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0001104659-01-501927.txt : 20010815 0001104659-01-501927.hdr.sgml : 20010815 ACCESSION NUMBER: 0001104659-01-501927 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICALOGIC/MEDSCAPE INC CENTRAL INDEX KEY: 0000923899 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 930890696 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28285 FILM NUMBER: 1713267 BUSINESS ADDRESS: STREET 1: 20500 NW EVERGREEN PARKWAY STREET 2: STE 400 CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5035317000 MAIL ADDRESS: STREET 1: 20500 NW EVERGREEN PARKWAY CITY: HILLSBORO STATE: OR ZIP: 97124 FORMER COMPANY: FORMER CONFORMED NAME: MEDICALOGIC INC DATE OF NAME CHANGE: 19990818 10-Q 1 j1254_10q.htm 10-Q Prepared by MerrillDirect

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2001 or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-28285

MEDICALOGIC/MEDSCAPE, INC.
(Exact name of registrant as specified in its charter)

Oregon (State or other jurisdiction of incorporation or organization)	93-0890696 (IRS Employer Identification No.)

20500 NW Evergreen Parkway Hillsboro, Oregon 97124 (Address of principal executive offices)

(503) 531-7000
(Registrant's telephone number, including area code)

Check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ýNo o

As of August 10, 2001, there were 56,428,054 shares of the Registrant's Common Stock outstanding.

MEDICALOGIC/MEDSCAPE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2001
INDEX

PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000
	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2001 and 2000
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk

PART II: OTHER INFORMATION
Item 1.	Legal Proceedings
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

				June 30, 2001			December 31, 2000 (1)


ASSETS

Current assets:
	Cash and cash equivalents			$	10,308		$	41,647
	Short–term investments			7,982			9,857
	Accounts receivable, net			10,018			13,428
	Net assets of discontinued operation			–			288,398
	Prepaid expenses and other current assets			14,040			14,272

		Total current assets		42,348			367,602
Property and equipment, net				21,878			26,343
Goodwill and intangibles, net				386,673			515,185
Prepaid advertising and other assets, net				62,696			54,893

			Total assets	$	513,595		$	964,023

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
	Accounts payable			$	2,743		$	2,457
	Accrued and other liabilities			12,876			21,923
	Net liabilities of discontinued operation			2,050			–
	Deferred revenue			11,518			10,548
	Long term liabilities, current portion			2,861			12,131

		Total current liabilities		32,048			47,059

Long term liabilities, net of current portion				1,699			4,623
Long term deferred revenue, net of current portion				814			814

			Total liabilities	34,561			52,496

Convertible redeemable preferred stock subscribed				–			15,800

Series 1 convertible redeemable preferred stock, 50,000,000 authorized, no par value, 5,933,332 and no shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively				8,819			–

Shareholders' equity:
	Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 56,428,054 and 55,657,348 shares at June 30, 2001 and December 31, 2000, respectively			1,254,633			1,255,375
	Common stock notes receivable, net			(6,215		)	(6,728		)
	Warrants			52,722			32,818
	Deferred stock compensation			(412		)	(741		)
	Accumulated deficit			(830,513		)	(384,997		)

		Total shareholders' equity		470,215			895,727

			Total liabilities and shareholders' equity	$	513,595		$	964,023

See Accompanying Notes to Condensed Consolidated Financial Statements.

(1) Derived from audited financial statements.

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

			Three Months Ended June 30,						Six Months Ended June 30,

			2001			2000			2001			2000


Revenues:
	Application license		$	1,129		$	1,134		$	2,481		$	4,573
	Subscription and support services		3,491			2,091			6,743			4,260
	Sponsorship and advertising		6,364			6,316			12,452			6,316

		Total revenues	10,984			9,541			21,676			15,149
	Non-cash sales discounts		(208		)	–			(208		)	–

		Net revenues	10,776			9,541			21,468			15,149

Operating expenses:
	Cost of revenues:
		Application license	64			93			312			554
		Subscription and support services	2,896			4,305			6,574			8,316
		Sponsorship and advertising	2,330			2,733			5,131			2,733
	Marketing and sales		10,780			15,518			23,191			24,177
	Research and development		3,931			4,318			9,244			8,077
	General and administrative		2,296			4,102			5,987			7,407
	Depreciation and amortization		60,787			32,706			126,689			34,660
	Restructuring charges		–			13,558			–			13,558
	Non-recurring gain		(8,500		)	–			(8,500		)	–


		Total operating expenses	74,584			77,333			168,628			99,482

Operating loss			(63,808		)	(67,792		)	(147,160		)	(84,333		)

	Other income, net		53			1,905			673			3,720

Loss from continuing operations			(63,755		)	(65,887		)	(146,487		)	(80,613		)

Discontinued operations:
	Loss from operations of discontinued operations		(23,160		)	(12,983		)	(46,614		)	(12,983		)
	Loss on disposal of discontinued operations, including provision of $7,750 for operating losses during phase-out period		(252,415		)	–			(252,415		)	–

Net loss			$	(339,330	)	$	(78,870	)	$	(445,516	)	$	(93,596	)

Basic and diluted net loss per share:
	Loss from continuing operations		$	(1.14	)	$	(1.55	)	$	(2.63	)	$	(2.18	)
	Loss from discontinued operations		(4.91		)	(0.30		)	(5.36		)	(0.35		)

	Net loss per share		$	(6.05	)	$	(1.85	)	$	(7.99	)	$	(2.53	)

Weighted average shares: basic and diluted			56,071			42,715			55,791			37,059

See Accompanying Notes to Condensed Consolidated Financial Statements.

