of
options...................... -- -- 497,445 -- -- (497,445) --
Issuance of series C preferred
Stock........................ -- -- 3,990,675 -- -- -- --
Issuance of Class B common
stock (acquisition).......... -- -- 2,154,013 -- -- (467,311) (627,950)
Exercise of stock options...... -- -- 4,770 -- -- -- --
Amortization of deferred stock
compensation................. -- -- -- -- -- 249,320 --
Net loss....................... -- -- -- -- -- -- --
--- ---- ----------- ---- --- --------- ---------
Balance, December 31, 1998....... -- $ -- $14,158,309 $ -- -- $(715,436) $(627,950)
=== ==== =========== ==== === ========= =========
<CAPTION>
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE ACCUMULATED
STOCK INCOME DEFICIT TOTAL
-------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997......... -- -- $(1,344,490) $(1,294,247)
Issuance of series B preferred
stock........................ -- -- -- 1,500,000
Conversion of preferred
stock........................ -- -- -- --
Issuance of series C preferred
stock........................ -- -- -- 5,300,447
Exercise of stock options...... -- -- -- 4,073
Contributed capital............ -- -- -- 642,364
Net loss....................... -- -- (3,463,914) (3,463,914)
------- --------------- ----------- -----------
Balance, December 31, 1997....... -- -- (4,808,404) 2,688,723
Purchase of treasury stock..... (3,277) -- -- (3,277)
Options issued to
nonemployees................. -- -- -- 65,000
Deferred stock compensation
related to issuance of
options...................... -- -- -- --
Issuance of series C preferred
Stock........................ -- -- -- 3,999,999
Issuance of Class B common
stock (acquisition).......... -- -- -- 1,095,262
Exercise of stock options...... -- -- -- 8,918
Amortization of deferred stock
compensation................. -- -- -- 249,320
Net loss....................... -- -- (3,900,619) (3,900,619)
------- --------------- ----------- -----------
Balance, December 31, 1998....... $(3,277) $ -- $(8,709,023) $ 4,203,326
======= =============== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
--------------------- ----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999.............. 1,079,000 $ 10,790 5,792,318 $ 57,923 -- --
Issuance of Series D preferred
stock............................. -- -- -- -- -- --
Warrants issued as compensation..... -- -- -- -- -- --
Issuance of Class A & B common stock
to CBS Corp....................... 7,397,208 73,972 6,541,160 65,412 -- --
Issuance of Class A common stock and
Series E preferred stock to NDC
Corp.............................. 1,000,000 10,000 -- -- -- --
Warrants issued as compensation for
services.......................... -- -- -- -- -- --
Exercise of stock options........... -- -- 1,311,773 13,118 -- --
Initial public offering of common
stock............................. -- -- -- -- 7,650,000 76,500
Conversion to common stock at
initial public offering........... (9,476,208) (94,762) (13,645,251) (136,453) 37,030,144 370,302
Deferred stock compensation related
to issuance of options............ -- -- -- -- -- --
Advertising and promotion services
received for stock................ -- -- -- -- -- --
Revaluation of warrants issued as
compensation for services......... -- -- -- -- -- --
Other comprehensive loss............ -- -- -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- -- --
Net loss............................ -- -- -- -- -- --
---------- -------- ----------- --------- ---------- --------
Balance, December 31, 1999............ -- $ -- -- $ -- 44,680,144 $446,802
========== ======== =========== ========= ========== ========
<CAPTION>
UNDESIGNATED SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ------------------- ------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999.............. -- -- 788,200 $ 7,882 -- -- 2,410,760 $ 24,108
Issuance of Series D preferred
stock............................. -- -- -- -- -- -- -- --
Warrants issued as compensation..... -- -- -- -- -- -- -- --
Issuance of Class A & B common stock
to CBS Corp....................... -- -- -- -- -- -- -- --
Issuance of Class A common stock and
Series E preferred stock to NDC
Corp.............................. -- -- -- -- -- -- -- --
Warrants issued as compensation for
services.......................... -- -- -- -- -- -- -- --
Exercise of stock options........... -- -- -- -- -- -- -- --
Initial public offering of common
stock............................. -- -- -- -- -- -- -- --
Conversion to common stock at
initial public offering........... -- -- (788,200) (7,882) -- -- (2,410,760) (24,108)
Deferred stock compensation related
to issuance of options............ -- -- -- -- -- -- -- --
Advertising and promotion services
received for stock................ -- -- -- -- -- -- -- --
Revaluation of warrants issued as
compensation for services......... -- -- -- -- -- -- -- --
Other comprehensive loss............ -- -- -- -- -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- -- --
--- --- -------- ------- --- ---- ---------- --------
Balance, December 31, 1999............ -- -- -- $ -- -- $ -- -- $ --
=== === ======== ======= === ==== ========== ========
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SERIES D & E
PREFERRED STOCK ADDITIONAL DEFERRED
--------------------- PAID-IN CONTRIBUTION STOCK NOTES
SHARES AMOUNT CAPITAL WARRANTS OF SERVICES COMPENSATION RECEIVABLE
---------- -------- ------------ ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999...... -- -- $14,158,309 -- -- $ (715,436) $(627,950)
Issuance of series D
preferred stock........... 1,757,683 17,577 19,396,969 -- -- -- --
Warrants issued as
compensation.............. -- -- (85,003) 85,003 -- -- --
Issuance of Class A & B
common stock to CBS
Corp...................... -- -- 156,317,070 -- (149,860,616) -- --
Issuance of Class A common
stock and series E
preferred stock to NDC
Corp...................... 400,000 4,000 19,422,040 -- (3,500,000) -- --
Warrants issued as
compensation for
services.................. -- -- -- 5,060,000 -- (5,060,000) --
Exercise of stock options... -- -- 252,324 -- -- -- --
Initial public offering of
common stock.............. -- -- 54,206,383 -- -- -- --
Conversion to common stock
at initial public
offering.................. (2,157,683) (21,577) (85,520) -- -- -- --
Deferred stock compensation
related to issuance of
options................... -- -- 2,614,225 -- -- (2,614,225) --
Advertising and promotion
services received for
stock..................... -- -- -- -- 8,136,697 -- --
Revaluation of warrants
issued as compensation for
services.................. -- -- -- 1,695,000 -- (1,695,000) --
Other comprehensive loss.... -- -- -- -- -- -- --
Amortization of deferred
stock compensation........ -- -- -- -- -- 2,101,246 --
Net loss.................... -- -- -- -- -- -- --
---------- -------- ------------ ---------- ------------- ----------- ---------
Balance, December 31, 1999.... -- $ -- $266,196,797 $6,840,003 $(145,223,919) $(7,983,415) $(627,950)
========== ======== ============ ========== ============= =========== =========
<CAPTION>
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE ACCUMULATED
STOCK INCOME DEFICIT TOTAL
-------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999...... $(3,277) -- $ (8,709,023) $ 4,203,326
Issuance of series D
preferred stock........... -- -- -- 19,414,546
Warrants issued as
compensation.............. -- -- -- --
Issuance of Class A & B
common stock to CBS
Corp...................... -- -- -- 6,595,838
Issuance of Class A common
stock and series E
preferred stock to NDC
Corp...................... -- -- -- 15,936,040
Warrants issued as
compensation for
services.................. -- -- -- --
Exercise of stock options... -- -- -- 265,442
Initial public offering of
common stock.............. -- -- -- 54,282,883
Conversion to common stock
at initial public
offering.................. -- -- -- --
Deferred stock compensation
related to issuance of
options................... -- -- -- --
Advertising and promotion
services received for
stock..................... -- -- -- 8,136,697
Revaluation of warrants
issued as compensation for
services.................. -- -- -- --
Other comprehensive loss.... -- (36,201) -- (36,201)
Amortization of deferred
stock compensation........ -- -- -- 2,101,246
Net loss.................... -- -- (36,711,716) (36,711,716)
------- -------- ------------ ------------
Balance, December 31, 1999.... $(3,277) $(36,201) $(45,420,739) $ 74,188,101
======= ======== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
MEDSCAPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (36,711) $(3,901) $(3,464)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock based compensation expense........................ 2,101 249 --
Amortization of license fees............................ 794 -- --
Non-cash advertising and promotion...................... 8,366 -- --
Depreciation and amortization........................... 1,010 287 160
Recruiting fees--issuance of options.................... -- 65 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.............. (4,596) 474 (284)
Increase in prepaid marketing and prepaid expenses and
other assets.......................................... (12,891) (6) (21)
Increase (decrease) in accounts payable and accrued
liabilities........................................... 8,696 (265) (91)
Increase (decrease) in deferred revenue................. 781 (1,126) 92
--------- ------- -------
Net cash used in operating activities................. (32,450) (4,223) (3,608)
--------- ------- -------
INVESTING ACTIVITIES
Purchase of fixed assets.................................. (8,034) (262) (222)
Acquisition of intangible assets.......................... (93) -- --
Investment in Softwatch................................... (3,156) -- --
Purchase of investment securities......................... (136,561) -- --
Proceeds from maturities and sales of investment
Securities.............................................. 100,162
Payments for business acquired, net of cash acquired (note
1)...................................................... -- (1,195) --
--------- ------- -------
Net cash used in investing activities................. (47,682) (1,457) (222)
--------- ------- -------
FINANCING ACTIVITIES
Proceeds from loan........................................ -- -- 962
Payment of loan........................................... -- (359) (1,150)
Proceeds from issuance of common stock.................... 53,858 -- --
Proceeds from issuance of preferred stock................. 28,870 4,000 6,801
Proceeds from exercise of stock options................... 265 9 4
Purchase of treasury stock................................ -- (3) --
Contributed capital....................................... -- -- 642
--------- ------- -------
Cash provided by financing activities................. 82,993 3,647 7,259
--------- ------- -------
Increase (decrease) in cash and cash equivalents............ 2,861 (2,033) 3,429
Cash and cash equivalents, beginning of period.............. 1,595 3,628 199
--------- ------- -------
Cash and cash equivalents, end of period.................... $ 4,456 $ 1,595 $ 3,628
========= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Medscape, Inc. was formed and incorporated under the laws of the State of
New York in March 1996, and commenced operations in April 1996. Medscape was
reincorporated in Delaware in December 1998. Medscape operates Medscape.com, a
healthcare web site for physicians and allied healthcare professionals such as
pharmacists and nurses, and CBS.Healthwatch.com, a separate web site to enhance
and personalize the consumer experience. The Medscape web sites are a valuable
resource that enables members to make better informed healthcare decisions.
Medscape provides comprehensive, authoritative and timely medical information,
including original proprietary articles written by renowned medical experts.
Medscape sells advertising and sponsorship, market research and other services
to pharmaceutical, medical device and other healthcare companies. Medscape also
sells products, such as medical books, to physicians, allied healthcare
professionals and consumers. Medscape operates in one segment in the United
States.
Effective October 27, 1998, Medscape acquired Healthcare Communications
Group, LLC, ("HCG") a Maryland limited liability company. HCG is a medical
communications/education company that develops, produces and distributes unique
live, print, digital and Internet-based programs for healthcare professionals
funded by pharmaceutical companies. The agreement provided for the purchase of
the membership interests of HCG.
The purchase price of $2,304,671 was allocated principally to working
capital and assets, including accounts receivable and goodwill (see below).
The acquisition of HCG has been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their respective estimated fair
values at the date of acquisition. The excess of the purchase price over the
aggregated estimated fair values of the net tangible assets acquired has been
recorded as goodwill, which is being amortized over fifteen years.
F-35
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
The purchase price was allocated in the following manner:
<TABLE>
<S> <C> <C>
Purchase price:
Cash at closing.................................... $1,075,000
Legal and accounting fees.......................... 134,409
Common stock 1,825,435 shares at $0.60 (Note 8).... 1,095,262
----------
2,304,671
Liabilities assumed:
Accounts payable................................... $ 74,777
Demand note, Medscape.............................. 275,000
Deferred revenue................................... 1,121,193
Payroll tax liabilities............................ 5,182 1,476,152
---------- ----------
Assets purchased:
Cash............................................... 14,081
Accounts receivable................................ 1,190,359
Prepaid expenses................................... 54,730
Fixed assets....................................... 76,777
Intangibles........................................ 5,383 (1,341,330)
---------- ----------
Total goodwill....................................... $2,439,493
==========
</TABLE>
The following presents, on a pro forma basis, Medscape's operations as if
Medscape and HCG were combined as of the beginning of the periods presented.
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Total revenue...................................... $ 5,653,660 $ 4,677,687
=========== ===========
Net loss........................................... $(3,928,202) $(3,086,341)
=========== ===========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Medscape and
its subsidiary, HCG. The results of the subsidiary acquired are included from
the date of acquisition. All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
F-36
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Medscape considers all highly liquid short-term cash investments purchased
with maturities of three months or less as cash and cash equivalents.
INVESTMENT SECURITIES
Medscape maintains a portfolio of short-term investment securities. All such
investments are classified as available for sale which requires that each
security be carried at fair value with changes in fair value reflected as a
component of comprehensive income within stockholders' equity.
CONCENTRATION OF CREDIT RISK
Medscape's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents, investment securities, and
trade accounts receivable. Medscape maintains its cash and cash equivalents in
bank accounts which, at times, exceed federally insured limits. Medscape
maintains its investment securities with an internationally known financial
institution. Medscape has not experienced any losses in these accounts. Medscape
believes it is not exposed to any significant credit risk on cash and cash
equivalents or its investment securities. Concentrations of credit risks with
respect to accounts receivable are limited because of Medscape's expanding
customer base and the credit worthiness of its three major customers (see
Note 12), making up the majority of the accounts receivable balance.
DEPRECIATION AND AMORTIZATION
Medscape provides for depreciation of property and equipment based on the
estimated useful lives of the applicable assets and the life of leases or the
life of the leasehold improvement if less, using the straight-line method.
Expenditures for renewals and improvements which extend the useful lives of
assets are capitalized, while maintenance and repairs are charged to operations
as incurred.
SOFTWARE DEVELOPED FOR INTERNAL USE
Medscape accounts for the costs of developing software for internal use
under the provisions of American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) No. 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE which was effective for
the year ended December 31, 1999. This SOP provides for the capitalization of
both internal costs, such as payroll and payroll related costs, and external
costs that are directly related to the development of certain systems and
related software. Medscape amortizes these costs over the anticipated life of
the systems. Prior to January 1, 1999, Medscape expensed all internal costs
relating to software development.
F-37
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL, OTHER INTANGIBLE ASSETS AND RELATED AMORTIZATION
Goodwill represents the excess of cost over the fair value of the net assets
acquired of HCG and is being amortized using the straight-line method over
fifteen years.
Other intangible assets consist of licenses and trademarks which are being
amortized using the straight-line method over their estimated useful life.
TRANSACTIONS WITH SOFTWATCH, LTD.
On June 15, 1999, Medscape purchased 1,040,170 Series A Preferred Shares of
Softwatch, Ltd. (Softwatch), an Israeli company, for $2,999,954 (which is
accounted for at cost). In addition, Medscape incurred $66,701 of expenses
relating to the investment. At the same time, Medscape and Softwatch entered
into a License and Web Site Development Agreement pursuant to which Medscape
licensed software from Softwatch to support its customer site and for Softwatch
to provide ongoing support services for the consumer site. On the date of the
Agreement, Medscape paid $500,000 in cash of a total licensing fee of
$1,500,000. The remaining $1,000,000 will be paid $500,000 upon delivery of the
software and $500,000 upon acceptance by Medscape. Medscape will also pay
royalties under the Agreement.
IMPAIRMENT OF LONG LIVED ASSETS
Medscape's long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur, Medscape
measures impairment by comparing the carrying value of the long-lived asset to
the estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows is less than the carrying amount of the assets, Medscape would
recognize an impairment loss. Medscape determined that, as of December 31, 1999
and 1998, there had been no impairment in the carrying value of the long-lived
assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The value of cash and cash equivalents, accounts receivable and accounts
payable approximate their carrying value due to their short-term maturities. The
investment securities are carried at their fair market value.
REVENUE RECOGNITION
Income is derived from a variety of sources including advertising,
sponsorship of on-line journals, medical conferences, market research and
e-commerce. Revenues from advertising are recognized in the period in which the
advertisement is displayed. Revenue from sponsored programs, such as medical
conferences, are recognized when the conference is completed and the next-day
conference summary is published on the Medscape Web site. Revenues from
sponsored content, such as clinical modules, is recognized on a percentage of
completion basis. Revenues from market research are recognized upon completion
of the project.
F-38
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents amounts billed in excess of revenues recognized.
Included in accounts receivable are amounts due (under contract) relating to
deferred revenue.
INCOME TAXES
Medscape accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.
SFAS No. 109 establishes financial accounting and reporting standards for the
effect of income taxes that result from activities during the current and
preceding years. SFAS No. 109 requires an asset and liability approach for
financial reporting for income taxes.
NET LOSS PER COMMON SHARE
Basic loss per common share was computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Diluted loss per
common share has not been presented since the impact for options, warrants and
conversion of preferred shares would have been anti-dilutive (see notes 8 and
9).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and hedging activities, and, as amended, is
required to be adopted during Medscape's year ending December 31, 2001.
Generally, SFAS No. 133 requires that an entity recognize all derivatives as
either an asset or liability and measure those instruments at fair value, as
well as identify the conditions for which a derivative may be specifically
designated as a hedge. Medscape currently does not have any derivative
instruments and is not engaged in hedging activities.
RECLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform to the
current year presentation.
3. INVESTMENT SECURITIES
At December 31, 1999, investment securities available for sale consist of
the following (in thousands):
<TABLE>
<CAPTION>
GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Category --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Commercial paper..................... $ 7,667 $1 -- $ 7,668
Corporate debt securities............ 12,176 -- (10) 12,166
Asset backed securities.............. 16,556 -- (27) 16,529
------- -- ---- -------
$36,399 $1 $(37) $36,363
======= == ==== =======
</TABLE>
F-39
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. INVESTMENT SECURITIES (CONTINUED)
All of the commercial paper and corporate debt securities have contractual
maturity dates of less than one year. All of the asset backed securities have
effective maturity dates of less than one year and have contractual maturity
dates ranging from less than one year to greater than ten years. A summary of
the contractual maturities is as follows (in thousands):
<TABLE>
<CAPTION>
GROSS FAIR
AMORTIZED MARKET
COST VALUE
Maturity Category --------- --------
<S> <C> <C>
Due within 1 year........................................ $19,843 $19,834
Due after 1 year though 5 years.......................... 14,174 14,150
Asset backed securities.................................. 2,382 2,379
------- -------
$36,399 $36,363
======= =======
</TABLE>
4. FIXED ASSETS
Fixed Assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- USEFUL LIFE
DESCRIPTION 1999 1998 (IN YEARS)
- ----------- -------- -------- -----------
<S> <C> <C> <C>
Computers and peripherals......................... $ 4,122 $ 602 3
Software.......................................... 3,716 -- 3
Furniture and fixtures............................ 205 66 5
Leasehold improvements............................ 798 139 2
------- -----
8,841 807
Less accumulated depreciation..................... (1,273) (427)
------- -----
Fixed assets--net................................. $ 7,568 $ 380
======= =====
</TABLE>
5. INTANGIBLE ASSETS
Intangible Assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- USEFUL LIFE
DESCRIPTION 1999 1998 (IN YEARS)
- ----------- -------- -------- -----------
<S> <C> <C> <C>
Trademarks....................................... $ 147 $ 55 15
Licenses......................................... 11,000 -- *
Goodwill......................................... 2,439 2,439 15
Organization costs............................... -- 23 5
------- ------
13,586 2,517
Less accumulated amortization.................... (996) (61)
------- ------
Intangible assets--net........................... $12,590 $2,456
======= ======
</TABLE>
F-40
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. INTANGIBLE ASSETS (CONTINUED)
In 1997, Medscape changed the useful life of intangible assets from
40 years for trademarks and 15 years for organization costs to 15 and 5 years,
respectively, to more properly reflect their expected useful lives in the
current business environment. The impact of the change was not material to
Medscape's financial statements.
* This category is comprised of 2 licenses, the first license is valued at
$7,000,000 and is being amortized over 7 years and the second license is valued
at $4,000,000 and is being amortized over it's useful life of 3 years.
6. INCOME TAXES
No provision for income taxes has been made because Medscape has sustained
cumulative losses since the commencement of its operations.
At December 31, 1999, Medscape had net operating loss carryforwards ("NOLs")
of approximately $51.7 million which will be available to reduce future taxable
income. The NOLs are scheduled to expire in the following years:
<TABLE>
<S> <C>
2011........................................................ $ 1,344,000
2012........................................................ 3,306,000
2018........................................................ 3,900,000
2019........................................................ 43,168,000
</TABLE>
In accordance with SFAS No. 109, Medscape has computed the components of
deferred income taxes as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Deferred tax assets........................... $ 23,756 $ 3,420 $ 1,961
Less valuation allowance...................... (23,756) (3,420) (1,961)
-------- ------- -------
Net deferred tax assets....................... $ -- $ -- $ --
======== ======= =======
</TABLE>
F-41
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. INCOME TAXES (CONTINUED)
The principal component of Medscape's deferred tax assets is its NOLs. At
December 31, 1999 and 1998, a valuation allowance equal to the amount of the
deferred tax assets is provided as it has not been established that it is more
likely than not that the tax benefits will be realized.
7. RETIREMENT PLAN
Medscape has a 401(k) Retirement/Savings Plan (the "Plan") for all eligible
employees. Employees are eligible to participate after they have completed three
months of service. Medscape is not required to, but may match employee
contributions. In addition, Medscape may make a discretionary contribution to
the Plan. Medscape did not make any contributions to the Plan for the years
ended December 31, 1999, December 31, 1998, or December 31, 1997.
8. STOCKHOLDERS' (DEFICIENCY) EQUITY
The only authorized stock of Medscape at December 31, 1999 is the common
stock and the Undesignated Preferred Stock. All other issues were either
redesignated or converted to common stock with Medscape's initial public
offering on September 27, 1999.
In January 1997, Medscape issued 123,974 shares of Series B preferred stock
at $12.10 per share for $1,500,000. In October 1997, Medscape issued 1,152,272
shares of Series C preferred stock at $4.60 per share for $5,300,447. As part of
this offering, Medscape converted all of the Series B preferred stock
outstanding for 326,087 shares of Series C preferred stock at $4.60 per share.
The total capital raised in 1997 from these offerings was $6,800,447, of which
$800,000 was used to pay the principal and interest on the loan payable to SCP
Communications, Inc. ("SCP"), a related party, with the remainder used to fund
Medscape's ongoing operations.
During 1997, SCP contributed to capital $642,364 which Medscape owed to it
under an administrative services agreement (note 13).
In March 1998, Medscape issued 932,401 shares of Series C preferred stock at
$4.29 per share for $3,999,999. In October 1998, Medscape issued 1,825,435
shares of Class B common stock in connection with the acquisition of Healthcare
Communications Group. Medscape also received a note for $627,950 from the
majority shareholder in lieu of payment for an additional 1,825,435 shares of
Class B common stock. The note is presented as a contra to shareholders' equity.
Such shares vest over 3 years. The fair value in excess of $627,950 has been
included in the charge to deferred stock compensation as an offset in the equity
section of the balance sheet and is being amortized over three years.
On May 17, 1999, Medscape effected a 2.5-for-one stock split for each
outstanding share of each class of common shares. In connection with the stock
split, the number of authorized shares of Class A common stock was increased to
an aggregate of 1,079,000 shares, the number of authorized shares of Class B
common stock was increased to an aggregate of 6,701,363 shares and the preferred
stock became convertible into 2.5 times as many shares of the Class A common
stock and each outstanding warrant and option became exercisable into 2.5 times
as many shares of the Class B common stock. The 2.5-for-one stock split
described above has been applied retrospectively for all periods presented.
On September 27, 1999, Medscape completed an initial public offering that
ultimately, after inclusion of the exercise on September 30, 1999 of the 900,000
share underwriter's over-allotment,
F-42
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' (DEFICIENCY) EQUITY (CONTINUED)
resulted in the issuance of 7,650,000 shares of common stock. Net proceeds
received, after deducting offering costs, totaled approximately $54.4 million,
including approximately $6.7 million received on October 5, 1999 from the
exercise of the over-allotment. Simultaneous with the offering, each outstanding
share of Class B common stock was converted into Class A common stock on a
one-for-one basis and Class A common stock was concurrently redesignated as
common stock. Additionally, each outstanding share of Series A, Series C-1, and
Series D preferred stock was converted into 2.5 shares of common stock,
Series C preferred stock was converted into 2.68 shares of common stock, and
Series E preferred stock was converted into 3.125 shares of common stock. The
conversions of preferred stock resulted in the issuance of 13,908,685 shares of
common stock. An increase in the number of authorized shares of common stock to
100,000,000 was also effected simultaneous with this offering and a new class of
5,000,000 shares of undesignated preferred stock was also authorized.
During September 1999, common stock was issued to CBS Corporation and to
National Data Corporation as discussed in Note 10.
9. STOCK OPTION PLAN
During 1996, the Board of Directors adopted the Medscape, Inc. 1996 Stock
Option Plan (the "Plan"). Pursuant to the Plan, the Board of Directors granted
incentive stock options to certain key employees and non-qualified stock options
to certain key non-employees all at fair value. Under the Plan approved by the
Board of Directors, the total number of shares of common stock that may be
granted is 8,250,000.
The incentive stock options granted permit the key employees the right and
option to purchase shares of common stock. Except for a change of control, as
defined, an option may not be exercised within one year from the date of the
grant and no option will be exercisable after 10 years from the date granted.
Stock options vest over a three or four-year period, with one-third or
one-quarter of the options becoming exercisable one year from date of grant. For
options issued with an exercise price below fair market value, the excess of the
fair market value over the exercise price has been charged to deferred stock
compensation expense and is being amortized over four years, the vesting period
of the options.
The non-qualified stock options also permit certain employees and
non-employees the right and option to purchase shares of common stock. Except
for a change of control, as defined, an option may not be exercised within one
year from the date of the grant and no option will be exercisable after
10 years from the date granted. Stock options vest over a four-year period, with
one-quarter of the options becoming exercisable one year from date of grant. For
options issued with an exercise price below fair market value, the excess of the
fair market value over the exercise price has been charged to deferred stock
compensation expense and is being amortized over four years, the vesting period
of the options.
In addition, the non-qualified stock options granted permit other
non-employees the option to purchase shares of common stock. One-quarter of the
options are exercisable one year from date of grant. For options issued with an
exercise price below fair market value, the excess of the fair market
F-43
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. STOCK OPTION PLAN (CONTINUED)
value over the exercise price has been charged to deferred stock compensation
expense and is being amortized over four years, the vesting period of the
options.
Transactions involving the incentive stock options granted to key employees
are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
OPTION PRICE
SHARES PER SHARE
--------- -------------------
<S> <C> <C>
Options outstanding January 1, 1997................ 284,677 $ .011
Granted.......................................... 557,500 .144 & .172
Exercised........................................ (7,978) .011
Canceled......................................... (109,977) --
--------- -------------------
Options outstanding December 31, 1997.............. 724,222 .011-.172
Granted.......................................... 1,650,118 .172 & .344
Exercised........................................ (7,797) .011 & .144
Canceled......................................... (48,125) .144 & .0172
--------- -------------------
Options outstanding December 31, 1998.............. 2,318,418 .011-.344
Granted.......................................... 3,316,038 8.625-10.00
Exercised........................................ (946,049) .011-3.40
Canceled......................................... (177,600) .144-10.00
--------- -------------------
Options outstanding December 31, 1999.............. 4,510,807 .011-.10.00
========= ===================
</TABLE>
Employee options exercisable at December 31, 1999, 1998 and 1997 were
1,343,091, 344,873, and 63,325, respectively.
SFAS No. 123 provides for a fair value based method of accounting for
employee options and options granted to non-employees and measures compensation
expense using an option valuation model that takes into account, as of the grant
date, the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the
stock, and the risk-free interest rate for the expected term of the options. For
the years ended December 31, 1996 and 1997 the fair value of options granted to
non-employees were nominal as determined using the Black Scholes option pricing
model. For options granted to non-employees in 1998, an amount equal to the fair
value of the services provided aggregating $65,000 is included as a charge to
general and administrative expenses in the 1998 statement of operations.
Medscape has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations
in accounting for its employee stock options. Medscape has issued its options at
fair value at the date of grant. Under APB 25, because the exercise price of
Medscape's employee stock options equals the fair value of the underlying stock
on the date of grant, no compensation expense is recognized.
F-44
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. STOCK OPTION PLAN (CONTINUED)
Pro forma disclosures as if Medscape adopted the cost recognition
requirement under SFAS 123 is presented below.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss as reported.................... $36,712 $3,901 $3,464
Net loss pro forma...................... 46,126 3,976 3,482
</TABLE>
The fair value of options granted under the Plan for the years ended
December 31, 1997 and 1998, in complying with SFAS No. 123 was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used: no dividend yield, no expected volatility in
1996, 1997 and 1998, 75.657% was used in 1999, risk free interest rate of 5.66%
as of December 31, 1997, 4.60% as of December 31, 1998 and 6.00% as of
December 31, 1999, and expected lives of 3.25 years. Pro forma compensation cost
of options granted under the Plan is measured based on the discount from fair
value.
Transactions involving non-qualified stock options granted to non-employees
are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
OPTION PRICE
SHARES PER SHARE
--------- -----------
<S> <C> <C>
Options outstanding January 1, 1997.................. 1,952,418 $ .011
Granted............................................ 175,000 .144
Exercised.......................................... (91,668) .011
Canceled........................................... (6,018) .011
--------- -----------
Options outstanding December 31, 1997................ 2,029,732 .011 & .144
Granted............................................ 340,000 .172 & .344
Exercised.......................................... (407,005) .011 & .144
Canceled........................................... (89,678) .011 & .172
--------- -----------
Options outstanding December 31, 1998................ 1,873,049 $ .011-.344
Granted............................................ -- --
Exercised.......................................... (365,725) .011 & .172
Canceled........................................... (16,050) .011
--------- -----------
Options outstanding December 31, 1999................ 1,491,274 $ .011-.344
========= ===========
</TABLE>
Non-employee options exercisable at December 31, 1999, 1998 and 1997 were
873,693, 998,330 and 625,742.5, respectively.
WARRANTS: TRANSACTION WITH AMERICA ONLINE, INC.
On September 3, 1999, Medscape entered into an agreement with America
Online, Inc., under which AOL has agreed to promote Medscape's co-branded Web
sites, through contextual links and banners, on the following AOL properties:
AOL, AOL.com, CompuServe Service, Netscape Netcenter and Digital City. In
addition, Medscape has paid AOL $13 million and will pay an additional
F-45
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. STOCK OPTION PLAN (CONTINUED)
$20 million over the next two years. These amounts will be charged to earnings
over the three-year life of the contract. In addition, Medscape granted AOL two
seven-year warrants, each to purchase up to 1,352,158 shares of Medscape's
common stock. One of the warrants fully vests on signing and has an exercise
price of $10 per share. The other warrant will vest over a three-year period
based on AOL meeting specified performance requirements and will have exercise
prices equal to the fair market value of Medscape's common stock at the time of
vesting. At the time of issuance, each warrant had a value of approximately
$2,530,000, as determined using the Black Scholes option pricing model. The
value of the performance warrant was approximately $4,225,000 as of
December 31, 1999 as determined using the Black Scholes option pricing model.
The value of the fully vested warrant is fixed and will be charged to earnings
over the three-year AOL contract, whereas the warrant that vests over three
years will be charged to earnings adjusted variably over the vesting period.
WARRANTS: CREDIT SUISSE FIRST BOSTON--RELATED TO PRIVATE FINANCING
In March 1999, in connection with the placement of the Series D preferred
stock, Medscape issued 14,887.5 warrants of Class B Common Stock to its
financial advisor. Each warrant entitles the warrant holder to purchase one
share of common stock for $0.004. The value of the warrants, determined using
the Black Scholes pricing model, was $85,000.
10. SIGNIFICANT TRANSACTIONS
TRANSACTIONS WITH CBS CORPORATION
On July 7, 1999, Medscape entered into a Common Stock Purchase agreement,
and on August 3, 1999, in related transactions, it entered into an Advertising
and Promotional Agreement, and a Trademark and Content Agreement with CBS
Corporation (CBS). Under the Stock Purchase Agreement, Medscape sold 7,397,208
shares of Class A common stock and 6,541,160 shares of Class B common stock to
CBS for an aggregate purchase price of $157,000,000, of which $139,384 was paid
in cash, $149,860,616 is to be paid through the advertising services to be
provided by CBS in accordance with the Advertising and Promotion Agreement, and
$7,000,000 is to be paid through the grant of rights under the Trademark and
Content Agreement. Subsequent to the execution of the agreement, the Class B
common stock was converted on a one-for-one basis into Class A common stock that
was concurrently redesignated as common stock upon completion of the Company's
initial public offering (Note 8). Over the seven-year term of the Advertising
and Promotion Agreement, CBS will arrange for the placement of approximately
$150 million of advertising and promotion in the United States for Medscape's
consumer and professional Web sites and their other products and services. Under
the Trademark and Content Agreement, CBS granted Medscape a license to the "CBS"
trademark and "Eye" design and to health related news content for a seven-year
period. Under the agreement CBS retains significant control over the use and
presentation of the CBS health content and CBS trademarks.
The $149,860,616 of advertising services to be provided by CBS will be
expensed as used over the life of the agreement. In addition, the trademark
license fee of $7,000,000 will be amortized on a straight-line basis over the
life of the agreement.
F-46
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. SIGNIFICANT TRANSACTIONS (CONTINUED)
TRANSACTIONS WITH NATIONAL DATA CORPORATION
On August 4, 1999, Medscape sold 400,000 shares of Series E preferred stock
at a purchase price of $25 per share and 1,000,000 shares of Class A common
stock at a purchase price of $10 per share to National Data Corporation (NDC),
which included a $10,000,000 cash investment and an additional $10,000,000
attributed to licensing and promotion to be provided by NDC and credits against
future commission amounts due by Medscape to NDC. The Series E preferred stock
was subsequently converted into 1,250,000 shares of common stock and the
Class A common stock was redesignated as common stock upon completion of the
Company's initial public offering (Note 8). $6,000,000 will be expensed as used
over the three-year life of the agreement. In addition, the license fee of
$4,000,000 will be amortized on a straight-line basis over the life of the
agreement.
11. EMPLOYMENT AGREEMENTS
Medscape has employment agreements with several employees ranging from one
to five years, with commitments aggregating in each of the years ending
December 31 (in thousands): $1,485 in 2000, $1,234 in 2001, $470 in 2002, and
$163 in 2003, and $0 in 2004.
12. MAJOR CUSTOMERS
For the year ended December 31, 1999, there were no sales to a single
customer in excess of 10% of revenues. For the year ended December 31, 1998,
sales to two major customers represent 27% and 14%. For the year ended
December 31, 1997, sales to three major customers represented 15%, 14% and 13%.
13. ADMINISTRATIVE SERVICES AGREEMENT
On April 1, 1996, Medscape and SCP, a company controlled by the same
stockholders, entered into a administrative services agreement under which SCP
provided Medscape with administrative, support services, and sufficient space
for Medscape to conduct its business. This agreement had been extended through
April 30, 1999.
At December 31, 1999, Medscape did not owe SCP any amounts under the
agreement compared to an aggregate due of $50,862 and $465,916 at December 31,
1998 and 1997, respectively. SCP provided services aggregating, $173,985,
$740,739 and $1,074,307 for the years ended December 31, 1999, 1998 and 1997,
respectively. In management's opinion, all of these services were provided and
paid for at a fair market value.
Medscape and SCP have entered into a ten-year "Publishers' Circle Agreement"
whereby SCP grants Medscape the right to distribute its content on the Web and
to provide the content for worldwide on-line search and retrieval. Additionally,
SCP agrees to promote Medscape in its publications, and run advertising in every
issue of its journals. In return, SCP can sell all Medscape products including
banner advertising for which SCP will receive a commission.
F-47
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. SUBSEQUENT EVENTS (UNAUDITED)
ACQUISITION OF DIALOG MEDICAL
In February 2000, Medscape signed a plan of merger and reorganization to
acquire all of the outstanding shares of Dialog Medical, Inc., a Delaware
corporation, in exchange for 275,000 shares of Medscape common stock. Dialog
Medical provides integrated patient education and informed consent materials for
physicians and consumers.
FORMATION OF MEDSCAPE EUROPE
On February 9, 2000 Medscape announced the creation of Medscape Europe to
accelerate its international expansion in the face of rising global demand for
Web-based health information and services. In addition to its European venture,
Medscape already operates a Japanese-language site, Medscape Japan.
MERGER WITH MEDICALOGIC
On February 22, 2000, Medscape announced that it had agreed to merge with
MedicaLogic, Inc. Medscape shareholders will receive 0.323 shares of MedicaLogic
common stock for each share of Medscape common stock. The transaction will
become effective upon approval by the shareholders of the two companies and the
satisfaction of other customary conditions. In connection with this proposed
transaction, Medscape issued warrants to purchase 100,000 shares of its common
stock at $9.3125 per share to its financial advisor. Simultaneous with the
announcement of the merger with MedicaLogic, MedicaLogic announced that it had
agreed to acquire Total eMed, Inc., a provider of electronic medical
transcription services, for approximately eight million shares of MedicaLogic's
common stock.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly results of operations for
1998 and 1999. This unaudited information has been prepared on the same basis as
the audited consolidated financial statements. In the opinion of management,
this table includes all adjustments, consisting only of normal
F-48
<PAGE>
MEDSCAPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
recurring adjustments, that are considered necessary for a fair presentation of
Medscape's financial position and results of operations for the quarters
presented.
<TABLE>
<CAPTION>
QUARTER ENDED (IN THOUSANDS)
1999 ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue........................................... $ 1,644 $ 3,285 $ 2,209 $ 4,018
------- ------- ------- --------
Operating Expenses
Editorial, production,
Content and technology........................ 1,268 2,653 3,293 5,753
Sales and Marketing............................. 1,247 2,682 4,866 18,149
General and administrative...................... 562 891 1,882 2,713
Depreciation and amortization................... 95 130 193 592
Stock based compensation........................ 298 482 537 784
------- ------- ------- --------
Total Operating Expenses.......................... 3,470 6,838 10,771 27,991
------- ------- ------- --------
Loss from Operations.............................. (1,826) (3,553) (8,562) (23,973)
Interest expense (income)....................... (81) (215) (191) (716)
------- ------- ------- --------
Net Loss.......................................... $(1,745) $(3,338) $(8,371) $(23,257)
======= ======= ======= ========
Basic net loss per share.......................... $ (0.25) $ (0.46) $ (0.46) $ (0.52)
======= ======= ======= ========
Weighted average number of shares of common stock
outstanding..................................... 6,871 7,291 18,356 44,680
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED (IN THOUSANDS)
1998 ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue............................................ $ 551 $ 526 $ 479 $ 1,513
------ ------ ------- -------
Operating Expenses
Editorial, production,
Content and technology......................... 404 509 565 1,216
Sales and Marketing.............................. 340 525 649 1,006
General and administrative....................... 311 369 357 432
Depreciation and amortization.................... 47 49 51 140
Stock based compensation......................... -- -- -- 249
------ ------ ------- -------
Total Operating Expenses........................... 1,102 1,452 1,622 3,043
------ ------ ------- -------
Loss from Operations............................... (551) (926) (1,143) (1,50)
Interest expense (income)........................ (49) (100) (72) (28)
------ ------ ------- -------
Net Loss........................................... $ (502) $ (826) $(1,071) $(1,502)
====== ====== ======= =======
Basic net loss per share........................... $ (.18) $ (.29) $ (.35) $ (0.26)
====== ====== ======= =======
Weighted average number of shares of common stock
outstanding...................................... 2,820 2,848 3,030 5,825
====== ====== ======= =======
</TABLE>
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
Healthcare Communications Group, LLC
Potomac, Maryland
We have audited the accompanying balance sheets of Healthcare Communications
Group, LLC ("HCG") as of December 31, 1997 and October 27, 1998, and the related
statements of operations, members' capital, and cash flows for the year ended
December 31, 1997 and the ten months ended October 27, 1998. These financial
statements are the responsibility of HCG's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of HCG at December 31, 1997 and October 27,
1998, and the results of its operations and its cash flows for the year ended
December 31, 1997 and the ten months ended October 27, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 9, 1999
F-50
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
BALANCE SHEETS
DECEMBER 31, 1997 AND OCTOBER 27, 1998
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)........................ $ 54,286 $ 14,081
Accounts receivable....................................... 520,388 1,190,359
Prepaid expenses and other assets......................... 116,063 54,730
-------- ----------
Total current assets.................................... 690,737 1,259,170
Property and equipment--net (Note 3)........................ 29,875 76,777
Intangible assets--net...................................... 6,800 5,383
-------- ----------
Total assets............................................ $727,412 $1,341,330
======== ==========
LIABILITIES AND MEMBERS' CAPITAL (DEFICIENCY IN CAPITAL)
Liabilities:
Accounts payable.......................................... $121,306 $ 23,012
Accrued expenses.......................................... 47,243 56,946
Demand note due to Medscape, Inc. (Note 4)................ -- 275,000
Deferred revenue (Note 2)................................. 190,000 1,121,193
-------- ----------
Total liabilities....................................... 358,549 1,476,151
Commitments (Note 4)
Members' capital (deficiency in capital).................... 368,863 (134,821)
-------- ----------
Total liabilities and members' capital.................. $727,412 $1,341,330
======== ==========
</TABLE>
See notes to financial statements.
F-51
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
TEN MONTHS ENDED OCTOBER 27, 1998
<TABLE>
<CAPTION>
TEN
YEAR MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 27,
1997 1998
------------ -----------
<S> <C> <C>
Revenues.................................................... $3,155,504 $2,584,615
---------- ----------
Operating expenses:
Editorial, production, content and technology............. 1,853,118 1,736,351
General and administration................................ 923,547 867,970
Depreciation and amortization............................. 4,231 9,419
---------- ----------
Total operating expenses................................ 2,780,896 2,613,740
---------- ----------
Income (loss) from operations............................... 374,608 (29,125)
Interest income........................................... (2,965) (1,542)
---------- ----------
Net income (loss)........................................... $ 377,573 $ (27,583)
========== ==========
</TABLE>
See notes to financial statements.
F-52
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF MEMBERS' CAPITAL (DEFICIENCY IN CAPITAL)
FOR THE TEN MONTHS ENDED OCTOBER 27, 1998 AND
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Members' capital, January 1, 1997........................... $ 148,636
Net income for the year ended December 31, 1997........... 377,573
Distribution to members during 1997....................... (157,346)
---------
Members' capital, December 31, 1997......................... 368,863
Net loss for the ten months ended October 27, 1998........ (27,583)
Distribution to members during 1998....................... (476,101)
---------
Members' deficiency in capital, October 27, 1998............ $(134,821)
=========
</TABLE>
See notes to financial statements.
F-53
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED OCTOBER 27, 1998
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27,
1997 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 377,573 $ (27,583)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 4,231 9,419
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.............. 1,148,237 (669,971)
Decrease in prepaid expenses............................ 2,873 61,333
Increase (decrease) in accounts payable and accruals.... 120,613 (88,591)
(Decrease) increase in deferred revenue................. (1,474,979) 931,193
----------- ---------
Net cash provided by operating activities............. 178,548 215,800
----------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment........................ (27,412) (54,904)
----------- ---------
Net cash used in investing activities................. (27,412) (54,904)
----------- ---------
FINANCING ACTIVITIES
Distributions to members.................................. (157,346) (476,101)
Demand note due to Medscape, Inc.......................... -- 275,000
----------- ---------
Net cash used in financing activities................. (157,346) (201,101)
----------- ---------
Decrease in cash and cash equivalents....................... (6,210) (40,205)
Cash and cash equivalents, beginning of period.............. 60,496 54,286
----------- ---------
Cash and cash equivalents, end of period.................... $ 54,286 $ 14,081
=========== =========
</TABLE>
See notes to financial statements.
F-54
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
TEN MONTHS ENDED OCTOBER 27, 1998 AND YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Healthcare Communications Group, ("HCG") is a Maryland limited liability
company, founded on November 17, 1995. HCG is a medical communications/education
company that develops, produces and distributes unique live, print, digital and
Internet-based programs for healthcare professionals that are funded by
pharmaceutical companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, HCG considers all highly
liquid short-term cash investments purchased with maturities of three months or
less as cash and cash equivalents.
CONCENTRATION OF CREDIT RISK
HCG's financial instruments that are exposed to concentration of credit
risks consist primarily of cash and cash equivalents and trade accounts
receivable. HCG maintains its cash and cash equivalents in bank accounts which,
at times, exceeds federally insured limits. HCG has not experienced any losses
in these accounts. HCG believes it is not exposed to any significant credit risk
on cash and cash equivalents. Concentrations of credit risks with respect to
accounts receivable are limited because of HCG's expanding customer base and
credit worthiness of its three major customers (see Note 5), making up the
majority of the accounts receivable balance.
DEPRECIATION AND AMORTIZATION
HCG provides for depreciation of property and equipment based on the
estimated useful lives of the applicable assets and the life of leases, using
the straight-line method.
Expenditures for renewals and improvements which extend the useful lives of
assets are capitalized, while maintenance and repairs are charged to operations
as incurred.
Intangible assets consists of trademarks which are being amortized using the
straight-line method over their estimated useful life.
REVENUE RECOGNITION
Revenue from custom programs, such as on-line conference summaries and
custom modules produced by HCG, are recognized on a percentage of completion
basis. Revenues from conferences and other events produced by HCG are recognized
upon completion of the conference or event. At December 31, 1997 and
October 27, 1998, there were no uncompleted projects.
F-55
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TEN MONTHS ENDED OCTOBER 27, 1998 AND YEAR ENDED DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
Deferred revenue represents amounts billed in excess of revenues recognized.
Included in accounts receivable are amounts due (under contract) relating to
deferred revenue.
IMPAIRMENT OF ASSETS
HCG's long-lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When these events occur, HCG measures
impairment by comparing the carrying value of the long-lived asset to the
estimated undiscounted future cash flows expected to result from use of the
assets and their eventual disposition. If the sum of the expected undiscounted
future cash flows is less than the carrying amount of the assets, HCG would
recognize an impairment loss. HCG determined that, as of December 31, 1997 and
October 27, 1998, there had been no impairment in the carrying value of the
long-lived assets.
INCOME TAXES
Under present income tax regulations, HCG pays no federal, state or local
income taxes. For tax purposes, any income or loss is included in the income tax
returns of the members.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components. HCG has no
elements of comprehensive income. HCG operates in one segment in the United
States.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and hedging activities for HCG's year ended
December 31, 2000. Generally, it requires that an entity recognize all
derivatives as either an asset or liability and measure those instruments at
fair value, as well as identify the conditions for which a derivative may be
specifically designated as a hedge. Management is currently evaluating the
effect of this statement on HCG's financial statements.
During 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP No. 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. This
statement is applicable to HCG's 1999 financial statements and will require HCG
to capitalize various payroll and payroll related costs and other costs that are
directly related to the development of some of the systems of HCG. HCG will
amortize these costs over the anticipated life of the systems. Management is
currently evaluating the effect of this statement on HCG's financial statements.
F-56
<PAGE>
HEALTHCARE COMMUNICATIONS GROUP, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TEN MONTHS ENDED OCTOBER 27, 1998 AND YEAR ENDED DECEMBER 31, 1997
3. PROPERTY AND EQUIPMENT
Property and equipment, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 27, USEFUL LIFE
DESCRIPTION 1997 1998 (IN YEARS)
- ----------- ------------ ----------- -----------
<S> <C> <C> <C>
Computers and equipment.................... $26,441 $ 79,507 5
Furnitures and fixtures.................... 6,959 8,797 7
------- -------- --
33,400 88,304
Less accumulated depreciation.............. (3,525) (11,527)
------- -------- --
Property and equipment--net................ $29,875 $ 76,777
======= ======== ==
</TABLE>
4. DEMAND NOTE
As of October 27, 1998, the demand note consists of $215,000 and $60,000,
borrowed on October 26 and October 23, 1998, respectively, from Medscape, Inc.
at an annual interest rate of 8% (Note 6). Under the terms of the demand note,
HCG was required to use the proceeds to pay amounts owed to vendors prior to the
acquisition by Medscape, Inc.
5. MAJOR CUSTOMERS
Sales to three major customers for the year ended December 31, 1997 and the
ten months ended October 27, 1998 represented 53% and 50% of total sales,
respectively. At December 31, 1997 and October 27, 1998, these three customers
represented 34% and 76% accounts receivable, respectively.
6. SUBSEQUENT EVENT
Effective October 27, 1998, the membership interests of HCG were purchased
by Medscape, Inc., a New York corporation.