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

				Six Months Ended June 30,

				2001			2000

Cash flows from operating activities:
	Net loss			$	(445,516	)	$	(93,596	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		126,689			34,660
		Other non-cash charges		4,236			3,705
		Non-cash restructuring charges		–			8,847
		Non-recurring gain		(8,500		)	–
		Loss from operations of discontinued operations		46,614			12,983
		Loss on disposal of discontinued operations		252,415			–
	Changes in assets and liabilities:
		Accounts receivable		3,410			(1,305		)
		Prepaid expenses and other assets		1,188			2,144
		Accounts payable		286			3,832
		Accrued liabilities		(11,097		)	5,283
		Deferred revenue		970			116

			Net cash used in operating activities	(29,305		)	(23,331		)

Cash flows from investing activities:
	Purchases of (proceeds from) short-term investments, net			1,875			(19,618		)
	Payments related to business combinations			(2,000		)	(14,687		)
	Purchases of property and equipment			(1,982		)	(13,553		)

			Net cash used in investing activities	(2,107		)	(47,858		)

Cash flows from financing activities:
	Proceeds from issuance of preferred stock, net			1,000			–
	Proceeds from issuance of common stock, net			1,258			605
	Payments of long-term liabilities, net			(2,185		)	(837		)

			Net cash provided by (used in) financing activities	73			(232		)

			Net decrease in cash and cash equivalents	(31,339		)	(71,421		)
Cash and cash equivalents, beginning of period				41,647			110,320

Cash and cash equivalents, end of period				$	10,308		$	38,899

Summary of non–cash investing and financing activities:
Fair value at conversion of the outstanding common stock, options and warrants in conjunction with the business combinations with Medscape, Inc. and Total eMed, Inc.				$	–		$	1,058,492
Assets acquired under capital leases				$	240		$	–

See Accompanying Notes to Condensed Consolidated Financial Statements.

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Business

MedicaLogic/Medscape, Inc., d.b.a. Medscape (together with its subsidiaries "Medscape" or the "Company"), is a leading provider of digital health record systems and information to the healthcare industry. Medscape develops digital health record applications designed to improve healthcare through the timely delivery of clinical data and information to healthcare professionals and consumers. The Company also provides online health information including medical news, articles, and conference coverage through its Internet portals, Medscape.com and CBSHealthWatch.com. Medscape's products and services are designed to enhance and improve the quality, cost, efficiency, safety and outcome of healthcare.

The Company was incorporated in Oregon in May 1985 as MedicaLogic, Inc. The Company's name was changed to MedicaLogic/Medscape, Inc. in May 2000. Since September 2000, the Company has done business under the trade name Medscape. The Company expanded its products and services in 2000 as a result of its merger with Medscape, Inc. ("Medscape, Inc."), and the acquisitions of Total eMed, Inc. ("Total eMed") and AnywhereMD.com, Inc. ("AnywhereMD.com"). These transactions added the following assets, respectively: Internet healthcare portals, Web-based transcription capability for the creation of digital health records and wireless prescribing technology for the Palm O/S™ platform. On July 31, 2001, the Company entered into a definitive agreement to sell Total eMed, Inc. to a new entity to be funded by Parthenon Capital, a Boston based private equity firm, for approximately $6.0 million in cash.

(b) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company's management and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ended December 31, 2001.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted under the Securities and Exchange Commission's rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company's Annual Report on Form 10-K/A for the year ended December 31, 2000 filed with the Securities and Exchange Commission.

(c) Discontinued Operations

On July 31, 2001, the Company entered into a definitive agreement to sell Total eMed, Inc. to a new entity to be funded by Parthenon Capital, a Boston based private equity firm, for approximately $6.0 million in cash. As a result, the operations of Total eMed, Inc., the Company’s transcription services segment, have been classified as discontinued operations in the accompanying Condensed Consolidated Financial Statements and related Notes. Revenues for Total eMed, Inc. were approximately $3.5 million and $6.7 million for the three months and six months ended June 30, 2001, respectively. Revenues for Total eMed, Inc. were approximately $1.3 million for the three months and six months ended June 30, 2000.

During the three months ended June 30, 2001, the Company adopted a plan to transfer the operations and certain assets of AnywhereMD, Inc. to an employee of the Company. Accordingly, the Company recognized a loss on disposal of AnywhereMD of approximately $4.6 million.

(d) Reclassifications

Amounts in the condensed consolidated financial statements as of December 31, 2000 and the three and six months ended June 30, 2000 have been reclassified to conform to the current period’s presentation, including discontinued operations.

(2) RESTRUCTURING CHARGES

Primarily as a result of the merger and acquisitions completed in 2000, the Company adopted certain restructuring plans during the year ended December 31, 2000. The restructuring plans resulted in restructuring charges related to the consolidation of duplicate functions and activities. These actions resulted in a reduction of approximately 300 employees or approximately 28% of the workforce, across essentially all of the Company’s functions and locations, a reduction in total facilities, including the closing of the San Francisco office and the impairment of certain assets.

Restructuring charges are primarily comprised of costs associated with employee severance, cancellation of lease agreements, and impairments of abandoned technologies and property and equipment. These charges amounted to approximately $17.5 million for the year ended December 31, 2000. At June 30, 2001, approximately $110,000 relating to these programs was included in current liabilities.

As of June 30, 2001, the following amounts were recorded (in thousands):

	Employee severance and related expenses		Impairment of technology and intangible assets		Abandonment and impairment of facilities, property and equipment		Total

2000 restructuring charges	$	11,287	$	3,108	$	3,111	$	17,506
Write-offs/payments	11,177		3,108		3,111		17,396

Restructuring accrual balance at June 30, 2001	$	110	$	–	$	–	$	110

The above provisions and related restructuring reserves are estimates based on the Company's current knowledge. Adjustments to the restructuring provisions may be necessary in the future based on further developments regarding restructuring related costs.

(3) BALANCE SHEET COMPONENTS

Warrants and Long-Term Liabilities

America Online, Inc.