F-57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Total eMed, Inc.:
We have audited the accompanying consolidated balance sheets of TOTAL
EMED, INC. (a Delaware corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
1999 and the period from March 4, 1998 (inception) to December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Total
eMed, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the periods then ended in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 21, 2000
(except with respect to the matter discussed in the
second paragraph of Note 14, as to which the date
is February 22, 2000)
F-58
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,150,103 $ 1,825,768
Short-term investments.................................... 12,851,585 --
Restricted cash........................................... -- 64,000
Accounts receivable, net of allowance for doubtful
accounts of $265,460
and $0 as of December 31, 1999 and 1998, respectively... 1,312,620 22,961
Note receivable from related party........................ -- 500,000
Interest receivable....................................... 303,039 29,624
Other current assets...................................... 88,248 17,207
----------- -----------
Total current assets.................................. 17,705,595 2,459,560
----------- -----------
PROPERTY AND EQUIPMENT, NET................................. 4,200,552 655,812
OTHER NONCURRENT ASSETS:
Intangible assets......................................... 1,934,457 --
Deposits.................................................. 41,811 14,485
----------- -----------
Total other noncurrent assets......................... 1,976,268 14,485
----------- -----------
Total assets.......................................... $23,882,415 $ 3,129,857
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 844,304 $ 218,994
Accrued payroll and related liabilities................... 814,417 47,959
Accrued sales taxes....................................... 250,000 --
Current portion of capital lease obligations.............. 4,960 4,264
Other current liabilities................................. 82,614 --
----------- -----------
Total current liabilities............................. 1,996,295 271,217
----------- -----------
LONG-TERM LIABILITIES:
Long-term portion of capital lease obligation............. 17,162 22,504
----------- -----------
Total liabilities..................................... 2,013,457 293,721
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK,
$0.001 par value, 435,200 shares authorized, issued and
outstanding (redemption value of $12,349,525 including
accrued dividends at January 1, 2003)..................... 5,817,436 4,447,724
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.0002 par value, 20,000,000 shares
authorized, 2,747,790 shares issued and outstanding at
December 31, 1999, 50,000 shares subscribed at December
31, 1999, 1,033,975 shares issued at December 31, 1998.... 560 207
Series B preferred stock, $0.001 par value, 14,000 shares
authorized,
issued and outstanding in 1999.......................... 13,772,500 --
Series C preferred stock, $0.001 par value, 12,000 shares
authorized,
issued and outstanding in 1999.......................... 11,772,500 --
Additional paid-in capital.............................. 259,600 43
Stock receivables....................................... (259,500) (250)
Accumulated deficit..................................... (9,494,138) (1,611,588)
----------- -----------
Total stockholders' equity (deficit).................. 16,051,522 (1,611,588)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)....................... $23,882,415 $ 3,129,857
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES.................................................... $ 4,597,762 $ 22,961
OPERATING EXPENSES:
Cost of revenues.......................................... 5,913,025 198,011
Selling, general and administrative..................... 4,384,392 1,368,045
Depreciation and amortization........................... 1,031,125 37,730
----------- -----------
Total operating expenses.............................. 11,328,542 1,603,786
----------- -----------
Operating loss........................................ (6,730,780) (1,580,825)
OTHER INCOME (EXPENSE):
Interest income......................................... 807,697 167,976
Forgiveness of note receivable and accrued interest..... (555,035) --
Other, net.............................................. (34,720) 430
----------- -----------
Total other income (expense).......................... 217,942 168,406
----------- -----------
NET LOSS.................................................... (6,512,838) (1,412,419)
PREFERRED STOCK ACCRETION................................... (1,369,712) (199,169)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK......................... $(7,882,550) $(1,611,588)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
SERIES B SERIES C SUBSCRIBED AND
PREFERRED STOCK PREFERRED STOCK OUTSTANDING ADDITIONAL
---------------------- ---------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- -------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 4, 1998 (date of
inception)....................... -- $ -- -- $ -- 1,033,975 $207 $ 43
Series A preferred stock
accretion........................ -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
------ ----------- ------ ----------- --------- ---- --------
BALANCE, DECEMBER 31, 1998......... -- -- 1,033,975 207 43
Issuance of preferred stock........ 14,000 13,772,500 -- -- -- -- --
Issuance of preferred stock........ -- -- 12,000 11,772,500 -- -- --
Issuance of common stock........... -- 1,713,815 343 67
Receipt of stock subscription
receivable....................... -- -- -- --
Stock subscription receivable...... -- -- -- -- 50,000 10 259,490
Series A preferred stock
accretion........................ -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
------ ----------- ------ ----------- --------- ---- --------
BALANCE, DECEMBER 31, 1999......... 14,000 $13,772,500 12,000 $11,772,500 2,797,790 $560 $259,600
====== =========== ====== =========== ========= ==== ========
<CAPTION>
STOCK ACCUMULATED
RECEIVABLES DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, MARCH 4, 1998 (date of
inception)....................... $ (250) $ -- $ --
Series A preferred stock
accretion........................ -- (199,169) (199,169)
Net loss........................... -- (1,412,419) (1,412,419)
--------- ----------- -----------
BALANCE, DECEMBER 31, 1998......... (250) (1,611,588) (1,611,588)
Issuance of preferred stock........ -- -- 13,772,500
Issuance of preferred stock........ -- -- 11,772,500
Issuance of common stock........... -- -- 410
Receipt of stock subscription
receivable....................... 250 -- 250
Stock subscription receivable...... (259,500) -- --
Series A preferred stock
accretion........................ -- (1,369,712) (1,369,712)
Net loss........................... -- (6,512,838) (6,512,838)
--------- ----------- -----------
BALANCE, DECEMBER 31, 1999......... $(259,500) $(9,494,138) $16,051,522
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (6,512,838) $(1,412,419)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,031,125 37,730
Loss on disposal of property and equipment.............. 27,386 --
Loss on forgiveness of note receivable.................. 555,035 --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable................................. (872,756) (22,961)
Interest receivable................................. (328,450) (29,624)
Other current assets................................ (71,041) (17,207)
Other noncurrent assets............................. (27,326) (14,485)
Accounts payable.................................... 544,331 218,994
Accrued payroll and related liabilities............. 695,376 47,959
Accrued sales taxes................................. 250,000 --
Other current liabilities........................... 82,614 --
------------ -----------
Net cash used in operating activities............. (4,626,544) (1,192,013)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (4,144,360) (665,652)
Acquisitions of assets, net of cash....................... (2,400,000) --
Short-term investments, net............................... (12,851,585) --
Investment in related party note receivable............... -- (500,000)
Receipts (purchases) of restricted cash investments....... 64,000 (64,000)
------------ -----------
Net cash used in investing activities............. (19,331,945) (1,229,652)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock..................... 25,545,000 4,248,555
Proceeds from sale of common stock........................ 660 --
Payment of notes payable assumed in acquisition........... (258,190) --
Payments on capital lease obligations..................... (4,646) (1,122)
------------ -----------
Net cash provided by financing activities......... 25,282,824 4,247,433
------------ -----------
NET CHANGE IN CASH.......................................... 1,324,335 1,825,768
CASH, at beginning of period................................ 1,825,768 --
------------ -----------
CASH, at end of period...................................... $ 3,150,103 $ 1,825,768
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 3,437 $ 497
============ ===========
SUPPLEMENTAL NON-CASH INFORMATION:
Equipment acquired under capital lease obligations........ $ -- $ 27,745
============ ===========
Assets acquired in acquisitions through assumption of
liabilities............................................. $ 410,251 $ --
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-62
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Total eMed, Inc. (the "Company") is a Delaware corporation formed on
December 31, 1999. The Company is the accounting successor to Network Health
Services, Inc., which was formed and began operations on March 4, 1998. The
Company was formed as part of a corporate reorganization in which all
stockholders of Network Health Services, Inc. exchanged all of their shares of
Network Health Services, Inc. for all of the shares of the Company. The Company
is a medical records solution company, which provides medical record
transcription and related services to healthcare providers practicing in
outpatient settings. The Company receives medical dictation in digital format
from subscribing physicians, transcribes the dictation into text format, stores
specific data elements from the records, then transmits the completed medical
record to the originating physician in the prescribed format. As of
December 31, 1999, the Company employs medical transcriptionists located in 35
states and provides transcription services to numerous outpatient clinics
located in eight states. The market for the Company's services, which
incorporate telecommunications technology, is characterized by risk and
uncertainty as a result of emerging competition, rapidly evolving technology and
concentration primarily in the outpatient healthcare industry. Consequently, the
Company is exposed to both technological risks and concentration risk related to
the Company's ability to collect the amounts due from customers as a result of
economic fluctuations in the general economy and the outpatient healthcare
industry.
OPERATIONS
The Company has incurred net operating losses and negative cash flows to
date. The Company is evaluating its operating results continuously and is also
evaluating several alternatives to obtain additional financing proceeds, if
necessary. However, the Company expects currently available cash to be
sufficient to meet operating expenses and capital requirements at least through
January 1, 2001.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Total eMed, Inc. and its wholly-owned subsidiaries: Total eMed of
Tennessee, Inc., Total eMed Financing Co., Inc. and Total eMed Leasing Co., LLC.
All significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with an original maturity
of less than three months.
SHORT-TERM INVESTMENTS
Short-term investments, which are carried at amortized cost as the Company
intends to hold such investments to maturity, totaled $12,851,585 at
December 31, 1999 and consisted of commercial paper. Amortized cost of such
investments approximates fair value. The Company had no short-term investments
at December 31, 1998.
F-63
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company places its short-term investments with high credit quality
financial institutions. At times, such investments may be in excess of the FDIC
insurance limit.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
Accounts receivable primarily represent amounts due from physician clinics
for transcription services rendered. Three customers represented more than 10%
of the Company's 1999 revenues: Diagnostic Clinic of Largo, Florida, 36%;
Vancouver Clinic of Vancouver, Washington, 12%; and IMA of Albany, New York,
10%.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, generally
three to five years. Leasehold improvements are depreciated on a straight-line
basis over the shorter of the lease term (including renewal options) or the
estimated useful life of the assets. Routine maintenance and repairs are charged
to expense as incurred, while betterments and renewals are capitalized.
INTANGIBLE ASSETS
Intangible assets represent the excess of the purchase price over the
estimated fair values of tangible assets acquired in the purchases of
businesses. Intangible assets include goodwill, client lists, workforce lists
and non-compete agreements.
The Company assesses the recoverability of its intangible assets by
determining whether the amortization of the applicable balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of the impairment, if any, is measured
based on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of intangible assets will be impacted if estimated operating cash
flows are not achieved.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based upon
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax laws that will be in effect when the
differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock options in accordance with Statement of
Financial Accounting Standards ("SFAS No. 123"), "Accounting for Stock Based
Compensation". Under SFAS No. 123, the Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations, in
accounting for its stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
F-64
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Fees for transcription-related services are based primarily on contracted
rates and revenue is recognized upon the rendering of services and delivery of
reports. The Company monitors actual performance standards against those
standards required in the contracts and records estimated decreases or increases
to billings, if necessary.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported assets and liabilities and
contingency disclosures at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable, capital lease obligations and all other
accrued liabilities approximate fair value due to the short-term nature of these
instruments.
COMPREHENSIVE INCOME
The Company has considered the provisions of Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting of Comprehensive
Income", and the effect on the Company's 1999 and 1998 consolidated financial
statements. SFAS No. 130 does not have an impact on the Company's financial
reporting since the Company had no components of other comprehensive income
during the periods presented.
2. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments at December 31, 1999:
<TABLE>
<CAPTION>
COST MATURITY
----------- ---------------
<S> <C> <C>
American Express Credit Corporation Commercial Paper........ $ 2,895,150 January 3, 2000
General Motors Acceptance Corporation Note Commercial
Paper..................................................... 2,027,268 April 25, 2000
Abbey National Commercial Paper............................. 3,000,000 May 12, 2000
Forrestal Funding Commercial Paper.......................... 4,929,167 January 5, 2000
-----------
$12,851,585
===========
</TABLE>
Subsequent to December 31, 1999, the American Express Credit Corporation
Commercial Paper and Forrestal Funding Commercial Paper have been reinvested in
other commercial paper short-term investments with a maturity date of April 8,
2000.
F-65
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
3. INTANGIBLE ASSETS
As of December 31, 1999, intangible assets, net of accumulated amortization,
consists of the following:
<TABLE>
<S> <C>
Goodwill.................................................... $1,006,250
Client lists................................................ 330,000
Workforce lists............................................. 386,000
Non-compete agreements...................................... 212,207
----------
$1,934,457
==========
</TABLE>
Goodwill is amortized on a straight-line basis over 20 years. Client lists
and workforce lists are amortized over five years. Non-compete agreements are
amortized over the life of the agreements, generally three years.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Leased equipment...................................... $ 27,745 $ 27,745
Leasehold improvements................................ 32,728 22,688
Furniture and equipment............................... 361,354 165,590
Computer equipment and software....................... 4,570,269 477,519
---------- --------
4,992,096 693,542
Less: accumulated depreciation and amortization....... (791,544) (37,730)
---------- --------
Net property and equipment............................ $4,200,552 $655,812
========== ========
</TABLE>
5. STOCK SPLIT
Effective September 22, 1999, the Company effected a five for one common
stock split for holders of record on that date. Accordingly, all references to
number of shares, per share amounts, stock option data, and exercise prices in
these consolidated financial statements and notes to consolidated financial
statements have been restated to reflect the stock split.
6. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
In March 1998, the Company issued 435,200 shares of Series A convertible
preferred stock, $0.001 par value per share (the "Series A Preferred Stock"),
for $4,352,000 of cash proceeds less offering expenses. Each share of Series A
Preferred Stock is convertible into five shares of Common Stock at any time at
the option of the holders. Series A Preferred Stock is automatically convertible
to Common Stock upon the occurrence of a Triggering Event, defined as (i) an
initial public offering of the Company under the Securities act of 1933
reflecting a common equity value of the Company of at least $35 million, (ii) a
business combination whereby shareholders of the Company own less than 50% of
F-66
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
6. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
the voting securities of the surviving or resulting company, or (iii) sale by
the Company of substantially all of its assets to an independent third party.
The holders of Series A Preferred Stock shall be entitled to receive, when,
as and if declared by the Board of Directors from funds legally available
therefore, a cash dividend per share at a rate of $0.50 per annum. The dividends
are cumulative from and after the date of original issue thereof whether or not
there are funds legally available. However, holders of Series A Preferred Stock
shall not be entitled to any dividends in excess of full cumulative dividends.
Accrued but unpaid dividends add to the liquidation preference. Upon the
occurrence of a Triggering Event as described above, the Series A Preferred
Stock shall be converted into common stock at its then conversion rate and all
accrued and unpaid dividends would be cancelled. As of December 31, 1999,
undeclared dividends on the Series A Preferred Stock were $398,933.
Each holder of Series A Preferred Stock is entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Company and shall
vote with holders of Common Stock upon all matters submitted to a vote of
shareholders. In all cases where Series A Preferred Stock and Common Stock are
to vote together, each holder of Series A Preferred Stock is entitled to the
number of shares of Common Stock into which each share of Series A Preferred
Stock is then convertible. Except as otherwise required by law, the holders of
Series A Preferred Stock have voting rights and powers equal to the voting
rights and powers of Common Stockholders.
No amendment of modification may be made to the Charter unless such
amendment or modification is approved by a majority of the Series A Preferred
Stock voting as a separate class. In addition, the approval of a majority of the
Series A Preferred Stock is necessary to authorize or issue any additional
shares of any series of Company stock.
In the absence of a Triggering Event occurring before January 1, 2003, any
holder of Series A Preferred Stock may, at any time thereafter, require the
Company to repurchase, all or any portion of the shares of Series A Preferred
Stock held by such holder for an amount equal to the greater of (i) book value
per share determined in accordance with the Company's financial statements for
the most recently ended quarter, (ii) the liquidation value per share (which is
$25.96 per share), (iii) seven times net earnings before interest, taxes,
depreciation, and amortization (EBITDA) for the most recent completed fiscal
year, or (iv) the appraised value per share on an as-converted basis. For each
share of Series A Preferred Stock that is redeemed, the Company will be
obligated to pay to the holders all accrued and unpaid dividends. The total
liquidation value (and minimum redemption value) at January 1, 2003, including
accrued dividends through January 1, 2003, will be $12,349,525. Future dividend
and other accretion related to the Series A Preferred Stock for the years
subsequent to December 31, 1999 (based on the assumption of the redemption value
equal to (ii) above) is as follows:
<TABLE>
<S> <C>
2000........................................................ $2,177,363
2001........................................................ 2,177,363
2002........................................................ 2,177,363
</TABLE>
Upon liquidation, dissolution, or winding up of the Company, holders of
Series A Preferred Stock will be entitled to be paid out of the assets available
for distribution to stockholders before any
F-67
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
6. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
distribution or payment is made to any Common Stock holder but after payment is
made in full upon the Series B and Series C Preferred Stock. The amount shall be
equal to the liquidation value per share ($25.96) plus all unpaid accrued
dividends.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share on all matters
to be voted on by the shareholders. The Charter does not provide for cumulative
voting, and, accordingly, the holders of a majority of the outstanding shares
have the power to elect all directors and to control the resolution of all
issues put to a vote of the shareholders. There are no preemptive or other
subscription rights, conversion rights, or redemption or sinking fund provisions
with respect to shares of the Common Stock. The shares of Common Stock have the
following rights, subject in each case, to the rights of the holders of any
outstanding shares of Preferred Stock: (i) to receive dividends, if any, as may
be declared and paid from time to time by the Board, in its discretion, from
funds legally available therefore; and (ii) upon liquidation, dissolution, or
winding up of the Company, to receive pro rata all assets remaining available
for distribution.
On October 27, 1999, the Company and a new member of the Board of Directors
entered into an agreement whereby the new Director obtained the ability to
purchase 50,000 shares of Common Stock at the fair market value of $5.19 per
share as determined by the Board of Directors. The Company received the proceeds
from the sale of Common Stock in January 2000. The related receivable at
December 31, 1999 has been reflected as common stock subscribed in the
December 31, 1999 consolidated financial statements.
PREFERRED STOCK
The Company has also authorized preferred stock to be issued in one or more
classes or series at such time(s) for such consideration as the Board of
Directors may determine.
SERIES B PREFERRED STOCK
In March 1999, the Company issued 14,000 shares of Series B convertible
preferred stock, $0.001 par value per share (the "Series B Preferred Stock"),
for $14,000,000 of cash proceeds less offering expenses. Each share of Series B
Preferred Stock is convertible into 280.7545 shares of Common Stock at any time
at the option of the holder. Series B Preferred Stock is automatically
convertible to Common Stock upon the occurrence of a Triggering Event, defined
as (i) an initial public offering of the Company under the Securities act of
1933 resulting in net cash proceeds of at least $25,000,000 and reflecting a
fully diluted common equity valuation of the Company of at least $125,000,000 on
or before December 31, 2000, $150,000,000 between January 1, 2001 and
December 31, 2001 or $200,000,000 from January 1, 2002 and thereafter, or
(ii) sale by the Company of substantially all of its assets for cash reflecting
a fully diluted common equity valuation of the Company of at least $125,000,000
on or before December 31, 2000, $150,000,000 between January 1, 2001 and
December 31, 2001 or $200,000,000 from January 1, 2002 and thereafter.
F-68
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Holders of Series B Preferred Stock are entitled to one vote per share equal
to the number of shares of Common Stock into which such shares of Series B
Preferred Stock are convertible. The holders of Series B Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors from
funds legally available therefore, an annual dividend equal to 5% of the
liquidation value ($1,000 per share plus all accrued and unpaid dividends),
compounded annually. Undeclared dividends add to the liquidation preference. As
of December 31, 1999, undeclared dividends on the Series B Preferred Stock are
$525,000.
Each holder of Series B Preferred Stock is entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Company and shall
vote with holders of Common Stock upon all matters submitted to a vote of
shareholders, except those matters required by law to be submitted to a class
vote. In all cases where Series B Preferred Stock and Common Stock are to vote
together, each holder of Series B Preferred Stock is entitled to the number of
shares of Common Stock into which each share of Series B Preferred Stock is then
convertible. Except as otherwise required by law, the holders of Series B
Preferred Stock have voting rights and powers equal to the voting rights and
powers of Common Stock holders.
No amendment or modification may be made to the Charter unless such
amendment or modification is approved by a majority of the Series B Preferred
Stock voting as a separate class. The approval of a majority of the Series B
Preferred Stock is necessary to authorize or issue any additional shares of any
series of Company stock. In addition, no merger, consolidation or other business
combination or a sale of the Company can occur without the approval of the
majority of the Series B Preferred Stock voting as a separate class.
Upon liquidation, dissolution, or winding up of the Company, holders of
Series B Preferred Stock will be entitled to be paid out of the assets available
for distribution to stockholders before any distribution or payment made to any
Common Stockholders or holders of Series A Preferred Stock. The amount shall be
equal to the then liquidation value per share. The liquidation value per share
is $1,037.50 as of December 31, 1999.
SERIES C PREFERRED STOCK
Simultaneous to the sale of the Series B Preferred Stock in March 1999, the
Company issued 12,000 shares of Series C senior preferred stock, $0.001 par
value per share (the "Series C Preferred Stock"), for $12,000,000 of cash
proceeds less offering expenses. The holders of Series C Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors from
funds legally available therefore, an annual dividend equal to 5% of the
liquidation value ($1,000 per share plus all accrued and unpaid dividends),
compounded annually. Undeclared dividends add to the liquidation preference. As
of December 31, 1999, undeclared dividends on the Series C Preferred Stock were
$450,000.
The Company may at any time redeem all of the shares of Series C Preferred
Stock for an amount equal to the redemption value ($1,000 per share plus all
accrued and unpaid dividends). Series C Preferred Stock is automatically
redeemable upon the occurrence of a Triggering Event, defined as (i) an initial
public offering of the Company under the Securities act of 1933, or (ii) a sale
by the
F-69
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Company of substantially all of its assets. The Series C Preferred Stock is not
convertible to common stock.
Holders of Series C Preferred Stock are not entitled to vote except as
required by law and except in connection with certain terms outlined in the
Company's Charter. No amendment or modification may be made to the Charter
unless such amendment or modification is approved by a majority of the Series C
Preferred Stock voting as a separate class. The approval of a majority of the
Series C Preferred Stock is necessary to authorize or issue any additional
shares of any series of Company stock. In addition, no merger, consolidation or
other business combination or a sale of the Company can occur without the
approval of the majority of the Series C Preferred Stock voting as a separate
class.
Upon liquidation, dissolution, or winding up of the Company, holders of
Series C Preferred Stock will be entitled to be paid out of the assets available
for distribution to stockholders before any distribution or payment made to any
Common Stockholders or holders of Series A Preferred Stock. The amount shall be
equal to the then liquidation value per share. The liquidation value per share
is $1,037.50 as of December 31, 1999.
8. LEASES
The Company has entered into various operating leases with third-parties for
office space and office equipment and a capital lease for telecommunications
equipment. The future minimum lease payments under noncancellable operating
leases greater than one year and capital leases at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- --------
<S> <C> <C>
2000..................................................... $291,478 $ 7,751
2001..................................................... 277,383 7,751
2002..................................................... 235,441 7,751
2003..................................................... 165,430 5,167
-------- -------
Subtotal................................................. $969,732 28,420
========
Less amounts representing interest....................... (6,298)
Less current portion of capital lease obligation......... (4,960)
-------
Total.................................................... $17,162
=======
</TABLE>
Total rental expense for operating leases was approximately $289,022 and
$41,996 for the periods ended December 31, 1999 and 1998, respectively.
9. ACQUISITIONS
Effective January 29, 1999, the Company acquired substantially all of the
business assets of Accu-Scribe Transcription Service, LLC ("Accu-Scribe"), a
Memphis, Tennessee based medical transcription company, in exchange for cash of
$800,000 and the assumption of certain liabilities of $10,206. The acquisition
was accounted for as a purchase and, accordingly, the purchase price was
F-70
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
9. ACQUISITIONS (CONTINUED)
allocated to all identifiable tangible assets based on their estimated fair
values. Net tangible assets with a fair value of $63,206 were acquired with the
balance of the consideration of $747,000 recorded as intangibles, including
client lists, workforce lists, non-compete agreements and goodwill. The purchase
price also contains various contingent consideration features whereas the
Company will issue 2,000 additional shares of Company common stock to the former
owners of Accu-Scribe upon Accu-Scribe fulfilling certain financial performance
targets for the eleven months ended December 31, 1999. Such financial targets
have not been met. The purchase price also contains similar contingent
consideration features in which the former owners of Accu-Scribe would be
entitled to an additional 2,000 shares of Company common stock as of
December 31, 2000 and 2,000 shares as of December 31, 2001, if certain financial
performance targets are met for the years ended December 31, 2000 and 2001.
Beginning January 29, 1999, all revenues and expenses associated with this
acquisition have been included in the consolidated financial statements of the
Company.
Effective April 1, 1999, the Company acquired substantially all of the
business assets of Bruyn Weber Information Services, Inc. ("BWIS"), an
Altamount, New York based medical transcription service company, in exchange for
$1,600,000 cash and the assumption of certain notes payable and other
liabilities totaling $400,045. The acquisition was accounted for as a purchase
and, accordingly, the purchase price was allocated to all identifiable tangible
assets based on their estimated fair values. Net tangible assets with a fair
value of $546,917 were acquired, with the balance of the consideration of
$1,453,128 recorded as intangibles, including client lists, workforce lists,
non-compete agreements and goodwill. The purchase price also contains various
contingent consideration features whereas the Company will issue shares of the
Company common stock and/or pay additional cash to the former owners of BWIS
upon BWIS fulfilling certain financial performance targets during the years 2000
and 2001. Beginning April 1, 1999, all revenues and expenses associated with
this acquisition have been included in the consolidated financial statements of
the Company.
The unaudited pro forma results of operations of the Company giving effect
to the acquisition of Accu-Scribe and BWIS as if the acquisitions had occurred
as of the beginning of each period presented would have resulted in pro forma
revenues of $5,494,832 and $2,142,816 for the periods ended December 31, 1999
and 1998, respectively. The net loss on a pro forma basis was $6,337,819 and
$1,314,482 for 1999 and 1998, respectively.
10. STOCK OPTION AND INCENTIVE PLAN
The Board of Directors has authorized a stock option and incentive plan
pursuant to which up to 683,780 shares of the Common Stock of the Company are
available for options. The plan allows for issuance of stock options, restricted
stock and other stock awards at the discretion of the Board of Directors. All
stock options have been issued with exercise prices at or greater than the fair
market value at the date of grant as determined by the Board of Directors.
F-71
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
10. STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
Information related to the stock option and incentive plan is summarized
below:
<TABLE>
<CAPTION>
1999
-------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
-------- --------
<S> <C> <C>
Outstanding-beginning of year............................. -- $ --
Granted................................................... 683,755 5.19
Exercised................................................. -- --
Cancelled................................................. (1,875) 5.19
------- -----
Outstanding-end of year................................... 681,880 5.19
------- -----
Exercisable at end of year................................ 271,777 $5.19
======= =====
</TABLE>
Pro forma information regarding the expense related to such options is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method. The fair value for these options was estimated at the date of
grant using the Black-Scholes valuation method with the following assumptions:
risk-free interest rate of 6.73%, a dividend yield of 0%, a volatility factor of
50% and a weighted-average expected life of options of 4 years.
For purposes of the pro forma disclosures, SFAS No. 123 requires the
estimated fair value of the options to be amortized to expense ratably over the
options' vesting period, generally four years. Based on the minimum value method
and the assumptions above, the Company's net loss for the year ended
December 31, 1999 would have increased by $504,618 to a pro forma net loss of
$7,017,456.
11. INCOME TAXES
Income tax expense (benefit) for the periods ended December 31, 1999 and
1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Expected federal income tax benefit................... $2,140,000 $474,000
Expected state tax benefit, net of federal tax
benefit............................................. 315,000 70,000
Increase in valuation allowance....................... (2,455,000) (544,000)
---------- --------
Total income tax benefit.............................. $ -- $ --
========== ========
</TABLE>
F-72
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
11. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability are presented
below:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Deferred tax assets:
Start-up costs....................................... $ 373,000 $472,000
Allowance for doubtful accounts...................... 104,000 --
Intangibles.......................................... 46,000 --
Accrued expenses..................................... 98,000 --
Net operating loss................................... 2,486,000 72,000
---------- --------
Total gross deferred tax asset......................... 3,107,000 544,000
Deferred tax liability:
Property and equipment depreciation.................. (83,000) --
---------- --------
Net deferred tax asset............................... 3,024,000 544,000
Valuation allowance.................................... (3,024,000) (544,000)
---------- --------
Deferred tax asset, net of valuation allowance......... $ -- $ --
========== ========
</TABLE>
Due to the uncertainty surrounding the realization of the benefits of the
deferred tax assets, the Company has established a valuation allowance against
all deferred tax assets.
The net change in the total valuation allowance, which primarily relates to
federal and state net operating loss carryforwards and deferred start-up costs,
for the years ended December 31, 1999 and 1998 was an increase of $2,480,000 and
$544,000, respectively. At December 31, 1999 and 1998, the Company had
approximately $6,374,000 and $184,000, respectively, of federal net tax
operating loss carryforwards which begin to expire in 2012. The utilization of
these carryforwards is subject to the future level of taxable income of the
applicable subsidiaries.
12. LITIGATION AND CONTINGENCIES
The Company is a defendant in a suit in the United States Federal Court,
Middle District of Tennessee, called MedQuist MRC Inc. v. John H. Dayani and
Network health Services, Inc. The plaintiff alleges that the Company tortiously
interfered with plaintiff's prospective economic advantage by interfering with
the relationship between plaintiff and Dr. John Dayani, the founder of the
Company and at that time a director of the plaintiff. The plaintiff seeks all of
the Company's profits from the medical transcription business. The Company does
not believe that it interfered in any way with the plaintiff's economic
relationships and it intends to defend itself vigorously.
The medical information that the Company transcribes and captures is of an
extremely sensitive nature. The Company is subject to certain contractual,
statutory, regulatory and common law requirements regarding the confidentiality
of such information. The Company requires its personnel to agree to keep all
medical information confidential and monitors compliance with applicable
F-73
<PAGE>
TOTAL EMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM MARCH 4, 1998
(INCEPTION) TO DECEMBER 31, 1998
12. LITIGATION AND CONTINGENCIES (CONTINUED)
confidentiality requirements. The Company's failure to comply with such
confidentiality requirements could result in material liability.
13. NOTE RECEIVABLE FROM RELATED PARTY
Effective March 6, 1998, the Company entered into a demand promissory note
receivable with the Company's Executive Chairman. The note accrued interest at
an annual rate of 7%. As of December 31, 1998, accrued interest of $29,624
related to the note receivable is reflected in the consolidated financial
statements. Effective September 22, 1999, the Board of Directors agreed to
forgive the demand promissory note receivable and all accrued interest through
that date, resulting in a charge to income of $555,035 during 1999.
14. SUBSEQUENT EVENTS
On February 21, 2000, the Company and a current customer, Diagnostic Clinic
of Largo, Florida, entered into an agreement whereby the customer has cancelled
its current transcription services contract. Revenues during 1999 under the
customer contract were approximately $1,700,000. Under the terms of the
cancellation, the Company has agreed to issue a $325,000 credit to the
customer's outstanding accounts receivable in return for payment of all
remaining accounts receivable. This credit has been reflected as a reduction to
accounts receivable and a reduction to revenues in the consolidated financial
statements for the year ended December 31, 1999.
On February 22, 2000, the Company announced that it had agreed to merge with
MedicaLogic, Inc. ("MedicaLogic"). MedicaLogic develops, markets and supports
electronic medical record software used by physicians throughout the U.S.
Company shareholders will receive 0.8042043 shares of MedicaLogic common stock
for each share of Company common stock (or common stock equivalent). The
transaction will become effective upon approval by the shareholders of the two
companies and the satisfaction of other customary conditions. Simultaneous with
the announcement of the merger with MedicaLogic, MedicaLogic announced that it
had agreed to merge with Medscape, Inc., an operator of healthcare web sites for
physicians and other healthcare professionals.
F-74
<PAGE>
APPENDIX A
AGREEMENT
OF
REORGANIZATION AND MERGER
AMONG
MEDICALOGIC, INC.,
AN OREGON CORPORATION,
MEDSCAPE, INC.,
A DELAWARE CORPORATION,
AND
MONEYPENNY MERGER CORP.,
A DELAWARE CORPORATION,
FEBRUARY 21, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C> <C>
ARTICLE I THE MERGER.................................................................... 1
1.1 The Merger.................................................................... 1
1.2 Effect of Merger.............................................................. 1
1.3 Merger Consideration.......................................................... 2
1.3.1 Medscape Stock........................................................ 2
1.3.2 Merger Corp. Stock.................................................... 2
1.3.3 Options and Warrants.................................................. 2
1.3.4 Stock Splits, Etc..................................................... 3
1.4 Surrender and Cancellation of Certificates.................................... 3
1.4.1 Surrender of Certificates............................................. 3
1.4.2 No Fractional Shares.................................................. 4
1.4.3 Escheat............................................................... 4
1.4.4 Option and Warrant Agreements......................................... 4
1.4.5 Treasury Shares....................................................... 4
1.5 Stock Transfer Books.......................................................... 4
1.6 Closing....................................................................... 5
1.7 Subsequent Actions............................................................ 5
1.8 Certificate of Incorporation; Bylaws; Directors and Officers of the Surviving
Corporation................................................................... 5
1.9 Shareholder Rights............................................................ 6
ARTICLE II FURTHER AGREEMENTS........................................................... 6
2.1 Voting Agreements............................................................. 6
ARTICLE III REPRESENTATIONS AND WARRANTIES.............................................. 6
3.1 Representations and Warranties of Medscape.................................... 6
3.1.1 Organization and Status............................................... 7
3.1.2 Capitalization........................................................ 7
3.1.3 Corporate Authority................................................... 8
3.1.4 Subsidiaries and Joint Ventures....................................... 8
3.1.5 SEC Reports and Financial Statements.................................. 8
3.1.6 Information Supplied.................................................. 9
3.1.7 Governmental Filings.................................................. 9
3.1.8 No Adverse Consequences............................................... 9
3.1.9 Undisclosed Liabilities; Returns...................................... 10
3.1.10 Absence of Certain Changes or Events.................................. 10
3.1.11 Litigation............................................................ 10
3.1.12 Employment Matters.................................................... 10
3.1.12.1 Labor Matters............................................... 10
3.1.12.2 Employee Benefits........................................... 11
3.1.12.3 Employment Agreements....................................... 12
3.1.13 Intellectual Property................................................. 12
3.1.14 [Reserved]............................................................ 12
3.1.15 Status of Contracts................................................... 12
3.1.16 [Reserved]............................................................ 13
3.1.17 Permits and Licenses.................................................. 13
3.1.18 Taxes................................................................. 13
3.1.18.1 Returns..................................................... 13
3.1.18.2 Taxes Paid or Reserved...................................... 14
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C> <C>
3.1.18.3 Definitions................................................. 14
3.1.19 Related Party Interests............................................... 14
3.1.20 No Powers of Attorney or Restrictions................................. 15
3.1.21 [Reserved]............................................................ 15
3.1.22 Consents and Approvals................................................ 15
3.1.23 Brokers and Finders................................................... 15
3.1.24 Opinion of Medscape Financial Advisor................................. 15
3.1.25 No Other Agreements to Sell Medscape or its Assets.................... 15
3.1.26 Vote Required......................................................... 16
3.1.27 Certain Representations and Warranties Regarding Code
Section 368(a)(2)(E).................................................. 16
3.2 Representations and Warranties of MedicaLogic................................. 17
3.2.1 Organization and Status............................................... 17
3.2.2 Capitalization........................................................ 18
3.2.3 Corporate Authority................................................... 18
3.2.4 Subsidiaries and Joint Ventures....................................... 18
3.2.5 SEC Reports and Financial Statements.................................. 18
3.2.6 Information Supplied.................................................. 19
3.2.7 Governmental Filings.................................................. 19
3.2.8 No Adverse Consequences............................................... 20
3.2.9 Undisclosed Liabilities; Returns...................................... 20
3.2.10 Absence of Certain Changes or Events.................................. 20
3.2.11 Litigation............................................................ 20
3.2.12 Employment Matters.................................................... 20
3.2.12.1 Labor Matters............................................... 20
3.2.12.2 Employee Benefits........................................... 21
3.2.12.3 Employment Agreements....................................... 22
3.2.13 Intellectual Property................................................. 22
3.2.14 Status of Contracts................................................... 22
3.2.15 Permits and Licenses.................................................. 23
3.2.16 Taxes................................................................. 23
3.2.16.1 Returns..................................................... 23
3.2.16.2 Taxes Paid or Reserved...................................... 24
3.2.17 Related Party Interests............................................... 24
3.2.18 No Powers of Attorney or Restrictions................................. 24
3.2.19 Consents and Approvals................................................ 25
3.2.20 Brokers and Finders................................................... 25
3.2.21 No Other Agreements to Sell MedicaLogic or its Assets................. 25
3.2.22 Opinion of MedicaLogic Financial Advisor.............................. 25
3.2.23 Vote Required......................................................... 25
3.2.24 Certain Representations and Warranties Regarding Code
Section 368(a)(2)(E).................................................. 25
3.2.25 Total eMed............................................................ 27
3.3 Representations and Warranties Relating to Merger Corp...................... .
27
3.3.1 Organization and Status............................................... 27
3.3.2 Capitalization........................................................ 27
3.3.3 Corporate Authority................................................... 27
3.3.4 Governmental Filings.................................................. 28
3.3.5 Certain Representations and Warranties Regarding Code
Section 368(a)(2)(E).................................................. 28
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C> <C>
ARTICLE IV COVENANTS.................................................................... 28
4.1 Mutual Covenants...................................................... 28
4.1.1 Preparation of Registration Statement and the Joint Proxy Statement... 28
4.1.2 Shareholder Meetings.................................................. 29
4.1.3 Consents and Approvals................................................ 30
4.1.4 Best Efforts.......................................................... 30
4.1.5 Publicity............................................................. 30
4.1.6 Confidentiality....................................................... 30
4.1.7 Antitrust Improvements Act............................................ 30
4.2 Covenants of Medscape................................................. 30
4.2.1 Conduct of Business................................................... 30
4.2.2 Acquisition Proposals................................................. 31
4.2.3 Investigations........................................................ 33
4.2.4 [Reserved]............................................................ 33
4.2.5 Notice and Cure....................................................... 33
4.3 Covenants of MedicaLogic...................................................... 33
4.3.1 Conduct of Business................................................... 34
4.3.2 Investigations........................................................ 34
4.3.3 Notification to Optionees............................................. 34
4.3.4 Officer and Director Indemnification.................................. 34
4.3.5 MedicaLogic Board..................................................... 35
4.3.6 Editor-in-Chief....................................................... 35
4.3.7 Notice and Cure....................................................... 35
4.3.8 Change of Control..................................................... 35
4.3.9 No Amendment to Total eMed Agreement.................................. 36
4.4 Covenants of Merger Corp...................................................... 36
ARTICLE V CONDITIONS.................................................................... 36
5.1 Conditions to the Obligations of All Parties.................................. 36
5.1.1 Regulatory Approvals.................................................. 36
5.1.2 Litigation............................................................ 36
5.1.3 Shareholder Approval.................................................. 37
5.1.4 Registration of Securities; Listing................................... 37
5.2 Conditions to the Obligations of Medscape..................................... 37
5.2.1 Representations, Warranties and Covenants............................. 37
5.2.2 No Material Adverse Change............................................ 37
5.3 Conditions to the Obligations of MedicaLogic and Merger Corp.................. 37
5.3.1 Representations, Warranties and Covenants............................. 38
5.3.2 No Material Adverse Change............................................ 38
ARTICLE VI TERMINATION.................................................................. 38
6.1 Termination by Mutual Consent................................................. 38
6.2 Termination by Either Medscape or MedicaLogic................................. 38
6.3 Effect of Termination and Abandonment......................................... 40
6.4 Termination Fees and Expenses................................................. 40
ARTICLE VII MISCELLANEOUS AND GENERAL................................................... 41
7.1 Payment of Expenses........................................................... 41
7.2 Entire Agreement.............................................................. 42
7.3 Assignment.................................................................... 42
7.4 Binding Effect; No Third Party Benefit........................................ 42
</TABLE>
A-iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C> <C>
7.5 Amendment and Modification.................................................... 42
7.6 Waiver of Conditions.......................................................... 42
7.7 Counterparts.................................................................. 42
7.8 Captions...................................................................... 42
7.9 Subsidiary.................................................................... 42
7.10 Notices....................................................................... 43
7.11 Choice of Law................................................................. 44
7.12 Separability.................................................................. 44
7.13 Extinguishment................................................................ 44
</TABLE>
A-iv
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A-1 Certificate of Incorporation of the Surviving Corporation
Exhibit A-2 Bylaws of the Surviving Corporation
Exhibit A-3 Directors of the Surviving Corporation
Exhibit B Form of Voting Agreement
Exhibit C Medscape Fairness Opinion
Exhibit D MedicaLogic Fairness Opinion
</TABLE>
A-v
<PAGE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 1.3.3 Vesting of Options
Schedule 2.1 Individuals Executing Voting Agreements
Schedule 3.1 Medscape Disclosure Schedule
Schedule 3.1.2 Medscape Capitalization
Schedule 3.1.4 Medscape Subsidiaries and Joint Ventures
Schedule 3.1.11 Medscape Litigation
Schedule 3.1.12.1 Medscape Employees Who Are Not US Citizens
Schedule 3.1.12.2 Medscape Employee Benefits
Schedule 3.1.12.3 Medscape Employment Agreements
Schedule 3.1.18 Medscape Taxes
Schedule 3.1.19 Medscape Related Party Interests
Schedule 3.1.20 Medscape Powers of Attorney or Restrictions
Schedule 3.1.25 No Other Agreements to Sell Medscape or its Assets
Schedule 3.2 MedicaLogic Disclosure Schedule
Schedule 3.2.2 MedicaLogic Capitalization
Schedule 3.2.10 Absence of Certain Changes or Events
Schedule 3.2.11 MedicaLogic Litigation
Schedule 3.2.12.1 MedicaLogic Employees Who Are Not US Citizens
Schedule 3.2.12.2 MedicaLogic Employee Benefits
Schedule 3.2.12.3 MedicaLogic Employment Agreements
Schedule 3.2.16 MedicaLogic Taxes
Schedule 3.2.17 MedicaLogic Related Party Interests
Schedule 3.2.21 No Other Agreements to Sell MedicaLogic or its Assets
Schedule 4.2.1(g) Medscape Capital Expenditures
</TABLE>
A-vi
<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
- ---- ----------------------
<S> <C>
Acquisition Transaction...................... Section 4.2.2
Agreement.................................... Preamble
CBS Agreement................................ Section 1.9
Closing...................................... Section 1.6
Closing Date................................. Section 1.6
Code......................................... Section 1.3.3
Condition Completion Date.................... Section 1.6
Confidentiality Agreement.................... Section 4.1.6
Conversion Ratio............................. Section 1.3.1
DGCL......................................... Section 1.2
ERISA........................................ Section 3.1.12.2
ERISA Plans.................................. Section 3.1.12.2
Effective Time............................... Section 1.1
Exchange Act................................. Section 3.1.5
GAAP......................................... Section 3.1.5
Governmental Entity.......................... Section 3.1.7
HSR Filing................................... Section 4.1.7
Information.................................. Section 4.1.6
Intellectual Property........................ Section 3.1.13
Joint Proxy Statement........................ Section 3.1.6
Lien......................................... Section 3.1.13
Material Adverse Change...................... Section 3.1
Material Adverse Effect...................... Section 3.1
MedicaLogic.................................. Preamble
MedicaLogic Articles of Incorporation........ Section 3.2.1
MedicaLogic Bylaws........................... Section 3.2.1
MedicaLogic Common Stock..................... Section 1.1
MedicaLogic Contracts........................ Section 3.2.14
MedicaLogic Disclosure Schedule.............. Section 3.2
MedicaLogic ERISA Plans...................... Section 3.2.12.2
MedicaLogic Financial Statements............. Section 3.2.5
MedicaLogic Representative................... Section 4.3.8
MedicaLogic Returns.......................... Section 3.2.16.1
MedicaLogic SEC Document..................... Section 3.2.5
MedicaLogic Special Meeting.................. Section 4.1.2.1
Medscape..................................... Preamble
Medscape Bylaws.............................. Section 3.1.1
Medscape Certificate of Incorporation........ Section 3.1.1
Medscape Common Stock........................ Section 1.1
Medscape Contracts........................... Section 3.1.15
Medscape Disclosure Schedule................. Section 3.1
Medscape Financial Statements................ Section 3.1.5
Medscape Option Plan......................... Section 3.1.2
Medscape SEC Document........................ Section 3.1.5
Medscape Special Meeting..................... Section 4.1.2.2
Merger....................................... Section 1.1
Merger Corp.................................. Preamble
Options...................................... Section 1.3.3
Permits...................................... Section 3.1.17
Registration Statement....................... Section 3.1.6
Representative............................... Section 4.2.2
Returns...................................... Section 3.1.18.1
</TABLE>
A-vii
<PAGE>
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
- ---- ----------------------
<S> <C>
SEC.......................................... Section 3.1.5
Securities Act............................... Section 1.3.3
Subsidiary................................... Section 7.9
Surviving Corporation........................ Section 1.2
Taxes........................................ Section 3.1.18.3
Total eMed Agreement......................... Section 3.2.25
Total eMed Merger............................ Section 1.9
Transfer Agent............................... Section 1.4.1
Voting Agreement............................. Section 2.1
Warrants..................................... Section 3.1.2
</TABLE>
A-viii
<PAGE>
AGREEMENT
OF
REORGANIZATION AND MERGER
THIS AGREEMENT OF REORGANIZATION AND MERGER (this "Agreement") is entered
into as of February 21, 2000 among MedicaLogic, Inc., an Oregon corporation
("MedicaLogic"), Medscape, Inc., a Delaware corporation ("Medscape"), and
Moneypenny Merger Corp., a Delaware corporation ("Merger Corp.").
AGREEMENT
In consideration of the mutual representations, warranties, covenants,
agreements and conditions contained herein, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Pursuant to the laws of the State of Delaware, and subject
to and in accordance with the terms and conditions of this Agreement, Merger
Corp. shall be merged with and into Medscape, and the outstanding shares of
common stock of Medscape (the "Medscape Common Stock") shall be converted into
the right to receive shares of common stock of MedicaLogic (the "MedicaLogic
Common Stock") in accordance with Section 1.3 of this Agreement. Medscape and
Merger Corp. shall execute a Certificate of Merger, to be filed with the
Secretary of State of Delaware, on the Closing Date, as defined in Section 1.6,
or as soon thereafter as practicable. The merger of Merger Corp. with and into
Medscape (the "Merger") shall take effect at the time when the Certificate of
Merger is duly filed with the Secretary of State of Delaware, or at such other
time as the parties may agree upon in writing pursuant to applicable law (the
"Effective Time").
1.2 EFFECT OF MERGER. At the Effective Time, Merger Corp. shall be merged
with and into Medscape in the manner and with the effect provided by the
Delaware General Corporation Law (the "DGCL"), the separate corporate existence
of Merger Corp. shall cease and Medscape shall be the surviving corporation (the
"Surviving Corporation"). The outstanding shares of Medscape Common Stock shall
be converted into shares of MedicaLogic Common Stock, and the outstanding shares
of capital stock of Merger Corp. shall be converted into shares of capital stock
of the Surviving Corporation, all on the basis, terms and conditions described
in Section 1.3.
1.3 MERGER CONSIDERATION.
1.3.1 MEDSCAPE STOCK. Each share of Medscape Common Stock outstanding
immediately before the Effective Time will cease to exist and will be
converted into the right to receive .323 of a share of MedicaLogic Common
Stock (the "Conversion Ratio").
1.3.2 MERGER CORP. STOCK. Each share of common stock of Merger Corp.
issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder
thereof, cease to exist and be converted into and become one share of common
stock of the Surviving Corporation. After the Effective Time, MedicaLogic,
the sole holder of shares of Merger Corp. common stock outstanding
immediately prior to the Effective Time, shall, upon surrender for
cancellation of a certificate representing such shares to the Surviving
Corporation, be entitled to receive in exchange therefor a certificate
representing the number of shares of common stock of the Surviving
Corporation into which such shares of Merger Corp. common stock have been
converted pursuant to this Section 1.3.2. Until so surrendered, the
certificates which prior to the Merger represented shares of Merger Corp.
common stock shall be deemed, for all corporate purposes, including voting
entitlement, to evidence ownership of the
A-1
<PAGE>
shares of the Surviving Corporation common stock into which such shares of
Merger Corp. common stock shall have been converted.
1.3.3 OPTIONS AND WARRANTS. Except as otherwise provided in this
Section 1.3.3, the terms and provisions of the stock options held by those
Medscape option holders under the Medscape Option Plans (the "Options") and
the terms and conditions of the Warrants (as defined in Section 3.1.2) will
continue in full force and effect following the Merger. By virtue of the
Merger and at the Effective Time, and without any further action on the part
of any holder thereof, each Option and Warrant will be converted into an
option or warrant, as applicable, to purchase the number of shares of
MedicaLogic Common Stock equal to the product (rounded to the nearest whole
number) of (x) the number of shares of Medscape Common Stock subject to such
Option or Warrant immediately before the Effective Time MULTIPLIED BY
(y) the Conversion Ratio. The exercise price per share for each Option or
Warrant after the Effective Time will be determined by dividing the per
share exercise price for such Option or Warrant immediately before the
Effective Time by the Conversion Ratio. The term, exercisability, status as
an incentive stock option under Section 422 of the United States Internal
Revenue Code of 1986, as amended (the "Code"), if applicable, and all other
terms and conditions of each Option will to the extent permitted by law and
otherwise reasonably practicable be unchanged; PROVIDED, HOWEVER, that it is
understood and agreed that the vesting of certain options as described in
SCHEDULE 1.3.3 will be accelerated by the transactions contemplated herein
and that Medscape shall amend its outstanding Options which do not so
accelerate to provide that vesting will accelerate (either in part or in
whole as may be finally determined by Medscape's Board with the consent of
MedicaLogic, which shall not be unreasonably withheld or delayed) on the
date that is one year after the Closing Date for any option holder who is
employed by MedicaLogic, Medscape or any of their respective subsidiaries at
such time. As promptly as practicable after the Effective Time, MedicaLogic
shall issue to each holder of an Option a written instrument informing such
holder of the assumption by MedicaLogic of such Option. Unless all Options
are, as of the Effective Time, issuable pursuant to an effective
registration statement on Form S-8 of MedicaLogic, or in the opinion of
counsel of MedicaLogic freely tradable pursuant to Rule 701 under the
Securities Act of 1933, as amended (the "Securities Act"), as soon as
practicable after the Effective Time, MedicaLogic shall file a registration
statement on Form S-8 (or any successor form) with respect to the Options
and shall use its reasonable efforts to maintain such registration statement
(or any successor form), including the current status of any related
prospectus, for so long as the Options remain outstanding. MedicaLogic shall
use its reasonable efforts to cause the MedicaLogic Common Stock subject to
the Options and Warrants to be quoted on the Nasdaq National Market or such
other system or exchange on which the MedicaLogic Common Stock is then
quoted or listed. MedicaLogic shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of MedicaLogic Common
Stock for delivery upon exercise of the Options and Warrants pursuant to
this Section 1.3.3.
1.3.4 STOCK SPLITS, ETC. If, between the date of this Agreement and
the Effective Time, the outstanding shares of either Medscape Common Stock
or MedicaLogic Common Stock shall have been changed into a different number
of shares or a different class by reason of any reclassification,
combination, recapitalization, stock split, stock dividend, subdivision,
exchange of shares, or other extraordinary transaction, the Conversion Ratio
shall be adjusted proportionately.
1.4 SURRENDER AND CANCELLATION OF CERTIFICATES.
1.4.1 SURRENDER OF CERTIFICATES. Promptly after the Effective Time,
MedicaLogic will cause its transfer agent (the "Transfer Agent") to send a
letter to each holder of shares of Medscape Common Stock that have been
converted into MedicaLogic Common Stock advising such holder that upon
surrender to the Transfer Agent of a certificate or certificates
representing such shares, along with a letter of transmittal in the form
enclosed therein, the holder shall be entitled to
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<PAGE>
receive a certificate representing the number of shares of MedicaLogic
Common Stock into which such shares of Medscape Common Stock shall have been
converted pursuant to the provisions of Section 1.3. If any certificate for
shares of MedicaLogic Common Stock is to be issued in a name other than that
in which the certificate for Medscape Common Stock surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof that
the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, and that the person requesting such exchange pay
to MedicaLogic or its agent designated for such purpose any transfer or
other taxes required, or establish to the satisfaction of MedicaLogic or its
agent that such tax has been paid or is not payable. If any holder of
Medscape Common Stock canceled and retired in accordance with this Agreement
is unable to deliver a certificate or certificates representing such shares
of the holder, MedicaLogic, in the absence of actual notice that any shares
theretofore represented by any such certificate have been acquired by a bona
fide purchaser, shall deliver to such holder the number of shares of
MedicaLogic Common Stock to which such holder is entitled in accordance with
the provisions of this Agreement upon the presentation of the following:
(i) evidence reasonably satisfactory to MedicaLogic (a) that such person is
the owner of the shares theretofore represented by each certificate claimed
by him, her or it to be lost, wrongfully taken or destroyed and (b) that he,
she or it is the person who would be entitled to present each such
certificate for conversion pursuant to this Agreement; and (ii) such
security or indemnity as may be reasonably requested by MedicaLogic to
indemnify and hold MedicaLogic and the Transfer Agent harmless.
1.4.2 NO FRACTIONAL SHARES. No certificates or scrip evidencing
fractional shares of MedicaLogic Common Stock shall be issued in the Merger.
In lieu of a fractional share, MedicaLogic will pay any holder of shares of
Medscape Common Stock who would otherwise have been entitled to a fraction
of a share of MedicaLogic Common Stock upon surrender of the certificates
therefor an amount of cash (without interest) determined by multiplying
(a) the closing price per share of MedicaLogic Common Stock on the last
trading day immediately preceding the Effective Time by (b) the fractional
share interest in MedicaLogic Common Stock to which such holder would
otherwise be entitled. The provisions of this Section 1.4.2 will apply to
the aggregate number of shares of Medscape Common Stock held by each holder
thereof and each such holder will be required to simultaneously surrender
all certificates relating to shares of Medscape Common Stock held by such
holder in accordance with the provisions of Section 1.4 in order to
surrender any such certificate.
1.4.3 ESCHEAT. Neither MedicaLogic nor Merger Corp. shall be liable to
any holder of shares of Medscape Common Stock for any such shares of
MedicaLogic Common Stock (or dividends or distributions with respect
thereto) or cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.4.4 OPTION AND WARRANT AGREEMENTS. After the Effective Time, each
holder of an Option or Warrant outstanding immediately before the Effective
Time will be deemed to hold an option or warrant exercisable for MedicaLogic
Common Stock in accordance with the provisions of Section 1.3.3.
1.4.5 TREASURY SHARES. At the Effective Time, each share of Medscape
Common Stock or other Medscape capital stock held in the treasury of
Medscape immediately before the Effective Time will be canceled and
extinguished without any conversion thereof and no payment will be made with
respect thereto.
1.5 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of Medscape will be closed and there will be no further registration of
transfers of Medscape capital stock or other securities thereafter on the
records of Medscape.
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1.6 CLOSING. The closing of the Merger (the "Closing") shall take place at
the offices of Stoel Rives LLP, 900 SW Fifth Avenue, Portland, Oregon at
5:00 p.m. local time on the third business day following the Condition
Completion Date (as hereinafter defined), or on such other date and/or at such
other place and time as Medscape, MedicaLogic and Merger Corp. may agree (the
"Closing Date"). The "Condition Completion Date" shall be the business day on
which the last of the conditions set forth in Article V hereof shall have been
fulfilled or waived (other than those conditions which, by their terms, are to
occur at Closing).
1.7 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to, or under any of the rights,
properties or assets of Medscape or Merger Corp. acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger or
otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation are authorized to execute and deliver, in the name and on
behalf of Medscape or Merger Corp., or otherwise, all such deeds, bills of sale,
assignments and assurances, and to take and do, in the name and on behalf of
Medscape or Merger Corp., or otherwise, all such other actions and things as may
be necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the Surviving
Corporation or otherwise to carry out the purposes of this Agreement.
1.8 CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS OF THE
SURVIVING CORPORATION.
(a) At the Effective Time, Merger Corp.'s Certificate of Incorporation,
a copy of which is attached to this Agreement as EXHIBIT A-1, shall be the
certificate of incorporation of the Surviving Corporation at and after the
Effective Time (until amended as provided by law and by that certificate of
incorporation).
(b) At the Effective Time, Merger Corp.'s bylaws, a copy of which is
attached to this Agreement as EXHIBIT A-2, shall be the bylaws of the
Surviving Corporation at and after the Effective Time (until amended as
provided by law, the certificate of incorporation of the Surviving
Corporation and the bylaws of the Surviving Corporation, as applicable).
(c) The persons listed on Exhibit A-3 shall be the directors of the
Surviving Corporation from and after the Effective Time, until their
successors are elected or appointed and qualified or until their resignation
or removal.
(d) The officers of Medscape immediately prior to the Effective Date
shall be the officers of the Surviving Corporation from and after the
Effective Time, until their successors are elected or appointed and
qualified or until their resignation or removal.
1.9 SHAREHOLDER RIGHTS. Upon the Effective Date, any registration rights
existing as of the date of this Agreement with respect to the Medscape Common
Stock shall be converted into the same rights with respect to the MedicaLogic
Common Stock received in exchange therefor pursuant to the Merger. Although the
parties acknowledge that the Merger does not constitute an assignment of that
certain Stockholders Agreement dated as of August 3, 1999 by and between
Medscape and CBS Corporation (the "CBS Agreement"), MedicaLogic agrees to
provide CBS Corporation (i) the right to designate one director to the Board of
Directors of MedicaLogic so long as CBS Corporation beneficially owns 5% or more
of the MedicaLogic Common Stock outstanding (without giving effect to any
reduction in such percentage due to events other than the sale of shares by CBS
Corporation) after the consummation of the Merger and the merger (the "Total
eMed Merger") contemplated by the Total eMed Agreement (as defined in
Section 3.2.25) and (ii) rights providing the economic equivalent of the rights
of CBS Corporation under the CBS Agreement (other than director nomination
rights). Each of
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MedicaLogic and Medscape covenants and agrees to execute such documents and take
such further actions as may be necessary or desirable to effectuate the
provisions of this Section 1.9.
ARTICLE II
FURTHER AGREEMENTS
2.1 VOTING AGREEMENTS. Each of the shareholders of MedicaLogic and
Medscape listed on SCHEDULE 2.1 will execute and deliver, concurrently with the
execution of this Agreement, a Voting Agreement in the form attached as
EXHIBIT B (the "Voting Agreement"). Each Voting Agreement provides, among other
things, that the signing holder will vote all of the shares of MedicaLogic
Common Stock or Medscape Common Stock, as the case may be, that such holder is
entitled to vote in favor of the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF MEDSCAPE. For purposes of this
Agreement, "Material Adverse Effect" or "Material Adverse Change" means any
effect, change, event, circumstance or condition which when considered with all
other effects, changes, events, circumstances or conditions would reasonably be
expected to affect materially and adversely the business, results of operations,
financial condition, or prospects of a party, in each case including its
subsidiaries together with it taken as a whole. In no event shall any of the
following constitute a Material Adverse Effect or a Material Adverse Change:
(i) any change in the trading prices of either of MedicaLogic's or Medscape's
equity securities between the date hereof and the Effective Time, in and of
itself; (ii) effects, changes, events, circumstances or conditions generally
affecting the industry in which either MedicaLogic or Medscape operates or
arising from changes in general business or economic conditions; (iii) any
effects, changes, events, circumstances or conditions resulting from any change
in law or generally accepted accounting principles, which affect generally
entities such as MedicaLogic and Medscape; and (iv) any effect resulting from
compliance by MedicaLogic or Medscape with the terms of this Agreement. Medscape
hereby represents and warrant to MedicaLogic and Merger Corp. that, except as
specifically set forth in SCHEDULE 3.1 (the "Medscape Disclosure Schedule") in a
numbered paragraph that corresponds to the section for which disclosure is made:
3.1.1 ORGANIZATION AND STATUS. Medscape and each of its subsidiaries
is a corporation or limited liability company duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation and is duly qualified and in good standing as a
foreign corporation or limited liability company in each jurisdiction where
its properties (whether owned, leased or operated) or its business conducted
require such qualification, except where failure to be so qualified would
not have a Material Adverse Effect on Medscape. Medscape and each of its
subsidiaries has all requisite corporate or limited liability company power
and authority to own, operate and lease its property and to carry on its
businesses as they are now being conducted. Medscape has delivered to
MedicaLogic complete and accurate copies of its Certificate of Incorporation
("Medscape Certificate of Incorporation") and Bylaws ("Medscape Bylaws"),
and the charter or formation documents of each of Medscape's subsidiaries,
each as amended to the date hereof.
3.1.2 CAPITALIZATION. Medscape has authorized capital stock consisting
of 100,000,000 shares of Medscape Common Stock, $0.01 par value, of which
44,797,321 shares were outstanding on February 21, 2000, and 5,000,000
shares of preferred stock, $0.01 par value, of which no shares were
outstanding on February 21, 2000. As of February 21, 2000, options to
purchase 5,839,457 shares of Medscape Common Stock were outstanding pursuant
to grants made under Medscape's 1996 Stock Option Plan, (the "Medscape
Option Plan") and four warrants to purchase up to
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2,819,204 shares of Medscape Common Stock were outstanding (the "Warrants"),
copies of which Warrants have been made available to MedicaLogic. All of the
outstanding shares of capital stock of Medscape have been duly authorized
and are validly issued, fully paid and nonassessable, and no shares were
issued, and no options or warrants were granted, in violation of preemptive
or similar rights of any shareholder or in violation of any applicable
securities laws. Except as set forth above, or on SCHEDULE 3.1.2, there are
no shares of capital stock of Medscape authorized, issued or outstanding,
and there are no preemptive rights or any outstanding subscriptions,
options, warrants, rights, convertible securities or other agreements or
commitments of Medscape of any character relating to the issued or unissued
capital stock or other securities of Medscape. There are no outstanding
obligations of Medscape or any of its subsidiaries to repurchase, redeem or
otherwise acquire any of the outstanding shares of capital stock of Medscape
or any of its subsidiaries.
3.1.3 CORPORATE AUTHORITY. Medscape has the corporate power and
authority and, except for the approval of its stockholders, has taken all
corporate action necessary to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been
duly and validly authorized by the Board of Directors of Medscape, validly
executed and delivered by Medscape and, as of the Closing Date, will have
been duly and validly approved by the stockholders of Medscape. This
Agreement constitutes the valid and binding obligation of Medscape,
enforceable against Medscape in accordance with its terms, except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought.
3.1.4 SUBSIDIARIES AND JOINT VENTURES. Except as disclosed on
SCHEDULE 3.1.4 Medscape has no subsidiaries and owns no stock or other
interest in any other corporation or in any partnership or limited liability
company, or other venture or entity. Except as disclosed on SCHEDULE 3.1.4
Medscape owns all of the issued and outstanding capital stock and other
ownership interests of each of its subsidiaries, free and clear of all
encumbrances, and there are no existing options, warrants, calls,
subscriptions, convertible securities or other securities, commitments or
obligations of any character relating to the securities of any such
subsidiary.
3.1.5 SEC REPORTS AND FINANCIAL STATEMENTS. Medscape has filed with
the Securities and Exchange Commission (the "SEC"), and has made available
to MedicaLogic true and complete copies of, all forms, reports, schedules,
statements, and other documents required to be filed by it since
September 26, 1999 under the Securities Exchange Act of 1934 (the "Exchange
Act") or the Securities Act (each of such forms, reports, schedules,
statements, and other documents, to the extent filed and publicly available
before the date of this Agreement, other than preliminary filings, is
referred to as a "Medscape SEC Document"). Each Medscape SEC Document, at
the time filed, (a) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading and (b) complied in all material
respects with the applicable requirements of the Exchange Act and the
Securities Act, as the case may be, and the applicable rules and regulations
of the SEC thereunder. The financial statements included in the Medscape SEC
Documents (the "Medscape Financial Statements") comply as to form in all
material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, recurring
audit adjustments) in all material respects the consolidated
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financial position of Medscape and its consolidated subsidiaries as at the
dates thereof and the consolidated results of their operations and cash
flows for the periods then ended.
3.1.6 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Medscape specifically for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 to be filed with the
SEC by MedicaLogic in connection with the registration of the MedicaLogic
Common Stock to be issued in the Merger, or any of the amendments or
supplements thereto (collectively, the "Registration Statement"), will, at
the time the Registration Statement is filed with the SEC, at any time it is
amended or supplemented and at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are
made, not misleading, or (ii) the proxy statement for use relating to
obtaining approval of the shareholders of MedicaLogic and Medscape of the
Merger (the "Joint Proxy Statement") will, at the time the Joint Proxy
Statement is first mailed to Medscape's stockholders or MedicaLogic's
shareholders or at the time of the MedicaLogic Special Meeting and Medscape
Special Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading, except that no representation or warranty is
made by Medscape with respect to statements made or incorporated by
reference therein based on (i) information supplied by MedicaLogic in
writing specifically for inclusion or incorporation by reference therein or
(ii) information relating to MedicaLogic which is reviewed by MedicaLogic
without objection and with the knowledge it will be used in the Joint Proxy
Statement.
3.1.7 GOVERNMENTAL FILINGS. Other than (a) the filing of the
Certificate of Merger contemplated by Article I, (b) the Joint Proxy
Statement described in Section 3.1.6 and (c) the HSR Filing to be made by
Medscape and described in Section 4.1.7, no notices, reports or other
filings are required to be made by Medscape or any of its subsidiaries with,
nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by Medscape or any of its subsidiaries from, any
domestic or foreign governmental or regulatory authority, agency, court,
commission or other entity ("Governmental Entity") in connection with the
execution and delivery of this Agreement by Medscape and the consummation by
Medscape of the transactions contemplated hereby.
3.1.8 NO ADVERSE CONSEQUENCES. Except as set forth on SCHEDULE 3.1.8,
neither the execution and delivery of this Agreement by Medscape nor the
consummation of the transactions contemplated by this Agreement will
(a) result in the creation or imposition of any lien, charge, encumbrance or
restriction on any of the assets or properties of Medscape or any of its
subsidiaries, (b) violate any provision of the Certificate of Incorporation
or Bylaws of Medscape or the comparable organizational documents of any of
its subsidiaries, (c) to the knowledge of Medscape, violate any statute,
judgment, order, injunction, decree, rule, regulation or ruling of any
Governmental Entity applicable to Medscape or any of its subsidiaries, or
(d) either alone or with the giving of notice or the passage of time or
both, conflict with, constitute grounds for termination of, accelerate the
performance required by, accelerate the maturity of any indebtedness or
obligation under, result in the breach of the terms, conditions or
provisions of or constitute a default under any mortgage, deed of trust,
indenture, note, bond, lease, license, permit or other agreement, instrument
or obligation to which Medscape or any of its subsidiaries is a party or by
which any of them is bound.
3.1.9 UNDISCLOSED LIABILITIES. Except for liabilities or obligations
which were incurred after the most recent audited balance sheet included in
a Medscape SEC Document in the ordinary course of business and of a type and
in an amount consistent with past practices, neither Medscape nor any of its
subsidiaries has any material liability or obligation (whether absolute,
accrued,
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contingent or otherwise, and whether due or to become due) which is not
accrued, reserved against, or identified in the most recent Medscape
Financial Statements.
3.1.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the
most recent audited balance sheet included in a Medscape SEC Document, there
has not been any Material Adverse Change in the business, results of
operations, financial condition, properties, assets or prospects of
Medscape.
3.1.11 LITIGATION. Except as listed on SCHEDULE 3.1.11, no litigation,
proceeding or governmental investigation is pending or, to Medscape's
knowledge, threatened against or relating to Medscape or any of its
subsidiaries, their respective officers or directors in their capacities as
such, or any of their respective properties or businesses.
3.1.12 EMPLOYMENT MATTERS.
3.1.12.1 LABOR MATTERS. Neither Medscape nor any of its
subsidiaries is a party or otherwise subject to any collective bargaining
or other agreement governing the wages, hours or terms of employment of
employees. Medscape and each of its subsidiaries is and has been in
compliance in all material respects with all applicable laws regarding
employment and employment practices, terms and conditions of employment,
wages and hours with respect to Medscape's employees and is not and has
not been engaged in any unfair labor practice. There is no (a) unfair
labor practice complaint against Medscape or any of its subsidiaries
pending before the National Labor Relations Board or any other
Governmental Entity, (b) labor strike, slowdown or work stoppage actually
occurring or, to the knowledge of Medscape, threatened against Medscape
or any of its subsidiaries, (c) representation petition respecting the
employees of Medscape or any of its subsidiaries pending before the
National Labor Relations Board or similar agency, or (d) grievance or any
arbitration proceeding pending arising out of or under collective
bargaining agreements applicable to Medscape or any of its subsidiaries.
Neither Medscape nor any of its subsidiaries has experienced any primary
work stoppage or other organized work stoppage involving its employees in
the past two years. Medscape is not aware of any labor strike, slowdown,
or work stoppage occurring or, to the knowledge of Medscape, threatened
against any of the principal suppliers of Medscape or any of their
subsidiaries that might reasonably be expected to have a Material Adverse
Effect on Medscape. Except as set forth in SCHEDULE 3.1.12.1, all of the
employees of Medscape and its subsidiaries working in the United States
are citizens or permanent residents of the United States. No employee of
Medscape or any of its subsidiaries is the beneficiary under an
employer-sponsored non-immigrant visa and no approvals, permits or
consents of any governmental entity are required in order for Medscape or
its subsidiaries to employ any current employee as a result of or in
connection with such employee's immigration status in the United States.
Medscape and its subsidiaries have fully completed and retained a
Form I-9 for each of their employees in accordance with applicable law,
and neither Medscape nor any of its subsidiaries is subject to
examination in connection with such forms or to any fines or other
penalties under laws relating to employees who are not authorized to work
in the United States.
3.1.12.2 EMPLOYEE BENEFITS. SCHEDULE 3.1.12.2 lists all pension,
retirement, profit sharing, deferred compensation, bonus, commission,
incentive compensation (including cash, stock and option plans or
arrangements), life insurance, health and disability insurance,
hospitalization and all other employee benefit plans or arrangements
(including, without limitation, any contracts or agreements with trustees
or insurance companies relating to any such employee benefit plans or
arrangements) established or maintained by Medscape or any of its
subsidiaries, and complete and accurate copies of all those plans or
arrangements have been made available to MedicaLogic. The employee
pension benefit plans (within the meaning of
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Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) established and maintained by Medscape or any of its
subsidiaries that are subject to ERISA (the "ERISA Plans") are listed
separately as ERISA Plans on SCHEDULE 3.1.12.2. The ERISA Plans comply in
all material respects with the applicable requirements of ERISA and the
Code. With respect to each ERISA Plan intended to constitute a
tax-qualified plan under Section 401(a) of the Code, Medscape has
received, or has requested or will timely request, from the Internal
Revenue Service a favorable determination that such plan and its related
trust is qualified under Section 401(a) of the Code and the related trust
is tax-exempt under Section 501(a) of the Code. To the knowledge of
Medscape, there has been no event subsequent to that determination that
is reasonably likely to result in the revocation of the tax-qualified
status of the ERISA Plans or the exemption of the related trusts. To the
knowledge of Medscape, none of the ERISA Plans, their related trusts or
any trustee, investment manager or administrator thereof has engaged in a
nonexempt "prohibited transaction," as such term is defined in
Section 406 of ERISA and Section 4975 of the Code that is reasonably
expected to have a Material Adverse Effect. Each ERISA Plan is and has
been operated and administered in material conformity with the
requirements of all applicable laws and regulations, whether or not the
ERISA Plan documents have been amended to reflect such requirements.
Medscape and its subsidiaries have no liability for, or commitment to
provide, medical benefits to future or current retirees of Medscape or
any of its subsidiaries.
3.1.12.3 EMPLOYMENT AGREEMENTS. Except as set forth on
SCHEDULE 3.1.12.3, each employee of Medscape or any of its subsidiaries
is an "at-will" employee and there are no written employment agreements
of any kind between Medscape or any of its subsidiaries and any
employees.
3.1.13 INTELLECTUAL PROPERTY. Medscape or one of its subsidiaries
owns, or has a valid license to use, all patents, trademarks, service marks,
trade names, copyrights, trade secrets, technology, know-how and other
intellectual property (the "Intellectual Property") necessary to or used in
the conduct of the business of Medscape and its subsidiaries as now
conducted and as proposed to be conducted. All Intellectual Property owned
by Medscape or any of its subsidiaries is owned by them free and clear of
all liens, mortgages, pledges, leases, restrictions and other claims and
encumbrances of any nature whatsoever (each, a "Lien"). To the knowledge of
Medscape, the conduct of the business of Medscape and its subsidiaries does
not conflict with or infringe upon any Intellectual Property rights of any
other person and no claims of conflict or infringement are pending or,
threatened against Medscape or any of its subsidiaries which, in any event,
would reasonably be expected to have a Material Adverse Effect. Medscape has
made all necessary filings and recordations and has paid all required fees
and Taxes (as defined in Section 3.1.18) to maintain ownership of the
Intellectual Property.
3.1.14 [Reserved].
3.1.15 STATUS OF CONTRACTS. There is no existing default or violation
by Medscape or its subsidiaries under any contracts, agreements, commitments
or instruments to which Medscape or any of its subsidiaries is a party or by
which it or any of them is bound (collectively, the "Medscape Contracts")
and no event has occurred which (whether with or without notice, lapse of
time or both) would constitute a default of Medscape or its subsidiaries
under any Medscape Contract, except for such defaults or violations as would
not in the aggregate have a Material Adverse Effect on Medscape. There is no
pending or, to the knowledge of Medscape, threatened, proceeding which would
interfere with the quiet enjoyment of any leasehold of which Medscape or any
of its subsidiaries is lessee or sublessee. Medscape is not aware of any
default by any other party to any Medscape Contract or of any event which
(whether with or without notice, lapse of time or both) would constitute a
material default by any other party with respect to obligations of
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that party under any Medscape Contract, and, to the knowledge of Medscape,
there are no facts that exist indicating that any of the Medscape Contracts
may be totally or partially terminated or suspended by the other parties.
Neither Medscape nor any of its subsidiaries is a party to, or bound by, any
Medscape Contract that Medscape can reasonably foresee will result in any
material loss to Medscape or such subsidiary upon the performance thereof
(including any liability for penalties or damages, whether liquidated,
direct, indirect, incidental or consequential).
3.1.16 [Reserved].
3.1.17 PERMITS AND LICENSES. Each of Medscape and its subsidiaries
holds, and at all times has held, all material governmental licenses,
permits, franchises, easements and authorizations (collectively, "Permits")
necessary for the lawful conduct of its business pursuant to all applicable
statutes, laws, ordinances, rules and regulations of all Governmental
Entities having jurisdiction over it or any part of its operations. Each of
Medscape and its subsidiaries is in compliance in all material respects with
each of the terms of the applicable Permits, and there are no claims of
violation by Medscape or any of its subsidiaries of any of such Permits.
Complete and accurate copies of all Permits held by Medscape and its
subsidiaries have been made available to MedicaLogic. All Governmental
Entities that have issued any Permits to or with respect to Medscape, its
business, or subsidiaries have consented or prior to the Closing will have
consented (where such consent is necessary) to the consummation of the
transactions contemplated by this Agreement without requiring modification
of the rights or obligations of Medscape or its subsidiaries under any of
such Permits.
3.1.18 TAXES.
3.1.18.1 RETURNS. Medscape and each of its subsidiaries has filed
on a timely basis all federal, state, local, foreign and other returns,
reports, forms, declarations and information returns required to be filed
by it with respect to Taxes (as defined below) which relate to its
business, results of operations, financial condition, properties or
assets for all periods (collectively, the "Returns") and has paid on a
timely basis all Taxes shown to be due and payable on the Returns. All
Returns filed are complete and accurate in all material respects and no
additional Taxes are owed by Medscape or any of its subsidiaries with
respect to the periods covered by the Returns or for any other period.
Medscape has made available to MedicaLogic complete and accurate copies
of all Returns. Neither Medscape nor any of its subsidiaries has been a
member of an affiliated group filing consolidated returns or has any
liability for Taxes of any person (other than itself), whether arising
under federal, state, local or foreign law, as a transferee or successor,
by contract, pursuant to Treas. Reg. Section 1.1502-6 or otherwise.
Except as set forth on SCHEDULE 3.1.18, neither Medscape nor any of its
subsidiaries is currently the beneficiary of any extension of time within
which to file any Return. Except as set forth on SCHEDULE 3.1.18, no
Returns have been examined by the applicable taxing authorities for any
period and, except as set forth on SCHEDULE 3.1.18, Medscape has not
received any notice of audit or review with respect to any Return or any
fiscal year, has no knowledge of any planned audit or review, and there
are no outstanding agreements or waivers extending the applicable
statutory periods of limitation for Taxes for any period. No claim has
ever been made by an authority in a jurisdiction where Medscape and its
subsidiaries do not file Returns that they are or may be subject to
taxation by that jurisdiction. All Taxes that are or have been required
to be withheld or collected by Medscape, its predecessors or its
subsidiaries have been duly withheld and collected and, to the extent
required, have been properly paid or deposited as required by applicable
laws. Neither Medscape nor any of its predecessors or subsidiaries has
made any payment, or is obligated to make any payment, or is a party to
an agreement that in certain circumstances could obligate it to make a
payment, that is not deductible under Section 280G of the Code. Except as
set forth in SCHEDULE 3.1.18, neither Medscape nor any of its
subsidiaries is an obligor on, and
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none of its assets have been financed directly or indirectly by, any tax
exempt bonds. Neither Medscape nor any of its subsidiaries is now or
during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code has ever been a United States real property holding corporation as
defined in Section 897(c)(2) of the Code. Neither Medscape nor any of its
subsidiaries has filed a consent pursuant to Section 341(f) of the Code
nor has it agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in
Section 341(f)(4) of the Code) owned by it.
3.1.18.2 TAXES PAID OR RESERVED. The unpaid Taxes of Medscape and
its subsidiaries (a) did not as of the date of the most recent audited
balance sheet included in a Medscape SEC Document exceed the reserve for
Tax liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on the
face of such balance sheet (rather than in any notes thereto) and (b) do
not exceed that reserve as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of Medscape
and its subsidiaries in filing their Returns.
3.1.18.3 DEFINITIONS. The term "Taxes" shall mean all federal,
state, local or foreign taxes, charges, fees, levies or other
assessments, however documented, including, without limitation, all net
income, gross income, gross receipts, premium, sales, use, ad valorem,
transfer, franchise, profits, license, withholding, payroll, employment,
excise, estimated severance, stamp, occupation, property, transfer,
workers' compensation, Pension Benefit Guaranty Corporation premiums, or
other taxes, fees, assessments or charges of any kind whatsoever that
Medscape or any of its subsidiaries is required to pay or collect,
together with any interest and any penalties (including penalties for
failure to file in accordance with applicable information reporting
requirements), and additions to tax imposed by a taxing authority.
3.1.19 RELATED PARTY INTERESTS. Except as listed in SCHEDULE 3.1.19,
no officer or director of Medscape or any of its subsidiaries (or any entity
owned or controlled by one or more of such parties) (a) has any interest in
any property, real or personal, tangible or intangible, used in or
pertaining to the business of Medscape or any of its subsidiaries, (b) is
indebted to Medscape or any of its subsidiaries, or (c) has any material
financial interest, direct or indirect, in any supplier or customer of, or
other outside business which has significant transactions with Medscape or
any of its subsidiaries. True and complete copies of all agreements listed
on SCHEDULE 3.1.19 have been provided to MedicaLogic. Neither Medscape nor
any of its subsidiaries is indebted to any of its shareholders, directors or
officers (or any entity owned or controlled by one or more of such parties)
except for amounts due under normal salary arrangements and for
reimbursement of ordinary business expenses. The consummation of the
transactions contemplated by this Agreement will not (either alone or upon
the occurrence of any act or event, or with the lapse of time, or both)
result in any payment (severance or other) becoming due from Medscape or any
of its subsidiaries to any of their respective shareholders, officers,
directors or employees (or any entity owned or controlled by one or more of
such parties).
3.1.20 NO POWERS OF ATTORNEY OR RESTRICTIONS. No power of attorney or
similar authorization given by Medscape or any of its subsidiaries is
presently in effect or outstanding. No contract or agreement to which
Medscape or any of its subsidiaries is a party or is bound or to which any
of its properties or assets is subject limits its freedom to compete in any
line of business or with any person. To the knowledge of Medscape, none of
the employees of Medscape or its subsidiaries is obligated under any
contract (including licenses, covenants or commitments of any nature), or
subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to
promote the interests of Medscape and its subsidiaries or that would
conflict with the business of Medscape or any of its subsidiaries as now
conducted or proposed to be conducted.
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3.1.21 [Reserved].
3.1.22 CONSENTS AND APPROVALS. Except as set forth in Section 3.1.7,
no consent, approval, or authorization of, or filing or registration with,
any court, regulatory authority, governmental body, or any other entity or
person not a party to this Agreement is required to be obtained by Medscape
or any of its subsidiaries for the consummation of the transactions
described in this Agreement.
3.1.23 BROKERS AND FINDERS. Except for fees owing to Lazard Freres &
Co. LLC and to Donaldson, Lufkin & Jenrette, neither Medscape nor any of its
subsidiaries has incurred any liability for any brokerage or investment
banking fees, commissions or finders' fees in connection with the Merger.
3.1.24 OPINION OF MEDSCAPE FINANCIAL ADVISOR. Medscape has received
from Lazard Freres & Co. LLC an opinion that the Conversion Ratio is fair,
from a financial point of view, to the holders of Medscape Common Stock. A
copy of such opinion is attached as Exhibit C.
3.1.25 NO OTHER AGREEMENTS TO SELL MEDSCAPE OR ITS ASSETS. Except as
set forth in SCHEDULE 3.1.25, neither Medscape nor any of its subsidiaries
has any legal obligation, absolute or contingent, to any other person to
sell any material portion of its assets, to sell its capital stock or other
ownership interests, or to effect any merger, consolidation or other
reorganization or to enter into any agreement with respect thereto. As of
the date hereof, Medscape is not engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to an
Acquisition Transaction, as defined in Section 4.2.2.
3.1.26 VOTE REQUIRED. The approval by a majority of the voting power
represented by the outstanding shares of Medscape Common Stock is the only
votes of the holders of any class or series of Medscape capital stock
necessary to approve the transactions contemplated by this Agreement.
3.1.27 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING CODE
SECTION 368(A)(2)(E).
3.1.27.1 Immediately following the Merger, Surviving Corporation
will hold at least 90% percent of the fair market value of Medscape's net
assets and at least 70% of the fair market value of Medscape's gross
assets held immediately prior to the Merger. For purposes of this
representation, amounts paid by Medscape to its shareholders who receive
cash or other property, Medscape assets used to pay its reorganization
expenses, and all redemptions and distributions (except for regular,
normal dividends) made by Medscape prior to and in connection with the
Merger, will be included as assets of Medscape held immediately prior to
the Merger.
3.1.27.2 There is no intercorporate indebtedness existing between
MedicaLogic and Medscape or between Merger Corp. and Medscape that was
issued, acquired, or will be settled at a discount.
3.1.27.3 Medscape has no plan or intention to issue additional
shares of its stock that would result in MedicaLogic losing control of
Medscape within the meaning of Section 368(c) of the Code. At the time of
the Merger, Medscape will not have outstanding any warrants, options,
convertible securities, or any other type of right pursuant to which any
person could acquire stock in Medscape that, if exercised or converted,
would affect MedicaLogic's acquisition or retention or control of
Surviving Corporation, as defined in Section 368(c) of the Code. As
defined in Section 368(c) of the Code, "control" means the direct
ownership of stock possessing at least 80% of the total combined voting
power for the election of directors of all classes of stock entitled to
vote and at least 80% of the total number of shares of all other classes
of stock.
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3.1.27.4 Medscape is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.1.27.5 On the date of the Merger, the fair market value of the
assets of Medscape will exceed the sum of its liabilities plus the amount
of liabilities, if any, to which its assets are subject.
3.1.27.6 Medscape is not under the jurisdiction of a court in a
title 11 or similar case within the meaning of Section 368(a)(3)(A) of
the Code.
3.1.27.7 None of the compensation received by any
shareholder-employee of Medscape will be separate consideration for, or
allocable to, any of his or her shares of Medscape stock; none of the
shares of MedicaLogic stock received by any shareholder-employee will be
separate consideration for, or allocable to, any employment agreement;
and the compensation paid to any shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
3.1.27.8 Except as set forth in SCHEDULE 3.1.27.8, during the past
five years, neither Medscape nor any person related to Medscape (as
defined in Treas. Reg. Section 1.368-1(e)(3) has directly or through any
transaction, agreement, or arrangement with any other person,
(i) acquired stock of Medscape with consideration other than common stock
of MedicaLogic or Medscape, or (ii) redeemed or made distributions with
respect to Medscape stock.
3.1.27.9 Medscape has not paid dividends financed, directly or
indirectly, with borrowed funds.
3.1.27.10 No Medscape shareholder has guaranteed any debt of
Medscape.
3.1.27.11 Except as otherwise provided in this Agreement, Medscape
will pay its own expenses, if any, incurred in connection with the Merger
and will not pay expenses of MedicaLogic or Merger Corp.
3.1.27.12 In the Merger, shares of Medscape stock representing
control of Medscape, as defined in Section 368(c) of the Code, will be
exchanged solely for voting stock of MedicaLogic.
3.2 REPRESENTATIONS AND WARRANTIES OF MEDICALOGIC. MedicaLogic hereby
represents and warrants to Medscape that, except as specifically set forth in
SCHEDULE 3.2 (the "MedicaLogic Disclosure Schedule") in a numbered paragraph
that corresponds to the section for which disclosure is made:
3.2.1 ORGANIZATION AND STATUS. MedicaLogic is a corporation duly
organized and validly existing under the laws of its jurisdiction of
incorporation and is duly qualified and in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or
operated, or the business conducted, by it require such qualification,
except where the failure to so qualify or be in good standing, when taken
together with all such failures, would not have a Material Adverse Effect on
MedicaLogic. MedicaLogic and each of its subsidiaries has all requisite
corporate power and authority to own, operate and lease its property and to
carry on its businesses as they are now being conducted. MedicaLogic has
delivered to Medscape complete and accurate copies of its Articles of
Incorporation ("MedicaLogic Articles of Incorporation") and Bylaws
("MedicaLogic Bylaws").
3.2.2 CAPITALIZATION. MedicaLogic has authorized capital stock
consisting of 100,000,000 shares of MedicaLogic Common Stock, no par value,
of which 32,417,478 shares were outstanding on February 21, 2000, and
50,000,000 shares of Preferred Stock, of which no shares were outstanding on
February 21, 2000. As of February 21, 2000, options to purchase 3,164,792
shares of
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MedicaLogic Common Stock were outstanding pursuant to grants made under
MedicaLogic's 1996 Stock Incentive Plan and MedicaLogic's 1993 Stock
Incentive Plan. All of the outstanding shares of capital stock of
MedicaLogic have been duly authorized and are validly issued, fully paid and
nonassessable, and no shares were issued, and no options were granted, in
violation of preemptive or similar rights of any shareholder or in violation
of any applicable securities laws. Except as set forth above, or on
SCHEDULE 3.2.2, there are no shares of capital stock of MedicaLogic
authorized, issued or outstanding, and there are no preemptive rights or any
outstanding subscriptions, options, warrants, rights, convertible securities
or other agreements or commitments of MedicaLogic of any character relating
to the issued or unissued capital stock or other securities of MedicaLogic.
There are no outstanding obligations of MedicaLogic to repurchase, redeem or
otherwise acquire any of its outstanding shares of capital stock.
3.2.3 CORPORATE AUTHORITY. MedicaLogic has the corporate power and
authority and has taken all corporate action necessary to execute and
deliver this Agreement and, upon receipt of the shareholder approval
contemplated in Section 4.1.2, to consummate the transactions contemplated
hereby. This Agreement has been duly and validly authorized by the Board of
Directors of MedicaLogic and duly and validly executed and delivered by
MedicaLogic and as of the Closing Date will be validly authorized by
MedicaLogic shareholders. This Agreement constitutes the valid and binding
obligation of MedicaLogic, enforceable against MedicaLogic in accordance
with its terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding
may be brought.
3.2.4 SUBSIDIARIES AND JOINT VENTURES. As of the date of this
Agreement, there are no subsidiaries or joint ventures of MedicaLogic that
are material to MedicaLogic.
3.2.5 SEC REPORTS AND FINANCIAL STATEMENTS. MedicaLogic has filed with
the SEC, and has made available to Medscape true and complete copies of, all
forms, reports, schedules, statements, and other documents required to be
filed by it since December 8, 1999 under the Exchange Act or the Securities
Act (each of such forms, reports, schedules, statements, and other
documents, to the extent filed and publicly available before the date of
this Agreement, other than preliminary filings, is referred to as a
"MedicaLogic SEC Document"). Each MedicaLogic SEC Document, at the time
filed, (a) did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading and (b) complied in all material respects
with the applicable requirements of the Exchange Act and the Securities Act,
as the case may be, and the applicable rules and regulations of the SEC
thereunder. The financial statements included in the MedicaLogic SEC
Documents (the "MedicaLogic Financial Statements") comply as to form in all
material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements,
as permitted by Form 10-Q of the SEC) and fairly present in all material
respects (subject, in the case of the unaudited statements, to normal,
recurring audit adjustments) the consolidated financial position of
MedicaLogic and its consolidated subsidiaries as at the dates thereof and
the consolidated results of their operations and cash flows for the periods
then ended.
3.2.6 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by MedicaLogic specifically for inclusion or incorporation by
reference in the Joint Proxy Statement for use relating to obtaining
approval of the shareholders of MedicaLogic and Medscape of the Merger will,
at the time the Joint Proxy Statement is first mailed to Medscape's
stockholders or
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MedicaLogic's shareholders or at the time of the MedicaLogic Special Meeting
and Medscape Special Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation or warranty is made by MedicaLogic with respect to statements
made or incorporated by reference therein based on (i) information supplied
by Medscape in writing specifically for inclusion or incorporation by
reference therein or (ii) information relating to Medscape which is reviewed
by Medscape without objection and with knowledge that it will be used in the
Joint Proxy Statement.
3.2.7 GOVERNMENTAL FILINGS. Other than (a) the filing of the
Certificate of Merger contemplated by Article I, (b) the HSR Filing to be
made by MedicaLogic and Medscape described in Section 4.1.7 and (c) the
Registration Statement and Joint Proxy Statement described in
Section 4.1.1, no notices, reports or other filings are required to be made
by MedicaLogic with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by MedicaLogic from, any
Governmental Entity in connection with the execution and delivery of this
Agreement by MedicaLogic and the consummation by MedicaLogic of the
transactions contemplated hereby.
3.2.8 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of
this Agreement by MedicaLogic nor the consummation of the transactions
contemplated by this Agreement will (a) result in the creation or imposition
of any Lien on any of the assets or properties of MedicaLogic or any of its
subsidiaries, (b) violate any provision of the Articles of Incorporation or
Bylaws of MedicaLogic or any of its subsidiaries, (c) to the knowledge of
MedicaLogic, violate any statute, judgment, order, injunction, decree, rule,
regulation or ruling of any governmental authority applicable to MedicaLogic
or any of its subsidiaries, or (d) either alone or with the giving of notice
or the passage of time or both, conflict with, constitute grounds for
termination of, accelerate the performance required by, accelerate the
maturity of any indebtedness or obligation under, result in the breach of
the terms, conditions or provisions of or constitute a default under any
mortgage, deed of trust, indenture, note, bond, lease, license, permit or
other agreement, instrument or obligation to which either MedicaLogic or any
of its subsidiaries is a party or by which any of them is bound.
3.2.9 UNDISCLOSED LIABILITIES. Except for liabilities or obligations
which were incurred after September 30, 1999 in the ordinary course of
business and of a type and in an amount consistent with past practices,
MedicaLogic has no material liability or obligation (whether absolute,
accrued, contingent or otherwise, and whether due or to become due) which is
not accrued, reserved against, or identified in the most recent MedicaLogic
Financial Statements.
3.2.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
SCHEDULE 3.2.10, since September 30, 1999 there has not been a Material
Adverse Change in MedicaLogic.
3.2.11 LITIGATION. Except as listed on SCHEDULE 3.2.11, no litigation,
proceeding or governmental investigation is pending or, to MedicaLogic's
knowledge, threatened against or relating to MedicaLogic, its officers or
directors in their capacities as such, or any of MedicaLogic's properties,
businesses or subsidiaries.
3.2.12 EMPLOYMENT MATTERS.
3.2.12.1 LABOR MATTERS. Neither MedicaLogic nor any of its
subsidiaries is a party or otherwise subject to any collective bargaining
or other agreement governing the wages, hours or terms of employment of
employees. MedicaLogic and each of its subsidiaries is and has been in
compliance in all material respects with all applicable laws regarding
employment and employment practices, terms and conditions of employment,
wages and hours with respect to MedicaLogic's employees and is not and
has not been engaged in any unfair labor practice.
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There is no (a) unfair labor practice complaint against MedicaLogic or
any of its subsidiaries pending before the National Labor Relations Board
or any other Governmental Entity, (b) labor strike, slowdown or work
stoppage actually occurring or, to the knowledge of MedicaLogic,
threatened against MedicaLogic or any of its subsidiaries,
(c) representation petition respecting the employees of MedicaLogic or
any of its subsidiaries pending before the National Labor Relations Board
or similar agency, or (d) grievance or any arbitration proceeding pending
arising out of or under collective bargaining agreements applicable to
MedicaLogic or any of its subsidiaries. Neither MedicaLogic nor any of
its subsidiaries has experienced any primary work stoppage or other
organized work stoppage involving its employees in the past two years.
MedicaLogic is not aware of any labor strike, slowdown, or work stoppage
occurring or, to the knowledge of MedicaLogic, threatened against any of
the principal suppliers of MedicaLogic or any of their subsidiaries that
might be expected to have a Material Adverse Effect on MedicaLogic.
Except as set forth in SCHEDULE 3.2.12.1, all of the employees of
MedicaLogic and its subsidiaries working in the United States are
citizens or permanent residents of the United States. No employee of
MedicaLogic or any of its subsidiaries is the beneficiary under an
employer-sponsored non-immigrant visa and no approvals, permits or
consents of any governmental entity are required in order for MedicaLogic
or its subsidiaries to employ any current employee as a result of or in
connection with such employee's immigration status in the United States.
MedicaLogic and its subsidiaries have fully completed and retained a
Form I-9 for each of their employees in accordance with applicable law,
and neither MedicaLogic nor any of its subsidiaries is subject to
examination in connection with such forms or to any fines or other
penalties under laws relating to employees who are not authorized to work
in the United States.
3.2.12.2 EMPLOYEE BENEFITS. SCHEDULE 3.2.12.2 lists all pension,
retirement, profit sharing, deferred compensation, bonus, commission,
incentive compensation (including cash, stock and option plans or
arrangements), life insurance, health and disability insurance,
hospitalization and all other employee benefit plans or arrangements
(including, without limitation, any contracts or agreements with trustees
or insurance companies relating to any such employee benefit plans or
arrangements) established or maintained by MedicaLogic or any of its
subsidiaries, and complete and accurate copies of all those plans or
arrangements have been made available to Medscape. The employee pension
benefit plans (within the meaning of Section 3(2) of ERISA) established
and maintained by MedicaLogic or any of its subsidiaries that are subject
to ERISA (the "MedicaLogic ERISA Plans") are listed separately as ERISA
Plans on SCHEDULE 3.2.12.2. The MedicaLogic ERISA Plans comply in all
material respects with the applicable requirements of ERISA and the Code.
With respect to each MedicaLogic ERISA Plan intended to constitute a
tax-qualified plan under Section 401(a) of the Code, MedicaLogic has
received, or has requested or will timely request, from the Internal
Revenue Service a favorable determination that such plan and its related
trust is qualified under Section 401(a) of the Code and the related trust
is tax-exempt under Section 501(a) of the Code. To the knowledge of
MedicaLogic, there has been no event subsequent to that determination
that is reasonably likely to result in the revocation of the
tax-qualified status of the MedicaLogic ERISA Plans or the exemption of
the related trusts. To the knowledge of MedicaLogic, none of the
MedicaLogic ERISA Plans, their related trusts or any trustee, investment
manager or administrator thereof has engaged in a nonexempt "prohibited
transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code that is reasonably expected to have a Material
Adverse Effect on MedicaLogic. Each MedicaLogic ERISA Plan is and has
been operated and administered in material conformity with the
requirements of all applicable laws and regulations, whether or not the
MedicaLogic ERISA Plan documents have been amended to reflect such
requirements. MedicaLogic and its
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subsidiaries have no liability for, or commitment to provide, medical
benefits to future or current retirees of MedicaLogic or any of its
subsidiaries.
3.2.12.3 EMPLOYMENT AGREEMENTS. Except as set forth on
SCHEDULE 3.2.12.3, each employee of MedicaLogic or any of its
subsidiaries is an "at-will" employee and there are no written employment
agreements of any kind between MedicaLogic or any of its subsidiaries and
any employees.
3.2.13 INTELLECTUAL PROPERTY. MedicaLogic or one of its subsidiaries
owns, or has a valid license to use, all Intellectual Property necessary to
or used in the conduct of the business of MedicaLogic and its subsidiaries
as now conducted and as proposed to be conducted. All Intellectual Property
owned by MedicaLogic or any of its subsidiaries is owned by them free and
clear of all Liens. To the knowledge of MedicaLogic, the conduct of the
business of MedicaLogic and its subsidiaries does not conflict with or
infringe upon any Intellectual Property rights of any other person and no
claims of conflict or infringement are pending or threatened against
MedicaLogic or any of its subsidiaries which, in any event, would reasonably
be expected to have a Material Adverse Effect. MedicaLogic has made all
necessary filings and recordations and has paid all required fees and Taxes
to maintain ownership of the Intellectual Property.