As a result of the Company's merger with Medscape, Inc. in May 2000, outstanding warrants to purchase shares of Medscape, Inc. common stock were converted to warrants to purchase 0.323 shares of the Company's common stock. At June 30, 2001, warrants to purchase 436,747 shares of the Company's common stock were exercisable at $30.96 per share and warrants to purchase 436,747 shares of the Company's common stock were exercisable at $10.84. The warrants were issued in connection with an agreement with AOL under which AOL has agreed to promote the Company's co-branded websites, through contextual links and banners, on the following AOL properties: AOL, AOL.com, CompuServe Service, Netscape Netcenter and Digital City. The agreement also required cash payments of $33 million to be paid to AOL, of which, the Company had paid approximately $18 million through March 31, 2001. The remaining $15 million was due through May 2002. In May 2001, the Company and AOL amended the terms of the agreement with respect to the remaining payments under this agreement. In accordance with the amendment, the Company paid AOL $1 million in June 2001 and the remaining balance was reduced to $333,000, due in four equal monthly payments beginning May 2002 through August 2002. The amendment also requires Medscape to provide certain advertising and promotional services to AOL valued at approximately $1.3 million through August 2002. As a result of the amendment, the Company recorded a net gain of $8.5 million during the three months ended June 30, 2001, reflected as a non-recurring gain. Also, in connection with the amendment, the amount of impressions to be received from AOL over the remainder of the agreement was reduced. Accordingly, the Company reduced the carrying value of the related intangible assets from approximately $6.3 million to $3.2 million to reflect the current fair value of the asset at June 30, 2001.

General Motors Corporation

In connection with the Company’s alliance with General Motors Corporation (“GM”), GM received warrants to purchase 5 million shares of Medscape’s common stock valued at approximately $12.5 million. The warrants were valued using the Black-Scholes option pricing model using the following assumptions: exercise price of $2.31, stock price of $3.56, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no dividends. Under the terms of the agreement, the warrants are non-forfeitable and fully vested at the date of grant. In addition, GM Corporation is bound to certain sale lock-up periods, as specified in the agreement. The value of the warrants issued under this alliance is being amortized as a non-cash sales discount over the life of the agreement, June 2001 through June 2004. Amortization of this non-cash sales discount during the three months and six months ended June 30, 2001 was approximately $208,000.

Preferred Stock and Warrant Agreement

On January 4, 2001, the Company closed a $17.8 million capital financing arrangement of which $15.8 million was received prior to December 31, 2000. The financing involved the issuance of 5,933,332 shares of Series 1 convertible redeemable preferred stock at $3 per share, with associated warrants to purchase 4,537,254 shares of common stock at an exercise price of $0.01 per share. The preferred stock carries a contingent cumulative annual dividend of $0.27 per share due only if certain conditions are met, is convertible into common stock on a share for share basis at the option of the preferred stock holders or automatically if certain conditions are met, is redeemable at $3.00 per share upon a change in control, is entitled to appoint a director to the Company’s board of directors, and contains approval rights over certain corporate actions.

The warrants to purchase shares were valued at approximately $7.6 million. The warrants are exerciseable for a period of five years, and were valued using the Black-Scholes option pricing model using the following assumptions: exercise price of $0.01, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no dividends.

Upon closing, the Company paid approximately $1 million in cash and issued warrants for 300,000 shares of Medscape common stock valued at approximately $300,000. The warrants were valued using the Black-Scholes option pricing model with the following assumptions: exercise price of $2.40, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no dividends. Total fees of $1.3 million associated with the financing were netted against proceeds received.

(4) SEGMENT INFORMATION

Summary financial data by business segment follows (in thousands):

		Three Months Ended June 30,						Six Months Ended June 30,

		2001			2000			2001			2000

Digital Health Record application:
	Net revenues	$	4,412		$	3,225		$	9,016		$	8,833
	Operating loss	(4,128		)	(11,953		)	(9,226		)	(23,235		)

Internet portal:
	Net revenues	6,364			6,316			12,452			6,316
	Operating loss	(3,305		)	(5,472		)	(7,388		)	(5,472		)

Consolidated and other:
	Net revenues	–			–			–			–
	Operating loss	(4,088		)	(4,103		)	(12,357		)	(7,408		)

Consolidated segment totals:
	Net revenues	10,776			9,541			21,468			15,149
	Operating loss	(11,521		)	(21,528		)	(28,971		)	(36,115		)

The following table reconciles consolidated segment operating loss to the Company’s consolidated loss from continuing operations:

	Three Months Ended June 30,						Six Months Ended June 30,

	2001			2000			2001			2000

Consolidated segment operating loss	$	(11,521	)	$	(21,528	)	$	(28,971	)	$	(36,115	)
Corporate and other unallocated shared income	53			1,905			673			3,720
Depreciation and amortization	(60,787		)	(32,706		)	(126,689		)	(34,660		)
Restructuring and other charges	–			(13,558		)	–			(13,558		)
Non-recurring gain	8,500			–			8,500			–

Loss from continuing operations	$	(63,755	)	$	(65,887	)	$	(146,487	)	$	(80,613	)

(5) SUBSEQUENT EVENTS

In July 2001, the Company adopted a restructuring plan, which resulted in a reduction of approximately 100 employees or approximately 22% of the workforce, excluding Total eMed, Inc., targeted primarily to general and administrative functions of the Company which will result in the recognition of restructuring charges during the three months ended September 30, 2001.

In July 2001, the Company also announced that it had retained Lazard Freres & Co. LLC as its financial advisor. Medscape, in conjunction with Lazard Freres, is exploring a variety of strategic and funding options, including the possible sale of parts or all of the Company.