3.2.14 STATUS OF CONTRACTS. There is no existing default or violation
by MedicaLogic or its subsidiaries under any contracts, agreements,
commitments or instruments to which MedicaLogic or any of its subsidiaries
is a party or by which it or any of them is bound (collectively, the
"MedicaLogic Contracts") and no event has occurred which (whether with or
without notice, lapse of time or both) would constitute a default of
MedicaLogic or its subsidiaries under any MedicaLogic Contract, except for
such defaults or violations as would not in the aggregate have a Material
Adverse Effect on MedicaLogic. There is no pending, or to the knowledge of
MedicaLogic, threatened, proceeding which would interfere with the quiet
enjoyment of any leasehold of which MedicaLogic or any of its subsidiaries
is lessee or sublessee. MedicaLogic is not aware of any default by any other
party to any MedicaLogic Contract or of any event which (whether with or
without notice, lapse of time or both) would constitute a material default
by any other party with respect to obligations of that party under any
MedicaLogic Contract, and, to the knowledge of MedicaLogic, there are no
facts that exist indicating that any of the MedicaLogic Contracts may be
totally or partially terminated or suspended by the other parties. Neither
MedicaLogic nor any of its subsidiaries is a party to, or bound by, any
MedicaLogic Contract that MedicaLogic can reasonably foresee will result in
any material loss to MedicaLogic or such subsidiary upon the performance
thereof (including any liability for penalties or damages, whether
liquidated, direct, indirect, incidental or consequential).
3.2.15 PERMITS AND LICENSES. Each of MedicaLogic and its subsidiaries
holds, and at all times has held, all material Permits necessary for the
lawful conduct of its business pursuant to all applicable statutes, laws,
ordinances, rules and regulations of all Governmental Entities having
jurisdiction over it or any part of its operations. Each of MedicaLogic and
its subsidiaries is in compliance in all material respects with each of the
terms of the applicable Permits, and there are no claims of violation by
MedicaLogic or any of its subsidiaries of any of such Permits. Complete and
accurate copies of all Permits held by MedicaLogic and its subsidiaries have
been made available to Medscape. All Governmental Entities that have issued
any Permits to or with respect to MedicaLogic, its business, or subsidiaries
have consented or prior to the Closing will have consented (where such
consent is necessary) to the consummation of the transactions contemplated
by this Agreement without requiring modification of the rights or
obligations of MedicaLogic or its subsidiaries under any of such Permits.
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3.2.16 TAXES.
3.2.16.1 RETURNS. MedicaLogic has filed on a timely basis all
federal, state, local, foreign and other returns, reports, forms,
declarations and information returns required to be filed by it with
respect to Taxes which relate to the business, results of operations,
financial condition, properties or assets of MedicaLogic for all periods
(collectively, the "MedicaLogic Returns") and has paid on a timely basis
all Taxes shown to be due and payable on the MedicaLogic Returns. All
MedicaLogic Returns filed are complete and accurate in all material
respects and no additional Taxes are owed by MedicaLogic or its
subsidiaries with respect to the periods covered by the MedicaLogic
Returns or for any other period. MedicaLogic has made available to
Medscape complete and accurate copies of all MedicaLogic Returns.
MedicaLogic has no liability for Taxes of any person (other than itself),
whether arising under federal, state, local or foreign law, as a
transferee or successor, by contract, pursuant to Treas. Reg. Section
1.1502-6 or otherwise. Except as set forth on SCHEDULE 3.2.16,
MedicaLogic is not currently the beneficiary of any extension of time
within which to file any MedicaLogic Return. Except as set forth on
SCHEDULE 3.2.16, no MedicaLogic Returns have been examined by the
applicable taxing authorities and, except as set forth on
SCHEDULE 3.2.16, MedicaLogic has not received any notice of audit or
review with respect to any MedicaLogic Return or any fiscal year, has no
knowledge of any planned audit or review, and there are no outstanding
agreements or waivers extending the applicable statutory periods of
limitation for Taxes for any period. No claim has ever been made by an
authority in a jurisdiction where MedicaLogic does not file MedicaLogic
Returns that they are or may be subject to taxation by that jurisdiction.
All Taxes that are or have been required to be withheld or collected by
MedicaLogic or its predecessors have been duly withheld and collected
and, to the extent required, have been properly paid or deposited as
required by applicable laws. Neither MedicaLogic nor any of its
predecessors has made any payment, or is obligated to make any payment,
or is a party to an agreement that in certain circumstances could
obligate it to make a payment, that is not deductible under Section 280G
of the Code. Except as set forth in SCHEDULE 3.2.16, MedicaLogic is not
an obligor on, and none of its assets have been financed directly or
indirectly by, any tax exempt bonds. MedicaLogic is not now nor during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code
has ever been a United States real property holding corporation as
defined in Section 897(c)(2) of the Code. MedicaLogic has not filed a
consent pursuant to Section 341(f) of the Code nor has MedicaLogic agreed
to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code) owned by MedicaLogic.
3.2.16.2 TAXES PAID OR RESERVED. The unpaid Taxes of MedicaLogic
(A) did not as of the date of the most recent audited balance sheet
included in a MedicaLogic SEC Document exceed the reserve for Tax
liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on the
face of such balance sheet (rather than in any notes thereto) and (B) do
not exceed that reserve as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of
MedicaLogic in filing its MedicaLogic Returns.
3.2.17 RELATED PARTY INTERESTS. Except as listed in SCHEDULE 3.2.17,
no officer or director of MedicaLogic (or any entity owned or controlled by
one or more of such parties) (a) has any interest in any property, real or
personal, tangible or intangible, used in or pertaining to MedicaLogic's
business, (b) is indebted to MedicaLogic or its subsidiaries, or (c) has any
material financial interest, direct or indirect, in any supplier or customer
of, or other outside business which has significant transactions with
MedicaLogic. True and complete copies of all agreements listed on
SCHEDULE 3.2.17 have been provided to Medscape. MedicaLogic is not indebted
to any of its
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shareholders, directors or officers (or any entity owned or controlled by
one or more of such parties) except for amounts due under normal salary
arrangements and for reimbursement of ordinary business expenses. The
consummation of the transactions contemplated by this Agreement will not
(either alone or upon the occurrence of any act or event, or with the lapse
of time, or both) result in any payment (severance or other) becoming due
from MedicaLogic to any of its shareholders, officers, directors or
employees (or any entity owned or controlled by one or more of such
parties).
3.2.18 NO POWERS OF ATTORNEY OR RESTRICTIONS. No power of attorney or
similar authorization given by MedicaLogic or any of its subsidiaries is
presently in effect or outstanding. No contract or agreement to which
MedicaLogic or any of its subsidiaries is a party or is bound or to which
any of its properties or assets is subject limits the freedom of MedicaLogic
to compete in any line of business or with any person. To the knowledge of
MedicaLogic, none of the employees of MedicaLogic or its subsidiaries is
obligated under any contract (including licenses, covenants or commitments
of any nature), or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of MedicaLogic or any of its subsidiaries
or that would conflict with the business of MedicaLogic or its subsidiaries
as now conducted or proposed to be conducted.
3.2.19 CONSENTS AND APPROVALS. Except as set forth in Section 3.2.3,
no consent, approval, or authorization of, or filing or registration with,
any court, regulatory authority, governmental body, or any other entity or
person not a party to this Agreement is required to be obtained by
MedicaLogic or its subsidiaries for the consummation of the transactions
described in this Agreement.
3.2.20 BROKERS AND FINDERS. Except for fees to be paid by MedicaLogic
to Donaldson, Lufkin and Jenrette in connection with a fairness opinion,
neither MedicaLogic nor any of its subsidiaries has incurred any liability
for any brokerage or investment banking fees, commissions or finders' fees
in connection with the Merger.
3.2.21 NO OTHER AGREEMENTS TO SELL MEDICALOGIC OR ITS ASSETS. As of
the date hereof, MedicaLogic is not engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to a
transaction that would result in a Change of Control (as defined in
Section 4.3.8).
3.2.22 OPINION OF MEDICALOGIC FINANCIAL ADVISOR. MedicaLogic has
received from Donaldson, Lufkin and Jenrette an opinion that the Conversion
Ratio is fair, from a financial point of view, to MedicaLogic. A copy of
such opinion is attached hereto as EXHIBIT D.
3.2.23 VOTE REQUIRED. The approval by a majority of the voting power
represented by the outstanding shares of MedicaLogic Common Stock is the
only vote of the holders of any class or series of MedicaLogic capital stock
necessary to approve the issuance of MedicaLogic Common Stock in the Merger.
3.2.24 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING CODE
SECTION 368(A)(2)(E).
3.2.24.1 Immediately following the Merger, Surviving Corporation
will hold at least 90% of the fair market value of Merger Corp.'s net
assets and at least 70% of the fair market value of Merger Corp.'s gross
assets held immediately prior to the Merger. For purposes of this
representation, amounts paid by Merger Corp. to Medscape shareholders who
receive cash or other property and Merger Corp. assets used to pay
reorganization expenses will be included as assets of Merger Corp. held
immediately prior to the Merger.
3.2.24.2 Prior to the Merger, MedicaLogic will be in control of
Merger Corp. within the meaning of Section 368(c) of the Code.
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3.2.24.3 MedicaLogic has no plan or intention to cause or allow
Surviving Corporation to issue additional shares of its stock that would
result in MedicaLogic losing control of Surviving Corporation within the
meaning of Section 368(c) of the Code.
3.2.24.4 Prior to or in the Merger, neither MedicaLogic nor any
person related to MedicaLogic (as defined in Treas. Reg. Section
1.368(e)(3)) will have acquired directly or through any transaction,
agreement or arrangement with any other person, stock of Medscape with
consideration other than common stock of MedicaLogic. There is no plan or
intention by MedicaLogic or any person related to MedicaLogic (as defined
in Treas. Reg. Section 1.368-1(e)(3)) to acquire or redeem any of the
stock of MedicaLogic issued in the Merger either directly or through any
transaction, agreement, or arrangement with any other person.
3.2.24.5 MedicaLogic has no plan or intention to liquidate Surviving
Corporation; to merge Surviving Corporation with and into another
corporation; to sell or otherwise dispose of the stock of Surviving
Corporation; or to cause Surviving Corporation to sell or otherwise
dispose of any of the assets of Medscape or Merger Corp., except for
dispositions made in the ordinary course of business or transfers of
assets to a corporation controlled by Surviving Corporation.
3.2.24.6 Merger Corp. will have no liabilities assumed by Surviving
Corporation and will not transfer to Surviving Corporation in the Merger
any assets subject to liabilities.
3.2.24.7 Following the Merger, MedicaLogic will cause Surviving
Corporation to continue the historic business of Medscape or to use a
significant portion of Medscape's business assets in a business, in each
case within the meaning of Treas. Reg. Section 1.368-1(d).
3.2.24.8 MedicaLogic does not own, nor has it owned during the past
five years, any shares of the stock of Medscape.
3.2.24.9 MedicaLogic is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.2.24.10 The payment of cash in lieu of fractional shares of
MedicaLogic stock is solely for the purpose of avoiding the expense and
inconvenience to MedicaLogic of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to the Medscape
shareholders instead of issuing fractional shares of MedicaLogic stock
will not exceed one percent of the total consideration that will be
issued in the Merger to the Medscape shareholders in exchange for their
shares of Medscape stock. The fractional share interests of each Medscape
shareholder will be aggregated, and no Medscape shareholder will receive
cash in an amount equal to or greater than the value of one full share of
MedicaLogic stock.
3.2.24.11 Following and in connection with the Merger, MedicaLogic
will not transfer any shares of Medscape Common Stock to (a) a
corporation that is not a member of MedicaLogic's "qualified group" as
defined in Treas. Reg. Section 1.368-1(d)(4)(ii) or (b) a partnership.
3.2.24.12 MedicaLogic will not redeem any of the MedicaLogic Common
Stock exchanged for Medscape Common Stock in connection with the Merger,
other than pursuant to an ongoing stock repurchase program not created or
modified in connection with the Merger.
3.2.24.13 No person related to MedicaLogic, as defined in Treas.
Reg. Section1.368-1(e)(3) will acquire, with consideration other than a
proprietary interest in MedicaLogic, Medscape Common Stock exchanged for
MedicaLogic Common Stock in the Merger.
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3.2.24.14 Except as otherwise provided in this Agreement,
MedicaLogic will pay its own expenses, if any, incurred in connection
with the Merger and will not pay expenses of Medscape or Merger Corp.
3.2.24.15 In the Merger, shares of Medscape stock representing
control of Medscape, as defined in Section 368(c) of the Code, will be
exchanged solely for voting stock of MedicaLogic.
3.2.25 TOTAL EMED. A true, complete and correct copy of the
Reorganization and Merger Agreement, dated as of the date hereof, between
MedicaLogic and Total eMed (the "Total eMed Agreement") has been delivered
to Medscape.
3.3 REPRESENTATIONS AND WARRANTIES RELATING TO MERGER CORP. MedicaLogic
and Merger Corp. hereby represent and warrant to Medscape that:
3.3.1 ORGANIZATION AND STATUS. Merger Corp. is a corporation duly
organized and validly existing under the laws of the State of Delaware.
Merger Corp. does not own any properties (other than the initial cash
subscription for shares) nor has it commenced any business or operations.
3.3.2 CAPITALIZATION. Merger Corp. has an authorized capital stock
consisting of 100 shares of Common Stock. All of the issued and outstanding
shares of capital stock of Merger Corp. are owned by MedicaLogic.
3.3.3 CORPORATE AUTHORITY. Merger Corp. has the corporate power and
authority and has taken all corporate action necessary to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The Agreement has been duly and validly authorized by the Board of
Directors and sole shareholder of Merger Corp., duly and validly executed
and delivered by Merger Corp. and constitutes the valid and binding
obligation of Merger Corp., enforceable against Merger Corp. in accordance
with its terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding
may be brought.
3.3.4 GOVERNMENTAL FILINGS. Other than the filing of the Certificate
of Merger contemplated by Article I, no notices, reports or other filings
are required to be made by Merger Corp. with, nor are any consents,
registrations, approvals, permits or authorizations required to be obtained
by Merger Corp. from, any Governmental Entity in connection with the
execution and delivery of this Agreement by Merger Corp. and the
consummation by Merger Corp. of the transactions contemplated hereby.
3.3.5 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING CODE
SECTION 368(A)(2)(E).
3.3.5.1 Merger Corp. is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.3.5.2 Except as otherwise provided in this Agreement, Merger Corp.
will pay its own expenses, if any, incurred in connection with the Merger
and will not pay expenses of MedicaLogic or Medscape.
3.3.5.3 Merger Corp. has been formed solely in order to consummate
the Merger, and Merger Corp. has not conducted and will not conduct any
business activities or other operations of any kind other than the
issuance of its stock to MedicaLogic, prior to the Effective Date.
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ARTICLE IV
COVENANTS
4.1 MUTUAL COVENANTS. Medscape and MedicaLogic mutually covenant and agree
as follows:
4.1.1 PREPARATION OF REGISTRATION STATEMENT AND THE JOINT PROXY
STATEMENT. Promptly following the date of this Agreement, Medscape and
MedicaLogic shall prepare and file with the SEC the Joint Proxy Statement,
and MedicaLogic shall prepare and file with the SEC the Registration
Statement, in which the Joint Proxy Statement will be included as a
prospectus. Each of Medscape and MedicaLogic shall use its reasonable best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. Each of
Medscape and MedicaLogic will use its reasonable best efforts to cause the
Joint Proxy Statement to be mailed to its respective shareholders as
promptly as practicable after the Registration Statement is declared
effective under the Securities Act. MedicaLogic shall also take any action
(other than qualifying to do business in any jurisdiction in which it is not
now so qualified) required to be taken under any applicable state securities
law in connection with the issuance of MedicaLogic Common Stock in the
Merger, and Medscape shall furnish all information concerning Medscape and
the holders of Medscape Common Stock and rights to acquire Medscape Common
Stock as may be reasonably required in connection with any such action. Each
of MedicaLogic and Medscape shall furnish all information concerning itself
to the other as may be reasonably requested in connection with any such
action and the preparation, filing and distribution of the Registration
Statement and the preparation, filing and distribution of the Joint Proxy
Statement. Medscape and MedicaLogic each agree to correct any information
provided by it for use in the Registration Statement or the Joint Proxy
Statement which shall have become false or misleading.
4.1.2 SHAREHOLDER MEETINGS.
4.1.2.1 MedicaLogic shall (i) promptly and duly call, give notice
of, convene and hold as soon as practicable following the date upon which
the Registration Statement becomes effective a meeting of the holders of
MedicaLogic Common Stock for the purpose of voting to approve the
issuance of the MedicaLogic Common Stock in the Merger (the "MedicaLogic
Special Meeting"), and (ii) take all reasonable and lawful action to
solicit and obtain such approval. Unless the MedicaLogic Board of
Directors determines in good faith after receipt of a written opinion
from outside legal counsel experienced in such matters that such action
would be a breach of their respective fiduciary duties under applicable
law, the MedicaLogic Board of Directors shall unanimously recommend that
the shareholders of MedicaLogic approve the issuance of MedicaLogic
Common Stock in the Merger and shall not withdraw or modify such
recommendation, and MedicaLogic shall include in the Joint Proxy
Statement the recommendation of the MedicaLogic Board of Directors in
favor of issuance of MedicaLogic Common Stock in the Merger. At the
MedicaLogic Special Meeting, MedicaLogic shall propose and recommend that
its Articles of Incorporation be amended at the Effective Time to change
its name to MedicaLogic/Medscape, Inc.
4.1.2.2 Medscape shall (i) promptly and duly call, give notice of,
convene and hold a meeting of the holders of Medscape Common Stock for
the purpose of voting to approve the Merger (the "Medscape Special
Meeting"), and (ii) take all reasonable and lawful action to solicit and
obtain such approval. Unless the Medscape Board of Directors determines
in good faith after receipt of a written opinion from outside legal
counsel experienced in such matters that such action would be a breach of
their respective fiduciary duties under applicable law, the Medscape
Board of Directors shall unanimously recommend that the stockholders of
Medscape approve this Agreement and the transactions contemplated herein
and shall not withdraw or modify such recommendation, and Medscape shall
include in the Joint Proxy Statement the recommendation of the Medscape
Board of Directors in favor of the Merger.
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4.1.3 CONSENTS AND APPROVALS. Medscape and MedicaLogic each will use
reasonable best efforts to secure, and MedicaLogic will cause Merger Corp.
to use its reasonable best efforts to secure, all consents, approvals,
licenses or permits which may be required in connection with the Merger, and
each will cooperate with the other to secure all such consents, approvals,
licenses or permits in a form mutually satisfactory to Medscape and
MedicaLogic.
4.1.4 BEST EFFORTS. Subject to the terms of this Agreement, Medscape
and MedicaLogic each will use reasonable best efforts, and MedicaLogic will
cause Merger Corp. to use its reasonable best efforts, to effectuate the
transactions contemplated hereby and to fulfill the conditions of their
respective obligations under this Agreement.
4.1.5 PUBLICITY. Except as required by law, no party will issue any
press releases or otherwise make any public statements with respect to the
transactions contemplated hereby without the prior written consent of
MedicaLogic and Medscape, in each case not to be unreasonably withheld.
4.1.6 CONFIDENTIALITY. The provisions of the Nondisclosure Agreement
(the "Confidentiality Agreement") between MedicaLogic and Medscape,
effective as of January 4, 2000, shall apply to all "Information" (as
defined in the Confidentiality Agreement) obtained by any party pursuant to
this Agreement.
4.1.7 ANTITRUST IMPROVEMENTS ACT. Each of MedicaLogic and Medscape
will timely and promptly make the filing required to be made by it under the
Antitrust Improvements Act of 1976, as amended (each such filing an "HSR
Filing"). MedicaLogic and Medscape will furnish to one another such
information and assistance as the other party may reasonably request in
connection with the other party's preparation of filings or submissions to
any governmental agency, including, without limitation, any HSR Filing. As
reasonably requested by the other party, MedicaLogic and Medscape will
supply one another with copies of all correspondence, filings or
communications (or memoranda setting forth the substance thereof) between
MedicaLogic and Medscape or their respective representatives, on the one
hand, and the Federal Trade Commission, the Antitrust Division of the United
States Department of Justice or any other governmental agency or authority
or members of their respective staffs, on the other hand, with respect to
this Agreement or the transaction contemplated hereby.
4.2 COVENANTS OF MEDSCAPE. Medscape covenants and agrees as follows:
4.2.1 CONDUCT OF BUSINESS. Prior to the Effective Time, Medscape and
each of its subsidiaries will carry on its business in the ordinary and
usual manner and maintain its existing relationships with suppliers,
customers, employees and business associates, and will not, without the
prior written consent of MedicaLogic, which consent will not be unreasonably
delayed or withheld:
(a) enter into any new agreements or modify existing agreements
respecting an increase in compensation or benefits payable to its
officers or employees except for normal year-to-year adjustments
consistent with past practices (it being agreed that the current employee
compensation proposals of Medscape for year 2000 previously disclosed by
Medscape to MedicaLogic will not require prior MedicaLogic approval);
(b) split, combine, reclassify any of the outstanding shares of its
capital stock or otherwise change its authorized capitalization;
(c) declare, set aside or pay any dividends payable in cash, stock
or property with respect to shares of its capital stock;
(d) issue, sell, pledge, dispose of or encumber any additional
shares of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire,
any shares of its capital stock of any class (other than pursuant to the
Options issued in the ordinary course and consistent with past practice
or the Warrants) or release any
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holder of Medscape Common Stock from any provision restricting the sale
or other transfer of Medscape Common Stock;
(e) redeem, purchase or otherwise acquire any shares of its capital
stock, merge into or consolidate with any other entity or permit any
other entity to merge into or consolidate with it, liquidate or sell or
dispose of any of its assets, or close any plant or business operation;
(f) except for short-term indebtedness and indebtedness incurred
pursuant to Medscape's revolving credit agreement and renewals,
replacements and amendments thereof not in excess of the current maximum
under such credit agreement incurred in the ordinary course of business,
incur, assume or guarantee any indebtedness, or modify or prepay any
existing indebtedness;
(g) except as set forth in the capital budget provided to
MedicaLogic or as set forth on Exhibit 4.2.1(g), authorize capital
expenditures other than in the ordinary course of business, form any
subsidiary, or make any acquisition of, or investment in, assets or stock
of any other person or entity;
(h) change its method of accounting as in effect at the date of the
most recent Medscape SEC Document, except as required by changes in
generally accepted accounting principles as concurred with by Medscape's
independent auditors, or change its fiscal year; or
(i) authorize or enter into an agreement to do any of the actions
referred to in paragraphs (a) through (h) above.
4.2.2 ACQUISITION PROPOSALS. Unless and until this Agreement shall
have been terminated pursuant to Section 6.1 or Section 6.2, neither
Medscape, nor any of its subsidiaries or other affiliates, shall, directly
or indirectly, and it shall use its reasonable best efforts to cause their
respective agents or representatives (each, a "Representative") not to,
(i) encourage, initiate or solicit, on or after the date hereof, any
inquiries or the submission of any proposals or offers from any person
relating to any merger, consolidation, sale of a material amount of its
assets or similar business transaction involving Medscape or any of its
subsidiaries (each, an "Acquisition Transaction"); (ii) participate in any
negotiations regarding, furnish to any other person any information with
respect to, or otherwise assist or participate in, any attempt by any third
party to propose or offer any Acquisition Transaction; (iii) enter into or
execute any agreement relating to an Acquisition Transaction; or (iv) make
or authorize any public statement, recommendation or solicitation in support
of any Acquisition Transaction or any proposal or offer relating to an
Acquisition Transaction, in each case other than with respect to the Merger.
Notwithstanding the foregoing, nothing contained herein shall prohibit
Medscape from:
(a) complying with Rule 14e-2(a) promulgated under the Exchange Act
with regard to an Acquisition Transaction proposal;
(b) providing information in response to a request therefor by a
person who has made an unsolicited bona fide written Acquisition
Transaction proposal if the Medscape Board of Directors receives from the
person so requesting such information an executed confidentiality
agreement on terms substantially equivalent to those contained in the
Confidentiality Agreement;
(c) engaging in any negotiations or discussions with any person who
has made an unsolicited bona fide written Acquisition Transaction
proposal; or
(d) withdrawing or modifying the approval or recommendation by the
Medscape Board of Directors of this Agreement or the Merger in connection
with recommending an unsolicited bona fide written Acquisition
Transaction proposal to the stockholders of Medscape;
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IF AND ONLY TO THE EXTENT THAT, both (i) in each case referred to in clause (c)
or (d) above, the Medscape Board of Directors determines in good faith after
receipt of a written opinion from outside legal counsel experienced in such
matters that such action is necessary in order for its directors to comply with
their respective fiduciary duties under applicable law and (ii) in each case
referred to in clause (c) or (d) above, the Medscape Board of Directors
determines in good faith (after consultation with its financial advisors) that
such Acquisition Transaction, if accepted, is reasonably likely to be completed,
taking into account all legal, financial and regulatory aspects of the proposal
and the person making the proposal and would, if completed, result in a
transaction superior to the transaction contemplated by this Agreement, taking
into account, among other things, the long term prospects and interests of
Medscape and its stockholders.
Medscape will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing. Medscape agrees it will take the necessary
steps to inform promptly its Representatives of the obligations undertaken in
this Section 4.2.2 and in the Confidentiality Agreement. Medscape will promptly
notify MedicaLogic if any such inquiries, proposals or offers are received by,
and such information is requested from, or any such discussions or negotiations
are sought to be initiated or continued with, Medscape or any of its
Representatives relating to an Acquisition Transaction proposal, indicating, in
connection with such notice, the name of such person and the material terms and
conditions of any proposals or offers and thereafter shall keep MedicaLogic
informed, on a current basis, of the status and terms of any such proposals or
offers and the status of any such negotiations or discussions. Prior to
providing any such information or commencing any such discussions or
negotiations, Medscape shall give MedicaLogic not less than five business days'
notice. Medscape also will promptly request each person that has heretofore
executed a confidentiality agreement in connection with its consideration of any
Acquisition Transaction proposal to return all confidential information
heretofore furnished to such person by or on behalf of it or any of its
subsidiaries.
4.2.3 INVESTIGATIONS. Medscape agrees to give MedicaLogic and its
representatives and agents reasonable access to all its officers, key
employees, premises, books and records and agreements and files and to cause
its officers of Medscape to furnish MedicaLogic with such financial and
operating data and other information with respect to its business and
properties as MedicaLogic shall from time to time reasonably request. Any
such investigations (a) shall be conducted in such manner as not to
interfere unreasonably with the operation of Medscape's business; and
(b) shall not diminish any of the representations and warranties hereunder.
4.2.4 [Reserved].
4.2.5 NOTICE AND CURE. Medscape will notify MedicaLogic in writing of,
and will use all commercially reasonable efforts to cure before the Closing,
any event, transaction or circumstance, as soon as practical after it
becomes known to Medscape, that causes or will cause any covenant or
agreement of Medscape under this Agreement to be breached or that renders or
will render untrue in any material respect any representation or warranty of
Medscape contained in this Agreement. Medscape also will notify MedicaLogic
in writing of, and will use all commercially reasonable efforts to cure,
before the Closing, any violation or breach, as soon as practical after it
becomes known to Medscape, of any representation, warranty, covenant or
agreement made by Medscape. No notice given pursuant to this Section 4.2.5
shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining
satisfaction of any condition contained herein.
4.3 COVENANTS OF MEDICALOGIC. MedicaLogic covenants and agrees as follows:
4.3.1 CONDUCT OF BUSINESS. Prior to the Effective Time, MedicaLogic
and each of its subsidiaries will carry on its business in the ordinary and
usual manner and maintain its existing
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relationships with suppliers, customers, employees and business associates,
and will not, without the prior written consent of Medscape, which consent
will not be unreasonably delayed or withheld:
(a) split, combine, reclassify any of the outstanding shares of its
capital stock or otherwise change its authorized capitalization;
(b) declare, set aside or pay any dividends payable in cash, stock
or property with respect to shares of its capital stock;
(c) except as to the Total eMed Merger, merge into or consolidate
with any other entity or permit any other entity to merge into or
consolidate with it, or acquire any other entity, if any such transaction
would prevent the Merger from occurring on or prior to August 31, 2000 or
if such transaction is with an entity outside of the healthcare industry;
(d) change its method of accounting as in effect at the date of the
most recent MedicaLogic SEC Document, except as required by changes in
generally accepted accounting principles as concurred with by
MedicaLogic's independent auditors, or change its fiscal year; or
(e) authorize or enter into an agreement to do any of the actions
referred to in paragraphs (a) through (d) above.
4.3.2 INVESTIGATIONS. MedicaLogic agrees to give Medscape and its
representatives and agents reasonable access to all its officers, key
employees, premises, books and records and agreements and files and to cause
its officers of MedicaLogic to furnish Medscape with such financial
operating data and other information with respect to its business and
properties as Medscape shall from time to time reasonably request. Any such
investigations (a) shall be conducted in such manner as not to interfere
unreasonably with the operation of MedicaLogic's business; and (b) shall not
diminish any of the representations and warranties hereunder.
4.3.3 NOTIFICATION TO OPTIONEES. Promptly after the Effective Date,
MedicaLogic will notify in writing each holder of an Option of the exchange
of the Option for an option to purchase MedicaLogic Common Stock in
accordance with Section 1.3.3 of this Agreement.
4.3.4 OFFICER AND DIRECTOR INDEMNIFICATION. For a period of six years
from the Closing Date, MedicaLogic agrees to indemnify the officers and
directors of Medscape for all actions taken prior to Closing to the extent
authorized in Medscape's Certificate of Incorporation and Bylaws prior to
Closing. For a period of three years from the Closing Date, MedicaLogic
agrees to maintain officer and director liability coverage, with respect to
claims arising from facts or events that occurred prior to Closing, for the
benefit of the present or former officers and directors of Medscape as of
the Closing Date in such amounts and on such terms that are no less
beneficial to officers and directors than the coverage maintained by
Medscape prior to the Effective Time; provided that in no event shall
MedicaLogic be obligated to expend in order to maintain or procure insurance
coverage pursuant to this Section 4.3.4 any amount per annum in excess of
150% of the aggregate premiums payable by Medscape and its subsidiaries in
1999 (on an annualized basis) for such purpose.
4.3.5 MEDICALOGIC BOARD. Effective on the Closing, MedicaLogic will
cause three nominees of Medscape to be elected or appointed to the
MedicaLogic Board and shall fix its Board at not more than eleven members.
4.3.6 EDITOR-IN-CHIEF. Effective on the Closing, MedicaLogic will
appoint George D. Lundberg, M.D., as the Editor-in-Chief of MedicaLogic.
4.3.7 NOTICE AND CURE. MedicaLogic will notify Medscape in writing of,
and will use all commercially reasonable efforts to cure before the Closing,
any event, transaction or circumstance,
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as soon as practical after it becomes known to MedicaLogic, that causes or
will cause any covenant or agreement of MedicaLogic under this Agreement to
be breached or that renders or will render untrue in any material respect
any representation or warranty of MedicaLogic contained in this Agreement.
MedicaLogic also will notify Medscape in writing of, and will use all
commercially reasonable efforts to cure, before the Closing, any violation
or breach, as soon as practical after it becomes known to MedicaLogic, of
any representation, warranty, covenant or agreement made by MedicaLogic. No
notice given pursuant to this Section 4.3.7 shall have any effect on the
representations, warranties, covenants or agreements contained in this
Agreement for purposes of determining satisfaction of any condition
contained herein.
4.3.8 CHANGE OF CONTROL. MedicaLogic agrees that (a) neither it nor
any of its subsidiaries or other affiliates shall, and it shall use its
reasonable best efforts to cause their respective agents or representatives
(each, a "MedicaLogic Representative") not to, directly or indirectly,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal or offer (including, without limitation, any proposal
or offer to its shareholders) with respect to any transaction that would
constitute a Change of Control (as defined below), (b) it will notify
Medscape promptly if any such inquiries, proposals or offers are received by
MedicaLogic and (c) will keep Medscape appropriately informed of the status
of any such inquiries, proposals or offers. Nothing contained herein shall
prohibit MedicaLogic from providing information in response to such proposal
or offer, engaging in negotiations or discussions with any person who has
made such proposal or offer, or entering into or consummating any such
transaction. A "Change of Control" shall occur if any of the following
applies: (A) any "Person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
MedicaLogic representing 50% or more of the combined voting power of
MedicaLogic's outstanding capital stock; (B) the shareholders of MedicaLogic
approve a merger or other consolidation of MedicaLogic with any other
company where the former shareholders of MedicaLogic do not own at least 50%
of combined voting power of the surviving or resulting corporation; or
(C) MedicaLogic sells 50% or more of its assets to a buyer that is not a
subsidiary of MedicaLogic.
4.3.9 NO AMENDMENT TO TOTAL EMED AGREEMENT. Without the prior written
consent of Medscape, MedicaLogic shall not consent to any amendment of the
Total eMed Agreement or the waiver of any provision thereof that would be
materially adverse to Medscape or its stockholders. Nothing herein shall be
construed to require MedicaLogic to consummate the Total eMed Merger.
4.4 COVENANTS OF MERGER CORP. Merger Corp. covenants and agrees that,
except as is contemplated by this Agreement, prior to the Effective Time, Merger
Corp., will not engage in any business activities or liquidate, merge into or
consolidate with any other corporation or permit any other corporation to merge
into or consolidate with it; or increase its authorized capital stock; or issue
options, rights or warrants to purchase any of its capital stock.
ARTICLE V
CONDITIONS
5.1 CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES. The obligations of
Medscape, MedicaLogic and Merger Corp. to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or before the
Closing of each of the following conditions:
5.1.1 REGULATORY APPROVALS. The parties shall have made all filings
and received all approvals of any Governmental Entity of competent
jurisdiction necessary in order to consummate the Merger, and each of such
approvals shall be in full force and effect at the Closing and not subject
to any condition which requires the taking or refraining from taking of any
action which would have a Material Adverse Effect on Medscape or on
MedicaLogic.
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5.1.2 LITIGATION. There shall not be in effect any order, decree or
injunction of a federal or state court of competent jurisdiction
restraining, enjoining or prohibiting the consummation of the transactions
contemplated by this Agreement (each party agreeing to use its reasonable
best efforts, including appeals to higher courts, to have any such
non-final, appealable order, decree or injunction set aside or lifted), and
no action shall have been taken, and no statute, rule or regulation shall
have been enacted, by any state or federal government or governmental agency
in the United States which would prevent the consummation of the Merger.
5.1.3 SHAREHOLDER APPROVAL. This Merger shall have been approved by
the affirmative vote of the holders of a majority of the outstanding shares
of Medscape Common Stock. The issuance of MedicaLogic Common Stock in the
Merger shall have been approved by the affirmative vote of the holders of a
majority of the shares of MedicaLogic Common Stock.
5.1.4 REGISTRATION OF SECURITIES; LISTING. The shares of MedicaLogic
Common Stock to be issued pursuant to this Agreement shall have been
registered under the Securities Act, and under the securities laws of such
states registrations or qualification as counsel for MedicaLogic or
Medscape, as the case may be, deems necessary or exemptions from such state
registration or qualification will have been determined by such counsel to
be available, and shall have been listed on the Nasdaq National Market.
5.2 CONDITIONS TO THE OBLIGATIONS OF MEDSCAPE. The obligations of Medscape
to consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or before the Closing of each of the following conditions:
5.2.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations
and warranties of MedicaLogic and Merger Corp. contained in this Agreement
qualified by "Material Adverse Effect" or other materiality qualifiers shall
be true and correct in all respects, and all other representations and
warranties of MedicaLogic and Merger Corp. contained in this Agreement shall
be true and correct in all respects (except where the failure to be true and
correct would not have a Material Adverse Effect on MedicaLogic), except for
representations and warranties made as of a specific date, which
representations and warranties need only be true and correct as of such
date, and for changes specifically contemplated by this Agreement, and
MedicaLogic and Merger Corp. shall have performed in all material respects
all of their respective covenants and obligations hereunder to be performed
as of the Closing. Medscape shall have received at the Closing certificates
to the foregoing effect, dated the Closing Date, and executed on behalf of
MedicaLogic by an executive officer of MedicaLogic and on behalf of Merger
Corp. by an executive officer of Merger Corp.
5.2.2 NO MATERIAL ADVERSE CHANGE. Since September 30, 1999, there
shall have been no Material Adverse Change in MedicaLogic, or discovery of a
condition or occurrence of an event which has resulted or reasonably can be
expected to result in a Material Adverse Change in MedicaLogic.
5.3 CONDITIONS TO THE OBLIGATIONS OF MEDICALOGIC AND MERGER CORP. The
obligations of MedicaLogic and Merger Corp. to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or before the
Closing of each of the following conditions:
5.3.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations
and warranties of Medscape contained in this Agreement qualified by
"Material Adverse Effect" or other materiality qualifiers shall be true and
correct in all respects, and all other representations and warranties of
Medscape contained in this Agreement shall be true and correct in all
respects (except where the failure to be true and correct would not have a
Material Adverse Effect on Medscape), except for representations and
warranties made as of a specific date, which representations and warranties
need only be true and correct as of such date, and for changes specifically
contemplated by this
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Agreement, and Medscape shall have performed in all material respects all of
its covenants and obligations hereunder to be performed as of the Closing.
MedicaLogic shall have received at the Closing certificates to the foregoing
effect, dated the Closing Date, and executed on behalf of Medscape by an
executive officer of Medscape.
5.3.2 NO MATERIAL ADVERSE CHANGE. Since the date of the most recent
audited balance sheet in a Medscape SEC Document, there shall have been no
Material Adverse Change in Medscape, or discovery of a condition or
occurrence of an event which has resulted or reasonably can be expected to
result in a Material Adverse Change in Medscape.
ARTICLE VI
TERMINATION
6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by the
mutual consent of Medscape and MedicaLogic.
6.2 TERMINATION BY EITHER MEDSCAPE OR MEDICALOGIC. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time:
(a) by MedicaLogic or Medscape if the Merger shall not have become
effective on or prior to August 31, 2000, provided, however, that the right
to terminate this Agreement pursuant to this Section 6.2(a) shall not be
available to any party whose breach of any covenant of this Agreement has
been the cause of, or resulted in, the failure of the Merger to occur on or
before such date;
(b) by MedicaLogic or Medscape if:
(1) any court of competent jurisdiction in the United States or any
state shall have issued an order, judgment or decree (other than a
temporary restraining order) restraining, enjoining or otherwise
prohibiting the Merger, and such order, judgment or decree shall have
become final and nonappealable;
(2) any required approval of the stockholders of Medscape for this
Agreement or the Merger shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at a duly held
meeting of stockholders or at any adjournment thereof; or
(3) the required approval of the shareholders of MedicaLogic for the
issuance of MedicaLogic Common Stock pursuant to this Agreement shall not
have been obtained by reason of the failure to obtain the required vote
upon a vote held at a duly held meeting of shareholders or at any
adjournment there;
(c) by MedicaLogic if the Board of Directors of Medscape (or any
committee thereof) (i) shall have withdrawn, amended or modified in a manner
adverse to MedicaLogic its approval or recommendation of the Merger, this
Agreement or the transactions contemplated hereby, (ii) shall fail to
reaffirm such approval or recommendation upon MedicaLogic's request,
(iii) shall have recommended or taken no position with respect to an
Acquisition Transaction in any communication to the stockholders of
Medscape, or (iv) shall resolve to take any of the foregoing actions;
(d) by MedicaLogic if Medscape or its Representatives shall have taken
any of the actions that would be proscribed by Section 4.2.2, other than
actions taken in the exercise of the fiduciary duties of Medscape's Board of
Directors and satisfying all the conditions of Section 4.2.2;
(e) by MedicaLogic if Medscape fails to include in the Joint Proxy
Statement the recommendation of the Board of Directors of Medscape in favor
of the Merger;
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(f) by MedicaLogic if a tender offer or exchange offer relating to
Medscape Common Stock shall have been commenced by a third party and
Medscape shall not have promptly thereafter sent its stockholders a
statement recommending rejection of such tender offer or exchange offer;
(g) by MedicaLogic if there has been a material breach by Medscape of
any representation, warranty, covenant or agreement contained in this
Agreement that is not curable or, if curable, is not cured within a
reasonable time (but in no event more than 30 days) after written notice of
such breach is given by MedicaLogic to Medscape;
(h) by Medscape if MedicaLogic or the MedicaLogic Representatives shall
have taken any of the actions that would be proscribed by Section 4.3.8
other than actions satisfying all the conditions of Section 4.3.8; or
(i) by Medscape if there has been a material breach by MedicaLogic of
any representation, warranty, covenant or agreement contained in this
Agreement that is not curable or, if curable, is not cured within a
reasonable time (but in no event more than 30 days) after written notice of
such breach is given by Medscape to MedicaLogic;
(j) by Medscape if the Board of Directors of MedicaLogic (or any
committee thereof) (i) shall have withdrawn, amended or modified in a manner
adverse to Medscape its approval or recommendation of the issuance of the
MedicaLogic Common Stock in the Merger, (ii) shall fail to reaffirm such
approval or recommendation upon Medscape's request, or (iii) shall resolve
to take any of the foregoing actions; or
(k) by Medscape if MedicaLogic fails to include in the Joint Proxy
Statement the recommendation of the Board of Directors of MedicaLogic in
favor of the issuance of the MedicaLogic Common Stock in the Merger.
6.3 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article VI,
(i) this Agreement immediately will become void and of no effect, except that
Sections 4.1.6, 6.3, 6.4 and 7.1 will survive the event of termination; and
(ii) no party hereto (or any of its directors of officers) shall have any
liability or further obligation to any other party to this Agreement, except
that nothing herein shall relieve any party for any willful breach of this
Agreement.
6.4 TERMINATION FEES AND EXPENSES.
6.4.1 Medscape agrees to pay MedicaLogic (provided that MedicaLogic is
not then in material breach of any representation, warranty, covenant or
agreement contained in this Agreement) within two business days after the
termination of this Agreement (or, in the case of (ii) and (iii) below, as
provided therein) by wire transfer, the sum of $30,000,000 in immediately
available funds in the event that any of the following shall have occurred:
(i) this Agreement shall have been terminated pursuant to
Section 6.2(c), Section 6.2(d), Section 6.2(e), Section 6.2(f) or
Section 6.2(g) or because of a breach of Section 4.2.2 by Medscape,
provided that if this Agreement is terminated pursuant to Section 6.2(g)
as a result of a non-intentional breach by Medscape, Medscape shall pay
to MedicaLogic MedicaLogic's actual out-of-pocket expenses rather than
the aforesaid $30,000,000 sum;
(ii) prior to the meeting of Medscape stockholders duly convened and
held to vote in respect to this Agreement and the Merger, an Acquisition
Transaction shall have been made to Medscape and made known to its
stockholders generally or shall have been made directly to its
stockholders generally or any person shall have publicly announced an
intention (whether or not conditional) to make an Acquisition
Transaction, and thereafter this Agreement shall have been terminated
pursuant to Section 6.2(b)(2) (in which circumstances
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the amounts payable under this Section 6.4.1 shall be payable on the
first business day after the date of such stockholder vote); or
(iii) this Agreement shall have been terminated pursuant to
Section 6.2(b)(2) and, within twelve months of such termination Medscape
enters into an agreement with any person with respect to an Acquisition
Transaction or an Acquisition Transaction is consummated (in which
circumstances the amounts payable under this Section 6.4.1 shall be
payable upon the signing of such agreement or, if no agreement is signed,
then at the closing (and as a condition to the closing, which condition
may not be waived without the express written consent of MedicaLogic) of
such Acquisition Transaction;
6.4.2 MedicaLogic agrees to pay Medscape (provided that Medscape is not
then in material breach of any representation, warranty, covenant or
agreement contained in this Agreement) by wire transfer, the sum of
$30,000,000 in immediately available funds in the event that the following
shall have occurred: (i) this Agreement shall have been terminated pursuant
to Section 6.2(b)(3), 6.2(h), 6.2(i), 6.2(j) or 6.2(k), provided that if
this Agreement is terminated pursuant to Section 6.2(i) as a result of a
non-intentional breach by MedicaLogic, MedicaLogic shall pay to Medscape
Medscape's actual out-of-pocket expenses rather than the aforesaid
$30,000,000 sum.
6.4.3 Each of Medscape and MedicaLogic acknowledge that the agreements
contained in Section 6.4 are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, the
respective parties would not enter into this Agreement; accordingly, if
either party fails to promptly pay the amount due pursuant to this
Section 6.4 and, in order to obtain such payment, the other party commences
a suit which results in a judgment for the fee set forth therein, the losing
party shall pay to the other its reasonable costs and expenses (including
attorneys' fees) in connection with such suit, together with interest from
the date of termination of this Agreement on the amounts owed at the prime
rate as announced by Key Bank of Oregon in effect from time to time during
such period plus two percent.
ARTICLE VII
MISCELLANEOUS AND GENERAL
7.1 PAYMENT OF EXPENSES. Subject to Section 6.4, if the Merger is not
consummated, each party shall pay its own out-of-pocket legal, accounting,
investment banking and other expenses incidental to this Agreement and the
transactions contemplated by this Agreement, except for the HSR Filing fees,
which shall be shared equally by Medscape and MedicaLogic. Nothing in this
Agreement is meant to limit the right of a non-breaching party to obtain
reimbursement of expenses and other damages, including attorneys' fees, incurred
as a result of a breach of this Agreement by the other party.
7.2 ENTIRE AGREEMENT. This Agreement, including the schedules and the
exhibits hereto, constitutes the entire agreement between the parties hereto and
supersedes all prior agreements and understandings, oral and written, among the
parties hereto with respect to the subject matter hereof.
7.3 ASSIGNMENT. This Agreement shall not be assignable by any of the
parties to this Agreement without the prior written consent of each of
MedicaLogic and Medscape.
7.4 BINDING EFFECT; NO THIRD PARTY BENEFIT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns, subject to the restrictions on assignment contained in
Section 7.3. Except as provided in Section 4.3.4 of this Agreement, nothing
express or implied in this Agreement is intended or shall be construed to confer
upon or give to a person, firm or corporation other than the parties hereto any
rights or remedies under or by reason of this Agreement or any transaction
contemplated hereby.
7.5 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement
may be amended, modified and supplemented at any time prior to or at the
Closing, whether before or after the votes of
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shareholders of Medscape or MedicaLogic, by written agreement executed and
delivered by the duly authorized officers of Medscape and MedicaLogic.
7.6 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law; PROVIDED, HOWEVER, that any waiver by a party must be in
writing.
7.7 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
7.8 CAPTIONS. The article, section and paragraph captions herein are for
convenience of reference only, do not constitute a part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
7.9 SUBSIDIARY. When a reference is made in this Agreement to a subsidiary
of a party, the term "subsidiary" means any corporation or other organization,
whether incorporated or unincorporated, of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party or by any one or more of its
subsidiaries, or by such party and one or more of its subsidiaries.
7.10 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or mailed, certified or registered mail with postage prepaid, or sent by telex,
telegram or facsimile (in each case with evidence of confirmed transmission) as
follows:
If to Medscape, to it at:
Medscape, Inc.
134 West 29(th) Street
New York, NY 10001
Telephone: (212) 760-3100
Facsimile: (212) 760-3140
Attention: Paul T. Sheils
with copies to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036
Telephone: (212) 336-2000
Facsimile: (212) 336-2222
Attention: John P. Schmitt, Esq.
If to MedicaLogic or Merger Corp., to it at:
MedicaLogic, Inc.
101 Green Street at Battery
San Francisco, California 94111
Telephone: (415) 678-3205
Facsimile: (415) 678-3300
Attention: Harvey J. Anderson
with copies to:
Stoel Rives LLP
900 S.W. Fifth Avenue
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Suite 2600
Portland, Oregon 97204
Telephone: (503) 224-3380
Facsimile: (503) 220-2480
Attention: Stephen E. Babson, Esq.
or to such other person or address as any party shall specify by notice in
writing. All such notices, requests, demands, waivers and communications shall
be deemed to have been received on the date of delivery or on the third business
day after the mailing thereof.
7.11 CHOICE OF LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon, exclusive of choice of law or
conflicts of law rules, provisions, or principles, except that the provisions of
this Agreement relating to the Merger shall also be governed by the merger
provisions of the DGCL.
7.12 SEPARABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
7.13 EXTINGUISHMENT. This Agreement, including all representations,
warranties and covenants, shall be extinguished and be of no further force or
effect after the Effective Time, except for Section 4.3.4, which will continue
in accordance with its terms.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first herein
above written.
<TABLE>
<S> <C> <C>
MEDICALOGIC, INC.
By: /s/ MARK K. LEAVITT, MD
-----------------------------------------
Name: Mark K. Leavitt, MD
Title: CEO
MEDSCAPE, INC.
BY: /S/ PAUL T. SHEILS
-----------------------------------------
Name: Paul T. Sheils
Title: CEO
MONEYPENNY MERGER CORP.
BY: /S/ DAVID C. MOFFENBEIER
-----------------------------------------
Name: David C. Moffenbeier
Title: President
</TABLE>
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APPENDIX B
AGREEMENT
OF
REORGANIZATION AND MERGER
AMONG
MEDICALOGIC, INC.,
AN OREGON CORPORATION,
TOTAL EMED, INC.,
A DELAWARE CORPORATION,
AND
AQ MERGER CORP.,
A DELAWARE CORPORATION,
FEBRUARY 21, 2000
<PAGE>
TABLE OF CONTENTS
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<S> <C> <C> <C> <C>
ARTICLE I THE MERGER........................................................................ 11
1.1 The Merger.................................................................... 11
1.2 Effect of Merger.............................................................. 11
1.3 Merger Consideration.......................................................... 11
1.3.1 Total eMed Stock...................................................... 11
1.3.2 Merger Corp. Stock.................................................... 11
1.3.3 Options............................................................... 11
1.3.4 Stock Splits, Etc..................................................... 11
1.4 Surrender and Cancellation of Certificates.................................... 11
1.4.1 Surrender of Certificates............................................. 11
1.4.2 No Fractional Shares.................................................. 11
1.4.3 Escheat............................................................... 11
1.4.4 Option Agreements..................................................... 11
1.4.5 Treasury Shares....................................................... 11
1.4.6 Withholding Rights.................................................... 11
1.4.7 Shares of Dissenting Stockholders..................................... 11
1.5 Stock Transfer Books.......................................................... 11
1.6 Closing....................................................................... 11
1.7 Subsequent Actions............................................................ 11
Certificate of Incorporation; Bylaws; Directors of the Surviving
1.8 Corporation................................................................... 11
ARTICLE II FURTHER AGREEMENTS............................................................... 11
2.1 Voting Agreements............................................................. 11
ARTICLE III REPRESENTATIONS AND WARRANTIES.................................................. 11
3.1 Representations and Warranties of Total eMed.................................. 11
3.1.1 Organization and Status............................................... 11
3.1.2 Capitalization........................................................ 11
3.1.3 Authority............................................................. 11
3.1.4 Subsidiaries and Joint Ventures....................................... 11
3.1.5 Financial Statements.................................................. 11
3.1.6 Information Supplied.................................................. 11
3.1.7 Governmental Filings.................................................. 11
3.1.8 No Adverse Consequences............................................... 11
3.1.9 Undisclosed Liabilities............................................... 11
3.1.10 Absence of Certain Changes or Events.................................. 11
3.1.11 Litigation............................................................ 11
3.1.12 Employment Matters.................................................... 11
3.1.12.1 Labor Matters............................................... 11
3.1.12.2 Employee Benefits........................................... 11
3.1.12.3 Employment Agreements....................................... 11
3.1.13 Title to and Condition of Real Property............................... 11
3.1.14 Title to and Condition of Fixed Assets................................ 11
3.1.15 Intellectual Property................................................. 11
3.1.16 Certain Contracts and Arrangements.................................... 11
3.1.17 Status of Contracts................................................... 11
3.1.18 Insurance............................................................. 11
3.1.19 Permits and Licenses.................................................. 11
3.1.20 Taxes................................................................. 11
</TABLE>
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3.1.20.1 Returns..................................................... 11
3.1.20.2 Taxes Paid or Reserved...................................... 11
3.1.20.3 Definitions................................................. 11
3.1.21 Related Party Interests............................................... 11
3.1.22 No Powers of Attorney or Restrictions................................. 11
3.1.23 Environmental Conditions.............................................. 11
3.1.23.1 Compliance.................................................. 11
3.1.23.2 Hazardous Substances........................................ 11
3.1.23.3 Filings and Notices......................................... 11
3.1.23.4 Definitions................................................. 11
3.1.24 Consents and Approvals................................................ 11
3.1.25 Brokers and Finders................................................... 11
3.1.26 [INTENTIONALLY OMITTED]............................................... 11
3.1.27 No Other Agreements to Sell Total eMed or Its Assets.................. 11
3.1.28 Vote Required......................................................... 11
3.1.29 Certain Representations and Warranties Regarding Code Section
368(a)(2)(E).......................................................... 11
3.2 Representations and Warranties of MDLI........................................ 11
3.2.1 Organization and Status............................................... 11
3.2.2 Corporate Authority................................................... 11
3.2.3 Governmental Filings.................................................. 11
3.2.4 Information Supplied.................................................. 11
3.2.5 SEC Reports and Financial Statements.................................. 11
3.2.6 No Adverse Consequences............................................... 11
3.2.7 Brokers and Finders................................................... 11
3.2.8 Opinion of MDLI Financial Advisor..................................... 11
3.2.9 Certain Representations and Warranties Regarding Code Section
368(a)(2)(E).......................................................... 11
3.2.10 Litigation............................................................ 11
3.2.11 Capitalization........................................................ 11
3.2.12 Undisclosed Liabilities; Returns...................................... 11
3.2.13 Absence of Certain Changes or Events.................................. 11
3.2.14 Taxes................................................................. 11
3.2.14.1 Returns..................................................... 11
3.2.14.2 Taxes Paid or Reserved...................................... 11
3.2.15 Related Party Interests............................................... 11
3.2.16 No Powers of Attorney or Restrictions................................. 11
3.2.17 Consents and Approvals................................................ 11
3.3 Representations and Warranties Relating to Merger Corp........................ 11
3.3.1 Organization and Status............................................... 11
3.3.2 Capitalization........................................................ 11
3.3.3 Corporate Authority................................................... 11
3.3.4 Governmental Filings.................................................. 11
3.3.5 Certain Representations and Warranties Regarding Code Section
368(a)(2)(E).......................................................... 11
ARTICLE IV COVENANTS........................................................................ 11
4.1 Mutual Covenants.............................................................. 11
4.1.1 Preparation of Registration Statement and the Joint Proxy Statement... 11
4.1.2 Shareholder Meetings.................................................. 11
4.1.3 Consents and Approvals................................................ 11
4.1.4 Best Efforts.......................................................... 11
4.1.5 Publicity............................................................. 11
</TABLE>
B-iii
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4.1.6 Confidentiality....................................................... 11
4.1.7 [INTENTIONALLY OMITTED]............................................... 11
4.1.8 Antitrust Improvements Act............................................ 11
4.1.9 Restructuring of Merger............................................... 11
4.2 Covenants of Total eMed....................................................... 11
4.2.1 Conduct of Business................................................... 11
4.2.2 Acquisition Proposals................................................. 11
4.2.3 Investigations........................................................ 11
4.3 Covenants of MDLI............................................................. 11
4.3.1 Investigations........................................................ 11
4.3.2 Notification to Optionees............................................. 11
4.3.3 MDLI Board............................................................ 11
4.3.4 [INTENTIONALLY OMITTED]............................................... 11
4.3.5 Nasdaq Listing Application............................................ 11
4.3.6 Officer and Director Indemnification.................................. 11
4.3.7 Conduct of Business................................................... 11
4.3.8 Break Up Fee.......................................................... 11
4.4 Covenants of Merger Corp...................................................... 11
ARTICLE V CONDITIONS........................................................................ 11
5.1 Conditions to the Obligations of All Parties.................................. 11
5.1.1 Regulatory Approvals.................................................. 11
5.1.2 Litigation............................................................ 11
5.1.3 Shareholder Approval.................................................. 11
5.1.4 Registration of Securities; Listing................................... 11
5.2 Conditions to the Obligations of Total eMed................................... 11
5.2.1 Representations, Warranties and Covenants............................. 11
5.2.2 No Material Adverse Change............................................ 11
5.2.3 Legal Opinion......................................................... 11
5.3 Conditions to the Obligations of MDLI and Merger Corp......................... 11
5.3.1 Representations, Warranties and Covenants............................. 11
5.3.2 Lock-up............................................................... 11
5.3.3 No Material Adverse Change............................................ 11
5.3.4 Financial Statements.................................................. 11
5.3.5 [INTENTIONALLY OMITTED]............................................... 11
5.3.6 Dissenting Shares..................................................... 11
5.3.7 Preferred Stock....................................................... 11
5.3.8 Escrow Schedule....................................................... 11
5.3.9 Legal Opinion......................................................... 11
ARTICLE VI TERMINATION...................................................................... 11
6.1 Termination by Mutual Consent................................................. 11
6.2 Termination by Either Total eMed or MDLI...................................... 11
6.3 Effect of Termination and Abandonment......................................... 11
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW.............................. 11
7.1 Survival of Representations and Warranties.................................... 11
7.2 Escrow Arrangements........................................................... 11
7.2.1 Contract Escrow Fund.................................................. 11
7.2.1.1 Litigation Escrow Fund...................................... 11
7.2.1.2 Distribution from Litigation Escrow Fund.................... 11
</TABLE>
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<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C> <C>
7.2.2 Escrow Period; Distribution upon Termination of Escrow Periods........ 11
7.2.3 Protection of Escrow Fund............................................. 11
7.2.4 Claims upon Escrow Fund............................................... 11
7.2.5 Objections to Claims.................................................. 11
7.2.6 Resolution of Conflicts; Arbitration.................................. 11
7.2.7 Securityholder Agent of the Shareholders; Power of Attorney........... 11
7.2.8 Actions of the Securityholder Agent................................... 11
7.2.9 Third-Party Claims.................................................... 11
7.2.10 Escrow Agent's Duties................................................. 11
7.2.11 Fees.................................................................. 11
7.2.12 Maximum Liability and Remedies........................................ 11
ARTICLE VIII MISCELLANEOUS AND GENERAL...................................................... 11
8.1 Payment of Expenses........................................................... 11
8.2 Entire Agreement.............................................................. 11
8.3 Assignment.................................................................... 11
8.4 Binding Effect; No Third Party Benefit........................................ 11
8.5 Amendment and Modification.................................................... 11
8.6 Waiver of Conditions.......................................................... 11
8.7 Counterparts.................................................................. 11
8.8 Captions...................................................................... 11
8.9 Subsidiary.................................................................... 11
8.10 Notices....................................................................... 11
8.11 Choice of Law................................................................. 11
8.12 Separability.................................................................. 11
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A-1 Certificate of Incorporation of the Surviving Corporation
Exhibit A-2 Bylaws of the Surviving Corporation
Exhibit B Form of Voting Agreement
Exhibit C Total eMed Financial Statements
Exhibit D MDLI Fairness Opinion
Exhibit E Form of Legal Opinion of MDLI's Counsel
Exhibit F Form of Legal Opinion of Total eMed's Counsel
</TABLE>
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<PAGE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 2.1 Individuals Executing Voting Agreements
Schedule 3.1 Total eMed Disclosure Schedule
Schedule 3.1.2 Capitalization
Schedule 3.1.4 Subsidiaries and Joint Ventures
Schedule 3.1.11 Litigation
Schedule 3.1.12.2 Employee Benefits
Schedule 3.1.12.3 Employment Agreements
Schedule 3.1.13 Title to and Condition of Real Property
Schedule 3.1.14 Title to and Condition of Fixed Assets
Schedule 3.1.15 Intellectual Property
Schedule 3.1.16 Certain Contracts and Arrangements
Schedule 3.1.18 Insurance
Schedule 3.1.19 Permits and Licenses
Schedule 3.1.20 Taxes
Schedule 3.1.21 Related Party Interests
Schedule 3.1.27 No Other Agreements to Sell Total eMed or its Assets
Schedule 3.2 MDLI Disclosure Schedule
Schedule 3.2.10 MDLI Litigation
Schedule 3.2.11 MDLI Capitalization
Schedule 3.2.13 Absence of Certain Changes or Events
Schedule 3.2.14 MDLI Taxes
Schedule 3.2.15 MDLI Related Party Interests
</TABLE>
B-vi
<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
- ---- ----------------------
<S> <C>
Acquisition Transaction..................................... Section 4.2.2
Agreement................................................... Preface
Bylaws...................................................... Section 3.1.1
Certificate of Incorporation................................ Section 3.1.1
Closing..................................................... Section 1.6
Closing Date................................................ Section 1.6
Code........................................................ Section 1.3.3
Confidential Information.................................... Section 4.1.6
Confidentiality Agreement................................... Section 4.1.6
Condition Completion Date................................... Section 1.6
Contract Escrow Fund........................................ Section 7.2.1
Contracts................................................... Section 3.1.17
Conversion Ratio............................................ Section 1.3
Copyrights.................................................. Section 3.1.15
Damages..................................................... Section 7.3.1
DGCL........................................................ Section 1.2
Dissenting Shares........................................... Section 1.4.7
Dissenting Stockholders..................................... Section 1.3
Earn-out Claims............................................. Section 7.2.1
Effective Time.............................................. Section 1.1
Employee Benefit Plans...................................... Section 3.1.12.2
Environmental Law........................................... Section 3.1.23.4
ERISA....................................................... Section 3.1.12.2
Escrow Agent................................................ Section 7.2.1
Escrow Amount............................................... Section 7.2.1
Escrow Fund................................................. Section 7.2.3.1
Escrow Period............................................... Section 7.2.2
Escrow Schedule............................................. Section 7.2.1
Exchange Act................................................ Section 3.2.5
Expiration Date............................................. Section 7.2.1
Form S-4.................................................... Section 3.1.6
GAAP........................................................ Section 3.1.5
HoldCo...................................................... Section 4.1.9.1
Governmental Entity......................................... Section 3.1.7
HSR Filing.................................................. Section 4.1.8
Hazardous Substance......................................... Section 3.1.23.4
Intellectual Property Rights................................ Section 3.1.15
Leased Real Property........................................ Section 3.1.13
Lien........................................................ Section 3.1.14
Litigation Escrow Fund...................................... Section 7.2.1.1
Litigation Expenses......................................... Section 7.2.1.2.1
Loss........................................................ Section 7.2.1
Maskworks................................................... Section 3.1.15
Material Adverse Change..................................... Section 3.1
Material Adverse Effect..................................... Section 3.1
MDLI........................................................ Preface
MDLI Common Stock........................................... Section 1.1
MDLI Disclosure Schedule.................................... Section 3.2
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
- ---- ----------------------
<S> <C>
MDLI Financial Statements................................... Section 3.2.5
MDLI Indemnified Parties.................................... Section 7.3.1
MDLI Returns................................................ Section 3.2.15.1
MDLI SEC Document........................................... Section 3.2.5
MDLI Special Meeting........................................ Section 4.1.2
Merger...................................................... Section 1.1
Merger Consideration........................................ Section 1.3
Merger Corp................................................. Preface
Most Recent Fiscal Year End................................. Section 3.1.5
New Shares.................................................. Section 7.2.3
Officer's Certificate....................................... Section 7.2.1
Options..................................................... Section 1.3.3
Patents..................................................... Section 3.1.15
Permits..................................................... Section 3.1.19
Policies.................................................... Section 3.1.18
Previously Leased Real Property............................. Section 3.1.13
Proxy Statement............................................. Section 3.1.6
PTO......................................................... Section 3.1.15
Reorganization.............................................. Section 4.1.9.1
Registered Intellectual Property Rights..................... Section 3.1.15
Representative.............................................. Section 4.2.2
Returns..................................................... Section 3.1.20.1
SEC......................................................... Section 3.1.6
Securities Act.............................................. Section 2.3.2
Securityholder Agent........................................ Section 7.2.7
Series C Common Equivalents................................. Section 1.3.1
Shareholders................................................ Section 7.2.1
Small Business Status....................................... Section 3.1.15
Subsidiary.................................................. Section 8.9
Superior Proposal........................................... Section 4.2.2
Total eMed.................................................. Preface
Total eMed Common Stock..................................... Section 1.1
Total eMed Disclosure Schedule.............................. Section 3.1
Total eMed Financial Statements............................. Section 3.1.5
Total eMed Indemnifiable Claim.............................. Section 7.3.1
Total eMed Intellectual Property............................ Section 3.1.15
Total eMed Option Grants.................................... Section 3.1.2
Total eMed Option Plans..................................... Section 3.1.2
Total eMed Registered Intellectual Property Rights.......... Section 3.1.15
Total eMed SEC Document..................................... Section 3.1.5
Total eMed Special Meeting.................................. Section 4.1.2
Voting Agreement............................................ Section 2.1
</TABLE>
B-viii
<PAGE>
AGREEMENT
OF
REORGANIZATION AND MERGER
THIS AGREEMENT OF REORGANIZATION AND MERGER (this "Agreement") is entered
into as of February 21, 2000 among MedicaLogic, Inc., an Oregon corporation
("MDLI"), Total eMed, Inc., a Delaware corporation ("Total eMed"), and AQ Merger
Corp., a Delaware corporation ("Merger Corp.").
AGREEMENT
In consideration of the mutual representations, warranties, covenants,
agreements and conditions contained herein, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Pursuant to the laws of the State of Delaware, and subject
to and in accordance with the terms and conditions of this Agreement, Merger
Corp. shall be merged with and into Total eMed, and each outstanding share of
common stock of Total eMed (the "Total eMed Common Stock") shall be converted
into the right to receive shares of common stock of MDLI (the "MDLI Common
Stock") in accordance with Section 1.3 of this Agreement. Total eMed and Merger
Corp. shall execute a Certificate of Merger, to be filed with the Secretary of
State of Delaware, on the Closing Date, as defined in Section 1.6, or as soon
thereafter as practicable. The merger of Merger Corp. with and into Total eMed
(the "Merger") shall take effect at the time when the Certificate of Merger is
duly filed with the Secretary of State of Delaware, or at such other time as the
parties may agree upon in writing pursuant to applicable law (the "Effective
Time").
1.2 EFFECT OF MERGER. At the Effective Time, Merger Corp. shall be merged
with and into Total eMed in the manner and with the effect provided by the
Delaware General Corporation Law (the "DGCL"), the separate corporate existence
of Merger Corp. shall cease and Total eMed shall be the surviving corporation
(the "Surviving Corporation"). The outstanding shares of Total eMed Common Stock
shall be converted into shares of MDLI Common Stock, and the outstanding shares
of capital stock of Merger Corp. shall be converted into shares of capital stock
of the Surviving Corporation, all on the basis, terms and conditions described
in Section 1.3.
1.3 MERGER CONSIDERATION. The aggregate maximum number of shares of MDLI
Common Stock to be issued in exchange for the acquisition by MDLI of all
outstanding Total eMed Common Stock and all outstanding convertible securities
of Total eMed and unexpired and unexercised options, warrants and other rights
to acquire any capital stock of Total eMed shall be 8,000,000 (the "Merger
Consideration").
1.3.1 TOTAL EMED STOCK. Each share of Total eMed Common Stock
outstanding immediately before the Effective Time and each share of
Series C Common Equivalents deemed outstanding immediately before the
Effective Time (other than shares of Total eMed Common Stock or Series C
Common Equivalents held by stockholders exercising appraisal rights under
Section 262 of the DGCL ("Dissenting Stockholders")) will cease to exist and
will be converted into the right to receive one share of MDLI Common Stock
multiplied by the Conversion Ratio (as defined below). The "Conversion
Ratio" shall mean the fraction, the numerator of which is the aggregate of
8,000,000 shares of MDLI Common Stock to be issued as Merger Consideration
and the denominator of which is the sum on the date of this Agreement of
(A) the total number of shares of Total eMed Common Stock issued and
outstanding, (B) the total number of shares of Total
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<PAGE>
eMed Common Stock issuable upon the conversion of all issued and outstanding
shares of Total eMed's Series A Preferred Stock, par value $.001, and Total
eMed's Series B Preferred Stock, par value $.001, and (C) the total number
of shares of Total eMed Common Stock issuable upon the exercise of all
options, warrants and other rights to purchase or acquire shares of Total
eMed Common Stock (excluding the shares issuable pursuant to the Stock
Earn-Out, as that term is defined in the Asset Purchase Agreement, dated
April 30, 1999, by and among a subsidiary of Total eMed, Bruyn Weber
Information Services, Inc., and certain other parties named therein,) and
(D) the total number of shares of Series C Common Equivalents deemed
outstanding. For the purposes of this Agreement, a holder of one share of
Total eMed's Series C Preferred Stock, par value $.001, shall be deemed to
hold 25.5407 shares of "Series C Common Equivalents", and such share of
Series C Common Equivalents shall be deemed to be outstanding.
1.3.2 MERGER CORP. STOCK. Each share of common stock of Merger Corp.
issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder
thereof, cease to exist and be converted into and become one share of common
stock of the Surviving Corporation. After the Effective Time, MDLI, the sole
holder of shares of Merger Corp. common stock outstanding immediately prior
to the Effective Time, shall, upon surrender for cancellation of a
certificate representing such shares to the Surviving Corporation, be
entitled to receive in exchange therefor a certificate representing the
number of shares of common stock of the Surviving Corporation into which
such shares of Merger Corp. common stock have been converted pursuant to
Section 1.3.2. Until so surrendered, the certificates which prior to the
Merger represented shares of Merger Corp. common stock shall be deemed, for
all corporate purposes, including voting entitlement, to evidence ownership
of the shares of the Surviving Corporation common stock into which such
shares of Merger Corp. common stock shall have been converted.
1.3.3 OPTIONS. Except as otherwise provided in Section 1.3.3, the
terms and provisions of the stock options held by those Total eMed option
holders under the Total eMed Option Plans and under the Total eMed Option
Grants (collectively, the "Options") will continue in full force and effect
following the Merger. By virtue of the Merger and at the Effective Time, and
without any further action on the part of any holder thereof, each Option
will be converted into an option to purchase the number of shares of MDLI
Common Stock equal to the product (rounded to the nearest whole number) of
(x) the number of shares of Total eMed Common Stock subject to such Option
immediately before the Effective Time multiplied by (y) the Conversion
Ratio. The exercise price per share for each Option after the Effective Time
will be determined by dividing the per share exercise price for such Option
immediately before the Effective Time by the Conversion Ratio. The term,
exercisability, vesting schedule, status as an incentive stock option under
Section 422 of the United States Internal Revenue Code of 1986, as amended
(the "Code"), if applicable, and all other terms and conditions of each
Option will, to the extent permitted by the existing terms of the Options or
permitted by law, and otherwise reasonably practicable, be unchanged. As
promptly as practicable after the Effective Time, MDLI shall issue to each
holder of an Option a written instrument informing such holder of the
assumption by MDLI of such Option. Unless all Options are, as of the
Effective Time, issuable pursuant to an effective registration statement on
Form S-8 of MDLI, or in the opinion of counsel of MDLI freely tradable upon
issuance pursuant to Rule 701 under the Securities Act of 1933, as Amended
(the "Securities Act"), as soon as practicable after the Effective Time,
MDLI shall file a registration statement on Form S-8 (or any successor form)
with respect to the Options and shall use its reasonable efforts to maintain
such registration statement (or any successor form), including the current
status of any related prospectus, for so long as the Options remain
outstanding. MDLI shall use its reasonable efforts to cause the MDLI Common
Stock subject to the Options to be quoted on the Nasdaq National Market or
such other system or exchange on which the MDLI Common Stock is then quoted
or listed. MDLI shall take all corporate action necessary to reserve for
issuance a sufficient
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<PAGE>
number of shares of MDLI Common stock for delivery upon exercise of the
Options pursuant to Section 1.3.3
1.3.4 STOCK SPLITS, ETC. If, between the date of this Agreement and
the Effective Time, the outstanding shares of either Total eMed Common Stock
or MDLI Common Stock shall have been changed into a different number of
shares or a different class by reason of any reclassification, combination,
recapitalization, stock split, stock dividend, subdivision, exchange of
shares, or other extraordinary transaction, the Conversion Ratio and the
Merger Consideration shall be adjusted proportionately.
1.4 SURRENDER AND CANCELLATION OF CERTIFICATES.
1.4.1 SURRENDER OF CERTIFICATES. Promptly after the Effective Time,
MDLI will cause its transfer agent (the "Transfer Agent") to send a letter
to each holder of shares of Total eMed Common Stock that have been converted
into MDLI Common Stock advising such holder that upon surrender to the
Transfer Agent of a certificate or certificates representing such shares,
along with a letter of transmittal in the form enclosed therein, stock
powers duly endorsed in blank with respect to shares of MDLI Common Stock
escrowed as provided for in Section 7.2, or other documents as may be
reasonably requested by MDLI or its agent, the holder shall be entitled to
receive a certificate representing the number of shares of MDLI Common Stock
into which such shares of Total eMed Common Stock shall have been converted
pursuant to the provisions of Section 1.3. If any certificate for shares of
MDLI Common Stock is to be issued in a name other than that in which the
certificate for Total eMed Common Stock surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, and that the person requesting such exchange pay
to MDLI or its agent designated for such purpose any transfer or other taxes
required, or establish to the reasonable satisfaction of MDLI or its agent
that such tax has been paid or is not payable. If any holder of Total eMed
Common Stock canceled and retired in accordance with this Agreement is
unable to deliver a certificate or certificates representing such shares of
the holder, MDLI, in the absence of actual notice that any shares
theretofore represented by any such certificate have been acquired by a bona
fide purchaser, shall deliver to such holder the number of shares of MDLI
Common Stock to which such holder is entitled in accordance with the
provisions of this Agreement upon the presentation of the following:
(i) evidence satisfactory to MDLI (a) that such person is the owner of the
shares theretofore represented by each certificate claimed by him, her or it
to be lost, wrongfully taken or destroyed and (b) that he, she or it is the
person who would be entitled to present each such certificate for conversion
pursuant to this Agreement; and (ii) such security or indemnity as may be
reasonably requested by MDLI to indemnify and hold MDLI and the Transfer
Agent harmless.
1.4.2 NO FRACTIONAL SHARES. No certificates or scrip evidencing
fractional shares of MDLI Common Stock shall be issued in the Merger. In
lieu of a fractional share, MDLI will pay any holder of shares of Total eMed
Common Stock who would otherwise have been entitled to a fraction of a share
of MDLI Common Stock upon surrender of the certificates therefor an amount
of cash (without interest) determined by multiplying (a) the closing price
per share of MDLI Common Stock on the first trading day immediately
preceding the Effective Time by (b) the fractional share interest in MDLI
Common Stock to which such holder would otherwise be entitled. The
provisions of this Section 1.4.2 will apply to the aggregate number of
shares of Total eMed Common Stock held by each holder thereof and each such
holder will be required to simultaneously surrender all certificates
relating to shares of Total eMed Common Stock held by such holder in
accordance with the provisions of Section 1.4 in order to surrender any such
certificate.
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<PAGE>
1.4.3 ESCHEAT. Neither MDLI nor Merger Corp. shall be liable to any
holder of shares of Total eMed Common Stock for any such shares of MDLI
Common Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
1.4.4 OPTION AGREEMENTS. After the Effective Time, each holder of an
Option outstanding immediately before the Effective Time will be deemed to
hold an option exercisable for MDLI Common Stock in accordance with the
provisions of Section 1.3.3.
1.4.5 TREASURY SHARES. At the Effective Time, each share of Total eMed
Common Stock or other Total eMed capital stock held in the treasury of Total
eMed immediately before the Effective Time will be canceled and extinguished
without any conversion thereof and no payment will be made with respect
thereto.
1.4.6 WITHHOLDING RIGHTS. MDLI shall be entitled to deduct and
withhold from the Merger Consideration such amounts as MDLI is required to
deduct and withhold with respect to the making of such payment under the
Code, or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by MDLI, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid by the holder of the
shares of Total eMed Common Stock in respect of which such deduction and
withholding was made by MDLI.
1.4.7 SHARES OF DISSENTING STOCKHOLDERS. Notwithstanding anything in
this Agreement to the contrary, any issued and outstanding Total eMed Common
Stock held by any Dissenting Stockholder who has not voted such Total eMed
Common Stock in favor of or consented to the Merger and who complies with
all the provisions of Section 262 of the DGCL concerning the right of
holders of Total eMed Common Stock to dissent from the Merger and require
appraisal of their Total eMed Common Stock ("Dissenting Shares") will not be
converted as described in Section 1.3 but will become only the right to
receive such consideration as may be determined to be due to such Dissenting
Stockholder pursuant to such provisions of the DGCL. If, after the Effective
Time, such Dissenting Stockholder withdraws the demand for appraisal or
fails to perfect or otherwise loses the right of appraisal, in any case
pursuant to the DGCL, such Dissenting Stockholder's Total eMed Common Stock
will be deemed to be converted as of the Effective Time into the right to
receive the Merger Consideration. Total eMed will give MDLI (i) prompt
notice of any demands received by Total eMed for appraisal of Total eMed
Common Stock and (ii) the opportunity to participate in and direct all
negotiations and proceedings with respect to any such demands. Total eMed
will not, without the prior written consent of MDLI, make any payment with
respect to, or settle, offer to settle, or otherwise negotiate, any such
demands.
1.5 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of Total eMed will be closed and there will be no further registration of
transfers of Total eMed capital stock or other securities thereafter on the
records of Total eMed.
1.6 CLOSING. The closing of the Merger (the "Closing") shall take place at
the offices of Stoel Rives LLP, 900 SW Fifth Avenue, Portland, Oregon at
10:00 a.m. local time on the third business day following the Condition
Completion Date (as hereinafter defined), or on such other date and/or at such
other place and time as Total eMed, MDLI and Merger Corp. may agree (the
"Closing Date"). The "Condition Completion Date" shall be the business day on
which the last of the conditions set forth in Article V hereof shall have been
fulfilled or waived (other than those conditions which, by their terms, are to
be satisfied at Closing).
1.7 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to, or under any of the rights,
properties or assets of Total
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<PAGE>
eMed or Merger Corp. acquired or to be acquired by the Surviving Corporation as
a result of, or in connection with, the Merger or otherwise to carry out this
Agreement, the officers and directors of the Surviving Corporation are
authorized to execute and deliver, in the name and on behalf of Total eMed or
Merger Corp., or otherwise, all such deeds, bills of sale, assignments and
assurances, and to take and do, in the name and on behalf of Total eMed or
Merger Corp., or otherwise, all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title and
interest in, to and under such rights, properties or assets in the Surviving
Corporation or otherwise to carry out the purposes of this Agreement.
1.8 CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS OF THE SURVIVING
CORPORATION.
(a) At the Effective Time, Merger Corp.'s Certificate of Incorporation,
a copy of which is attached to this Agreement as EXHIBIT A-1, shall be the
certificate of incorporation of the Surviving Corporation at and after the
Effective Time (until amended as provided by law and by that certificate of
incorporation).
(b) At the Effective Time, Merger Corp.'s bylaws, a copy of which is
attached to this Agreement as EXHIBIT A-2, shall be the bylaws of the
Surviving Corporation at and after the Effective Time (until amended as
provided by law, the certificate of incorporation of the Surviving
Corporation and the bylaws of the Surviving Corporation, as applicable).
(c)The directors of Merger Corp. immediately prior to the Effective Time
shall be the directors of the Surviving Corporation from and after the
Effective Time, until their successors are elected or appointed and
qualified or until their resignation or removal.
ARTICLE II
FURTHER AGREEMENTS
2.1 VOTING AGREEMENTS. Each of the shareholders of Total eMed and MDLI
listed on SCHEDULE 2.1 will execute and deliver, concurrently with the execution
of this Agreement, a Voting Agreement in the form attached as EXHIBIT B (the
"Voting Agreement"). Each Voting Agreement provides that the signing holder will
vote all of the shares of Total eMed Common Stock or MDLI Common Stock, as the
case may be, that such holder is entitled to vote in favor of the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF TOTAL EMED. For purposes of this
Agreement, "Material Adverse Effect" or "Material Adverse Change" means any
effect, change, event, circumstance or condition which when considered with all
other effects, changes, events, circumstances or conditions would affect
materially and adversely the business, results of operations or financial
condition of a party, in each case including its Subsidiaries together with it
taken as a whole. In no event shall any of the following constitute a Material
Adverse Effect or a Material Adverse Change: (i) any change in the trading
prices of MDLI Common Stock between the date hereof and the Effective Time, in
and of itself; (ii) effects, changes, events, circumstances or conditions
generally affecting the industry in which either MDLI or Total eMed operates or
arising from changes in general business or economic conditions; (iii) any
effects, changes, events, circumstances or conditions resulting from any change
in law or generally accepted accounting principles, which affect generally
entities such as MDLI and Total eMed; and (iv) any effect resulting from
compliance by MDLI or Total eMed with the terms of this Agreement. Total eMed
hereby represents and warrants to MDLI and Merger Corp. that, except as
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<PAGE>
specifically set forth in SCHEDULE 3.1 (the "Total eMed Disclosure Schedule") in
a numbered paragraph that corresponds to the section for which disclosure is
made:
3.1.1 ORGANIZATION AND STATUS. Total eMed and each of its Subsidiaries
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation and is duly qualified and in
good standing as a foreign corporation in each jurisdiction where its
properties (whether owned, leased or operated) or its business conducted
require such qualification, except where failure to be so qualified would
not have a Material Adverse Effect on Total eMed. Total eMed has all
requisite corporate power and authority to own, operate and lease its
property and to carry on its businesses as they are now being conducted.
Total eMed has delivered to MDLI complete and accurate copies of its
Certificate of Incorporation ("Certificate of Incorporation") and Bylaws
("Bylaws"), each as amended to the date hereof.
3.1.2 CAPITALIZATION. Total eMed has authorized capital stock
consisting of 20,000,000 shares of Total eMed Common Stock, of which
2,797,790 shares are outstanding; and 461,200 shares of preferred stock (the
"Total eMed Preferred Stock"); of which 435,200 shares are designated as
Series A Preferred Stock, $.001 par value, of which 435,200 shares are
outstanding; 14,000 shares are designated as Series B Preferred Stock, $.001
par value, of which 14,000 shares are outstanding; and 12,000 shares are
designated as Series C Preferred Stock, $.001 par value, of which 12,000
shares are outstanding. The Series A Preferred Stock will convert into
2,176,000 shares of Total eMed Common Stock. The Series B Preferred Stock
will convert into 3,930,563 shares of Total eMed Common Stock. The Series C
Preferred Stock will be deemed to convert into 306,488 shares of Series C
Common Equivalents. Options to purchase 444,380 shares of Total eMed Common
Stock are outstanding pursuant to grants made under Total eMed's 1999
Incentive Stock Option Plan and 1999 Stock Option and Incentive Plan
(collectively, the "Total eMed Option Plans"). Options to purchase 237,500
shares of Total eMed Common Stock are outstanding pursuant to grants made
under individual stock option agreements with the following (the "Total eMed
Option Grants"): Karen Pou (12,500 shares); Kelly Gill (75,000 shares); and
Richard Rehm (150,000 shares). All of the outstanding shares of capital
stock of Total eMed have been duly authorized and are validly issued, fully
paid and nonassessable, and no shares were issued, and no options were
granted, in violation of preemptive or similar rights of any shareholder or
in violation of any applicable securities laws. Except as set forth above,
or on SCHEDULE 3.1.2, there are no shares of capital stock of Total eMed
authorized, issued or outstanding, and there are no preemptive rights or any
outstanding subscriptions, options, warrants, rights, convertible securities
or other agreements or commitments of Total eMed of any character relating
to the issued or unissued capital stock or other securities of Total eMed.
There are no outstanding obligations of Total eMed or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any of the
outstanding shares of capital stock of Total eMed or any of its
Subsidiaries.
3.1.3 AUTHORITY. Total eMed has the corporate power and authority and,
except for the approval of its stockholders, has taken all corporate action
necessary to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
authorized by the Board of Directors of Total eMed, validly executed and
delivered by Total eMed. This Agreement constitutes the valid and binding
obligation of Total eMed, enforceable against Total eMed in accordance with
its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and except that the availability
of the equitable remedy of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding may be
brought.
3.1.4 SUBSIDIARIES AND JOINT VENTURES. Except as disclosed on
SCHEDULE 3.1.4, Total eMed has no subsidiaries and owns no stock or other
interest in any other corporation or in any partnership or limited liability
company, or other venture or entity. Except as disclosed on SCHEDULE 3.1.4,
Total
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eMed owns all of the issued and outstanding capital stock and other
ownership interests of each of its Subsidiaries, free and clear of all
encumbrances, and there are no existing options, warrants, calls,
subscriptions, convertible securities or other securities, commitments or
obligations of any character relating to the securities of any such
Subsidiary.
3.1.5 FINANCIAL STATEMENTS. Attached hereto as Exhibit C are the
following consolidated financial statements (collectively the "Total eMed
Financial Statements"): audited consolidated balance sheets and statements
of income, changes in stockholders' equity, and cash flow as of and for the
fiscal years ended December 31, 1998 and December 31, 1999 (the "Most Recent
Fiscal Year End") for Total eMed. The Total eMed Financial Statements
(including the notes thereto) have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods covered thereby, present fairly in all material
respects the consolidated financial condition of Total eMed as of such dates
and the consolidated results of operations of Total eMed for such periods,
are correct and complete, and are consistent with the books and records of
Total eMed (which books and records are correct and complete in all material
respects).
3.1.6 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Total eMed in writing specifically for inclusion or
incorporation by reference in (i) the registration statement on Form S-4 to
be filed with the Securities and Exchange Commission (the "SEC") by MDLI in
connection with the registration of the Merger Consideration, or any of the
amendments or supplements thereto (collectively, the "Form S-4"), will, at
the time the Form S-4 is filed with the SEC, at any time it is amended or
supplemented and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) the joint proxy statement for use
relating to obtaining approval of the shareholders of MDLI and Total eMed of
the Merger (the "Proxy Statement") will, at the time the Proxy Statement is
first mailed to Total eMed's stockholders or MDLI's shareholders or at the
time of the MDLI Special Meeting and Total eMed Special Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, except that no representation or warranty is made by Total eMed
with respect to statements made or incorporated by reference therein based
on information contained therein which is supplied by any other party
including without limitation, (i) information supplied by MDLI in writing
specifically for inclusion or incorporation by reference therein or
(ii) information relating to MDLI which is reviewed by MDLI without
objection and with the knowledge it will be used in the Proxy Statement.
3.1.7 GOVERNMENTAL FILINGS. Other than (a) the filing of the
Certificate of Merger contemplated by Article I, (b) the Proxy Statement
described in Section 3.1.6 and (c) the HSR Filing to be made by Total eMed
and described in Section 4.1.8, no notices, reports or other filings are
required to be made by Total eMed with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by Total eMed
from, any domestic or foreign governmental or regulatory authority, agency,
court, commission or other entity ("Governmental Entity") in connection with
the execution and delivery of this Agreement by Total eMed and the
consummation by Total eMed of the transactions contemplated hereby.
3.1.8 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of
this Agreement by Total eMed nor the consummation of the transactions
contemplated by this Agreement will (a) result in the creation or imposition
of any lien, charge, encumbrance or restriction on any of the assets or
properties of Total eMed, (b) violate any provision of the Certificate of
Incorporation or Bylaws of Total eMed, (c) violate any statute, judgment,
order, injunction, decree, rule, regulation or ruling of any Governmental
Entity applicable to Total eMed, or (d) either alone or
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with the giving of notice or the passage of time or both, conflict with,
constitute grounds for termination of, accelerate the performance required
by, accelerate the maturity of any indebtedness or obligation under, result
in the breach of the terms, conditions or provisions of or constitute a
default under any mortgage, deed of trust, indenture, note, bond, lease,
license, permit or other agreement, instrument or obligation to which Total
eMed is a party or by which any of them are bound, except, in the case of
clause (c) or (d), for violations, conflicts or breaches that would not have
a Material Adverse Effect on Total eMed.
3.1.9 UNDISCLOSED LIABILITIES. Except for liabilities or obligations
which were incurred after the date of the Total eMed Financial Statements in
the ordinary course of business and of a type and in an amount consistent
with past practices, Total eMed has no material liability or obligation
(whether absolute, accrued, contingent, or otherwise, and whether due or to
become due) which is not accrued, reserved against, or identified on the
Total eMed Financial Statements or included in the notes thereto, except for
liabilities or obligations that would not have a Material Adverse Effect on
Total eMed.
3.1.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
Schedule 3.1.10, since the date of the Most Recent Fiscal Year End, there
has not been:
(a) Any Material Adverse Change in Total eMed; or
(b) Any change by Total eMed in accounting methods, principles or
practices.
3.1.11 LITIGATION. Except as listed on SCHEDULE 3.1.11, no material
litigation, proceeding or governmental investigation is pending or, to Total
eMed's knowledge, threatened against or relating to Total eMed, its officers
or directors in their capacities as such, or any of Total eMed's properties,
businesses or Subsidiaries.
3.1.12 EMPLOYMENT MATTERS.
3.1.12.1 LABOR MATTERS. Neither Total eMed nor any of its
Subsidiaries is a party to or otherwise subject to any collective
bargaining or other agreement governing the wages, hours or terms of
employment of employees. Total eMed and each of its Subsidiaries is and
have been in material compliance with all applicable laws regarding
employment and employment practices, terms and conditions of employment,
wages and hours and is not and has not been engaged in any unfair labor
practice. There is no (a) unfair labor practice complaint against Total
eMed or any of its Subsidiaries pending before the National Labor
Relations Board or any other Governmental Entity, (b) labor strike,
slowdown or work stoppage actually occurring or, to the knowledge of
Total eMed, threatened against Total eMed or any of its Subsidiaries,
(c) representation petition respecting the employees of Total eMed or any
of its Subsidiaries pending before the National Labor Relations Board or
similar agency, or (d) grievance or any arbitration proceeding pending
arising out of or under collective bargaining agreements applicable to
Total eMed or any of its Subsidiaries. Total eMed and its Subsidiaries
have not experienced any primary work stoppage or other organized work
stoppage involving their employees in the past two years. Total eMed is
not aware of any labor strike, slowdown, or work stoppage occurring or,
to the knowledge of Total eMed, threatened against any of Total eMed's
principal suppliers that might be expected to have a Material Adverse
Effect on Total eMed or its Subsidiaries. All of the employees of Total
eMed and its Subsidiaries working in the United States are citizens or
permanent residents of the United States. No employee of Total eMed or
its Subsidiaries is the beneficiary under an employer-sponsored
non-immigrant visa and no approvals, permits or consents of any
governmental entity are required in order for Total eMed or its
Subsidiaries to employ any current employee as a result of or in
connection with such employee's immigration status in the United States.
Total eMed and its Subsidiaries have fully completed and retained a
Form I-9 for each of their employees in
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accordance with applicable law, and Total eMed and its Subsidiaries are
not its Subsidiaries is subject to examination in connection with such
forms or to any fines or other penalties under laws relating to employees
who are not authorized to work in the United States.
3.1.12.2 EMPLOYEE BENEFITS. Schedule 3.1.12.2 lists all pension,
retirement, profit sharing, deferred compensation, bonus, commission,
incentive compensation (including cash, stock and option plans or
arrangements), life insurance, health and disability insurance,
hospitalization and all other employee benefit plans or arrangements
(including, without limitation, any contracts or agreements with
trustees, insurance companies or others relating to any such employee
benefit plans or arrangements) established or maintained by Total eMed or
its Subsidiaries, and complete and accurate copies of all those plans or
arrangements have been provided to MDLI (the "Employee Benefit Plans").
The Employee Benefit Plans are listed separately on SCHEDULE 3.1.12.2 and
comply in all material respects with the requirements of applicable law.
None of the Employee Benefit Plans, their related trusts or any trustee,
investment manager or administrator thereof has engaged in a nonexempt
"prohibited transaction," as such term is defined in Section 406 of ERISA
and Section 4975 of the Code. Total eMed and its Subsidiaries have no
obligation of any kind (whether under the terms of the Employee Benefit
Plans or under any understanding with employees) to make payments under,
or to pay contributions to, any plan, agreement or other arrangement for
deferred compensation of employees, whether or not tax qualified,
including, without limitation, a single employer tax qualified plan, a
tax qualified plan of a controlled group of corporations, a
multi-employer pension plan, a "defined benefit" plan, a nonqualified
deferred compensation plan, an individual employment or compensation
agreement or a commitment to provide medical benefits to retirees.
3.1.12.3 EMPLOYMENT AGREEMENTS. Except as set forth on
SCHEDULE 3.1.12.3, each employee of Total eMed or its Subsidiaries is an
"at-will" employee and there are no written employment, commission or
compensation agreements of any kind between Total eMed or its
Subsidiaries and any employees. SCHEDULE 3.1.12.3 lists all Total eMed's
or its Subsidiaries' employment or supervisory manuals, employment or
supervisory policies, and written information generally provided to
employees (such as applications or notices), and complete and accurate
copies of those manuals, policies and written information have been
provided to MDLI. Total eMed and its Subsidiaries do not have any
agreements or understandings with employees, including without limitation
any agreements or understandings regarding compensation of any nature,
severance payments or retirement benefits, except as reflected in the
items listed in SCHEDULES 3.1.12.2 and 3.1.12.3.
3.1.13 TITLE TO AND CONDITION OF REAL PROPERTY. Total eMed does not
own any real property. Schedule 3.1.13 contains a list of all real property
currently leased or occupied by Total eMed or its Subsidiaries (the "Leased
Real Property"), including the dates of and parties to all leases and any
amendments thereof and a list of all real property previously leased or
occupied by Total eMed or its Subsidiaries (the "Previously Leased Real
Property"). All Leased Real Property (including improvements thereon) is in
satisfactory condition and repair consistent with its present use, and is
available for immediate use in the conduct of Total eMed's business. Neither
the operations of Total eMed or its Subsidiaries on any Leased Real
Property, nor any improvements on the Leased Real Property, violates any
applicable building or zoning code or regulation of any governmental
authority having jurisdiction, except where such violation would not have a
Material Adverse Effect on Total eMed. The Leased Real Property includes all
real property necessary to conduct the business of Total eMed and its
Subsidiaries as presently conducted. None of the Leased Real Property has
been condemned or otherwise taken by public authority and no such
condemnation is, to the knowledge of Total eMed, threatened or contemplated.
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3.1.14 TITLE TO AND CONDITION OF FIXED ASSETS. SCHEDULE 3.1.14
contains a complete and accurate list of all tangible personal property
(excluding inventory) owned or leased by Total eMed or its Subsidiaries (the
"Tangible Personal Property"), including the dates of and parties to all
leases and any amendments thereof except for items of Tangible Personal
Property with a cost basis of less than $25,000. Except as set forth in
SCHEDULE 3.1.14, Total eMed or its Subsidiaries have good and marketable
title to all of the Tangible Personal Property, free and clear of all liens,
mortgages, pledges, leases, restrictions and other claims and encumbrances
of any nature whatsoever (each, a "Lien"), except for statutory liens and
other Liens that would not materially interfere with the intended use of
such Tangible Personal Property. In all material respects, the Tangible
Personal Property is in good operating condition and repair (ordinary wear
and tear excepted), is performing satisfactorily, and is adequate for the
conduct of the business of Total eMed. All Tangible Personal Property and
the state of maintenance thereof are in compliance with all applicable laws
and regulations.
3.1.15 INTELLECTUAL PROPERTY.
3.1.15.1 DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the following respective meanings:
(i) "Technology" shall mean any or all of the following:
(A) works of authorship including, without limitation, computer
programs, source code and executable code, whether embodied in
software, firmware or otherwise, documentation, designs, files, net
lists, records (not including medical records), data and mask works;
(B) inventions (whether or not patentable), improvements and
technology; (C) proprietary and confidential information, including
technical data and customer and supplier lists, trade secrets and
know how; (D) databases, data compilations and collections and
technical data; (E) logos, trade names, trade dress, trademarks and
service marks; (F) World Wide Web addresses, domain names and sites;
(G) tools, methods and processes; and (H) all instances of the
foregoing in any form and embodied in any media.
(ii) "Intellectual Property Rights" shall mean any or all of the
following and all rights in, arising out of, or associated therewith:
(A) all United States and foreign patents and utility models and
applications therefor and all reissues, divisions, re-examinations,
renewals, extensions, provisionals, continuations and
continuations-in-part thereof and equivalent or similar rights
anywhere in the world in inventions and discoveries, including,
without limitation, invention disclosures ("Patents"); (B) all trade
secrets and other rights in know-how and confidential or proprietary
information; (C) all copyrights, copyrights registrations and
applications therefor and all other rights corresponding thereto
throughout the world ("Copyrights"); (D) all mask works, mask work
registrations and applications therefor, and any equivalent or
similar rights in semiconductor masks, layouts, architectures or
topology ("Maskworks"); (E) all industrial designs and any
registrations and applications therefor throughout the world;
(F) all rights in World Wide Web addresses and domain names and
applications and registrations therefor; (G) all trade names, logos,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor and all goodwill associated
therewith throughout the world ("Trademarks"); and (H) any similar,
corresponding or equivalent rights to any of the foregoing anywhere
in the world.
(iii) "Total eMed Intellectual Property" shall mean any
Technology and Intellectual Property Rights including Total eMed
Registered Intellectual Property Rights (as defined below) that are
owned (in whole or in part) by Total eMed or any of its Subsidiaries.
(iv) "Registered Intellectual Property Rights" shall mean all
United States, international and foreign: (A) Patents, including
applications therefor; (B) registered
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Trademarks, applications to register Trademarks, including
intent-to-use applications, or other registrations or applications
related to Trademarks; (C) Copyright registrations and applications
to register Copyrights; (D) Maskwork registrations and applications
to register Maskworks; and (E) any other Technology that is the
subject of an application, certificate, filing, registration or other
document issued by, filed with, or recorded by, any state, government
or other public or private legal authority at any time, which
application, certificate, filing, registration or other document
gives the owner thereof rights against a third party.