On August 2, 2001, the Company received notice from NASDAQ that the Company’s common stock had failed to maintain a minimum bid price of $1.00 over the prior thirty (30) consecutive trading days as required by the NASDAQ National Marketplace Rules (the Rules). The Company has until October 31, 2001 to regain compliance with the Rules or the Company’s common stock will be subject to possible delistment from the exchange. Regaining compliance requires, in part, that the Company’s bid price for shares of its common stock trade at or above $1.00 for a minimum of 10 consecutive trading days before October 31, 2001.

On August 2, 2001, the law firm of Bernstein, Liebhard & Lifshitz, LLP announced that the Company, a current director, a prior officer and four underwriters of our initial public offering are defendants in a class action lawsuit filed in the United States District Court for the Southern District of New York. The Company has not yet been served with the complaint. However, the purported class action is brought on behalf of purchasers of our common stock between December 13, 1999 and December 6, 2000. The plaintiffs allege that our prospectus was materially false and misleading because it failed to disclose, among other things, that our lead underwriter required several investors who wanted large allocations of initial public offering securities to pay undisclosed and excessive underwriters' compensation in the form of increased brokerage commissions and required investors to agree to buy shares after the initial public offering was completed at predetermined prices as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that because of these purchases, the Company's post-initial public offering stock price was artificially inflated. As a result of the alleged omissions and the purported inflation of our stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. We intend to vigorously defend the lawsuit.

On August 7, 2001, Dr. Mark Leavitt's ex-wife Sandra Leavitt filed a lawsuit against Dr. Leavitt "individually and in his capacity as Chairman of the Board of MedicaLogic/Medscape." The complaint, filed in Mulmomah County Circuit Court as Case No. 0108-08072, alleges that Dr Leavitt and the Company defrauded Ms. Leavitt into signing a lock-up agreement with the underwriters of the Company's initial public offering. The lock-up agreement barred Ms. Leavitt, for a period of time, from selling her Company stock without written consent of the lead underwriter on the public offering. Ms Leavitt alleges that, but for the lock-up agreement, she would have sold her stock in the public market at $50 per share and that, if she had done so, her return would have been $12,625,000. We intend to vigorously defend the lawsuit.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS.

This report contains, including the following discussions, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, among others, those statements using terminology such as ‘‘may’’, ‘‘will’’, ‘‘expects’’, ‘‘plans’’, ‘‘estimates’’, ‘‘anticipates’’, ‘‘potential’’, ‘‘believes’’, ‘‘intends’’ or the negative thereof or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future.

Forward-looking statements include statements regarding the rate of growth and acceptance of Medscape’s Internet and wireless products and services, new products, web sites and services, expected revenues from advertising, sponsored programs, sponsored content, eCommerce, license and subscription fees and the relative mix between revenue sources, the level of research and development, sales and marketing, administrative and other operating costs, additional investment in staff and infrastructure and additional capital needs. Medscape wishes to caution the reader that these forward-looking statements involve risks and uncertainties and the factors described under ‘‘Risk Factors’’ in the Company's 10-K/A filed with the Securities and Exchange Commission may cause Medscape’s results to differ materially from those stated in the forward-looking statements. The following discussions also should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2000 filed on Form 10K/A with the Securities and Exchange Commission on May 29, 2001.

OVERVIEW

Medscape was founded in 1985 as MedicaLogic, Inc., and until 2000 was solely focused on the development, marketing and support of digital health record ("DHR") systems. In May 2000, the Company expanded its products and services as a result of its merger with Medscape, Inc., and the acquisitions of Total eMed, Inc. and AnywhereMD, Inc. These transactions added the following assets, respectively: leading Internet healthcare portals, Web-based transcription capability for the creation of digital health records and wireless prescribing technology for the Palm O/S™ platform. The results of operations for acquired businesses are included in the 2000 results from the acquisition date forward. Since September 2000, the Company has done business under the name Medscape. On July 31, 2001, the Company entered into a definitive agreement to sell Total eMed, Inc. to a new entity to be funded by Parthenon Capital, a Boston based private equity firm, for approximately $6.0 million in cash. As a result, the operations of Total eMed Inc., the Company's transcription services segment, have been classified as discontinued operations in the accompanying Condensed Consolidated Financial Statements and related Notes.

Medscape is a leading provider of digital health record (DHR) systems for the healthcare industry. The DHR replaces or augments the paper medical record, provides decision support, and facilitates the flow of clinical information necessary for patient care, potentially increasing both efficiency and safety. As of June 30, 2001, Medscape DHR systems housed digital records for more than 15 million patients. The DHR line of business derives revenues from software licenses, monthly service subscriptions, and support and consulting fees. Customers for this product line include academic medical centers such as Baylor College of Medicine, healthcare delivery networks such as Providence Health System in Portland, Oregon (which provides regional healthcare to customers through a combination of hospitals, clinics, physician practices, and other healthcare facilities and services), and both the NASA space shuttle program and the International Space Station program.

The Company's Internet portals are Medscape.com for physicians and other healthcare professionals, and CBSHealthWatch.com for consumers. Through Medscape.com, the Company provides medical news, articles, and conference coverage as well as accredited continuing medical education programs. As of June 30, 2001, approximately 625,000 physicians and 1.8 million non–physician healthcare professionals (such as nurses and physician assistants) worldwide had registered at Medscape.com, and during the second quarter of 2001 approximately 50,000 hours of accredited continuing medical education were delivered via the site. Through CBSHealthWatch.com, the Company provides health information tailored to the healthcare consumer's perspective. CBSHealthWatch.com is the exclusive Internet healthcare site integrated into CBS News programming and is promoted on some Viacom media properties, including CBS. The Internet portal line of business derives revenue from advertising and sponsorship. Customers for this line of business include leading pharmaceutical companies such as GlaxoSmithKline, Merck and Pfizer.

The Company is working to integrate its existing offerings to customers by combining a number of the Company's products and services, and is also supporting the creation of reports and data produced from its DHR products and Internet portals. To protect the privacy of individual, identifiable health information, these reports provide only aggregated, statistical information about substantial populations. These integrated offerings will focus on the education of physicians and patients about new treatments, on improved safety and appropriateness of prescribing, on recruitment of patients for clinical research trials and other matters. The Company has announced two transactions that represent the first step in presenting an integrated offering. In its agreement with GlaxoSmithKline, the world's largest pharmaceutical company, we combined the sale of sponsorship and promotional services on its Internet portals with the sale of aggregated statistical data on disease management from its DHR systems. In its agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of sales of its DHR products and our new Medscape Mobile handheld software. These products provide both a prescription writer and access to information from the Company's Internet portals to physicians who treat GM patients. GM will also receive reports and other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. GM and Medscape will share in any savings from prescription drug claims realized directly from usage of Medscape Mobile. Revenues have not been significant to date.

RECENT DEVELOPMENTS

In July 2001, the Company entered into a definitive agreement to sell its transcription services segment, Total eMed, Inc. The agreement was preceded by the signing of a letter of intent to sell the business unit for approximately $6.0 million in cash to a new entity to be funded by Parthenon Capital, a Boston-based private equity firm. In the accompanying financial statements, the operations of the transcription services segment have been classified as discontinued operations. Metric data herein excludes Total eMed, Inc. For the quarter ended June 30, 2001, Medscape recorded losses from discontinued operations of approximately $275.6 million comprised of the results of operations of Total eMed, Inc., the loss on disposal of the net assets, the direct costs of the disposition, and the estimated future net operating losses of the transcription business through the estimated closing date. The loss on disposal of net assets consists primarily of goodwill, which arose from the purchase of Total eMed, Inc. in May 2000 for approximately eight million shares of Medscape’s common stock that was valued at the time of the announcement of the acquisition at approximately $42.67 per share.

On August 2, 2001, the Company received notice from NASDAQ that the Company's common stock had failed to maintain a minimum bid price of $1.00 over the prior thirty (30) consecutive trading days as required by the NASDAQ National Marketplace Rules (the Rules). The Company has until October 31, 2001 to regain compliance with the Rules or the Company's common stock will be subject to possible delistment from the exchange. Regaining compliance requires, in part, that the Company's bid price for shares of its common stock trade at or above $1.00 for a minimum of 10 consecutive trading days before October 31, 2001.

On August 2, 2001, the law firm of Bernstein, Liebhard & Lifshitz, LLP announced that the Company, a current director, a prior officer and four underwriters of our initial public offering are defendants in a class action lawsuit filed in the United States District Court for the Southern District of New York. The Company has not yet been served with the complaint. However, the purported class action is brought on behalf of purchasers of our common stock between December 13, 1999 and December 6, 2000. The plaintiffs allege that our prospectus was materially false and misleading because it failed to disclose, among other things, that our lead underwriter required several investors who wanted large allocations of initial public offering securities to pay undisclosed and excessive underwriters' compensation in the form of increased brokerage commissions and required investors to agree to buy shares after the inital public offering was completed at predetermined prices as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that because of these purchases, the Company's post-initial public offering stock price was artificially inflated. As a result of the alleged omissions and the purported inflation of our stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. We intend to vigorously defend the lawsuit.

RESULTS OF OPERATIONS

KEY METRICS

The following table highlights key metrics the Company uses to measure adoption of its products and services (in thousands). Metric data presented herein excludes contributions from Total eMed, Inc. and referenced prior period data has been restated on a pro forma basis for comparability with the current presentation.

		June 30,

		2001	2000

Registered Digital Health Record (DHR) application users:
	Logician by Medscape	13	9
	Medscape Mobile	103	–
	Other Internet-based and hand-held products	14	8

Total registered DHR application users		130	17

Total digital health records		15,022	10,324

Registered Internet portal users (worldwide):
	Physicians	625	440	(1)
	Allied health professionals	1,775	1,200	(1)
	Consumers	1,225	850	(1)

Total registered Internet portal users		3,625	2,490	(1)

(1)	Registered Internet portal users as of June 30, 2000 presented above are those of Medscape, Inc, which merged with MedicaLogic, Inc. in May 2000.

At June 30, 2001, the number of digital health records in the Company’s systems was approximately 15 million. By June 30, 2001, approximately 103,000 physicians and other healthcare professionals had downloaded Medscape Mobile applications. Clinician users of the Company’s other Internet-based and handheld devices totaled approximately 14,000 at June 30, 2001.

Registered users worldwide of Medscape’s Internet portals totaled approximately 3.6 million as of June 30, 2001, including approximately 625,000 registered physicians, 1.8 million registered allied healthcare professionals and 1.2 million registered consumer users. The Company issued approximately 50,000 and 22,000 online continuing medical education (“CME”) credits during the three months ended June 30, 2001 and 2000, respectively.

Revenues

The following table presents net revenues of the Company for the three and six month periods ended June 30, 2001 and 2000 (in thousands, except percentages).

			Three Months Ended June 30,									Six Months Ended June 30,

			2001					2000				2001					2000

Revenues:
	Application license		$	1,129		10.3	%	$	1,134	11.9	%	$	2,481		11.4	%	$	4,573	30.2	%
	Subscription and support services		3,491			31.8		2,091		21.9		6,743			31.1		4,260		28.1
	Sponsorship and advertising		6,364			57.9		6,316		66.2		12,452			57.5		6,316		41.7

		Total revenues	10,984			100.0		9,541		100.0		21,676			100.0		15,149		100.0

Non-cash sales discount			(208		)	(1.9	)	–		–		(208		)	(1.0	)	–		–

		Net revenues	$	10,776		98.1	%	$	9,541	100.0	%	$	21,468		99.0	%	$	15,149	100.0	%

Three Months Ended June 30, 2001 and 2000

Application License Revenues

Application license revenues consist of revenues from perpetual software license sales of Logician by Medscape, the Company’s server-based application.