3.1.15.2 SCHEDULE 3.1.15.2 lists all Registered Intellectual
Property Rights owned by, filed in the name of, or applied for, by Total
eMed or any of its Subsidiaries (the "Total eMed Registered Intellectual
Property Rights") and lists any proceedings or actions currently pending
and which Total eMed or any of its Subsidiaries have initiated or of
which Total eMed or any of its Subsidiaries have requested written notice
before any court, tribunal (including the United States Patent and
Trademark Office (the "PTO") or equivalent authority anywhere in the
world) related to any of Total eMed Registered Intellectual Property
Rights or Total eMed Intellectual Property.
3.1.15.3 Each registration of Total eMed Registered Intellectual
Property Rights is valid and subsisting or pending, and all necessary
registration, maintenance and renewal fees that have come due in
connection with such Total eMed Registered Intellectual Property Rights
have been paid and all necessary documents and certificates that have
come due in connection with such Total eMed Registered Intellectual
Property Rights have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property Rights. Except as set forth on
SCHEDULE 3.1.15.3, there are no actions that must be taken by Total eMed
or any of its Subsidiaries within 120 days of the Closing Date, including
the payment of any registration, maintenance or renewal fees or the
filing of any responses to PTO office actions, documents, applications or
certificates for the purposes of obtaining, maintaining, perfecting or
preserving or renewing any Total eMed Registered Intellectual Property
Rights. In each case in which Total eMed or any of its Subsidiaries has
acquired all rights, title and interest in, as opposed to the right to
use, any Technology or Intellectual Property Right from any person, Total
eMed or its Subsidiaries have obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Technology or
Intellectual Property Rights to Total eMed or to its Subsidiaries, except
for such assignments that failure of which to obtain will not have a
Material Adverse Effect. Except as set forth on SCHEDULE 3.1.15.3,
neither Total eMed nor its Subsidiaries has claimed a particular status,
including "Small Business Status," in the application for any Total eMed
Intellectual Property Rights, which claim of status was not at the time
made, or which has since become, inaccurate or false or that will no
longer be true and accurate as a result of the Closing.
3.1.15.4 Neither Total eMed nor its Subsidiaries has knowledge of
any facts or circumstances that would render any Total eMed Intellectual
Property invalid or unenforceable. Except as set forth on
SCHEDULE 3.1.15.4, Neither Total eMed nor any of its Subsidiaries knows
of information, materials, facts or circumstances, including any
information or fact that would constitute prior art, that would render
any of Total eMed Registered Intellectual Property Rights invalid or
unenforceable, or would adversely effect any pending application for any
Total eMed Registered Intellectual Property Right and neither Total eMed
nor any of its Subsidiaries has knowledge of any misrepresentation or
failure to disclose, any fact or circumstances in any application for any
Total eMed Registered Intellectual Property Right that would constitute
fraud or a misrepresentation with respect to such application or
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that would otherwise affect the validity or enforceability of any Total
eMed Registered Intellectual Property Right.
3.1.15.5 Each item of Total eMed Intellectual Property is free and
clear of any Liens except for non-exclusive licenses granted to end-user
customers in the ordinary course of business. The Total eMed Intellectual
Property is subject only to non-exclusive licenses granted to
distributors, resellers and end-users. Without limiting the foregoing, to
the knowledge of Total eMed or any of its Subsidiaries: (i) Total eMed
and/or its Subsidiaries is the exclusive owner(s) of all Trademarks used
by Total eMed or any of its Subsidiaries in connection with the operation
or conduct of the business of Total eMed or any of its Subsidiaries,
including the sale, licensing, distribution or provision of any products
or services by Total eMed or any of its Subsidiaries; and (ii) except as
set forth on SCHEDULE 3.1.15.5, Total eMed or its Subsidiaries owns
exclusively, and has good title to, all copyrighted works created by
Total eMed or its Subsidiaries or which Total eMed or any of its
Subsidiaries otherwise purports to own.
3.1.15.6 Except as set forth in SCHEDULE 3.1.15.6, all Total eMed
Intellectual Property will be fully transferable, alienable or licensable
by Surviving Corporation and/or MDLI without restriction to the extent
Total eMed or any of its Subsidiaries could do the same and except that
any such transfer, alienation or license shall be subject to
non-exclusive licenses granted to end user customers in the ordinary
course of Total eMed's or its Subsidiaries' business prior to the Merger
and without payment of any kind to any third party other than royalties
and fees payable in the ordinary course of Total eMed's or its
Subsidiaries' business prior to the Merger.
3.1.15.7 To the extent that any Technology has been developed or
created by a third party for Total eMed or any of its Subsidiaries, Total
eMed or its Subsidiaries have a written agreement with such third party
with respect thereto and Total eMed or its Subsidiaries thereby either
(i) have obtained ownership of, and is the exclusive owner of, or
(ii) have obtained a license, in each case, sufficient for the conduct of
its business as currently conducted, to such third party's Intellectual
Property Rights in such Technology by operation of law or by valid
assignment or license.
3.1.15.8 Except as set forth on SCHEDULE 3.1.15.8 and with the
exception of "shrink-wrap" or similar widely-available commercial
end-user licenses, all Technology used in or to Total eMed's knowledge
necessary to the conduct of Total eMed's or any of its Subsidiaries'
business as presently conducted by Total eMed or its Subsidiaries was
written and created solely by either (i) employees of Total eMed or its
Subsidiaries acting within the scope of their employment or (ii) by third
parties who have validly licensed rights to Total eMed or its
Subsidiaries or who have validly and irrevocably assigned all of their
rights, including Intellectual Property Rights therein, to Total eMed or
its Subsidiaries, and no third party owns or has any rights to any of
Total eMed or its Subsidiaries Intellectual Property.
3.1.15.9 The employees of Total eMed or any of its Subsidiaries
listed on SCHEDULE 3.1.15.9 have entered into a valid and binding written
agreement with Total eMed or its Subsidiaries sufficient to vest title in
Total eMed or its Subsidiaries to all Technology, including without
limitation all Total eMed Intellectual Property, created by such employee
in the scope of his or her employment with Total eMed or its
Subsidiaries.
3.1.15.10 Except as set forth on SCHEDULE 3.1.15.10, no person who
has licensed Technology or Intellectual Property Rights to Total eMed or
any of its Subsidiaries has ownership rights or license rights to
improvements made by Total eMed or its Subsidiaries in such Technology or
Intellectual Property Rights.
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3.1.15.11 Neither Total eMed nor any of its Subsidiaries has
transferred ownership of, or granted any exclusive license of or right to
use, or authorized the retention of any exclusive rights to use or joint
ownership of, any Technology or Intellectual Property Right that is
Intellectual Property, to any other person.
3.1.15.12 SCHEDULE 3.1.15.12 lists material contracts, licenses and
agreements to which Total eMed or any of its Subsidiaries is a party with
respect to any Technology or Intellectual Property Rights. Neither Total
eMed nor any of its Subsidiaries are in breach of or have failed to
perform under, any of the foregoing contracts, licenses or agreements
and, to Total eMed's or its Subsidiaries' knowledge, no other party to
any such contract, license or agreement is in breach thereof or has
failed to perform thereunder, except for breaches or failures to perform
that would not have a Material Adverse Effect on Total eMed or any of its
Subsidiaries.
3.1.15.13 SCHEDULE 3.1.15.13 lists all material contracts, licenses
and agreements between Total eMed or any of its Subsidiaries and any
other person wherein or whereby Total eMed or its Subsidiaries have
agreed to, or assumed, any obligation or duty to warrant, indemnify,
reimburse, hold harmless, guaranty or otherwise assume or incur any
obligation or liability or provide a right of rescission with respect to
the infringement or misappropriation by Total eMed or its Subsidiaries or
such other person of the Intellectual Property Rights of any person other
than Total eMed or its Subsidiaries.
3.1.15.14 To the knowledge of Total eMed or any of its Subsidiaries,
there are no contracts, licenses or agreements between Total eMed or its
Subsidiaries and any other person with respect to Total eMed Intellectual
Property under which there is any dispute regarding the scope of such
agreement, or performance under such agreement, including with respect to
any payments to be made or received by Total eMed or any of its
Subsidiaries thereunder.
3.1.15.15 To the knowledge of Total eMed and any of its
Subsidiaries, the operation of the business of Total eMed and its
Subsidiaries as it currently is conducted, including but not limited to
the design, development, use, import, branding, advertising, promotion,
marketing, manufacture and sale of the products, technology or services
(including products, technology or services currently under development)
of Total eMed and its Subsidiaries does not and will not and will not
when conducted by MDLI and/or Surviving Corporation in the same manner
following the Closing, infringe or misappropriate any Intellectual
Property Right of any person or constitute unfair competition or trade
practices under the laws of any jurisdiction, and Total eMed and its
Subsidiaries have not received written notice from any person claiming,
or has any reason to believe, that such operation or any act, product,
technology or service (including products, technology or services
currently under development) of Total eMed or any of its Subsidiaries
infringes or misappropriates any Intellectual Property Right of any
person or constitutes unfair competition or trade practices under the
laws of any jurisdiction.
3.1.15.16 To Total eMed's or any of its Subsidiaries' knowledge, no
person is infringing or misappropriating any Total eMed Intellectual
Property.
3.1.15.17 No Total eMed Intellectual Property or service of Total
eMed or any of its Subsidiaries is subject to any proceeding of which
Total eMed or any of its Subsidiaries has received written notice or
outstanding decree, order, judgment or settlement agreement or
stipulation that restricts in any manner the use, transfer or licensing
thereof by Total eMed or any of its Subsidiaries or may affect the
validity, use or enforceability of such Total eMed Intellectual Property.
3.1.15.18 No (i) product, technology, service or publication of
Total eMed or any of its Subsidiaries, (ii) material published or
distributed by Total eMed or any of its Subsidiaries or (iii) conduct or
statement of Total eMed or any of its Subsidiaries constitutes obscene
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material, a defamatory statement or material, false advertising or, to
Total eMed's or any of its Subsidiaries' knowledge, otherwise violates in
any material respect any law or regulation.
3.1.15.19 To Total eMed's or any of its Subsidiaries' knowledge,
except as set forth on SCHEDULE 3.1.15.19, and except for Technology or
Intellectual Property subject to "shrink wrap" or similar widely
available commercial end user licenses, Total eMed Intellectual Property
constitutes all the Technology and Intellectual Property Rights used in
and/or to our knowledge necessary to the conduct of the business of Total
eMed or its Subsidiaries as it currently is conducted, including, without
limitation, the design, development, manufacture, use, import and sale of
products, technology and performance of services.
3.1.15.20 Except to the extent resulting from the continuation of
contracts and licenses of Total eMed or any of its Subsidiaries following
the Closing on the terms applicable prior to the Closing, and except for
the contracts identified in SCHEDULE 3.1.15.20, neither this Agreement
nor the transactions contemplated by this Agreement by operation of law
or otherwise, of any contracts or agreements to which Total eMed or any
of its Subsidiaries is a party, will result in (i) the Surviving
Corporation's granting to any third party any right to or with respect to
any Technology or Intellectual Property Right owned by, or licensed to,
either of them, (ii) either MDLI's or the Surviving Corporation's being
obligated to pay any royalties or other amounts to any third party in
excess of those payable by Total eMed or any of its Subsidiaries, MDLI or
Surviving Corporation, respectively, prior to the Closing.
3.1.15.21 All Technology used in Total eMed's products and services,
and all Technology used in the operation of Total eMed's or any of its
Subsidiaries' business is Year 2000 compliant, except where the failure
to be Year 2000 compliant will not have a Material Adverse Effect. As
used in this agreement, "Year 2000 compliant" means that the Technology
is designed to be used prior to, during and after the calendar year 2000,
and the technology will accurately receive, provide and process date and
time data (including, but not limited to, calculating, comparing and
sequencing) from, into and between the 20th and 21st centuries, including
the years 1999 and 2000, and leap-year calculations and will not
malfunction, cease to function, or provide invalid or incorrect results
as a result of date and time data, to the extent that other Technology
used in combination with the Technology that is the subject of this
representation, properly exchanges date and time data with it.
3.1.16 CERTAIN CONTRACTS AND ARRANGEMENTS. SCHEDULE 3.1.16, which is
organized by type of agreement, contains a complete and accurate list of
each of the following types of agreements or arrangements, including any
amendments thereto, to which Total eMed or any of its Subsidiaries is a
party or by which it is bound:
(a) any mortgage, note or other instrument or agreement relating to
the borrowing of money or the incurrence of indebtedness or the guaranty
of any obligation for the borrowing of money;
(b) any contract, agreement, purchase order or acknowledgment form
for the purchase, sale, lease or other disposition of equipment,
products, materials or capital assets, or for the performance of services
(including without limitation consulting services), with respect to which
the annual aggregate dollar amount either due to or payable by Total eMed
or its Subsidiaries exceeds $50,000;
(c) contracts or agreements for the joint performance of work or
services, and all other joint venture agreements;
(d) written contracts or agreements with agents, brokers,
consignees, sales representatives or distributors relating to the sale of
products or services in excess of $50,000;
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(e) confidentiality or inventions assignment agreements with parties
other than employees of Total eMed; and
(f) any other contract, instrument, agreement or obligation not
described in any other Schedule which contains unfulfilled obligations,
is not terminable without payment of premium or penalty upon 30 days'
notice or less and the annual amount either due to or payable by Total
eMed or its Subsidiaries exceeds $50,000 for any single contract or
$100,000 in the aggregate.
3.1.17 STATUS OF CONTRACTS. Each of the contracts, agreements,
commitments and instruments listed on SCHEDULES 3.1.13, 3.1.14, 3.1.15, and
3.1.16 (collectively, the "Contracts") is in full force and effect and is
valid, binding and enforceable by or its Subsidiaries in accordance with its
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and except that the availability
of the equitable remedy of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding may be
brought. There is no existing default or violation by Total eMed or its
Subsidiaries under any Contract and no event has occurred which (whether
with or without notice, lapse of time or both) would constitute a default of
Total eMed or its Subsidiaries under any Contract, except for such defaults
as would not in the aggregate have a Material Adverse Effect. There is no
pending or threatened proceeding which would interfere with the quiet
enjoyment of any leasehold of which Total eMed or any of its Subsidiaries is
lessee or sublessee. Complete and accurate copies of all Contracts have been
delivered to MDLI. Total eMed is not aware of any default by any other party
to any Contract or of any event which (whether with or without notice, lapse
of time or both) would constitute a material default by any other party with
respect to obligations of that party under any Contract, and, to the
knowledge of Total eMed, there are no facts that exist indicating that any
of the Contracts may be totally or partially terminated or suspended by the
other parties, except for defaults that would not have a Material Adverse
Effect on Total eMed or its Subsidiaries. Total eMed has not granted any
waiver or forbearance with respect to any of the Contracts.
3.1.18 INSURANCE. SCHEDULE 3.1.18 contains a complete and accurate
list of all policies of fire, liability, worker's compensation and other
forms of insurance insuring Total eMed, its officers or directors, its
assets or its operations (the "Policies"), setting forth the applicable
deductible amounts. All of the Policies are valid, enforceable and in full
force and effect, all premiums with respect to the Policies covering all
periods up to and including the date as of which this representation is
being made have been paid and no notice of cancellation or termination has
been received with respect to any Policy. The Policies are sufficient for
compliance with all requirements of law and agreements to which Total eMed
or any of its Subsidiaries is a party, and Total eMed believes the Policies
are sufficient to provide insurance for the risks and in the amounts and
types of coverage necessary for the operation of Total eMed's and its
Subsidiaries' businesses. There have been no claims made for insurance
payment under any of the Policies in the three years preceding the date of
this Agreement. Complete and accurate copies of the Policies and all
endorsements thereto have been delivered to MDLI. Total eMed has not been
refused any insurance coverage and no insurance coverage has been canceled
during the three years preceding the date of this Agreement.
3.1.19 PERMITS AND LICENSES. SCHEDULE 3.1.19 contains a complete and
accurate list of all material governmental licenses, permits, franchises,
easements and authorizations (collectively, "Permits") held by Total eMed or
its Subsidiaries, listed by Governmental Entity. Each of Total eMed and its
Subsidiaries holds, and at all times has held, all Permits necessary for the
lawful conduct of its business pursuant to all applicable statutes, laws,
ordinances, rules and regulations of all Governmental Entities having
jurisdiction over it or any part of its operations, except for Permits the
failure of which to obtain would not have a Material Adverse Effect on Total
eMed or
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its Subsidiaries. Each of Total eMed and its Subsidiaries is in material
compliance with each of the terms of the applicable Permits listed on
SCHEDULE 3.1.19, and there are no claims of violation by Total eMed or any
of its Subsidiaries of any of such Permits. Complete and accurate copies of
all Permits held by Total eMed and its Subsidiaries have been delivered to
MDLI. All Governmental Entities that have issued any Permits to or with
respect to Total eMed or its business have consented to the consummation of
the transactions contemplated by this Agreement without requiring
modification of the rights or obligations of Total eMed or is Subsidiaries
under any of such Permits.
3.1.20 TAXES.
3.1.20.1 RETURNS. Except as set forth on Schedule 3.1.20, Total
eMed has filed on a timely basis all federal, state, local, foreign and
other returns, reports, forms, declarations and information returns
required to be filed by them with respect to Taxes (as defined below)
which relate to the business, results of operations, financial condition,
properties or assets of Total eMed for all periods (collectively, the
"Returns") and have paid on a timely basis all Taxes shown to be due on
the Returns. All Returns filed are complete and accurate in all material
respects and no additional Taxes are owed by Total eMed with respect to
the periods covered by the Returns or for any other period. Total eMed
has provided MDLI with complete and accurate copies of all Returns for
each of Total eMed's fiscal years. Total eMed has never been a member of
an affiliated group filing consolidated returns and has no any liability
for Taxes of any person (other than itself), whether arising under
federal, state, local or foreign law, as a transferee or successor, by
contract, pursuant to Treas Reg Section 1.1502-6 or otherwise. Except as
set forth on SCHEDULE 3.1.20, Total eMed is not currently the beneficiary
of any extension of time within which to file any Return. Except as set
forth on SCHEDULE 3.1.20, no Returns have been examined by the applicable
taxing authorities for any period and, except as set forth on
SCHEDULE 3.1.20, Total eMed has not received any notice of audit or
review with respect to any Return or any fiscal year, has no knowledge of
any planned audit or review, and there are no outstanding agreements or
waivers extending the applicable statutory periods of limitation for
Taxes for any period. No claim has ever been made by an authority in a
jurisdiction where Total eMed does not file Returns that Total eMed is or
may be subject to taxation by that jurisdiction. All Taxes that are or
have been required to be withheld or collected by Total eMed or its
predecessors have been duly withheld and collected and, to the extent
required, have been properly paid or deposited as required by applicable
laws. Neither Total eMed nor any of its predecessors has made any
payment, or is obligated to make any payment, or is a party to an
agreement that in certain circumstances could obligate it to make a
payment, that is not deductible under Section 280G of the Code. Except as
set forth in SCHEDULE 3.1.20, Total eMed is not an obligor on, and none
of its assets have been financed directly or indirectly by, any tax
exempt bonds. Total eMed is not now nor during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code has ever been a United
States real property holding corporation as defined in Section 897(c)(2)
of the Code. Total eMed has not filed a consent pursuant to
Section 341(f) of the Code nor has Total eMed agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as such term is defined in Section 341(f)(4) of the Code)
owned by Total eMed.
3.1.20.2 TAXES PAID OR RESERVED. The unpaid Taxes of Total eMed
(a) did not as of the Most Recent Fiscal Year End exceed the reserve for
Tax liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on the
face of the Total eMed Financial Statements (rather than in any notes
thereto) and (b) do not exceed that reserve as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of Total eMed in filing its Returns.
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3.1.20.3 DEFINITIONS. The term "Taxes" shall mean all federal,
state, local or foreign taxes, charges, fees, levies or other
assessments, however documented, including, without limitation, all net
income, gross income, gross receipts, premium, sales, use, ad valorem,
transfer, franchise, profits, license, withholding, payroll, employment,
excise, estimated severance, stamp, occupation, property, transfer,
workers' compensation, Pension Benefit Guaranty Corporation premiums, or
other taxes, fees, assessments or charges of any kind whatsoever that
Total eMed is required to pay or collect, together with any interest and
any penalties (including penalties for failure to file in accordance with
applicable information reporting requirements), and additions to tax.
3.1.21 RELATED PARTY INTERESTS. Except as listed in SCHEDULE 3.1.21,
no shareholder, officer or director of Total eMed (or any entity owned or
controlled by one or more of such parties) (a) has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to
Total eMed's business, (b) is indebted to Total eMed or any of its
Subsidiaries, or (c) to the knowledge of Total eMed has any financial
interest, direct or indirect, in any supplier or customer of, or other
outside business which has significant transactions with Total eMed. True
and complete copies of all agreements listed on SCHEDULE 3.1.21 have been
provided to MDLI. Total eMed is not indebted to any of its shareholders,
directors or officers (or any entity owned or controlled by one or more of
such parties) except for amounts due under normal salary arrangements and
for reimbursement of ordinary business expenses. The consummation of the
transactions contemplated by this Agreement will not (either alone or upon
the occurrence of any act or event, or with the lapse of time, or both)
result in any payment (severance or other) becoming due from Total eMed to
any of its shareholders, officers, directors or employees (or any entity
owned or controlled by one or more of such parties).
3.1.22 NO POWERS OF ATTORNEY OR RESTRICTIONS. No power of attorney or
similar authorization given by Total eMed or any of its Subsidiaries is
presently in effect or outstanding. No contract or agreement to which Total
eMed or any of its Subsidiaries is a party or is bound or to which any of
its properties or assets is subject limits the freedom of Total eMed to
compete in any line of business or with any person. To the knowledge of
Total eMed none of the employees of Total eMed or its Subsidiaries is
obligated under any contract (including licenses, covenants or commitments
of any nature), or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of Total eMed or any of its Subsidiaries or
that would conflict with the business of Total eMed or its Subsidiaries as
now conducted or proposed to be conducted.
3.1.23 ENVIRONMENTAL CONDITIONS.
3.1.23.1 COMPLIANCE. The business and assets of Total eMed and its
Subsidiaries, including without limitation the Leased Real Property and,
during the term of possession by Total eMed, the Previously Leased Real
Property, are and have been in compliance with all Environmental Laws (as
defined below) and all Permits required under any Environmental Laws are
listed separately in SCHEDULE 3.1.19. There are no pending or threatened
claims, actions or proceedings against Total eMed or any of its
Subsidiaries under any Environmental Law or related Permit. All wastes
generated in connection with the business of Total eMed and its
Subsidiaries are and have been transported and disposed of off-site in
compliance with all Environmental Laws, and true and correct logs of such
transportation and disposal have been made available to MDLI.
3.1.23.2 HAZARDOUS SUBSTANCES. To the knowledge of Total eMed, no
Hazardous Substance has been disposed of, spilled, leaked or otherwise
released on, in, under or from the Leased Real Property or the Previously
Leased Real Property or has otherwise come to be located in the soil or
water (including surface and ground water) on or under the Leased Real
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Property or the Previously Leased Real Property, in each case while such
property was leased by Total eMed. To the knowledge of Total eMed, none
of the assets of Total eMed or its Subsidiaries, or the improvements on
the Leased Real Property or the Previously Leased Real Property, have
incorporated into them any asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls (including in any electrical transformer or
capacitor located on such property), or any other Hazardous Substance
which is prohibited, restricted or regulated when present in buildings,
structures, fixtures or equipment. To the knowledge of Total eMed, no
Hazardous Substance is or has been generated, manufactured, treated,
stored, transported, used or otherwise handled on the Leased Real
Property or the Previously Leased Real Property or in connection with the
business of Total eMed or its Subsidiaries while occupied by Total eMed
or its Subsidiaries. To the knowledge of Total eMed, there are not and
never have been any above-ground or underground storage tanks on the
Leased Real Property or on the Previously Leased Property (whether or not
regulated and whether or not out of service, closed or decommissioned).
3.1.23.3 FILINGS AND NOTICES. Total eMed and its Subsidiaries have
timely filed all required reports, obtained all required approvals and
permits, and generated and maintained all required data, documentation
and records under all applicable Environmental Laws. All notifications
required by any Environmental Law in respect of any discharge, release or
emission, including any notices required to be provided under any
applicable state or local law, if any, have been made within the time
prescribed by such Environmental Law, and copies of all such
notifications have been provided to MDLI. No part of the Leased Real
Property or the Previously Leased Real Property is listed as a site
contaminated by Hazardous Substances pursuant to any Environmental Law.
3.1.23.4 DEFINITIONS. As used in this Agreement, (a) "Environmental
Law" means any federal, state, foreign or local statute, ordinance or
regulation pertaining to the protection of human health or the
environment and any applicable orders, judgments, decrees, permits,
licenses or other authorizations or mandates under such statutes,
ordinances or regulations, and (b) "Hazardous Substance" means any
hazardous, toxic, radioactive or infectious substance, material or waste
as defined, listed or regulated under any Environmental Law, and includes
without limitation radioactive material and petroleum oil and its
fractions.
3.1.24. CONSENTS AND APPROVALS. Except as set forth in Section 3.1.7,
no consent, approval, or authorization of, or filing or registration with,
any court, regulatory authority, governmental body, or any other entity or
person not a party to this Agreement is required to be obtained by Total
eMed or any of its Subsidiaries for the consummation of the transactions
described in this Agreement, except for consents, approvals, authorizations,
filings or registrations that would not have a Material Adverse Effect on
Total eMed or its Subsidiaries.
3.1.25 BROKERS AND FINDERS. Except for fees owing to Credit Suisse
First Boston Corporation, Total eMed has not incurred any liability for any
brokerage or investment banking fees, commissions or finders' fees in
connection with the Merger.
3.1.26 [INTENTIONALLY OMITTED].
3.1.27 NO OTHER AGREEMENTS TO SELL TOTAL EMED OR ITS ASSETS. Except as
set forth in SCHEDULE 3.1.27, Total eMed has no legal obligation, absolute
or contingent, to any other person to sell any material portion of Total
eMed's assets, to sell the capital stock or other ownership interests of
Total eMed, or to effect any merger, consolidation or other reorganization
of Total eMed of any of its Subsidiaries or to enter into any agreement with
respect thereto. As of the date hereof, Total eMed is not engaged, directly
or indirectly, in any discussions or negotiations with any other party with
respect to an Acquisition Transaction, as defined in Section 4.2.2.
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3.1.28 VOTE REQUIRED. The approval by a majority of the voting power
represented by the outstanding shares of Total eMed Common Stock and by each
class of Total eMed Preferred Stock (each voting separately as a class) is
the only vote of the holders of any class or series of Total eMed capital
stock necessary to approve the transactions contemplated by this Agreement.
3.1.29 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING CODE
SECTION 368(A)(2)(E).
3.1.29.1 Immediately following the Merger, Surviving Corporation
will hold at least 90 percent of the fair market value of Total eMed's
net assets and at least 70 percent of the fair market value of Total
eMed's gross assets held immediately prior to the Merger. For purposes of
this representation, amounts paid by Total eMed to its shareholders who
receive cash or other property, Total eMed assets used to pay its
reorganization expenses, and all redemptions and distributions (except
for regular, normal dividends) made by Total eMed prior to and in
connection with the Merger, will be included as assets of Total eMed held
immediately prior to the Merger.
3.1.29.2 There is no intercorporate indebtedness existing between
MDLI and Total eMed or between Merger Corp. and Total eMed that was
issued, acquired, or will be settled at a discount.
3.1.29.3 Total eMed has no plan or intention to issue additional
shares of its stock that would result in MDLI losing control of Total
eMed within the meaning of Section 368(c) of the Code. At the time of the
Merger, Total eMed will not have outstanding any warrants, options,
convertible securities, or any other type of right pursuant to which any
person could acquire stock in Total eMed that, if exercised or converted,
would affect MDLI's acquisition or retention or control of Surviving
Corporation, as defined in Section 368(c) of the Code. As defined in
Section 368(c) of the Code, "control" means the ownership of stock
possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of stock.
3.1.29.4 Total eMed is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.1.29.5 On the date of the Merger, the fair market value of the
assets of Total eMed will exceed the sum of its liabilities plus the
amount of liabilities, if any, to which its assets are subject.
3.1.29.6 Total eMed is not under the jurisdiction of a court in a
title 11 or similar case within the meaning of Section 368(a)(3)(A) of
the Code.
3.1.29.7 None of the compensation received by any
shareholder-employee of Total eMed will be separate consideration for, or
allocable to, any of his or her shares of Total eMed stock; none of the
shares of MDLI stock received by any shareholder-employee will be
separate consideration for, or allocable to, any employment agreement;
and the compensation paid to any shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
3.1.29.8 Except as listed on SCHEDULE 3.1.29.8, during the past five
years, neither Total eMed nor any person related to Total eMed (as
defined in Treas Reg Section 1.368-1(e)(3)) has directly or through any
transaction, agreement, or arrangement with any other person,
(i) acquired stock of Total eMed with consideration other than common
stock of MDLI or Total eMed, or (ii) redeemed or made distributions with
respect to Total eMed stock.
3.1.29.9 Total eMed has not paid dividends financed, directly or
indirectly, with borrowed funds.
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3.1.29.10 No Total eMed shareholder has guaranteed any debt of Total
eMed.
3.1.29.11 Except as otherwise provided in this Agreement, Total eMed
will pay its own expenses, if any, incurred in connection with the Merger
and will not pay expenses of MDLI or Merger Corp.
3.1.29.12 For purposes of satisfying the requirements of Treas Reg
Section 1.368-1(d), Total eMed's significant historic lines of business
are medical record transcription and related services to healthcare
providers practicing in outpatient settings.
3.1.29.13 In the Merger, shares of Total eMed stock representing
control of Total eMed, as defined in Section 368(c) of the Code, will be
exchanged solely for voting stock of MDLI.
3.2 REPRESENTATIONS AND WARRANTIES OF MDLI. MDLI hereby represents and
warrants to Total eMed that, except as specifically set forth in Schedule 3.2
(the "MDLI Disclosure Schedule") in a numbered paragraph that corresponds to the
section for which disclosure is made:
3.2.1 ORGANIZATION AND STATUS. MDLI is a corporation duly organized
and validly existing under the laws of its jurisdiction of incorporation and
is duly qualified and in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by it require such qualification, except where the failure to so
qualify or be in good standing, when taken together with all such failures,
would not have a Material Adverse Effect on MDLI. MDLI has all requisite
corporate power and authority to own, operate and lease its property and to
carry on its businesses as they are now being conducted.
3.2.2 CORPORATE AUTHORITY. MDLI has the corporate power and authority
and has taken all corporate action necessary to execute and deliver this
Agreement and, upon receipt of the shareholder approval contemplated in
Section 4.1.2, to consummate the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Board of Directors of
MDLI and duly and validly executed and delivered by MDLI and as of the
Closing Date will be validly authorized by MDLI shareholders. This Agreement
constitutes the valid and binding obligation of MDLI, enforceable in
accordance with its terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding may be brought.
3.2.3 GOVERNMENTAL FILINGS. Other than (a) the filing of the
Certificate of Merger contemplated by Article I, (b) the HSR Filing to be
made by MDLI and Total eMed described in Section 4.1.8 and (c) the Form S-4
and Proxy Statement described in Section 4.1.1, no notices, reports or other
filings are required to be made by MDLI with, nor are any consents,
registrations, approvals, permits or authorizations required to be obtained
by MDLI from, any Governmental Entity in connection with the execution and
delivery of this Agreement by MDLI and the consummation by MDLI of the
transactions contemplated hereby.
3.2.4 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by MDLI specifically for inclusion or incorporation by reference in
the Form S-4 or the Proxy Statement for use relating to registration of the
Merger Consideration or to obtain approval of the shareholders of MDLI and
Total eMed of the Merger, respectively, will, at the time the Form S-4 is
filed with the SEC or at the time the Proxy Statement is first mailed to
Total eMed's stockholders or MDLI's shareholders or at the time of the MDLI
Special Meeting and Total eMed Special Meeting, respectively, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, except that no representation or warranty is made by MDLI with
respect to statements made or incorporated by reference therein
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based on (i) information supplied by Total eMed in writing specifically for
inclusion or incorporation by reference therein or (ii) information relating
to Total eMed which is reviewed by Total eMed without objection and with
knowledge that it will be used in the Form S-4 or the Proxy Statement.
3.2.5 SEC REPORTS AND FINANCIAL STATEMENTS. MDLI has filed with the
SEC, and has made available to Total eMed true and complete copies of, all
forms, reports, schedules, statements, and other documents required to be
filed by it since September 30, 1999 under the Securities Exchange Act of
1934, as amended (the "Exchange Act") or the Securities Act (each of such
forms, reports, schedules, statements, and other documents, to the extent
filed and publicly available before the date of this Agreement, other than
preliminary or pre-effective filings, is referred to as a "MDLI SEC
Document"). Each MDLI SEC Document, at the time filed, (a) did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (b) complied in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be,
and the applicable rules and regulations of the SEC thereunder. The
financial statements included in the MDLI SEC Documents (the "MDLI Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-Q of the SEC) and
fairly present in all material respects (subject, in the case of the
unaudited statements, to normal, recurring audit adjustments) the
consolidated financial position of MDLI and its consolidated subsidiaries as
at the dates thereof, the consolidated results of their operations and cash
flows for the periods then ended, are correct and complete, and are
consistent with the books and records of MDLI (which books and records are
correct and complete in all material respects).
3.2.6 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of
this Agreement by MDLI nor the consummation of the transactions contemplated
by this Agreement will (a) result in the creation or imposition of any Lien
on any of the assets or properties of MDLI, (b) violate any provision of the
Articles of Incorporation or Bylaws of MDLI, (c) to the knowledge of MDLI,
violate any statute, judgment, order, injunction, decree, rule, regulation
or ruling of any governmental authority applicable to MDLI, or (d) either
alone or with the giving of notice or the passage of time or both, conflict
with, constitute grounds for termination of, accelerate the performance
required by, accelerate the maturity of any indebtedness or obligation
under, result in the breach of the terms, conditions or provisions of or
constitute a default under any mortgage, deed of trust, indenture, note,
bond, lease, license, permit or other agreement, instrument or obligation to
which either MDLI is a party or by which any of them is bound.
3.2.7 BROKERS AND FINDERS. Except for fees to be paid by MDLI to
Donaldson, Lufkin & Jenrette in connection with a fairness opinion, MDLI has
not incurred any liability for any brokerage or investment banking fees,
commissions or finders' fees in connection with the Merger.
3.2.8 OPINION OF MDLI FINANCIAL ADVISOR. The Board of Directors of
MDLI has received from Donaldson, Lufkin & Jenrette an opinion as to the
fairness from a financial point of view of the ratio to be applied for the
exchange of common stock in the Merger. A copy of such opinion is attached
hereto as Exhibit D.
3.2.9 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING CODE
SECTION 368(A)(2)(E).
3.2.9.1 Immediately following the Merger, Surviving Corporation will
hold at least 90 percent of the fair market value of Merger Corp.'s net
assets and at least 70 percent of the fair market value of Merger Corp.'s
gross assets held immediately prior to the Merger. For
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purposes of this representation, amounts paid by Merger Corp. to Total
eMed shareholders who receive cash or other property and Merger Corp.
assets used to pay reorganization expenses will be included as assets of
Merger Corp. held immediately prior to the Merger.
3.2.9.2 Prior to the Merger, MDLI will be in control of Merger Corp.
within the meaning of Section 368(c) of the Code.
3.2.9.3 MDLI has no plan or intention to cause or allow Surviving
Corporation to issue additional shares of its stock that would result in
MDLI losing control of Surviving Corporation within the meaning of
Section 368(c) of the Code.
3.2.9.4 Prior to or in the Merger, neither MDLI nor any person
related to MDLI (as defined in Treas Reg Section 1.368-1(e)(3)) will have
acquired directly or through any transaction, agreement or arrangement
with any other person, stock of Total eMed with consideration other than
common stock of MDLI. There is no plan or intention by MDLI or any person
related to MDLI (as defined in Treas Reg Section 1.368-1(e)(3)) to
acquire or redeem any of the stock of MDLI issued in the Merger either
directly or through any transaction, agreement, or arrangement with any
other person.
3.2.9.5 MDLI has no plan or intention to liquidate Surviving
Corporation; to merge Surviving Corporation with and into another
corporation; to sell or otherwise dispose of the stock of Surviving
Corporation; or to cause Surviving Corporation to sell or otherwise
dispose of any of the assets of Total eMed or Merger Corp., except for
dispositions made in the ordinary course of business or transfers of
assets to a corporation controlled by Surviving Corporation.
3.2.9.6 Merger Corp. will have no liabilities assumed by Surviving
Corporation and will not transfer to Surviving Corporation in the Merger
any assets subject to liabilities.
3.2.9.7 Following the Merger, MDLI will cause Surviving Corporation
to continue the historic business of Total eMed or use a significant
portion of Total eMed's business assets in a business.
3.2.9.8 MDLI does not own, nor has it owned during the past five
years, any shares of the stock of Total eMed.
3.2.9.9 MDLI is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.2.9.10 The payment of cash in lieu of fractional shares of MDLI
stock is solely for the purpose of avoiding the expense and inconvenience
to MDLI of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be
paid in the Merger to the Total eMed shareholders instead of issuing
fractional shares of MDLI stock will not exceed one percent of the total
consideration that will be issued in the Merger to the Total eMed
shareholders in exchange for their shares of Total eMed stock. The
fractional share interests of each Total eMed shareholder will be
aggregated, and no Total eMed shareholder will receive cash in an amount
equal to or greater than the value of one full share of MDLI stock.
3.2.9.11 Following and in connection with the Merger, MDLI will not
transfer any shares of Total eMed Common Stock to (a) a corporation that
is not a member of MDLI's "qualified group" as defined in Treas Reg
Section 1.368-1(d)(4)(ii) or (b) a partnership.
3.2.9.12 MDLI will not redeem any of the MDLI Common Stock exchanged
for Total eMed Common Stock in connection with the Merger, other than
pursuant to an ongoing stock repurchase program not created or modified
in connection with the Merger.
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3.2.9.13 No person related to MDLI, as defined in Treas Reg
Section1.368-1(e)(3) will acquire, with consideration other than a
proprietary interest in MDLI, Total eMed Common Stock exchanged for MDLI
Common Stock in the Merger.
3.2.9.14 Except as otherwise provided in this Agreement, MDLI will
pay its own expenses, if any, incurred in connection with the Merger and
will not pay expenses of Total eMed.
3.2.9.15 In the Merger, shares of Total eMed stock representing
control of Total eMed, as defined in Section 368(c) of the Code, will be
exchanged solely for voting stock of MDLI.
3.2.10 LITIGATION. Except as listed on Schedule 3.2.10, no material
litigation, proceeding or governmental investigation is pending or, to
MDLI's knowledge, threatened against or relating to MDLI, its officers or
directors in their capacities as such, or any of MDLI's properties or
businesses.
3.2.11 CAPITALIZATION. MDLI has authorized capital stock consisting of
100,000,000 shares of MDLI Common Stock, no par value, of which 30,776,975
shares were outstanding on December 31, 1999 and 50,000,000 shares of
Preferred Stock, of which no shares were outstanding on December 31, 1999.
As of November 30, 1999, a total of options to purchase 2,878,560 shares of
MDLI Common Stock were outstanding pursuant to grants made under MDLI's 1996
Stock Incentive Plan and MDLI's 1993 Stock Incentive Plan. All of the
outstanding shares of capital stock of MDLI have been duly authorized and
are validly issued, fully paid and nonassessable, and no shares were issued,
and no options were granted, in violation of preemptive or similar rights of
any shareholder or in violation of any applicable securities laws. Except as
set forth above, or on Schedule 3.2.11, there are no shares of capital stock
of MDLI authorized, issued or outstanding, and there are no preemptive
rights or any outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of MDLI of any
character relating to the issued or unissued capital stock or other
securities of MDLI. There are no outstanding obligations of MDLI to
repurchase, redeem or otherwise acquire any of its outstanding shares of
capital stock. All shares of MDLI Common Stock to be issued and delivered in
the Merger shall be, at the time of such issuance and delivery, validly
issued, fully paid and nonassessable shares of MDLI Common Stock, free of
all preemptive rights.
3.2.12 UNDISCLOSED LIABILITIES. Except for liabilities or obligations
which were incurred after September 30, 1999 in the ordinary course of
business and of a type and in an amount consistent with past practices, MDLI
has no material liability or obligation (whether absolute, accrued,
contingent or otherwise, and whether due or to become due) which is not
accrued, reserved against, or identified in the most recent MDLI Financial
Statements.
3.2.13 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
Schedule 3.2.13, since September 30, 1999 there has not been a Material
Adverse Change.
3.2.14 Taxes.
3.2.14.1 RETURNS. MDLI has filed on a timely basis all federal,
state, local, foreign and other returns, reports, forms, declarations and
information returns required to be filed by them with respect to Taxes
which relate to the business, results of operations, financial condition,
properties or assets of MDLI for all periods (collectively, the "MDLI
Returns") and has paid on a timely basis all Taxes shown to be due on the
MDLI Returns. All MDLI Returns filed are complete and accurate in all
material respects and no additional Taxes are owed by MDLI or its
subsidiaries with respect to the periods covered by the MDLI Returns or
for any other period. MDLI has no any liability for Taxes of any person
(other than themselves), whether arising under federal, state, local or
foreign law, as a transferee or successor, by contract, pursuant to Treas
Reg Section 1.1502-6 or otherwise. Except as set forth on
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Schedule 3.2.14, MDLI is not currently the beneficiary of any extension
of time within which to file any MDLI Return. Except as set forth on
Schedule 3.2.14, no MDLI Returns have been examined by the applicable
taxing authorities and, except as set forth on Schedule 3.2.14, MDLI has
not received any notice of audit or review with respect to any MDLI
Return or any fiscal year, has no knowledge of any planned audit or
review, and there are no outstanding agreements or waivers extending the
applicable statutory periods of limitation for Taxes for any period. No
claim has ever been made by an authority in a jurisdiction where MDLI
does not file MDLI Returns that they are or may be subject to taxation by
that jurisdiction. All Taxes that are or have been required to be
withheld or collected by MDLI or its predecessors have been duly withheld
and collected and, to the extent required, have been properly paid or
deposited as required by applicable laws. Neither MDLI nor any of its
predecessors has made any payment, or is obligated to make any payment,
or is a party to an agreement that in certain circumstances could
obligate it to make a payment, that is not deductible under Section 280G
of the Code. Except as set forth in Schedule 3.2.14, MDLI is not an
obligor on, and none of its assets have been financed directly or
indirectly by, any tax exempt bonds. MDLI is not now nor during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code has
ever been a United States real property holding corporation as defined in
Section 897(c)(2) of the Code. MDLI has not filed a consent pursuant to
Section 341(f) of the Code nor has MDLI agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as such
term is defined in Section 341(f)(4) of the Code) owned by MDLI.
3.2.14.2 TAXES PAID OR RESERVED. The unpaid Taxes of MDLI (A) did
not as of December 31, 1999 exceed the reserve for Tax liability (rather
than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the
most recent balance sheet included in an MDLI SEC Document (rather than
in any notes thereto) and (B) do not exceed that reserve as adjusted for
the passage of time through the Closing Date in accordance with the past
custom and practice of MDLI in filing its MDLI Returns.
3.2.15 RELATED PARTY INTERESTS. There are no other material
related-party transactions, as defined under Regulation S-K of the
Securities Act, other than those listed on Schedule 3.2.15.
3.2.16 NO POWERS OF ATTORNEY OR RESTRICTIONS. No power of attorney
or similar authorization given by MDLI is presently in effect or
outstanding. No contract or agreement to which MDLI is a party or is
bound or to which any of its properties or assets is subject limits the
freedom of MDLI to compete in any line of business or with any person. To
the knowledge of MDLI none of the employees of MDLI is obligated under
any contract (including licenses, covenants or commitments of any
nature), or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her
best efforts to promote the interests of MDLI or that would conflict with
the business of MDLI as now conducted or proposed to be conducted.
3.2.17 CONSENTS AND APPROVALS. Except as set forth in
Section 3.2.3, no consent, approval, or authorization of, or filing or
registration with, any court, regulatory authority, governmental body, or
any other entity or person not a party to this Agreement is required to
be obtained by MDLI for the consummation of the transactions described in
this Agreement.
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3.3 REPRESENTATIONS AND WARRANTIES RELATING TO MERGER CORP. MDLI and
Merger Corp. hereby represent and warrant to Total eMed that:
3.3.1 ORGANIZATION AND STATUS. Merger Corp. is a corporation duly
organized and validly existing under the laws of the State of Delaware.
Merger Corp. does not own any properties (other than the initial cash
subscription for shares) nor has it commenced any business or operations.
3.3.2 CAPITALIZATION. Merger Corp. has an authorized capital stock
consisting of 100 shares of Common Stock. All of the issued and outstanding
shares of capital stock of Merger Corp. are owned by MDLI.
3.3.3 CORPORATE AUTHORITY. Merger Corp. has the corporate power and
authority and has taken all corporate action necessary to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The Agreement has been duly and validly authorized by the Board of
Directors and sole shareholder of Merger Corp., duly and validly executed
and delivered by Merger Corp. and constitutes the valid and binding
obligation of Merger Corp., enforceable in accordance with its terms, except
as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought.
3.3.4 GOVERNMENTAL FILINGS. Other than the filing of the Certificate
of Merger contemplated by Article I, no notices, reports or other filings
are required to be made by Merger Corp. with, nor are any consents,
registrations, approvals, permits or authorizations required to be obtained
by Merger Corp. from, any Governmental Entity in connection with the
execution and delivery of this Agreement by Merger Corp. and the
consummation by Merger Corp. of the transactions contemplated hereby.
3.3.5 CERTAIN REPRESENTATIONS AND WARRANTIES REGARDING CODE
SECTION 368(A)(2)(E).
3.3.5.1 Merger Corp. is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
3.3.5.2 Except as otherwise provided in this Agreement, Merger Corp.
will pay its own expenses, if any, incurred in connection with the Merger
and will not pay expenses of MDLI or Total eMed.
3.3.5.3 Merger Corp. has been formed solely in order to consummate the
Merger, and Merger Corp. has not conducted and will not conduct any business
activities or other operations of any kind other than the issuance of its
stock to MDLI, prior to the Effective Date.
ARTICLE IV
COVENANTS
4.1 MUTUAL COVENANTS. Total eMed and MDLI mutually covenant and agree as
follows:
4.1.1 PREPARATION OF REGISTRATION STATEMENT AND THE PROXY
STATEMENT. Promptly following the date of this Agreement and as soon as
practicable, Total eMed and MDLI shall prepare and file with the SEC the
Proxy Statement, and MDLI shall prepare and file with the SEC the Form S-4,
in which the Proxy Statement will be included as a prospectus. Each of Total
eMed and MDLI shall use its reasonable best efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable after
such filing. MDLI will use its reasonable best efforts to cause the Proxy
Statement to be mailed to its shareholders as promptly as practicable after
the Form S-4 is declared effective under the Securities Act. MDLI shall also
take any action required to be taken under any applicable state securities
law in connection with the issuance of MDLI Common Stock in the Merger, and
Total eMed shall furnish all information concerning Total eMed and the
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holders of Total eMed Common Stock and rights to acquire Total eMed Common
Stock as may be reasonably required in connection with any such action. Each
of MDLI and Total eMed shall furnish all information concerning itself to
the other as may be reasonably requested in connection with any such action
and the preparation, filing and distribution of the Form S-4 and the
preparation, filing and distribution of the Proxy Statement. Total eMed and
MDLI each agree to correct any information provided by it for use in the
Form S-4 or the Proxy Statement which shall have become false or misleading.
MDLI shall notify Total eMed promptly (i) of the receipt of the comments of
the SEC, (ii) of any request by the SEC for amendments or supplements to the
S-4, (iii) of the time when the S-4 has become effective or any supplement
or amendment has been filed, or the issuance of any stop order and (iv) of
the suspension of the qualification of the MDLI Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction and
shall supply Total eMed with copies of all correspondence with the SEC with
respect to the S-4.
4.1.2 SHAREHOLDER MEETINGS.
(a) MDLI shall (i) promptly and duly call, give notice of, convene
and hold as soon as practicable following the date upon which the
Form S-4 becomes effective a meeting of the holders of MDLI Common Stock
for the purpose of voting to approve the issuance of the MDLI Common
Stock in the Merger (the "MDLI Special Meeting"), and (ii) take all
reasonable and lawful action to solicit and obtain such approval. Except
as limited by the fiduciary obligations of the MDLI Board of Directors,
the S-4 shall include the recommendation of the MDLI Board of Directors
in favor of the issuance of the MDLI Common Stock in connection with the
Merger and, to the extent required by applicable law or otherwise, the
other transactions contemplated hereby (the "Proposal"). Unless and until
this Agreement is validly terminated in accordance with its terms,
nothing herein shall limit or eliminate in any way MDLI's obligation to
call, give notice of, convene and hold the MDLI Special Meeting and at
such meeting to submit the Proposal to a vote of the MDLI shareholders
(and not postpone or adjourn such meeting or the vote of the MDLI
shareholders upon the Proposal to another date without Total eMed's
approval, not to be unreasonably withheld if and only to the extent such
postponement or adjournment is required by law or by the SEC or Nasdaq
regulation). Total eMed shall (i) promptly and duly call, give notice of,
convene and hold on the same date as the MDLI Special Meeting is held a
meeting of the holders of Total eMed Capital Stock for the purpose of
voting to approve the Merger (the "Total eMed Special Meeting"), and
(ii) take all reasonable and lawful action to solicit and obtain such
approval.