For the three months ended June 30, 2001, total application license revenue was flat at $1.1 million as compared to the three months ended June 30, 2000. The Company believes this lack of growth resulted primarily from expansion into ASP and subscription-based models for certain product offerings, the temporary deferral of customer orders resulting from both the delay and subsequent adoption of the Health Insurance Portability and Accountability Act (HIPAA) during the first half of 2001 and, in part, to the financial uncertainty regarding ongoing funding of the Company over prospective customers’ long-term planning cycles.

Subscription and Support Services Revenues

Subscription revenues are comprised primarily of recurring fees charged to users of Medscape’s Internet-based, wireless and hand-held applications, including applications in the Medscape Mobile Suite and Logician ASP products. Support services revenues consist primarily of installation services and support fees for DHR applications.

For the three months ended June 30, 2001, total subscription and support services revenues increased from $2.1 million to $3.5 million, or approximately 66.6% as compared to the three months ended June 30, 2000. The increase is due primarily to the Company’s expansion into ASP and subscription-based models for certain product offerings and to an increasing license base utilizing the Company’s service and support offerings.

Sponsorship and Advertising Revenues

Sponsorship and advertising revenues consist primarily of revenue from pharmaceutical companies that sponsor certain content development and purchase advertising services on Medscape’s professional and consumer Internet portals including:

	•	banner advertising, which is based on a specified number of impressions delivered

	•	sponsorship activities related to the development of original client-sponsored content, including modules on specific disease topics

	•	editorial coverage of medical conferences

	•	continuing medical education activities

For the three months ended June 30, 2001, sponsorship and advertising revenues increased from $6.3 million to $6.4 million, or approximately 1.6% as compared to the three months ended June 30, 2000. The increase is due primarily to the inclusion of a full quarter of revenue related to the merger with Medscape, Inc. completed in May 2000. The increase was partially offset by a decrease in advertising revenues due primarily to a general slowing in advertising spending during the first half of 2001.

Six Months Ended June 30, 2001 and 2000

Application License Revenues

For the six months ended June 30, 2001, total application license revenues decreased from $4.6 million to $2.5 million, or approximately 45.7% as compared to the six months ended June 30, 2000. The decrease is due primarily to expansion into ASP and subscription-based models for certain product offerings, the temporary deferral of customer orders resulting from both the delay and subsequent adoption of the Health Insurance Portability and Accountability Act (HIPAA) during the first half of 2001 and, in part, to the financial uncertainty regarding ongoing funding of the Company over prospective customers’ long-term planning cycles.

Subscription and Support Services Revenues

For the six months ended June 30, 2001, total subscription and support services revenues increased from $4.3 million to $6.7 million, or approximately 55.8% as compared to the six months ended June 30, 2000. The increase is due primarily to from the Company’s expansion into subscription-based models for certain product offerings and an increasing license base utilizing the Company’s service and support offerings.

Sponsorship and Advertising Revenues

For the six months ended June 30, 2001, sponsorship and advertising revenues increased from $6.3 million to $12.5 million, or approximately 98.4% as compared to the six months ended June 30, 2000. The increase is due primarily to the inclusion of a full six months of revenue related to the merger with Medscape, Inc. completed in May 2000. The increase was partially offset by a decrease in advertising revenues due primarily to a general slowing in advertising spending during the first half of 2001.

Operating Expenses

The following table and related discussion highlights the operating expenses of the Company for the three and six months ended June 30, 2001 and 2000 (in thousands, except percentages).

		Three Months Ended June 30,									Six Months Ended June 30,

		2001					2000				2001					2000


Total revenues		$	10,984		100.0	%	$	9,541	100.0	%	$	21,676		100.0	%	$	15,149	100.0	%
Non-cash sales discounts		(208		)	(1.9	)	–		–		(208		)	(1.0	)	–		–

Net revenues		10,776			98.1		9,541		100.0		21,468			(99.0	)	15,149		100.0

Operating expenses:
Cost of revenues:
	Application license	64			0.6		93		1.0		312			1.4		554		3.7
	Subscription and support services	2,896			26.4		4,305		45.1		6,574			30.3		8,316		54.9
	Sponsorship and advertising	2,330			21.2		2,733		28.6		5,131			23.7		2,733		18.0
Marketing and sales		10,780			98.1		15,518		162.6		23,191			107.0		24,177		159.6
Research and development		3,931			35.8		4,318		45.3		9,244			42.6		8,077		53.3
General and administrative		2,296			20.9		4,102		43.0		5,987			27.6		7,407		48.9
Depreciation and amortization		60,787			553.4		32,706		342.8		126,689			584.5		34,660		228.8
Restructuring charges		–			–		13,558		142.1		–			–		13,558		89.5
Non-recurring gain		(8,500		)	(77.4	)	–		–		(8,500		)	(39.2	)	–		–

Total operating expenses		$	74,584		679.0	%	$	77,333	810.5	%	$	168,628		777.9	%	$	99,482	656.7	%

Three Months Ended June 30, 2001 and 2000

Cost of Revenues

Cost of revenues includes expenses associated with building, maintaining, and upgrading the Company’s DHR applications and data centers, certain licensing, editorial and content development costs.

Application License. For the three months ended June 30, 2001, cost of application licenses decreased from $0.9 million to $0.6 million, or approximately 31.2% as compared to the three months ended June 30, 2000. The decrease is due primarily to expected decreases in software license revenue as the Company moved to ASP and subscription-based models for more of its product offerings. As a percentage of application license revenues, cost of application licenses decreased from 8.2% to approximately 5.7% due primarily to operating efficiencies obtained from better utilization of the Company’s existing resources.

Subscription and Support Services. For the three months ended June 30, 2001, cost of subscription and support services decreased from $4.3 million to $2.9 million, or approximately 32.6% as compared to the three months ended June 30, 2000. The decrease is due primarily to targeted restructuring efforts undertaken during the second half of 2000. As a percentage of subscription and support service revenues, cost of subscription and support services decreased from 205.9% to approximately 83.0% due primarily to operating efficiencies obtained from better utilization of the Company’s existing resources.

Sponsorship and Advertising. For the three months ended June 30, 2001, cost of sponsorship and advertising services decreased from $2.7 million to $2.3 million, or approximately 14.8% as compared to the three months ended June 30, 2000. The decrease is due primarily to targeted restructuring efforts undertaken during the second half of 2000. As a percentage of sponsorship and advertising revenues, cost of sponsorship and advertising services decreased from 43.3% to approximately 36.6% due primarily to operating efficiencies obtained from better utilization of the Company’s existing resources.

Marketing and Sales

Marketing and sales expense consists primarily of costs to acquire and retain registered users of the Company’s products and the operating expenses associated with ongoing marketing and sales efforts.

For the three months ended June 30, 2001, marketing and sales expense decreased from $15.5 million to $10.8 million, or approximately 30.3% as compared to the three months ended June 30, 2000. As a percentage of total revenues, marketing and sales expense decreased from 162.6% to approximately 98.1%. The decrease is due primarily to the impact of the targeted restructuring actions undertaken during the second half of 2000, reduced outside consulting, and planned reductions in spending.

Research and Development

Research and development expense consists primarily of costs incurred for new software application development and upgrades, and for enhancements to and maintenance of the Company’s Internet portals.

For the three months ended June 30, 2001, research and development expense decreased from $4.3 million to $3.9 million, or approximately 9.3% as compared to the three months ended June 30, 2000. As a percentage of total revenues, research and development expense decreased from 45.3% to approximately 35.8%. The decrease is due primarily to the impact of the targeted restructuring actions undertaken during the second half of 2000, reduced outside consulting, and planned reductions in spending.

General and Administrative

General and administrative expense consists primarily of costs related to the finance, administrative, and legal functions necessary to support the Company’s strategic initiatives.

For the three months ended June 30, 2001, general and administrative expense decreased from $4.1 million to $2.3 million, or approximately 43.9% as compared to the three months ended June 30, 2000. As a percentage of total revenues, general and administrative expense decreased from 43.0% to approximately 20.9%. The decrease is due primarily to the impact of the restructuring actions undertaken during the second half of 2000, reduced occupancy costs and planned reductions in spending.

Depreciation and Amortization

For the three months ended June 30, 2001, depreciation and amortization expense increased from $32.7 million to $60.8 million, or approximately 85.9% as compared to the three months ended June 30, 2000. The increase is due primarily to the inclusion of a full quarter of goodwill amortization expense related to the merger with Medscape, Inc. completed in May 2000 and as a percentage of total revenues depreciation and amortization expense increased from 342.8% to approximately 553.4%.

Restructuring Charges

Restructuring charges for the three months ended June 30, 2000 were $13.6 million and were approximately 142.1% of total revenues. The restructuring charges were due primarily to the consolidation of duplicate business functions and activities across essentially all of the Company’s operating segments resulting from the merger with Medscape, Inc. completed in May 2000.

Non-Recurring Gain

A non-recurring gain of $8.5 million was recognized for the three months ended June 30, 2001 and was approximately 77.4% of total revenues. The gain resulted from the re-negotiation and subsequent reduction of certain of the Company’s contractual liabilities.

Other Income, Net

For the three months ended June 30, 2001, other income, which consists primarily of interest income from investments, decreased from $1.9 million to $0.5 million, or approximately 97.2% as compared to the three months ended June 30, 2000. The decrease is due primarily to lower balances of interest bearing cash equivalents and short-term investments.

Six Months Ended June 30, 2001 and 2000

Cost of Revenues

Application License. For the six months ended June 30, 2001, cost of application licenses decreased from $0.6 million to $0.3 million, or approximately 43.7% as compared to the six months ended June 30, 2000. The decrease is due primarily to expected decreases in software license revenue as the Company moved to ASP and subscription-based models for more of its product offerings. As a percentage of application license revenues, cost of application licenses remained essentially flat at approximately 12%.

Subscription and Support Services. For the six months ended June 30, 2001, cost of subscription and support services decreased from $8.3 million to $6.6 million, or approximately 20.5% as compared to the six months ended June 30, 2000. The decrease is due primarily to targeted restructuring efforts undertaken during the second half of 2000. As a percentage of subscription and support service revenues, cost of subscription and support services decreased from 195.2% to approximately 97.5% due primarily to operating efficiencies obtained from better utilization of the Company’s existing resources.

Sponsorship and Advertising. For the six months ended June 30, 2001, cost of sponsorship and advertising services increased from $2.7 million to $5.1 million, or approximately 88.8% as compared to the six months ended June 30, 2000. The increase is due primarily to the inclusion of additional revenues relating to the merger with Medscape, Inc. in May 2000. As a percentage of sponsorship and advertising revenues, cost of sponsorship and advertising services decreased from 43.3% to approximately 41.2% due primarily to operating efficiencies obtained from better utilization of the Company’s existing resources.

Marketing and Sales

For the six months ended June 30, 2001, marketing and sales expense decreased from $24.2 million to $23.2 million, or approximately 4.1% as compared to the six months ended June 30, 2000. As a percentage of total revenues, marketing and sales expense decreased from 159.6% to approximately 107.0%. The decrease is due primarily to the impact of the targeted restructuring actions undertaken during the second half of 2000, reduced outside consulting, and planned reductions in spending.

Research and Development

For the six months ended June 30, 2001, research and development expense increased from $8.1 million to $9.2 million, or approximately 13.6% as compared to the six months ended June 30, 2000. The increase is due primarily to the inclusion of a full six months of research and development costs related to the merger with Medscape, Inc. completed in May 2000, an increase in the number of technical employees required to support additional growth of the Company’s products and services and new product offerings in the area of wireless-based handheld devices. As a percentage of total revenues, research and development expense decreased from 53.3% to approximately 42.6%, due primarily to the inclusion of additional revenues relating to the merger with Medscape, Inc. in May 2000.