(b) Except as limited by the fiduciary obligations of the Total eMed
Board of Directors, the Proxy Statement shall include the recommendation
of the Total eMed Board of Directors in favor of the Merger. Unless and
until this Agreement is validly terminated in accordance with its terms,
nothing herein shall limit or eliminate in any way Total eMed's
obligation to call, give notice of, convene and hold the Total eMed
Special Meeting and at such meeting to submit the Proposal to a vote of
the Total eMed shareholders (and not postpone or adjourn such meeting or
the vote of the Total eMed shareholders upon the Merger to another date
without MDLI's approval, not to be unreasonably withheld if and only to
the extent such postponement or adjournment is required by law or by the
SEC or Nasdaq regulation).
4.1.3 CONSENTS AND APPROVALS. Total eMed and MDLI each will use
reasonable best efforts to secure, and MDLI will cause Merger Corp. to use
its reasonable best efforts to secure, all consents, approvals, licenses or
permits which may be required in connection with the Merger, and each will
cooperate with the other to secure all such consents, approvals, licenses or
permits in a form mutually satisfactory to Total eMed and MDLI.
4.1.4 BEST EFFORTS. Subject to the terms of this Agreement, Total eMed
and MDLI each will use reasonable best efforts, and MDLI will cause Merger
Corp. to use its reasonable best efforts,
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to effectuate the transactions contemplated hereby and to fulfill the
conditions of their respective obligations under this Agreement.
4.1.5 PUBLICITY. Except as required by law, no party will issue any
press releases or otherwise make any public statements with respect to the
transactions contemplated hereby without the prior written consent of MDLI
and Total eMed, in each case not to be unreasonably withheld.
4.1.6 CONFIDENTIALITY. The provisions of the Mutual Confidential
Disclosure Agreement between MDLI and Total eMed (the "Confidentiality
Agreement") shall apply to all "Confidential Information" (as defined in the
Confidentiality Agreement) obtained by any party pursuant to this Agreement.
4.1.7 [INTENTIONALLY OMITTED].
4.1.8 ANTITRUST IMPROVEMENTS ACT. Each of MDLI and Total eMed will
timely and promptly make the filing required to be made by it under the
Antitrust Improvements Act of 1976, as amended (each such filing an "HSR
Filing"). MDLI and Total eMed will furnish to one another such information
and assistance as the other party may reasonably request in connection with
the other party's preparation of filings or submissions to any governmental
agency, including, without limitation, any HSR Filing. As reasonably
requested by the other party, MDLI and Total eMed will supply one another
with copies of all correspondence, filings or communications (or memoranda
setting forth the substance thereof) between MDLI and Total eMed or their
respective representatives, on the one hand, and the Federal Trade
Commission, the Antitrust Division of the United States Department of
Justice or any other governmental agency or authority or members of their
respective staffs, on the other hand, with respect to this Agreement or the
transaction contemplated hereby.
4.1.9 RESTRUCTURING OF MERGER. The parties expressly acknowledge and
agree that, although it is their current intention to effect a business
combination among themselves in the form contemplated by this Agreement, it
may be preferable to effectuate such a business combination by means of an
alternate structure as described below.
4.1.9.1 MDLI, in its sole discretion, may determine, not later than
March 31, 2000, to reorganize for the purpose of effecting one or more
business combinations in addition to the combination contemplated by this
Agreement (the "Reorganization"). As a result of the Reorganization, a
newly-established holding company ("HoldCo") would directly own all of
the issued and outstanding capital stock of MDLI, and the articles of
incorporation of HoldCo would be the same as the articles of
incorporation of MDLI (other than in any respect which does not
materially adversely affect the benefits of the Merger for Total eMed
stockholders).
4.1.9.2 In the event MDLI determines to effect the Reorganization,
this Agreement shall be amended so that the rights and obligations of
MDLI shall become the rights and obligations of HoldCo, the
representations and warranties of MDLI shall be repeated by HoldCo
(subject to such changes as may be necessary to reflect the
Reorganization), and in all other respects this Agreement shall remain
the same, except for those changes as may be necessary to reflect the
Reorganization. In no event shall such changes materially adversely
affect the relative rights, obligations, benefits and burdens of
MDLI/HoldCo and Total eMed, or the benefits of the Merger for Total eMed
stockholders.
4.1.9.3 The parties agree that any Reorganization and the steps,
actions or approvals required, taken or proposed to implement the same
shall not give rise to any breach of this Agreement or right to terminate
this Agreement, and that the amendments to this Agreement required to
give effect to the Reorganization shall not have any effect on the
binding nature of this Agreement or the obligations of the parties to
effect and consummate the transactions contemplated hereby. The parties
further agree to use all reasonable best efforts to ensure that the
Reorganization and the Merger are completed.
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4.2 COVENANTS OF TOTAL EMED. Total eMed covenants and agrees as follows:
4.2.1 CONDUCT OF BUSINESS. Prior to the Effective Time, Total eMed
will carry on its business in the ordinary and usual manner and maintain its
existing relationships with suppliers, customers, employees and business
associates, and will not, without the prior written consent of MDLI:
(a) amend its Certificate of Incorporation or Bylaws;
(b) enter into any new agreements or modify existing agreements
respecting an increase in compensation or benefits payable to its
officers or employees; except that Total eMed may, without MDLI's prior
written consent, enter into new employment agreements or hire new
employees in its ordinary course of business and with respect to
nonmanagement positions;
(c) split, combine, reclassify any of the outstanding shares of its
capital stock or otherwise change its authorized capitalization;
(d) declare, set aside or pay any dividends payable in cash, stock
or property with respect to shares of its capital stock;
(e) issue, sell, pledge, dispose of or encumber any additional
shares of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire,
any shares of its capital stock of any class (other than pursuant to
Options in the ordinary course and consistent with past practice and
other than conversions of Preferred Stock in connection with the
transactions contemplated by this Agreement);
(f) redeem, purchase or otherwise acquire any shares of its capital
stock, merge into or consolidate with any other corporation or permit any
other corporation to merge into or consolidate with it, liquidate or sell
or dispose of any of its assets other than in the ordinary course of
business, or close any plant or business operation;
(g) except for short-term indebtedness and indebtedness incurred
pursuant to Total eMed's revolving credit agreement and renewals,
replacements and amendments thereof not in excess of the current maximum
under such credit agreement incurred in the ordinary course of business,
incur, assume or guarantee (other than endorsements) any indebtedness, or
modify or repay any existing indebtedness;
(h) enter into any transaction, make any commitment (whether or not
subject to the approval of the Board of Directors of Total eMed) or
modify any Contracts, except as otherwise contemplated or permitted by
this Agreement or in the ordinary course of business and not exceeding
$25,000 singly, or take any action which could be reasonably anticipated
to have a Material Adverse Effect on Total eMed;
(i) transfer, lease, license, guarantee, sell, mortgage, pledge, or
dispose of, any property or assets (including without limitation any
intellectual property), encumber any property or assets or incur or
modify any liability, other than the sale of inventory in the ordinary
and usual course of business;
(j) authorize capital expenditures other than in the ordinary course
of business, form any subsidiary, or make any acquisition of, or
investment in, assets or stock of any other person or entity;
(k) make any tax election;
(l) permit any insurance policy naming it as a beneficiary or a loss
payable payee to be canceled or terminated without prior notice to MDLI;
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(m) change its method of accounting as in effect at the Most Recent
Fiscal Year End except as required by changes in GAAP as concurred with
by Total eMed's independent auditors, or change its fiscal year;
(n) authorize or enter into an agreement to do any of the actions
referred to in paragraphs (a) through (m) above.
4.2.2 ACQUISITION PROPOSALS. Unless and until this Agreement shall
have been terminated pursuant to Section 6.1 or Section 6.2, Total eMed
shall not directly, or indirectly through any officer, director, agent,
employee or representative (each, a "Representative") (i) encourage,
initiate, solicit or entertain, on or after the date hereof, any inquiries
or the submission of any proposals or offers from any person relating to any
merger, consolidation, sale of all or substantially all of its assets or
similar business transaction involving Total eMed (each, an "Acquisition
Transaction"); (ii) participate in any negotiations regarding, furnish to
any other person any information with respect to, or otherwise assist or
participate in, any attempt by any third party to propose or offer any
Acquisition Transaction; (iii) enter into or execute any agreement relating
to an Acquisition Transaction; or (iv) make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Transaction or any proposal or offer relating to an Acquisition Transaction,
in each case other than with respect to the Merger. Total eMed will promptly
(a) notify MDLI in writing if, on or after the date of this Agreement, it
receives any proposal or written inquiry or written request for information
in connection with an Acquisition Transaction or potential Acquisition
Transaction and (b) notify MDLI in writing of the significant terms and
conditions of any Acquisition Transaction or potential Acquisition
Transaction including the identity of the party making an Acquisition
Transaction. In addition, from and after the date of this Agreement, until
the earlier to occur of the Effective time or termination of this Agreement
pursuant to its terms, Total eMed will not, and will instruct its directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Transaction made by any person, entity or group (other than MDLI).
4.2.3 INVESTIGATIONS. Total eMed agrees to give MDLI and its
representatives and agents reasonable access to all its premises, books and
records and agreements and files and to cause its officers of Total eMed to
furnish MDLI with such financial and operating data and other information
with respect to its business and properties as MDLI shall from time to time
reasonably request. Any such investigations (a) shall be conducted in such
manner as not to interfere unreasonably with the operation of Total eMed's
business; and (b) shall not diminish any of the representations and
warranties hereunder.
4.3 COVENANTS OF MDLI.
4.3.1 INVESTIGATIONS. MDLI agrees to give Total eMed and its
representatives and agents reasonable access to all its premises, books and
records and agreements and files and to cause its officers of MDLI to
furnish Total eMed with such financial operating data and other information
with respect to its business and properties as Total eMed shall from time to
time reasonably request. Any such investigations (a) shall be conducted in
such manner as not to interfere unreasonably with the operation of MDLI's
business; and (b) shall not diminish any of the representations and
warranties hereunder.
4.3.2 NOTIFICATION TO OPTIONEES. Promptly after the Effective Date,
MDLI will notify in writing each holder of an Option of the exchange of the
Option for an option to purchase MDLI Common Stock in accordance with
Section 1.3.3 of this Agreement.
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4.3.3 MDLI BOARD. Effective on the Closing, MDLI will cause two
persons designated by Total eMed, who are reasonably acceptable to MDLI, to
be elected or appointed to the MDLI Board of Directors.
4.3.4 [INTENTIONALLY OMITTED].
4.3.5 NASDAQ LISTING APPLICATION. MDLI shall promptly prepare and
submit to Nasdaq a listing application for the MDLI Common Stock to be
issued in the Merger, and shall use its reasonable best efforts to obtain,
prior to the Effective Time, approval for the listing of such MDLI Common
Stock.
4.3.6 OFFICER AND DIRECTOR INDEMNIFICATION. For a period of six years
from the Closing Date, MDLI agrees to indemnify the officers and directors
of Total eMed for all actions taken prior to Closing to the extent
authorized in Total eMed's charter and bylaws prior to Closing and to the
extent such officer and director liability coverage was maintained by Total
eMed prior to Closing. For a period of six years MDLI agrees to maintain
officer and director liability coverage for the benefit of the officers and
directors of Total eMed in such amounts and on such terms substantially
equivalent to the coverage maintained by Total eMed prior to the Effective
Time.
4.3.7 CONDUCT OF BUSINESS. Prior to the Effective Time, MDLI will not:
(a) amend its Articles of Incorporation or Bylaws if the amendment
would materially and adversely affect the relative rights, preferences
and privileges of the MDLI Common Stock; or
(b) declare, set aside or pay any dividends payable in cash, stock
or property with respect to shares of its Capital Stock.
4.3.8 BREAK UP FEE. If the shareholders of MDLI fail to approve the
issuance of the MDLI Common Stock in the Merger at the MDLI Special Meeting
and Total eMed is not in breach of this Agreement in any material respect,
MDLI shall within five business days pay to Total eMed the cash amount of
$6,000,000.
4.4 COVENANTS OF MERGER CORP. Merger Corp. covenants and agrees that,
except as is contemplated by this Agreement, prior to the Effective Time, Merger
Corp., subject to Section 4.1.9 above, will not engage in any business
activities or liquidate, merge into or consolidate with any other corporation or
permit any other corporation to merge into or consolidate with it; or increase
its authorized capital stock; or issue options, rights or warrants to purchase
any of its capital stock.
ARTICLE V
CONDITIONS
5.1 CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES. The obligations of Total
eMed, MDLI and Merger Corp. to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or before the Closing of each of the
following conditions:
5.1.1 REGULATORY APPROVALS. The parties shall have made all filings
and received all approvals of any Governmental Entity of competent
jurisdiction necessary in order to consummate the Merger, and each of such
approvals shall be in full force and effect at the Closing and not subject
to any condition which requires the taking or refraining from taking of any
action which would have a Material Adverse Effect on Total eMed or on MDLI.
5.1.2 LITIGATION. There shall not be in effect any order, decree or
injunction of a Federal or State court of competent jurisdiction
restraining, enjoining or prohibiting the consummation of the transactions
contemplated by this Agreement (each party agreeing to use its reasonable
best efforts, including appeals to higher courts, to have any such
non-final, appealable order, decree or
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injunction set aside or lifted), and no action shall have been taken, and no
statute, rule or regulation shall have been enacted, by any state or federal
government or governmental agency in the United States which would prevent
the consummation of the Merger.
5.1.3 SHAREHOLDER APPROVAL. Each class or series of the capital stock
of Total eMed shall have approved the Merger in accordance with Total eMed's
Certificate of Incorporation, the rights and privileges of such class or
series, and the DGCL. The issuance of MDLI Common Stock in the Merger shall
have been approved by the affirmative vote of the holders of a majority of
the shares of MDLI Common Stock present in person or represented by proxy,
entitled to vote and voted at the MDLI Special Meeting.
5.1.4 REGISTRATION OF SECURITIES; LISTING. The shares of MDLI Common
Stock to be issued pursuant to this Agreement will have been registered
under the Securities Act, and under the securities laws of such states as
counsel for MDLI deems necessary or exemptions from such state registrations
or qualifications will have been determined by such counsel to be available,
and will have been listed on the Nasdaq National Market System.
5.2 CONDITIONS TO THE OBLIGATIONS OF TOTAL EMED. The obligations of Total
eMed to consummate the transactions contemplated by this Agreement are subject
to the fulfillment at or before the Closing of each of the following conditions:
5.2.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations
and warranties of MDLI contained in this Agreement qualified by "Material
Adverse Effect" shall be true and correct in all respects, and all other
representations and warranties of MDLI contained in this Agreement shall be
true and correct in all respects, except where the failure to be true and
correct would not have a Material Adverse Effect on MDLI, except for
representations and warranties made as of a specific date, which
representations and warranties need only be true and correct as of such
date, and for changes specifically contemplated by this Agreement, and MDLI
and Merger Corp. shall have performed in all material respects all of their
respective covenants and obligations hereunder to be performed as of the
Closing. Total eMed shall have received at the Closing certificates to the
foregoing effect, dated the Closing Date, and executed on behalf of MDLI by
an executive officer of MDLI and on behalf of Merger Corp. by an executive
officer of Merger Corp.
5.2.2 NO MATERIAL ADVERSE CHANGE. Since September 30, 1999, there
shall have been no Material Adverse Change, or discovery of a condition or
occurrence of an event, which has resulted or reasonably can be expected to
result in a Material Adverse Change of MDLI and its subsidiaries taken as a
whole.
5.2.3 LEGAL OPINION. Total eMed shall have received from legal counsel
to MDLI an opinion dated as of the Closing, substantially in the form
attached to this Agreement as Exhibit E.
5.3 CONDITIONS TO THE OBLIGATIONS OF MDLI AND MERGER CORP. The obligations
of MDLI and Merger Corp. to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or before the Closing of each of the
following conditions:
5.3.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations
and warranties of Total eMed contained in this Agreement qualified by
"Material Adverse Effect" shall be true and correct in all respects, and all
other representations and warranties of Total eMed contained in this
Agreement shall be true and correct in all respects, except where the
failure to be true and correct would not have a Material Adverse Effect on
Total eMed, except for representations and warranties made as of a specific
date, which representations and warranties need only be true and correct as
of such date, and for changes specifically contemplated by this Agreement
and Total eMed shall have performed in all material respects all of its
covenants and obligations hereunder to be performed as of the Closing. MDLI
shall have received at the Closing certificates to the
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foregoing effect, dated the Closing Date, and executed on behalf of Total
eMed by an executive officer of Total eMed.
5.3.2 LOCK-UP. The stockholders of Total eMed listed on Schedule 2.1
shall at MDLI's request enter into an agreement with the underwriters in
MDLI's initial public offering in customary form providing that before
June 7, 2000 the stockholders may not sell or otherwise transfer any
securities of MDLI.
5.3.3 NO MATERIAL ADVERSE CHANGE. Since the Most Recent Fiscal Year
End, there shall have been no Material Adverse Change, or discovery of a
condition or occurrence of an event, which has resulted or reasonably can be
expected to result in a Material Adverse Change of Total eMed and its
Subsidiaries taken as a whole.
5.3.4 [INTENTIONALLY OMITTED].
5.3.5 [INTENTIONALLY OMITTED].
5.3.6 DISSENTING SHARES. Not more than ten percent of the total issued
and outstanding Total eMed Common Shares (taking into account all Total eMed
Common Shares issued or issuable pursuant to options, warrants, convertible
securities, or other rights to acquire Total eMed Common Stock) shall be
Dissenting Shares.
5.3.7 PREFERRED STOCK. Immediately prior to the Effective Time, all of
the issued and outstanding shares of Preferred Stock of Total eMed shall
have been converted into shares of Common Stock of Total eMed in accordance
with their terms, except for Total eMed's Series C Preferred Stock, par
value $.001, which shall be deemed to be converted into Series C Common
Equivalents, and which shall deemed to be outstanding.
5.3.8 ESCROW SCHEDULE. Total eMed shall have executed and delivered to
MDLI the Escrow Schedule (as defined in Section 7.2.1 of this Agreement).
5.3.9 LEGAL OPINION. MDLI shall have received from legal counsel to
Total eMed an opinion dated as of the Closing, substantially in the form
attached to this Agreement as Exhibit F.
ARTICLE VI
TERMINATION
6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by the
mutual consent of Total eMed and MDLI.
6.2 TERMINATION BY EITHER TOTAL EMED OR MDLI. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time:
(a) by MDLI or Total eMed if the Merger shall not have become effective
on or prior to July 31, 2000, provided, however, that the right to terminate
this Agreement pursuant to this Section 6.2(a) shall not be available to any
party whose breach of this Agreement has been the cause of, or resulted in,
the failure of the Merger to occur on or before such date;
(b) by MDLI or Total eMed if any court of competent jurisdiction in the
United States or any state shall have issued an order, judgment or decree
(other than a temporary restraining order) restraining, enjoining or
otherwise prohibiting the Merger and such order, judgment or decree shall
have become final and nonappealable;
(c) by MDLI if MDLI is not in material breach of this Agreement and
there has been a material breach by Total eMed of any representation,
warranty, covenant or agreement contained in this Agreement that is not
curable or, if curable, is not cured within a reasonable time (but in
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no event more than 30 days) after written notice of such breach is given by
Total eMed to MDLI; or
(d) by Total eMed if Total eMed is not in material breach of this
Agreement and there has been a material breach by MDLI of any
representation, warranty, covenant or agreement contained in this Agreement
that is not curable or, if curable, is not cured within a reasonable time
(but in no event more than 30 days) after written notice of such breach is
given by MDLI to Total eMed.
6.3 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article VI,
(i) this Agreement immediately will become void and of no effect, except that
Sections 4.1.6, and 8.1 will survive the event of termination; and (ii) no party
hereto (or any of its directors of officers) shall have any liability or further
obligation to any other party to this Agreement, except for breach of this
Agreement.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of Total eMed's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement (each as modified by the Disclosure Schedules) shall
survive the Merger and continue until 5:00 p.m., Pacific time, on the fifth
business day after the delivery to MDLI of the audit report of its independent
public accountants regarding MDLI's consolidated financial statements for the
year ended December 31, 2000 (the "Expiration Date"). The representations,
warranties and covenants of MDLI in this Agreement shall not survive the Merger
and shall terminate at the Effective Time.
7.2 ESCROW ARRANGEMENTS.
7.2.1 CONTRACT ESCROW FUND. At the Effective Time, holders of Total
eMed Common Stock immediately before the Effective Time (the "Shareholders")
will be deemed to have received and deposited with the Escrow Agent (as
defined below) five percent of the shares of MDLI Common Stock to be
received by the holders of Total eMed Common Stock pursuant to Section 1.3
of this Agreement, provided that the shares to be delivered on behalf of
each such holder shall be rounded down to the nearest whole share of MDLI
Common Stock (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by MDLI after the
Effective Time) (the "Escrow Amount") without any act of any shareholder. As
soon as practicable after the Effective Time, the Escrow Amount, without any
act of any Total eMed shareholder, will be deposited with West Coast Trust
(or other institution acceptable to MDLI and the Securityholder Agent (as
defined in Section 7.2.7 below)) as Escrow Agent (the "Escrow Agent"), such
deposit to constitute an escrow fund (the "Contract Escrow Fund") to be
governed by the terms set forth herein. The portion of the Escrow Amount
contributed on behalf of each shareholder of Total eMed shall be in
proportion to the aggregate MDLI Common Stock to which such holder would
otherwise be entitled under Section 1.3 and shall be in the respective share
amounts and percentages listed opposite each Shareholder's names listed in a
schedule to be executed by Total eMed and delivered to MDLI at Closing (the
"Escrow Schedule"). The Contract Escrow Fund shall be available to
compensate MDLI and its affiliates (including the Surviving Corporation) for
any claims, losses, liabilities, obligations, damages, deficiencies, costs
and expenses, including reasonable attorneys' fees and expenses, and
expenses of investigation and defense (hereinafter individually a "Loss" and
collectively "Losses") incurred by MDLI, its officers, directors, or
affiliates (including the Surviving Corporation) directly or indirectly as a
result of any inaccuracy or breach of a representation or warranty of Total
eMed contained herein (or in any certificate, instrument, schedule or
document attached to this Agreement and delivered by Total eMed in
connection with the Merger). Except as otherwise provided herein, MDLI may
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not receive any shares from the Contract Escrow Fund unless and until
Officer's Certificates (as defined in Section 7.2.4.1 below) identifying
Losses, the aggregate amount of which exceeds $1,000,000 (except in the case
of Losses arising from any breach or inaccuracy of Sections 3.1.2
(Capitalization), 3.1.15 (Intellectual Property) and 3.1.20 (Taxes), as to
which such threshold shall not apply), have been delivered to the Escrow
Agent as provided in Section 7.2.5 and such amount is determined pursuant to
this Article VII to be payable; in such case, MDLI may recover shares from
the Contract Escrow Fund equal in value to all indemnified Losses (to the
extent such Losses exceed the $1,000,000 threshold) for which there is no
objection or any objection had been resolved in accordance with the
provisions of this Article VII. For purposes of this Article VII, each of
the matters described on Schedule 3.1.2 of Total eMed's Disclosure Schedules
shall be deemed to be a breach of Total eMed's representations and
warranties in Section 3.1.2 of this Agreement (the "Earn-out Claim(s)"). The
Earn-out Claims shall not be subject to the $1,000,000 threshold. MDLI may
make claims against the Contract Escrow Fund with respect to any and all
Earn-out Claims (a) to compensate for any Losses; (b) to satisfy any
obligation to issue shares of the capital stock of MDLI or any of its
affiliates; and/or (c) to compensate and reimburse MDLI for any Losses or
other amounts MDLI directly or indirectly incurs or expends to redeem,
acquire or cancel by any means permitted by law such shares of the capital
stock of MDLI's affiliate.
7.2.1.1 LITIGATION ESCROW FUND. In addition to the shares placed in
the Contract Escrow Fund, at the Effective Time, the Shareholders will be
deemed to have received and deposited with the Escrow Agent shares of
MDLI Common Stock whose market value equals $21,000,000, based on the
average closing price of MDLI Common Stock for the ten full trading days
immediately preceding the Effective Time. The shares to be delivered on
behalf of each such holder shall be rounded down to the nearest whole
share of MDLI Common Stock (plus any additional shares as may be issued
upon any stock split, stock dividend or recapitalization effected by MDLI
after the Effective Time) without any act of any shareholder. Such
deposit shall constitute an escrow fund (the "Litigation Escrow Fund")
which shall be available to compensate MDLI and its affiliates (including
the Surviving Corporation) for any and all Losses, whether by way of
settlement, arbitration, adjudication or other quasi-judicial proceeding,
arising from or relating to the lawsuit styled MEDQUIST MRC, INC. V. JOHN
H. DAYANI AND NETWORK HEALTH SERVICES, INC. in the United States District
Court, Northern District of Ohio, Eastern Division, Case Number 1:99CV
2010, subsequently transferred to the United States District Court,
Middle Tennessee District (the "Litigation"). The portion of the shares
contributed to the Litigation Escrow Fund on behalf of each Shareholder
shall be in the respective share amounts and percentages listed opposite
each Shareholder's names listed in the Escrow Schedule. At all times
during the term of the Litigation Escrow Fund, the Shareholders shall be
deemed to be the record holders of their respective amounts of the MDLI
Common Stock in such fund.
7.2.1.2 DISTRIBUTION FROM LITIGATION ESCROW FUND. The shares in the
Litigation Escrow Fund shall be distributed only in accordance with the
provisions hereof.
7.2.1.2.1 Except as otherwise provided herein, MDLI may not
receive any shares from the Litigation Escrow Fund for losses
relating to fees and expenses of the Litigation (the "Litigation
Expenses") unless and until Officer's Certificates (as defined in
Section 7.2.4.1 below) identifying Litigation Expenses, the aggregate
amount of which exceeds $1,000,000 (provided that this threshold
shall only apply to Litigation Expenses and shall not apply to any
other Losses agreed to in any settlement or awarded in any
arbitration, adjudication or other quasi-judicial proceeding), have
been delivered to the Escrow Agent as provided in Section 7.2.5 and
such amount is determined pursuant to this Article VII to be payable;
in such case, MDLI may recover shares from the Litigation Escrow Fund
equal in value to all indemnified Litigation Expenses (to the extent
such
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Litigation Expenses exceed the $1,000,000 threshold) for which there
is no objection or any objection had been resolved in accordance with
the provisions of this Article VII.
7.2.1.2.2 In the event of final settlement or arbitration award
or the entry of a final order in adjudication of the Litigation, the
Securityholder Agent and MDLI shall both certify to the Escrow Agent
the amount of the Losses incurred by MDLI and/or its affiliates in
the Litigation. As promptly as practicable after receipt thereof, the
Escrow Agent shall deliver to MDLI the number of shares equal to the
amount of Losses agreed to or awarded to MDLI or any of its
affiliates in any settlement, arbitration, adjudication or
quasi-judicial proceeding divided by the closing price per share of
MDLI Common Stock on the date that the settlement, award, or order
becomes final. The Escrow Agent shall also deliver any remaining
shares to the Shareholders in proportion to their respective original
contributions to the Litigation Escrow Fund (as set forth on the
Escrow Schedule). This Section 7.2.1.2.2 shall not apply to the
distribution of shares from the Litigation Escrow Fund for payment of
Litigation Expenses.
7.2.1.2.3 Prior to the settlement, arbitration or adjudication
of the Litigation, the Securityholder Agent may periodically, but no
more often than twice each calendar year, request that MDLI consider
releasing shares from the Litigation Escrow Fund (each such
consideration, a "Litigation Assessment"). The request for a
Litigation Assessment shall be accompanied by an explanation of any
facts and circumstances that merit the release of shares from the
Litigation Escrow Fund. MDLI shall in good faith consider those facts
and circumstances and any other information which MDLI deems
reasonable, including the market value of the shares in the
Litigation Escrow Fund relative to the original $21,000,000
valuation, and shall evaluate the risk of a finding of liability
against MDLI and its affiliates in the Litigation. After conducting
the Litigation Assessment and within fourteen days of receiving the
request for the Litigation Assessment, MDLI shall respond to the
Securityholder Agent in writing with its decision as to whether to
allow the distribution of any shares from the Litigation Escrow Fund.
In the event MDLI allows such a distribution, it will direct the
Escrow Agent to release to the Shareholders the particular number of
shares, and the Escrow Agent shall thereupon release to the
Shareholders such shares, in proportion to their respective original
contributions to the Litigation Escrow Fund (as set forth on the
Escrow Schedule).
7.2.1.2.4 The rights of MDLI to make claims upon the Litigation
Escrow Fund shall be the sole and exclusive remedy of MDLI as against
the Shareholders after the Effective Time with respect to the
Litigation.
7.2.1.2.5 The provisions of Sections 7.2.3, 7.2.4 (solely with
respect to Litigation Expenses), 7.2.5 (solely with respect to
Litigation Expenses), 7.2.6 (solely with respect to Litigation
Expenses), 7.2.7, 7.2.8, 7.2.9, 7.2.10 and 7.2.11 shall apply to the
existence and operation of the Litigation Escrow Fund.
7.2.2 ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW
PERIODS. Subject to the following requirements, the Contract Escrow Fund
shall be in existence immediately following the Effective Time and shall
terminate at 5:00 p.m., Pacific time, on the Expiration Date (the "Escrow
Period"); provided, however, that the Escrow Period shall not terminate with
respect to such amount (or some portion thereof), that together with the
aggregate amount remaining in the Contract Escrow Fund is reasonably
necessary to satisfy any unsatisfied claims concerning facts and
circumstances existing prior to the termination of such Escrow Period
specified in any Officer's Certificate delivered to the Escrow Agent prior
to termination of such Escrow Period. MDLI and Total eMed, on behalf of
itself and its stockholders, agree that (i) as of the Expiration Date, any
and all Earn-out Claims shall be deemed to be an unsatisfied claim;
(ii) MDLI may make claims
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against the Contract Escrow Fund with respect to the Earn-out Claims after
the Expiration Date; and (iii) the Escrow Period shall extend with until
final resolution of all Earn-out Claims. As soon as all such unsatisfied
claims have been resolved, as evidenced by written memorandum of the
Securityholder Agent and MDLI, the Escrow Agent shall deliver to the
Shareholders the remaining portion of the Contract Escrow Fund not required
to satisfy such unsatisfied claims; provided, however, the Escrow Agent
shall release to the Shareholders on the Expiration Date such portion of the
Contract Escrow Fund that is in excess of the amount in dispute of any
unsatisfied claims. Deliveries of Escrow Amounts to the Shareholders
pursuant to this Section 7.2.2 shall be made in proportion to their
respective original contributions to the Contract Escrow Fund (as set forth
on the Escrow Schedule). At all times during the Escrow Period, the
Shareholders shall be deemed to be the record holders of their respective
amounts of the MDLI Common Stock comprising the Escrow Amount.
Securityholder Agent shall provide to the Escrow Agent a current schedule of
the Shareholders' names and addresses and pro rata share of the Escrow
Amount prior to the date of distribution of the Escrow Amount.
7.2.3 PROTECTION OF ESCROW FUND.
7.2.3.1 For purposes of this Article VII, the Contract Escrow Fund
and the Litigation Escrow Fund shall be collectively referred to as the
"Escrow Fund."
7.2.3.2 The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in
accordance with the terms of this Agreement and shall hold and dispose of
the Escrow Fund only in accordance with the terms hereof.
7.2.3.3 Any shares of MDLI Common Stock or other equity securities
issued or distributed by MDLI (including shares issued upon a stock split
or stock dividend) ("New Shares") in respect of MDLI Common Stock in the
Escrow Fund which have not been released from the Escrow Fund shall be
added to the Escrow Fund and become a part thereof. New Shares issued in
respect of shares of MDLI Common Stock which have been released from the
Escrow Fund shall not be added to the Escrow Fund but shall be
distributed to the recordholders thereof. Cash dividends on MDLI Common
Stock shall not be added to the Escrow Fund but shall be distributed to
the recordholders thereof.
7.2.3.4 Each Shareholder shall be deemed the record holder of, and
shall have voting, dividend, distribution and all other rights with
respect to the shares of MDLI Common Stock contributed to the Escrow Fund
by such Shareholder (and on any voting securities and other equity
securities added to the Escrow Fund in respect of such shares of MDLI
Common Stock).
7.2.4 CLAIMS UPON ESCROW FUND.
7.2.4.1 Upon receipt by the Escrow Agent at any time on or before
the Expiration Date of a certificate (an "Officer's Certificate") signed
by any officer of MDLI: (A) stating that MDLI has paid or properly
incurred Losses, and (B) specifying in reasonable detail the individual
items of Losses included in the amount so stated, the date each such item
was paid or properly accrued, and the nature of the misrepresentation,
breach of warranty, covenant, obligation or claim to which such item is
related, the Escrow Agent shall, subject to the provisions of
Section 7.2.5 hereof, deliver to MDLI out of the Escrow Fund, as promptly
as practicable, shares of MDLI Common Stock held in the Escrow Fund in an
amount equal to such Losses.
7.2.4.2 For the purposes of determining the number of shares of MDLI
Common Stock to be delivered out of the Escrow Fund pursuant to Sections
7.2.4.1 of this Agreement, the shares of MDLI Common Stock shall be
valued at the closing price per share of MDLI Common Stock on the later
of the date of the Officer's Certificate or the date of the resolution of
any objection to an Officer's Certificate.
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7.2.4.3 Litigation Expenses shall be paid with shares from the
Litigation Escrow Fund.
7.2.4.4 In the event of a breach of the representation set forth in
Section 3.1.15.21 of this Agreement, MDLI agrees to pursue its rights and
remedies under a vendor's warranty policy with respect to the Technology,
if any, before pursuing a claim against the Contract Escrow Fund.
7.2.5 OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent by the Securityholder Agent, the party
delivering the Officer's Certificate shall deliver a duplicate copy of such
certificate to the other party and for a period of 30 days after such
delivery, the Escrow Agent shall not deliver any Escrow Amounts pursuant to
Section 7.2.4 hereof unless the Escrow Agent shall have received written
authorization from such other party to make such delivery. After the
expiration of such 30 day period, the Escrow Agent shall make delivery of
shares of MDLI Common Stock from the Escrow Fund in accordance with
Section 7.2.4 hereof, provided that no such payment or delivery may be made
if such other party shall object in a written statement to the claim made in
the Officer's Certificate, and such statement shall have been delivered to
the Escrow Agent prior to the expiration of such 30 day period.
7.2.6 RESOLUTION OF CONFLICTS; ARBITRATION.
7.2.6.1 In case the Securityholder Agent shall so object in writing
to any claim or claims made in any Officer's Certificate, the
Securityholder Agent and MDLI shall attempt in good faith to agree upon
the rights of the respective parties with respect to each of such claims.
If the Securityholder Agent and MDLI should so agree, a memorandum
setting forth such agreement shall be prepared and signed by both parties
and shall be furnished to the Escrow Agent. The Escrow Agent shall be
entitled to rely on any such memorandum and distribute shares of MDLI
Common Stock from the Escrow Fund in accordance with the terms thereof.
7.2.6.2 If no such agreement can be reached after good faith
negotiation, and in any event not later than 60 days after receipt of the
written objection of the Securityholder Agent, either MDLI or the
Securityholder Agent may demand arbitration of the matter unless the
amount of the damage or loss is at issue in pending litigation with a
third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in either
such event the matter shall be settled by arbitration conducted by three
arbitrators. MDLI and the Securityholder Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third
arbitrator, each of which arbitrators shall be independent and have at
least ten years relevant experience. The arbitrators shall set a limited
time period and establish procedures designed to reduce the cost and time
for discovery while allowing the parties an opportunity, adequate in the
sole judgment of the arbitrators, to discover relevant information from
the opposing parties about the subject matter of the dispute. The
arbitrators shall rule upon motions to compel or limit discovery and
shall have the authority to impose sanctions, including attorneys fees
and costs, to the extent as a court of competent law or equity, should
the arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without
substantial justification. The decision of a majority of the three
arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this
Agreement, and notwithstanding anything in Section 7.2.5 hereof, the
Escrow Agent shall be entitled to act in accordance with such decision
and make or withhold payments out of the Escrow Fund in accordance
therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
7.2.6.3 Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be
held in San Francisco, California under
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the rules then in effect of the Judicial Arbitration and Mediation
Services, Inc. For purposes of this Section 7.2.6, in any arbitration
hereunder in which any claim or the amount thereof stated in the
Officer's Certificate is at issue, the party delivering the Officer's
Certificate shall be deemed to be the Non-Prevailing Party in the event
that the arbitrators award the sum of one-half or less of the disputed
amount plus any amounts not in dispute; otherwise, the other party shall
be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration, and the expenses, including
without limitation, reasonable attorneys' fees and costs, incurred by the
other party to the arbitration, independent of the escrow fund.
7.2.7 SECURITYHOLDER AGENT OF THE SHAREHOLDERS; POWER OF ATTORNEY.
7.2.7.1 In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, EF Private Equity
Partners (Americas) LP shall be appointed as agent and attorney-in-fact
(the "Securityholder Agent") for each shareholder of Total eMed (except
such shareholders, if any, as shall have perfected their appraisal rights
under the DGCL, for and on behalf of the Shareholders, to give and
receive notices and communications, to authorize delivery to MDLI of
shares of MDLI Common Stock from the Escrow Fund in satisfaction of
claims by MDLI, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to
such claims, and to take all actions necessary or appropriate in the
judgment of Securityholder Agent for the accomplishment of the foregoing.
Such agency may be changed by the Shareholders from time to time upon not
less than 30 days prior written notice to MDLI; provided that the
Securityholder Agent may not be removed unless holders of a two-thirds
interest of the Escrow Fund agree to such removal and to the identity of
the substituted agent. Any vacancy in the position of Securityholder
Agent may be filled by approval of the holders of a majority in interest
of the Escrow Fund. No bond shall be required of the Securityholder
Agent, and the Securityholder Agent shall not receive compensation for
his or her services. Notices or communications to or from the
Securityholder Agent shall constitute notice to or from each of the
shareholders of Total eMed.
7.2.7.2 The Securityholder Agent shall not be liable for any act
done or omitted hereunder as Securityholder Agent while acting in good
faith and in the exercise of reasonable judgment. The Shareholders on
whose behalf the Escrow Amount was contributed to the Escrow Fund shall
jointly and severally indemnify the Securityholder Agent and hold the
Securityholder Agent harmless against any loss, liability or expense
incurred without negligence or bad faith on the part of the
Securityholder Agent and arising out of or in connection with the
acceptance or administration of the Securityholder Agent's duties
hereunder, including the reasonable fees and expenses of any legal
counsel retained by the Securityholder Agent.
7.2.8 ACTIONS OF THE SECURITYHOLDER AGENT. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all
the Shareholders for whom a portion of the Escrow Amount otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each of such Shareholders, and the Escrow Agent and MDLI may
rely upon any such written decision, consent or instruction of the
Securityholder Agent as being the decision, consent or instruction of each
every such Shareholder. The Escrow Agent and MDLI are hereby relieved from
any liability to any person for any acts done by them in accordance with
such decision, consent or instruction of the Securityholder Agent.
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7.2.9 THIRD-PARTY CLAIMS.
7.2.9.1 If any third party shall notify MDLI or its affiliates with
respect to any matter (hereinafter referred to as a "Third Party Claim"),
which may give rise to a claim by MDLI against the Escrow Fund, then MDLI
shall give notice to the Securityholder Agent within 30 days of MDLI
becoming aware of any such Third Party Claim or of facts upon which any
such Third Party Claim will be based setting forth such material
information with respect to the Third Party Claim as is reasonably
available to MDLI; provided, however, that no delay or failure on the
part of MDLI in notifying the Securityholder Agent shall relieve the
Securityholder Agent and the Shareholders from any obligation hereunder
unless the Securityholder Agent and the Shareholders are thereby
materially prejudiced (and then solely to the extent of such prejudice).
The Securityholder Agent and the Shareholders shall not be liable for any
attorneys fees and expenses incurred by MDLI prior to MDLI's giving
notice to the Securityholder Agent of a Third Party Claim. The
Shareholders shall be entitled, at their expense, to participate, but
without controlling, in any defense of a Third Party Claim; provided,
however, the Shareholders may assume the defense of the Third Party
Claim, if permitted by Section 7.2.9.2, if the Securityholder Agent
notifies MDLI in writing, within ten days after receiving notice of the
Third Party Claim, of the Shareholders intent to assume the defense.
7.2.9.2 The Shareholders may elect to assume the defense of the
Third Party Claim unless (i) such Third Party Claim seeks an order,
injunction, or other equitable relief against MDLI or any of its
subsidiaries (and either (A) the third party seeks a temporary
restraining order or preliminary injunction, or (B) MDLI reasonably
determines that the relief sought would be materially adverse to it) or
(ii) MDLI has reasonably concluded that there is a conflict of interest
between it and the Shareholders in the conduct of the defense of such
claim. If the Shareholders assume the defense of the Third-Party Claim,
the Securityholder Agent shall undertake, conduct, and control the
settlement or defense of the Third-Party Claim diligently, through
counsel chosen by it and approved by MDLI, and shall use all reasonable
efforts in good faith to resolve the Third Party Claim expeditiously and
at the least possible cost under the circumstances; provided, however,
that the Securityholder Agent shall have no obligation to undertake any
separate obligation or duty in settlement of such claim. MDLI shall
cooperate with the indemnifying party in connection therewith and make
available to the Securityholder Agent all relevant information reasonably
available to it that is material to the defense of the Third Party Claim.
MDLI may participate in the defense of the Third Party Claim through
counsel of its choice. Neither the Securityholder Agent nor the
Shareholders shall, without the prior written consent of MDLI, settle or
compromise, or consent to the entry of any judgment in, any such claim or
any pending or threatened claim or action in respect of which
indemnification may be sought under this Article VII, unless such
settlement, compromise, or consent includes an unconditional release of
MDLI and each of its subsidiaries from all liability arising out of such
claim or action. If the Shareholders do not elect to assume the defense
of the Third Party Claim, then MDLI shall undertake, conduct, and control
the settlement or defense of the Third Party Claim diligently, through
counsel chosen by MDLI, and shall use all reasonable efforts in good
faith to resolve the Third Party Claim expeditiously and at the least
possible cost under the circumstances; provided, however, that MDLI shall
have no obligation to undertake any separate obligation or duty in
settlement of such claim or to undertake any action that would materially
adversely affect the future conduct of its business. The Securityholder
Agent shall cooperate with MDLI in connection therewith and make
available to MDLI all relevant information reasonably available to the
Securityholder Agent or the Shareholders that is material to the defense
of the Third Party Claim. MDLI shall have the right in its sole
discretion to settle any Claim; provided, however,
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that MDLI may not settle any Third Party Claim without the consent of the
Securityholder Agent, which consent shall not be unreasonably withheld.
7.2.10 ESCROW AGENT'S DUTIES.
7.2.10.1 The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as
set forth in any additional written escrow instructions which the Escrow
Agent may receive after the date of this Agreement which are signed by an
officer of MDLI and the Securityholder Agent and agreed to and signed by
the Escrow Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be
genuine and to have been signed or presented by the proper party or
parties. The Escrow Agent shall not be liable for any act done or omitted
hereunder as Escrow Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith.
7.2.10.2 The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by
any other person, excepting only orders or process of courts of law, and
is hereby expressly authorized to comply with and obey orders, judgments
or decrees of any court. In case the Escrow Agent obeys or complies with
any such order, judgment or decree of any court, the Escrow Agent shall
not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
7.2.10.3 The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
7.2.10.4 The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this
Agreement or any documents deposited with the Escrow Agent.
7.2.10.5 In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses,
except for gross negligence or willful misconduct on the part of the
Escrow Agent. The Escrow Agent shall not incur any such liability for
(A) any act or failure to act made or omitted in good faith, or (B) any
action taken or omitted in reliance upon any written instrument,
including any written statement or affidavit provided for in this
Agreement that the Escrow Agent shall in good faith believe to be
genuine, nor will the Escrow Agent be liable or responsible for
forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Escrow Agent may consult with
the legal counsel in connection with Escrow Agent's duties under this
Agreement and shall be fully protected in any act taken, suffered, or
permitted by him/her in good faith in accordance with the advice of
counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on
behalf of any party to this Agreement.
7.2.10.6 If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required
to determine the controversy or to take any action regarding it. The
Escrow Agent may hold all documents and shares of MDLI Common Stock and
may wait for settlement of any such controversy by final appropriate
legal proceedings or other means as, in the Escrow Agent's discretion,
the Escrow Agent may be required, despite what may be set forth elsewhere
in this Agreement. In such event, the Escrow Agent will not
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<PAGE>
be liable for damage. Furthermore, the Escrow Agent may at its option,
file an action of interpleader requiring the parties to answer and
litigate any claims and rights among themselves. The Escrow Agent is
authorized to deposit with the clerk of the court all documents and
shares of MDLI Common Stock held in escrow, except all cost, expenses,
charges and reasonable attorney fees incurred by the Escrow Agent due to
the interpleader action and which the parties jointly and severally agree
to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed
by the terms of this Agreement.
7.2.10.7 MDLI and the Surviving Corporation agree jointly and
severally to indemnify and hold Escrow Agent harmless against any and all
losses, claims, damages, liabilities, and expenses, including reasonable
costs of investigation, counsel fees, and disbursements that may be
imposed on Escrow Agent or incurred by Escrow Agent in connection with
the performance of his/her duties under this Agreement, including but not
limited to any litigation arising from this Agreement or involving its
subject matter; provided, however, that in the event the Securityholder
Agent shall be the Non-Prevailing Party in connection with any claim or
action initiated by one or more of the Shareholders, then Shareholders
shall be responsible for the indemnification of the Escrow Agent to the
full extent provided by this Section 7.2.10.7.
7.2.10.8 The Escrow Agent may resign at any time upon giving at
least 30 days written notice to the parties; provided, however, that no
such resignation shall become effective until the appointment of a
successor escrow agent which shall be accomplished as follows: the
parties shall use their best efforts to mutually agree on a successor
escrow agent within 30 days after receiving such notice. If the parties
fail to agree upon a successor escrow agent within such time, the Escrow
Agent shall have the right to appoint a successor escrow agent. The
successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all
the estates, properties, rights, powers, and duties of the predecessor
escrow agent as if originally named as escrow agent. The Escrow Agent
shall be discharged from any further duties and liability under this
Agreement.
7.2.10.9 Anything in this Agreement to the contrary notwithstanding,
in no event shall the Escrow Agent be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not
limited to lost profits), even if the Escrow Agent has been advised of
the likelihood of such loss or damage and regardless of the form of
action.
7.2.10.10 It is further understood that any corporation into which
the Escrow Agent is its individual capacity may be merged or converted or
with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Escrow Agent in its
individual capacity shall be a party, or any corporation to which
substantially all the corporate trust business of the Escrow Agent in its
individual capacity my be transferred, shall be the Escrow Agent under
this Escrow Agreement without further act.
7.2.11 FEES. All fees of the Escrow Agent for performance of its
duties hereunder shall be paid by MDLI. It is understood that the fees
and usual charges agreed upon for services of the Escrow Agent shall be
considered compensation for ordinary services as contemplated by this
Agreement. In the event that the conditions of this Agreement are not
promptly fulfilled, or if the Escrow Agent renders any service not
provided for in this Agreement, or if the parties request a substantial
modification of its terms, or if any controversy arises, or if the Escrow
Agent is made a party to, or intervenes in, any litigation pertaining to
this escrow or its subject matter, the Escrow Agent shall be reasonably
compensated for such extraordinary
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<PAGE>
services and reimbursed for all costs, attorneys' fees, and expenses
occasioned by such default, delay, controversy or litigation. MDLI
promises to pay these sums upon demand.
7.2.12 MAXIMUM LIABILITY AND REMEDIES. The rights of MDLI to make
claims upon the Contract Escrow Fund in accordance with this Article VII
shall be the sole and exclusive remedy of MDLI after the Closing with
respect to any representation or warranty made by Total eMed under this
Agreement.
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 PAYMENT OF EXPENSES. If the Merger is not consummated, each party
shall pay its own out-of-pocket legal, accounting, investment banking and other
expenses incidental to this Agreement and the transactions contemplated by this
Agreement, except for the HSR Filing fees, which shall be shared equally by
Total eMed and MDLI. Nothing in this Agreement is meant to limit the right of a
non-breaching party to obtain reimbursement of expenses and other damages,
including attorneys' fees, incurred as a result of a breach of this Agreement by
the other party.
8.2 ENTIRE AGREEMENT. This Agreement, including the schedules and the
exhibits hereto, constitutes the entire agreement between the parties hereto and
supersedes all prior agreements and understandings, oral and written, among the
parties hereto with respect to the subject matter hereof.
8.3 ASSIGNMENT. This Agreement shall not be assignable by any of the
parties to this Agreement without the prior written consent of each of MDLI and
Total eMed; provided that MDLI may assign this Agreement to an affiliate;
provided no such assignment shall result in Total eMed shareholders receiving
consideration in any form other than stock of MDLI or such affiliate which has
been registered under the Securities Act.
8.4 BINDING EFFECT; NO THIRD PARTY BENEFIT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns, subject to the restrictions on assignment contained in
Section 8.3. Except as provided for in Section 4.3.6 and Article VII of this
Agreement, nothing express or implied in this Agreement is intended or shall be
construed to confer upon or give to a person, firm or corporation other than the
parties hereto any rights or remedies under or by reason of this Agreement or
any transaction contemplated hereby.
8.5 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement
may be amended, modified and supplemented at any time prior to or at the
Closing, whether before or after the votes of shareholders of Total eMed, by
written agreement executed and delivered by the duly authorized officers of
Total eMed and MDLI.
8.6 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law; PROVIDED, HOWEVER, that any waiver by a party must be in
writing.
8.7 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
8.8 CAPTIONS. The article, section and paragraph captions herein are for
convenience of reference only, do not constitute a part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
8.9 SUBSIDIARY. When a reference is made in this Agreement to a subsidiary
of a party, the term "subsidiary" means any corporation or other organization,
whether incorporated or unincorporated, of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect
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to such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries.
8.10 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or mailed, certified or registered mail with postage prepaid, or sent by telex,
telegram or facsimile (in each case with evidence of confirmed transmission) as
follows:
If to Total eMed, to it at:
5301 Virginia Way
Suite 250
Brentwood, TN 37027
Attn: President
Fax: (615) 234 1319
Tel: (615) 234-1300 x113
with copies to:
Harwell Howard Hyne Gabbert & Manner, PC
1800 First American Center
315 Deaderick Street
Nashville, TN 37238
Attn: Peter Oldham
Fax: (615) 251-1059
Tel: (615) 251-1069
If to MDLI or Merger Corp., to it at:
20500 NW Evergreen Parkway
Hillsboro, OR 97124
Attn: David C. Moffenbeier
Fax: (503) 531-7134
Tel: (503) 531-7010
with copies to:
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2600
Portland, OR 97204
Attn: Stephen E. Babson
Fax: (503) 220-2480
Tel: (503) 294-9645
If to the Escrow Agent, to it at:
West Coast Trust
801 Main Street
Vancouver, WA 98666
Atten: Mr. Robert W. Ives
Fax: (360) 693-5667
Tel: (360) 693-6092
or to such other person or address as any party shall specify by notice in
writing. All such notices, requests, demands, waivers and communications shall
be deemed to have been received on the date of delivery or on the third business
day after the mailing thereof.
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<PAGE>
8.11 CHOICE OF LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, exclusive of choice of law or
conflicts of law rules, provisions, or principles, except that the provisions of
this Agreement relating to the Merger shall also be governed by the merger
provisions of the DGCL.
8.12 SEPARABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
[SIGNATURE PAGES FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties to this Agreement as of the date set
forth in the preface of this Agreement.
<TABLE>
<S> <C> <C>
MEDICALOGIC, INC.
By: /s/ MARK K. LEAVITT, MD
-----------------------------------------
Name: Mark K. Leavitt, MD
Title: CEO
TOTAL EMED, INC.
BY: /S/ RICHARD REHM, MD
-----------------------------------------
Name: Richard Rehm, MD
Title: CEO
AQ MERGER CORP.
BY: /S/ DAVID C. MOFFENBEIER
-----------------------------------------
Name: Daivd C. Moffenbeier
Title: President
WEST COAST TRUST CO., INC.,
doing business as WEST COAST TRUST
BY: /S/ ROBERT W. IVES
-----------------------------------------
Name: Robert W. Ives
Title: Trust Officer
West Coast Trust Company, Inc.
</TABLE>
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<PAGE>
APPENDIX C
FAIRNESS OPINION OF DONALDSON, LUFKIN & JENRETTE RELATING TO MEDSCAPE
DONALDSON, LUFKIN & JENRETTE
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
2121 AVENUE OF THE STARS, LOS ANGELES, CA 90067-5014
February 21, 2000
Board of Directors
MedicaLogic, Inc.
20500 NW Evergreen Parkway
Hillsboro, OR 97124
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to MedicaLogic, Inc. (the "Company") of the Conversion Ratio (as defined
below) pursuant to the terms of the Agreement of Reorganization and Merger, to
be dated as of February 21, 2000 (the "Agreement"), among the Company,
Medscape, Inc. ("Medscape") and Medscape Merger Corp., a wholly owned subsidiary
of the Company ("Merger Sub"), pursuant to which Merger Sub will be merged (the
"Merger") with and into Medscape.
Pursuant to the Agreement, each share of common stock of Medscape will be
converted into the right to receive .323 of a share of common stock, no par
value ("Company Common Stock") of the Company (the "Conversion Ratio").
In arriving at our opinion, we have reviewed the draft dated February 19,
2000 of the Agreement and the exhibits thereto. We also have reviewed financial
and other information that was publicly available or furnished to us by the
Company and Medscape including information provided during discussions with
their respective managements. Included in the information provided during
discussions with the respective managements were certain financial projections
of Medscape for the period beginning January 1, 2000 and ending December 31,
2002 prepared by the management of Medscape, as adjusted by management of the
Company, as well as guidance with respect to trends in expected operating
results for the period beginning January 1, 2003 and ending December 31, 2004.
Also included were certain financial projections of the Company for the period
beginning January 1, 2000 and ending December 31, 2004 and certain financial
projections for Medscape for the period beginning January 1, 2003 and ending
December 31, 2004, in each case prepared by the management of the Company. In
addition, we have compared certain financial data of Medscape with various other
companies whose securities are traded in public markets, reviewed prices paid in
certain other business combinations and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Medscape or
their respective representatives, or that was otherwise reviewed by us, and have
assumed that the Company is not aware of any information prepared by it or its
other advisors that might be material to our opinion that has not been made
available to us. In particular, we have relied upon the estimates of the
management of the Company of the operating synergies achievable as a result of
the Merger and upon our discussion of such synergies with the management of
Medscape. With respect to the financial projections of Medscape prepared by
management of Medscape and supplied to us and the guidance provided by Medscape
management with respect to the
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trends in expected operating results of Medscape for the period beginning
January 1, 2003 and ending December 31, 2004, we have relied on representations
that the projections have been reasonably prepared and that such projections and
such guidance reflect the best currently available estimates and judgments of
the management of Medscape as to the future operating and financial performance
of Medscape. With respect to the financial projections of the Company supplied
to us and the adjusted projections of Medscape and the projections for Medscape
for the period beginning January 1, 2003 and ending December 31, 2004 prepared
by management of the Company, we have relied on representations that the
projections have been reasonably prepared and such projections and such
adjustments reflect the best currently available estimates and judgments of the
management of the Company as to the future operating and financial performance
of the Company and Medscape, respectively. We have not assumed any
responsibility for making any independent evaluation of any assets or
liabilities or for making any independent verification of any of the information
reviewed by us. We have relied as to certain legal matters on advice of counsel
to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which Company Common Stock will actually trade at any time. Our
opinion does not address the relative merits of the Merger and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Merger. Our opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for the Company and for Medscape in the past and has
been compensated for such services.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Conversion Ratio is fair to the Company from a financial
point of view.
<TABLE>
<S> <C> <C>
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ LAURENCE E. PAUL
-----------------------------------------
Laurence E. Paul, M.D.
Managing Director
</TABLE>
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APPENDIX D
FAIRNESS OPINION OF DONALDSON, LUFKIN & JENRETTE RELATING TO TOTAL EMED
DONALDSON, LUFKIN & JENRETTE
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
2121 AVENUE OF THE STARS, LOS ANGELES, CA 90067-5014
February 21, 2000
Board of Directors
MedicaLogic, Inc.
20500 NW Evergreen Parkway
Hillsboro, OR 97124
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to MedicaLogic, Inc. (the "Company") of the Exchange Ratio (as defined
below) pursuant to the terms of the Agreement of Reorganization and Merger, to
be dated as of February 21, 2000 (the "Agreement"), among the Company, Total
eMed, Inc. ("Total eMed") and AQ Merger Corp., a wholly owned subsidiary of the
Company ("Merger Sub"), pursuant to which Merger Sub will be merged (the
"Merger") with and into Total eMed.
Pursuant to the Agreement, each share of common stock of Total eMed will be
converted into the right to receive the number of shares of common stock, no par
value, of the Company ("Company Common Stock") equal to a fraction (the
"Conversion Ratio"), the numerator of which is the aggregate of 8,000,000 shares
of Company Common Stock to be issued as merger consideration and the denominator
of which is the sum on the date of the Agreement of (A) the total number of
shares of common stock of Total eMed issued and outstanding, (B) the total
number of shares of common stock of Total eMed issuable upon the conversion of
all issued and outstanding shares of Series A and Series B preferred stock of
Total eMed, (C) the total number of shares of common stock of Total eMed
issuable upon the exercise of all options, warrants and other rights to purchase
or acquire shares of common stock of Total eMed (excluding shares issuable to
Bruyn Weber Information Systems pursuant to a stock earn-out), and (D) the total
number of Series C common equivalents, which shall be the number of shares of
Total eMed common stock that the outstanding shares of Total eMed Series C
preferred stock are deemed to represent for purposes of the conversion, or
306,488 shares of Total eMed common stock.
In arriving at our opinion, we have reviewed the draft dated February 17,
2000 of the Agreement and the exhibits thereto. We also have reviewed financial
and other information that was publicly available or furnished to us by the
Company and Total eMed including information provided during discussions with
their respective managements. Included in the information provided during
discussions with the respective managements were certain financial projections
of Total eMed for the period beginning January 1, 2000 and ending December 31,
2004 prepared by the management of Total eMed, as adjusted by management of the
Company. Also included were certain financial projections of the Company for the
period beginning January 1, 2000 and ending December 31, 2004 prepared by the
management of the Company. In addition, we have compared certain financial data
of Total eMed with various other companies whose securities are traded in public
markets, reviewed prices paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
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In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Total eMed or
their respective representatives, or that was otherwise reviewed by us, and have
assumed that the Company is not aware of any information prepared by it or its
other advisors that might be material to our opinion that has not been made
available to us. With respect to the financial projections supplied to us, we
have relied on representations that they have been reasonably prepared on the
basis reflecting the best currently available estimates and judgments of the
management of the Company and Total eMed as to the future operating and
financial performance of the Company and Total eMed, respectively, and, with
respect to the adjusted projections of Total eMed, that they reflect the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of Total eMed. We have not
assumed any responsibility for making any independent evaluation of any assets
or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to certain legal matters on advice
of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which Company Common Stock will actually trade at any time. Our
opinion does not address the relative merits of the Merger and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Merger. Our opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for the Company in the past and has been compensated
for such services. Employees of DLJ, including certain employees who have
advised the Company in connection with the Merger, own in the aggregate less
than 1% of the outstanding common stock of Total eMed on a fully diluted basis.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the Company from a financial
point of view.
<TABLE>
<S> <C> <C>
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ LAURENCE E. PAUL
-----------------------------------------
Laurence E. Paul, M.D.
MANAGING DIRECTOR
</TABLE>
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<PAGE>
APPENDIX E
FAIRNESS OPINION OF LAZARD FRERES & CO. LLC
LAZARD FRERES & CO. LLC
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
February 21, 2000
The Board of Directors
Medscape, Inc.
129 West 29(th) Street
New York, NY 10001-5399
Dear Members of the Board:
We understand that Medscape, Inc., a Delaware corporation ("Medscape"),
Moneypenny Merger Corp., a Delaware corporation ("Merger Corp."), and
MedicaLogic, Inc., an Oregon corporation ("MedicaLogic"), have entered into an
Agreement of Reorganization and Merger dated as of February 21, 2000 (the
"Agreement"), pursuant to which Merger Corp. will merge with and into Medscape
(the "Merger"). Pursuant to the Agreement, each share of Medscape Common Stock
(as defined in the Agreement) will be converted into the right to receive 0.323
shares of MedicaLogic Common Stock (as defined in the Agreement) (the
"Conversion Ratio").
You have requested our opinion as to the fairness of the Conversion Ratio,
from a financial point of view, to holders of Medscape Common Stock. In
connection with this opinion, we have:
(i) Reviewed and analyzed the financial terms and conditions of the
Agreement;
(ii) Reviewed and analyzed certain historical business and financial
information relating to Medscape and MedicaLogic;
(iii) Reviewed and analyzed various financial forecasts and other data
provided to us by Medscape and MedicaLogic relating to their respective
businesses;
(iv) Held discussions with members of the senior managements of Medscape and
MedicaLogic with respect to the businesses and prospects of Medscape
and MedicaLogic, respectively, the strategic objectives of each, and
possible benefits which might be realized following the Merger;
(v) Reviewed and analyzed public information with respect to certain other
companies in lines of businesses we believe to be generally comparable
to the businesses of Medscape and MedicaLogic;
(vi) Reviewed and analyzed the financial terms of certain business
combinations involving companies in lines of businesses we believe to
be generally comparable to those of Medscape and MedicaLogic, and in
other industries generally;
(vii) Reviewed and analyzed the historical stock prices and trading volumes
of Medscape's and MedicaLogic's common stock; and
(viii) Reviewed and analyzed management's view of the pro forma impact of the
Merger on the revenues and earnings before goodwill of MedicaLogic;
(ix) Conducted such other financial studies, analyses and investigations as
we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent
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valuation or appraisal of any of the assets or liabilities of Medscape or
MedicaLogic, or concerning the solvency or fair value of either of the foregoing
entities. With respect to financial forecasts, we have assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management of Medscape and MedicaLogic as to the
future financial performance of Medscape and MedicaLogic, respectively. We
assume no responsibility for and express no view as to such forecasts or the
assumptions on which they are based. We express no view with regard to
Medscape's underlying business decision to effect the Merger.
It should be noted that, within the context of our engagement by Medscape,
we have not been authorized to and have not solicited alternative offers for
Medscape or its assets, or investigated any other alternative transactions which
may be available to Medscape. Our opinion does not address the relative merits
of the Merger and other business strategies that Medscape's Board of Directors
has considered or may be considering.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. In rendering our opinion, we have assumed that the Merger
will be consummated in accordance with the terms described in the Agreement,
without any waiver of any material terms or conditions by Medscape, and that the
Merger will be treated as a tax-free reorganization and/or exchange, each
pursuant to the Internal Revenue Code of 1986. In addition, we have assumed that
obtaining the necessary regulatory approvals for the Merger will not have an
adverse effect on Medscape or MedicaLogic or the contemplated benefits to be
derived from the Merger.
As you are aware, Total eMed, a Tennessee corporation ("eMed") and
MedicaLogic have entered into or plan to enter into an Agreement and Plan of
Merger dated as of February 21, 2000 (the "eMed Agreement"), pursuant to which
we understand that eMed will merge with and into MedicaLogic (the "eMed
Merger"). Neither the Merger nor the eMed Merger is dependent upon the closing
of the other. Accordingly, with your permission, in rendering our opinion, we
are not opining as to the fairness of the consideration to be paid in connection
with the eMed Merger to Medscape or its stockholders from a financial point of
view nor did we analyze the relative merits of the eMed Agreement or the effects
of the eMed Agreement and the eMed Merger on (i) Medscape or its stockholders,
(ii) the fairness of the Conversion Ratio, from a financial point of view, to
Medscape or to its stockholders or (iii) the contemplated benefits to be derived
from the Merger.
Lazard Freres & Co. LLC is acting as investment banker to Medscape in
connection with the Merger and we will receive a fee for our services, a
substantial portion of which is contingent upon the closing of the Merger.
Lazard also is the holder of 56,250 shares of the Common Stock of Medscape and a
warrant to purchase 100,000 shares of such Common Stock.
Our engagement and the opinion expressed herein are for the benefit of
Medscape's Board of Directors and do not constitute a recommendation that
Medscape pursue the Merger or that any stockholder vote in favor of the Merger.
In addition, in rendering this opinion, we are not expressing any opinion as to
the price at which the shares of MedicaLogic Common Stock will actually trade at
any time. It is understood that this letter may not be disclosed or otherwise
referred to without our prior consent, except for its inclusion in its entirety
in filings Medscape may be required to make with the Securities and Exchange
Commission and except as may otherwise be required by law or by a court of
competent jurisdiction.
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Based on and subject to the foregoing, we are of the opinion that the
Conversion Ratio is fair to the holders of Medscape Common Stock from a
financial point of view.
<TABLE>
<S> <C> <C>
VERY TRULY YOURS,
LAZARD FRERES & CO. LLC
By /s/ STEPHEN H. SANDS
------------------------------------------
Stephen H. Sands
Managing Director
</TABLE>
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APPENDIX F
DELAWARE GENERAL CORPORATION LAW SECTION 262-APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section251 (other than a merger effected pursuant to
Section251(g) of this title), Section252, Section254, Section257, Section258,
Section263 or Section264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section228
or Section253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent
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to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent
of the corporation that is required to give either notice that such notice
has been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein. For purposes of determining the stockholders
entitled to receive either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to the date
the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to
the effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all
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relevant factors, including the rate of interest which the surviving or
resulting corporation would have had to pay to borrow money during the pendency
of the proceeding. Upon application by the surviving or resulting corporation or
by any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted such stockholder's certificates of
stock to the Register in Chancery, if such is required, may participate fully in
all proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 339, L.
'98, eff. 7-1-98.)
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APPENDIX G
PROPOSED AMENDMENT TO MEDICALOGIC'S
RESTATED ARTICLES OF INCORPORATION
Article I of the 1999 Restated Articles of Incorporation is hereby amended
to read in its entirety as follows:
The name of the Corporation is MedicaLogic/Medscape, Inc.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII of the Registrant's 1994 Restated Articles of Incorporation
requires indemnification of current or former directors of MedicaLogic to the
fullest extent not prohibited by the Oregon Business Corporation Act. The Oregon
Business Corporation Act permits or requires indemnification of directors and
officers in certain circumstances. The effects of the indemnification provisions
are as follows:
(a) The indemnification provisions grant a right of indemnification in
respect of any proceeding (other than an action by or in the right of
MedicaLogic), if the person concerned acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
MedicaLogic, was not adjudged liable on the basis of receipt of an improper
personal benefit and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The termination of a
proceeding by judgment, order, settlement, conviction or plea of nolo
contendere, or its equivalent, is not, of itself, determinative that the person
did not meet the required standards of conduct.
(b) The indemnification provisions grant a right of indemnification in
respect of any proceeding by or in the right of MedicaLogic against the expenses
(including attorney fees) actually and reasonably incurred if the person
concerned acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of MedicaLogic, expect that no right
of indemnification will be granted if the person is adjudged to be liable to
MedicaLogic.
(c) Every person who has been wholly successful, on the merits or otherwise,
in the defense of any proceeding to which the person was a party because of the
person's status as a director or officer is entitled to indemnification as a
matter of right.
(d) Because the limits of permissible indemnification under Oregon law are
not clearly defined, the indemnification provisions may provide indemnification
broader than that described in (a) and (b).
(e) The Registrant may advance to a director or officer the expenses
incurred in defending any proceeding in advance of its final disposition if the
director or officer affirms in writing in good faith that he or she has met the
standard of conduct to be entitled to indemnification as described in (a) or
(b) above and undertakes to repay any amount advanced if it is determined that
the person did not meet the required standard of conduct.
The Registrant has obtained insurance for the protection of its directors
and officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the person indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
2.1 Agreement of Reorganization and Merger, dated as of
February 21, 2000, among MedicaLogic, Inc., Medscape, Inc.,
and Moneypenny Merger Corp. (included in the Joint Proxy
Statement/Prospectus as Appendix A).
2.2 Agreement of Reorganization and Merger, dated as of
February 21, 2000, among MedicaLogic, Inc., Total
eMed, Inc. and AQ Merger Corp. (included in the Joint Proxy
Statement/Prospectus as Appendix B).
3.1 1999 Restated Articles of Incorporation, as amended.
Incorporated by reference to Exhibit 4.1 to MedicaLogic's
Registration Statement on Form S-8 (Registration
No. 333-94751).
3.2 Restated Bylaws of MedicaLogic. Incorporated by reference to
Exhibit 3.2 to MedicaLogic's Registration Statement on
Form S-1 (Registration No. 333-87285) (the "Form S-1").
4.1 See Article II of Exhibit 3.1 and Article V of Exhibit 3.2.
4.2 Specimen Stock Certificate. Incorporated by reference to
Exhibit 4.1 to the Form S-1.
5.1* Opinion of Stoel Rives LLP as to the legality of the
securities being registered.
8.1* Fairness Opinion of Donaldson, Lufkin, and Jenrette
regarding the Medscape Merger (included in the Joint Proxy
Statement/Prospectus as Appendix C).
8.2* Fairness Opinion of Donaldson, Lufkin, and Jenrette
Regarding the Total eMed Merger (included in the Joint Proxy
Statement/Prospectus as Appendix D).
8.3* Fairness Opinion of Lazard Freres & Co. LLC (included in the
Joint Proxy Statement/ Prospectus as Appendix E).
8.4* Form of opinion of Patterson, Belknap, Webb & Tyler LLP
regarding tax consequences of MedicaLogic/Medscape merger.
8.5* Form of opinion of Harwell Howard Hyne Gabbert & Manner P.C.
regarding tax consequences of MedicaLogic/Total eMed merger.
21.1 Subsidiaries of MedicaLogic. Incorporated by reference to
Exhibit 21.1 to the Form S-1.
23.1 Consent of Stoel Rives LLP (included in Exhibit 5.1).
23.2* Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
23.3* Consent of Lazard Freres & Co. LLC.
23.4* Consent of KPMG LLP.
23.5* Consent of Deloitte & Touche LLP.
23.6* Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on Page II-6 of the
Registration Statement).
99.1* Form of Proxy of MedicaLogic.
99.2* Form of Proxy of Medscape.
99.3* Form of Proxy of Total eMed.
</TABLE>
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* Filed herewith
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
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(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Hillsboro, Oregon, on April 4, 2000.
<TABLE>
<S> <C> <C>
MEDICALOGIC, INC.
BY: /S/ FRANK J. SPINA
-----------------------------------------
Frank J. Spina
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 4, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
Chairman of the Board and
/s/ MARK K. LEAVITT * Chief Executive Officer
------------------------------------------- (Principal Executive
Mark K. Leavitt Officer)
Senior Vice President and
/s/ FRANK J. SPINA Chief Financial Officer
------------------------------------------- (Principal Financial and
Frank J. Spina Accounting Officer)
/s/ DAVID C. MOFFENBEIER *
------------------------------------------- Director
David C. Moffenbeier
/s/ BRUCE M. FRIED *
------------------------------------------- Director
Bruce M. Fried
/s/ RONALD H. KASE *
------------------------------------------- Director
Ronald H. Kase
/s/ NEAL MOSZKOWSKI *
------------------------------------------- Director
Neal Moszkowski
/s/ MARK A. STEVENS *
------------------------------------------- Director
Mark A. Stevens
/s/ RONALD R. TAYLOR *
------------------------------------------- Director
Ronald R. Taylor
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ FRANK J. SPINA
-------------------------------------------
Frank J. Spina
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Agreement of Reorganization and Merger, dated as of
February 21, 2000, among MedicaLogic, Inc., Medscape, Inc.,
and Moneypenny Merger Corp. (included in the Joint Proxy
Statement/Prospectus as Appendix A).
2.2 Agreement of Reorganization and Merger, dated as of
February 21, 2000, among MedicaLogic, Inc., Total
eMed, Inc. and AQ Merger Corp. (included in the Joint Proxy
Statement/Prospectus as Appendix B).
3.1 1999 Restated Articles of Incorporation, as amended.
Incorporated by reference to Exhibit 4.1 to MedicaLogic's
Registration Statement on Form S-8 (Registration
No. 333-94751).
3.2 Restated Bylaws of MedicaLogic. Incorporated by reference to
Exhibit 3.2 to MedicaLogic's Registration Statement on
Form S-1 (Registration No. 333-87285) (the "Form S-1").
4.1 See Article II of Exhibit 3.1 and Article V of Exhibit 3.2.
4.2 Specimen Stock Certificate. Incorporated by reference to
Exhibit 4.1 to the Form S-1.
5.1* Opinion of Stoel Rives LLP as to the legality of the
securities being registered.
8.1* Fairness Opinion of Donaldson, Lufkin, and Jenrette
regarding the Medscape Merger (included in the Joint Proxy
Statement/Prospectus as Appendix C).
8.2* Fairness Opinion of Donaldson, Lufkin, and Jenrette
Regarding the Total eMed Merger (included in the Joint Proxy
Statement/Prospectus as Appendix D).
8.3* Fairness Opinion of Lazard Freres & Co. LLC (included in the
Joint Proxy Statement/ Prospectus as Appendix E).
8.4* Form of opinion of Patterson, Belknap, Webb & Tyler LLP
regarding tax consequences of MedicaLogic/Medscape merger.
8.5* Form of opinion of Harwell Howard Hyne Gabbert & Manner P.C.
regarding tax consequences of MedicaLogic/Total eMed merger.
21.1 Subsidiaries of MedicaLogic. Incorporated by reference to
Exhibit 21.1 to the Form S-1.
23.1 Consent of Stoel Rives LLP (included in Exhibit 5.1).
23.2* Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
23.3* Consent of Lazard Freres & Co. LLC.
23.4* Consent of KPMG LLP.
23.5* Consent of Deloitte & Touche LLP.
23.6* Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on Page II-6 of the
Registration Statement).
99.1* Form of Proxy of MedicaLogic.
99.2* Form of Proxy of Medscape.
99.3* Form of Proxy of Total eMed.
</TABLE>
- ------------------------
* Filed herewith
<PAGE>
EXHIBIT 5.1
March 31, 2000
Board of Directors
MedicaLogic, Inc.
20500 NW Evergreen Parkway
Hillsboro, OR 97124
We have acted as counsel for MedicaLogic, Inc., an Oregon corporation
(the "Company"), in connection with the preparation and filing of a Registration
Statement on Form S-4 (the "Registration Statement") under the Securities Act of
1933, as amended, covering 25,350,569 shares of common stock of the Company (the
"Shares") to be issued in connection with the Agreement of Reorganization and
Merger among the Company and Medscape, Inc., a Delaware corporation
("Medscape"), and the Agreement of Reorganization and Merger among the Company
and Total eMed, Inc. a Delaware corporation ("Total eMed") (collectively the
"Merger Agreements"). We have reviewed the corporate actions of the Company in
connection with this matter and have examined the documents, corporate records
and other instruments we deemed necessary for the purpose of this opinion.
Based on the foregoing, it is our opinion that the Company is a
corporation validly existing under the laws of the State of Oregon.
We are further of the opinion that all action necessary to make valid
the proposed issuance of the Shares by the Company will have been taken when:
(1) the Registration Statement, as it may be amended, shall have been
declared effective;
(2) for each of the respective mergers, a Certificate of Merger shall
have been filed in accordance with the laws of the State of
Delaware;
<PAGE>
(3) the respective Merger Agreements shall have been approved by the
requisite votes of the shareholders of the Company and of
Medscape or Total eMed, as the case may be;
(4) all other conditions to the consummation of the mergers
contemplated by the respective Merger Agreements shall have been
satisfied or waived; and
(5) the Shares shall have been appropriately issued and delivered for
the consideration contemplated by, and otherwise in conformity
with, the acts, proceedings and documents referred to above.
We are further of the opinion that when the steps set forth in the
immediately preceding paragraphs shall have been taken, the Shares will have
been duly issued and be validly outstanding and all of the Shares will be fully
paid and non-assessable.
We consent to the use of our name in the Registration Statement and in
the Proxy Statement/ Prospectus filed as a part thereof, and to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ STOEL RIVES LLP
STOEL RIVES LLP
<PAGE>
EXHIBIT 8.4
FORM OF OPINION OF PATTERSON, BELKNAP, WEBB & TYLER LLP
REGARDING TAX CONSEQUENCES OF OF MEDICALOGIC/MEDSCAPE MERGER
Medscape, Inc.
134 West 29th Street
New York, New York 10001
Dear Sirs:
You have requested our opinion as to whether the merger (the "Merger") of
Moneypenny Merger Corp. ("Merger Sub"), a Delaware corporation and a wholly
owned subsidiary of MedicaLogic, Inc. ("MedicaLogic"), an Oregon corporation,
with and into Medscape, Inc. (the "Company"), a Delaware corporation, will be
treated as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
We have examined such contracts, agreements, certificates and other
documents as we believe necessary to render this opinion, including the
following documents, which the Company has furnished to us:
- The Agreement and Plan of Merger among the Company, MedicaLogic and
Merger Sub, dated as of February 21, 2000 (the "Merger Agreement");
- The Joint Proxy Statement/Prospectus relating to the Merger,
dated ____________; and
- The Officer's Certificate of the Company, and the Officers'
Certificate of Merger Sub and MedicaLogic, each dated as of the date
hereof, (together, the "Officers' Certificates," copies of which are
attached hereto and which are incorporated herein by reference).
The Company, MedicaLogic and Merger Sub have represented to us, in the
Officers' Certificates, that the foregoing documents furnished to us are
accurate and complete in all material respects.
In rendering our opinion, we have examined and relied upon the accuracy and
completeness of the facts, information, covenants and representations contained
in originals or copies, certified or otherwise identified to our satisfaction,
of the Merger Agreement, the Proxy Statement and such other documents as we have
deemed necessary or appropriate as a basis for the opinion set forth below. In
addition, we have relied upon, but have not independently verified, certain
statements and representations made by executives of the Company,
<PAGE>
MedicaLogic and Merger Sub, including statements and representations contained
in the Officers' Certificates. In particular, where such statements and
representations are made to the best knowledge and belief of the person making
such statement or representation, we have assumed the facts to be as so stated
and represented. In our examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such documents. We also have assumed that the
Merger will be consummated in accordance with the terms of the Merger Agreement.
Our opinion is conditioned on the initial and continuing accuracy of such facts,
information, covenants, representations, statements and assumptions.
In rendering our opinion, we have considered the applicable provisions of
the Code, the Treasury Regulations promulgated thereunder, pertinent judicial
authorities, interpretive rulings of the Internal Revenue Service (the
"Service") and such other authorities as we have considered relevant. It should
be noted that statutes, regulations, judicial decisions and administrative
interpretations are subject to change at any time and, in some circumstances,
with retroactive effect. A material change in the authorities upon which our
opinion is based could affect our conclusions.
OPINION
Based solely upon the foregoing, and subject to the limitations set forth
herein, it is our opinion that under current law for federal income tax purposes
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code.
You should note that the foregoing opinion will not be binding upon the
Service and it is possible that the Service could take positions contrary to the
opinions set forth herein. Although it is our opinion that even if the Service
took such contrary positions, the Company would prevail, it is possible that the
courts would sustain the Service's challenge. Our opinion does not address any
foreign, state or local tax implications of the proposed reorganization.
<PAGE>
This opinion letter is solely for the benefit of the Company and may not be
quoted or relied upon by any other person or entity without our express prior
written consent. We have no obligation to update this letter to take into
account any developments occurring after the date of this letter. No opinion is
implied or to be inferred beyond the opinions expressly stated herein.
Very truly yours,
PATTERSON, BELKNAP, WEBB & TYLER
By:
----------------------------
A Member of the Firm
<PAGE>
Exhibit 8.5
[GRAPHIC OMITTED]
[H(3)GM LETTERHEAD]
May ____, 2000
Total eMed, Inc.
5301 Virginia Way, Suite 250
Brentwood, TN 37027
Re: MERGER OF AQ MERGER CORP. WITH AND INTO TOTAL EMED, INC.
Dear Ladies/Gentlemen:
We have acted as tax counsel to Total eMed, Inc., a Delaware corporation
("Total eMed"), in connection with the transactions contemplated by that certain
Agreement of Reorganization and Merger dated as of February 21, 2000 (the
"Agreement") by and among MedicaLogic, Inc., an Oregon corporation ("MDLI"), its
wholly-owned subsidiary, AQ Merger Corp., a Delaware corporation ("Merger
Corp."), and Total eMed. Pursuant to the Agreement, Merger Corp. will merge with
and into Total eMed and Total eMed will become a wholly-owned subsidiary of MDLI
(the "Merger").
In connection with the Merger, you have asked us to render an opinion that
the reorganization described in the Agreement will qualify as a tax-free
reorganization pursuant to section 368 of the Internal Revenue Code of 1986, as
amended to the date of this letter (the "Code"). In response to your request,
our opinion is set forth below.
Except as otherwise provided in this letter, capitalized terms referred to
herein have the meanings set forth in the Agreement. All section references,
unless otherwise indicated, are to the Code.
For the purpose of rendering this opinion, we have examined and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents:
1. The Agreement (including Exhibits thereto);
<PAGE>
Total eMed, Inc.
May ____, 2000
Page 2
2. Representations made to us by MDLI and Merger Corp.;
3. Representations made to us by Total eMed;
4. Representations made to us in Continuity of Interest Certificates
by certain shareholders of Total eMed;
5. The Joint Proxy Statement and Form S-4 filed by MDLI with the
Securities and Exchange Commission pursuant to the Securities Exchange Act
of 1934, as amended; and
6. Such other instruments and documents relating to the formation,
organization and operation of MDLI, Merger Corp. and Total eMed or to the
consummation of the Merger and the transactions contemplated in the
Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic;
documents submitted to us as copies conform to the original documents; and
there has been (or will be by the Effective Time of the Merger) due
execution and delivery of all documents where due execution and delivery
are prerequisites to effectiveness thereof.
2. The transactions contemplated by the Agreement and the Form S-4
will be consummated as described therein.
3. Total eMed, MDLI and Merger Corp. have the legal right and power
under all applicable laws and regulations to enter into, execute and
consummate the transactions contemplated by and described in the Agreement
and the Form S-4.
4. The continuity of interest requirement as specified in U.S.
Treasury Regulations Section 1.368-1(e) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions will be
satisfied.
5. After the Merger, Total eMed will hold "substantially all" of the
properties held prior to the Merger by it and Merger Corp. within the
meaning of Section 368(a)(2)(E)(i) of the Code and the Treasury Regulations
promulgated thereunder.
<PAGE>
Total eMed, Inc.
May ____, 2000
Page 3
6. To the extent any expenses relating to the Merger (or the "plan
of reorganization" within the meaning of Treasury Regulations Sections
1.368-1(c) and 1.368- 2(g) with respect to the Merger) are funded directly
or indirectly by a party other than the incurring party, such expenses will
be within the guidelines established in Revenue Ruling 73-54, 1973-1 C.B.
187.
7. No outstanding indebtedness of Total eMed, MDLI or Merger Corp.
has or will represent equity for tax purposes; no outstanding equity of
Total eMed, MDLI or Merger Corp. has represented or will represent
indebtedness for tax purposes; no outstanding security, instrument,
agreement or arrangement (other than Total eMed common or preferred stock)
that provided for or contains a right to acquire Total eMed common or
preferred stock or to share in the appreciation of Total eMed common or
preferred stock will represent outstanding equity of Total eMed for
purposes of Section 368(c) of the Code.
8. Any representation or statement made "to the best of knowledge"
or similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will constitute
a "reorganization" as defined in Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is subject to
the exceptions, limitations and qualifications set forth below.
1. This opinion is rendered as of the date of this letter and
represents, and is based upon our best judgment, regarding the application
of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures.
Our opinion is not binding upon the Internal Revenue Service or the courts,
and the Internal Revenue Service is not precluded from successfully
asserting a contrary position. Furthermore, no assurance can be given that
future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy
of the conclusions stated herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
2. This opinion addresses only the specific tax opinion set forth
above, and does not address any other federal, state, local or foreign tax
consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with
<PAGE>
Total eMed, Inc.
May ____, 2000
Page 4
the Merger). In particular, without limitation, we express no opinion
regarding (i) whether, and the extent to which, any Total eMed shareholder
who has provided or will provide services to Total eMed, MDLI or Merger
Corp. will have compensation income under any provision of the Code; (ii)
the effects of any such compensation income, including but not limited to,
the effect upon the basis and holding period of the MDLI common stock
received by any such shareholder in the Merger; (iii) the potential
application of the "golden parachute" provisions (Sections 280G, 3121(v)(2)
and 4999) of the Code, the alternative minimum tax provisions (Sections 55,
56, and 57) of the Code and Sections 108, 305, 306, 357 and 424 of the
Code, or the Treasury Regulations promulgated thereunder; (iv) the tax
consequences of the Merger to MDLI, Merger Corp. or Total eMed, including
without limitation, the recognition of any gain and the survival and/or
availability, after the Merger, of any of the federal income tax attributes
or elections of Total eMed, after application of any provision of the Code,
as well as the Treasury Regulations promulgated thereunder and judicial
interpretations thereof; (v) the basis of any equity interest in Total eMed
acquired by MDLI in the Merger; (vi) the tax consequences of any
transaction in which Total eMed stock or a right to acquire Total eMed
stock was received; and (vii) the tax consequences of the Merger (including
the opinion set forth above) as applied to specific stockholders of Total
eMed and/or holders of options or warrants for Total eMed stock, including
but not limited to, dealers in securities, corporate shareholders subject
to the alternative minimum tax, foreign persons, and holders of shares
acquired upon exercise of stock options or in other compensatory
transactions, including without limitation the tax consequences to the
holders of options for Total eMed stock of MDLI's assumption of such
outstanding options.
3. No opinion is expressed as to any transaction other than the
Merger as described in the Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Agreement
are not consummated in accordance with the terms of such Agreement and
without waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we have
relied are not true and accurate at all relevant times. In the event any
one of the statements, representations, warranties, or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might
be adversely affected and may not be relied upon.
<PAGE>
Total eMed, Inc.
May ____, 2000
Page 5
4. This opinion is intended solely for the purpose of satisfying the
request of Total eMed, and accordingly, may not be relied upon for any
other purpose or by any other person or entity, and may not be made
available to any other person or entity without our prior written consent.
Sincerely,
HARWELL HOWARD HYNE GABBERT
& MANNER, P.C.
<PAGE>
Exhibit 23.2
CONSENT OF DONALDSON, LUFKIN & JENRETTE
We hereby consent to the inclusion of our opinions, dated February 21,
2000, in the joint proxy statement/prospectus of MedicaLogic, Inc., Medscape,
Inc. and Total eMed, Inc., which is a part of this Registration Statement on
Form S-4 and to the references to such opinions in such joint proxy
statement/prospectus. In executing this consent, we do not admit or acknowledge
that Donaldson, Lufkin & Jenrette Securities Corporation is within the class of
persons whose consent is required by Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder.
Date: March 29, 2000
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By: CHET MEHTA
----------------------------
Name: Chet Mehta
Title: Senior Vice President
<PAGE>
EXHIBIT 23.3
CONSENT OF LAZARD FRERES & CO. LLC
March 30, 1999
The Board of Directors
Medscape, Inc.
134 West 29th Street
New York, New York 10001-5399
We hereby consent to the reference to the opinion of our Firm in the Proxy
Statement. In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
<TABLE>
<S> <C> <C>
Very truly yours,
LAZARD FRERES & CO. LLC
By /s/ STEPHEN H. SANDS
-------------------------------
Stephen H. Sands
Managing Director
</TABLE>
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MedicaLogic, Inc.:
We consent to the use of our Independent Auditors' Report dated February 4,
2000, relating to the consolidated balance sheets of MedicaLogic, Inc. as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1999 which report is included in the
Joint Proxy Statement/Prospectus on Form S-4, dated on or about March 28, 2000,
of MedicaLogic, Inc., and to the reference to our firm under the heading
"Experts" in the Joint Proxy/Registration Statement.
/s/ KPMG LLP
Portland, Oregon
March 28, 2000
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-32390 of MedicaLogic, Inc. on Form S-4 of our report dated February 4,
2000 on the consolidated financial statements of Medscape, Inc. as of
December 31, 1999 and 1998, and for each of the years in the three year period
ended December 31, 1999, appearing in the Prospectus, which is part of this
Registration Statement, and to the use in this Registration Statement of our
report dated April 9, 1999 on the financial statements of Healthcare
Communications Group as of October 27, 1998 and December 31, 1997, and for the
ten months ended October 27, 1998 and for the year ended December 31, 1997,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
March 30, 2000
New York, New York
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 21, 2000 (except with respect to the matter discussed in
the second paragraph of Note 14, as to which the date is February 22, 2000)
relating to the consolidated financial statements of Total eMed, Inc. and
subsidiaries included in this registration statement on Form S-4 of
MedicaLogic Inc., and to all references to our firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 29, 2000
<PAGE>
EXHIBIT 99.1
PROXY
MEDICALOGIC, INC.
Special Meeting, May 10, 2000
PROXY SOLICITED BY BOARD OF DIRECTORS
PLEASE SIGN AND RETURN THIS PROXY
The undersigned hereby appoints Frank Spina, Dave Hoffenbier, and Mark
Leavitt, and each of them, proxies with power of substitution to vote on
behalf of the undersigned all shares that the undersigned may be entitled to
vote at the special meeting of shareholders of MedicaLogic, Inc.
("MedicaLogic") on May 10, 2000 and any adjournments thereof, with all powers
that the undersigned would possess if personally present, with respect to the
following:
1. A proposal to approve 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., Medscape, Inc. and Moneypenny Merger
Corp.
/ / FOR / / AGAINST / / ABSTAIN
2. A proposal to approve 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
3. A proposal to amend 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
4. Transaction of any business that properly comes before the meeting and any
adjournments thereof.
A majority of the proxies or substitutes at the meeting may exercise all the
powers granted hereby.
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE.)
<PAGE>
The shares represented by this proxy will be voted as specified on the reverse
hereof, but if no specification is made, this proxy will be voted for approval
of (i) the issuance of common stock of MedicaLogic in the MedicaLogic/Medscape
merger, (ii) the issuance of common stock of MedicaLogic in the
MedicaLogic/Total eMed merger, and (iii) the amendment of the 1999 restated
articles of incorporation of MedicaLogic. THE PROXIES MAY VOTE IN THEIR
DISCRETION AS TO OTHER MATTERS THAT MAY COME BEFORE THIS MEETING.
Shares:
Date:__________________________________, 2000
_____________________________________________
P Signature or Signatures
R
0 Please date and sign as name is imprinted
X hereon, including designation as executor,
Y trustee, etc., if applicable. A corporation
must sign its name by the president or other
authorized officer.
The Special Meeting of Shareholders of
MedicaLogic, Inc. will be held on May 10
at 10:00 a.m., Pacific Time, at
20500 NW Evergreen Parkway, Hillsboro
Oregon 97124
PLEASE NOTE: ANY SHARES OF STOCK OF MEDICALOGIC HELD IN THE NAME OF FIDUCIARIES,
CUSTODIANS OR BROKERAGE HOUSES FOR THE BENEFIT OF THEIR CLIENTS MAY ONLY BE
VOTED BY THE FIDUCIARY, CUSTODIAN OR BROKERAGE HOUSE ITSELF--THE BENEFICIAL
OWNER MAY NOT DIRECTLY VOTE OR APPOINT A PROXY TO VOTE THE SHARES AND MUST
INSTRUCT THE PERSON OR ENTITY IN WHOSE NAME THE SHARES ARE HELD HOW TO VOTE THE
SHARES HELD FOR THE BENEFICIAL OWNER. THEREFORE, IF ANY SHARES OF STOCK OF
MEDICALOGIC ARE HELD IN "STREET NAME" BY A BROKERAGE HOUSE, ONLY THE BROKERAGE
HOUSE, AT THE INSTRUCTIONS OF ITS CLIENT, MAY VOTE OR APPOINT A PROXY TO VOTE
THE SHARES.
<PAGE>
EXHIBIT 99.2
PROXY
MEDSCAPE, INC.
Special Meeting, May 15, 2000
PROXY SOLICITED BY BOARD OF DIRECTORS
PLEASE SIGN AND RETURN THIS PROXY
The undersigned hereby appoints Steven Kalin, Tony Plesner, and Mark E.
Boulding, and each of them, proxies with power of substitution to vote on
behalf of the undersigned all shares that the undersigned may be entitled to
vote at the special meeting of shareholders of Medscape, Inc. ("Medscape") on
May 15, 2000 and any adjournments thereof, with all powers that the
undersigned would possess if personally present, with respect to the
following:
1. A proposal to approve the Agreement of Reorganization and Merger, dated as
of February 21, 2000, among MedicaLogic, Inc., Medscape, Inc. and
Moneypenny Merger Corp.
/ / FOR / / AGAINST / / ABSTAIN
2. Transaction of any business that properly comes before the meeting and any
adjournments thereof.
A majority of the proxies or substitutes at the meeting may exercise all the
powers granted hereby.
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE.)
<PAGE>
The shares represented by this proxy will be voted as specified on the reverse
hereof, but if no specification is made, this proxy will be voted for approval
of the MedicaLogic/Medscape merger. THE PROXIES MAY VOTE IN THEIR DISCRETION AS
TO OTHER MATTERS THAT MAY COME BEFORE THIS MEETING.
Shares:
Date:__________________________________, 2000
_____________________________________________
P Signature or Signatures
R
0 Please date and sign as name is imprinted
X hereon, including designation as executor,
Y trustee, etc., if applicable. A corporation
must sign its name by the president or other
authorized officer.
The Special Meeting of Shareholders of
Medscape, Inc. will be held on May 15
at 9:30 a..m., Eastern Daylight Time, at
CBS Corporation, Studio 19, 19th Floor,
51 W. 52nd Street, New York, New York 10019
PLEASE NOTE: ANY SHARES OF STOCK OF MEDSCAPE HELD IN THE NAME OF FIDUCIARIES,
CUSTODIANS OR BROKERAGE HOUSES FOR THE BENEFIT OF THEIR CLIENTS MAY ONLY BE
VOTED BY THE FIDUCIARY, CUSTODIAN OR BROKERAGE HOUSE ITSELF--THE BENEFICIAL
OWNER MAY NOT DIRECTLY VOTE OR APPOINT A PROXY TO VOTE THE SHARES AND MUST
INSTRUCT THE PERSON OR ENTITY IN WHOSE NAME THE SHARES ARE HELD HOW TO VOTE THE
SHARES HELD FOR THE BENEFICIAL OWNER. THEREFORE, IF ANY SHARES OF STOCK OF
MEDSCAPE ARE HELD IN "STREET NAME" BY A BROKERAGE HOUSE, ONLY THE BROKERAGE
HOUSE, AT THE INSTRUCTIONS OF ITS CLIENT, MAY VOTE OR APPOINT A PROXY TO VOTE
THE SHARES.
<PAGE>
EXHIBIT 99.3
PROXY
TOTAL eMED, INC.
Special Meeting, May 10, 2000
PROXY SOLICITED BY BOARD OF DIRECTORS
PLEASE SIGN AND RETURN THIS PROXY
The undersigned hereby appoints Richard R. Rehm, Ted S. MacDonald, and Kelly
Gill, and each of them, proxies with power of substitution to vote on behalf
of the undersigned all shares that the undersigned may be entitled to vote at
the special meeting of shareholders of Total eMed, Inc. ("Total eMed") on
May 10, 2000 and any adjournments thereof, with all powers that the
undersigned would possess if personally present, with respect to the
following:
1. A proposal to approve 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
2. Transaction of any business that properly comes before the meeting and any
adjournments thereof.
A majority of the proxies or substitutes at the meeting may exercise all the
powers granted hereby.
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE.)
<PAGE>
The shares represented by this proxy will be voted as specified on the reverse
hereof, but if no specification is made, this proxy will be voted for approval
of the MedicaLogic/Total eMed merger. THE PROXIES MAY VOTE IN THEIR DISCRETION
AS TO OTHER MATTERS THAT MAY COME BEFORE THIS MEETING.
Shares:
Date:__________________________________, 2000
_____________________________________________
P Signature or Signatures
R
0 Please date and sign as name is imprinted
X hereon, including designation as executor,
Y trustee, etc., if applicable. A corporation
must sign its name by the president or other
authorized officer.
The Special Meeting of Shareholders of
Total eMed, Inc. will be held on May 10
at 10 a.m., Central Daylight Time, at
5301 Virginia Way, Suite 250, Brentwood,
Tennessee 37027
PLEASE NOTE: ANY SHARES OF STOCK OF TOTAL EMED HELD IN THE NAME OF FIDUCIARIES,
CUSTODIANS OR BROKERAGE HOUSES FOR THE BENEFIT OF THEIR CLIENTS MAY ONLY BE
VOTED BY THE FIDUCIARY, CUSTODIAN OR BROKERAGE HOUSE ITSELF--THE BENEFICIAL
OWNER MAY NOT DIRECTLY VOTE OR APPOINT A PROXY TO VOTE THE SHARES AND MUST
INSTRUCT THE PERSON OR ENTITY IN WHOSE NAME THE SHARES ARE HELD HOW TO VOTE THE
SHARES HELD FOR THE BENEFICIAL OWNER. THEREFORE, IF ANY SHARES OF STOCK OF TOTAL
EMED ARE HELD IN "STREET NAME" BY A BROKERAGE HOUSE, ONLY THE BROKERAGE HOUSE,
AT THE INSTRUCTIONS OF ITS CLIENT, MAY VOTE OR APPOINT A PROXY TO VOTE THE
SHARES.