General and Administrative

For the six months ended June 30, 2001, general and administrative expense decreased from $7.4 million to $6.0 million, or approximately 18.9% as compared to the six months ended June 30, 2000. As a percentage of total revenues, general and administrative expense decreased from 48.9% to approximately 27.6%. The decrease is due primarily to the impact of the restructuring actions undertaken during the second half of 2000, reduced occupancy costs and planned reductions in spending.

Depreciation and Amortization

For the six months ended June 30, 2001 depreciation and amortization expense increased from $34.7 million to $126.7 million, or approximately 265.1% as compared to the six months ended June 30, 2000. The increase is due primarily to the inclusion of a full six months of goodwill amortization expense related to the merger with Medscape, Inc. completed in May 2000 and as a percentage of total revenues, depreciation and amortization expense increased from 228.8% to approximately 584.5%.

Restructuring Charges

Restructuring charges for the six months ended June 30, 2000 were $13.6 million and were approximately 89.5% of total revenues. The restructuring charges were due primarily to the consolidation of duplicate business functions and activities across essentially all of the Company’s operating segments resulting from the merger with Medscape, Inc. in May 2000.

Non-Recurring Gain

A non-recurring gain of $8.5 million was recognized for the six months ended June 30, 2001 and was approximately 39.2% of total revenues. The gain resulted from the re-negotiation and subsequent reduction of certain of the Company’s contractual liabilities.

Other Income, Net

For the six months ended June 30, 2001, other income decreased from $3.7 million to $0.7 million, or approximately 81.8% as compared to the six months ended June 30, 2000. The decrease was due primarily to lower balances of interest bearing cash equivalents and short-term investment balances, in addition to the recognition of a loss on the sale of certain fixed assets as a result of the closing of the Company’s San Francisco office.

Segment Results of Operations

The Company currently has two reportable operating segments. For further information regarding segments, please refer to Note 4 – Segment Information contained in the Notes to the Condensed Consolidated Financial Statements.

A summary of the segment financial information is as follows (in thousands):

				Three Months Ended June 30,						Six Months Ended June 30,

				2001			2000			2001			2000

Segment revenues:
Digital Health Record application				$	4,412		$	3,225		$	9,016		$	8,833
Internet portal				6,364			6,316			12,452			6,316

		Total net revenues		10,776			9,541			21,468			15,149

Segment loss from operations:
	Digital Health Record application			(4,128		)	(11,953		)	(9,226		)	(23,235		)
	Internet portal			(3,305		)	(5,472		)	(7,388		)	(5,472		)
Consolidated and other charges				(4,088		)	(4,103		)	(12,357		)	(7,408		)
Depreciation, amortization, restructuring and non-recurring gain				(52,287		)	(46,264		)	(118,189		)	(48,218		)

			Total loss from operations	$	(63,808	)	$	(67,792	)	$	(147,160	)	$	(84,333	)

Segment Revenues

Digital health record application segment revenues include both application license revenues and subscription and support service revenues. Internet portal segment revenues consist of sponsorship and advertising revenues. See management’s discussion and analysis of revenues presented under Results of Operations.

Segment Loss from Operations

Digital Health Record Application. For the three months ended June 30, 2001, loss from operations for the digital health record application segment decreased from approximately $12.0 million to $4.1 million, or approximately 65.8% as compared to the three months ended June 30, 2000. The decrease is due primarily to a 36.7% increase in segment revenues in addition to improved margins due to operating efficiencies obtained from better utilization of the Company’s existing resources. For the six months ended June 30, 2001, loss from operations for the digital health record application segment decreased from approximately $23.2 million to $9.2 million, or approximately 60.3% as compared to the six months ended June 30, 2000. The decrease is due primarily to a 2.0% increase in segment revenues in addition to improved margins due to operating efficiencies obtained from better utilization of the Company’s existing resources.

Internet Portal. For the three months ended June 30, 2001, loss from operations for the Internet portal segment decreased from approximately $5.5 million to $3.3 million, or approximately 40.0% as compared to the three months ended June 30, 2000. The decrease is due primarily to targeted restructuring efforts undertaken during the second half of 2000, in addition to efficiencies obtained from better utilization of the Company’s existing resources. For the six months ended June 30, 2001, loss from operations for the Internet portal segment increased from approximately $5.5 million to $7.4 million, or approximately 34.5% as compared to the six months ended June 30, 2000. The increase is due primarily to the inclusion of a full six months of operating losses from Medscape, Inc which merged with MedicaLogic, Inc. in May 2000.

Liquidity and Capital Resources

The following table calculates the net operating loss before depreciation, amortization, restructuring and non-recurring gains (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,

	2001			2000			2001			2000


Operating loss	$	(63,808	)	$	(67,792	)	$	(147,160	)	$	(84,333	)
Depreciation and amortization	60,787			32,706			126,689			34,660
Restructuring and other charges	–			13,558			–			13,558
Non-recurring gain	(8,500		)	–			(8,500		)	–

Operating loss before depreciation, amortization, restructuring and non-recurring gains	$	(11,521	)	$	(21,528	)	$	(28,971	)	$	(36,115	)

As of June 30, 2001, the Company’s cash and cash equivalents balance totaled approximately $10.3 million and short-term investments totaled $8.0 million, a decrease in total of $33.2 million from the December 31, 2000 balances of $41.6 million and a $9.9 million, respectively.

The Company’s operating activities resulted in net cash outflows of approximately $29.3 million and $23.3 million for the six months ended June 30, 2001 and 2000, respectively. Cash outflows for the six months ended June 30, 2001 resulted from the Company’s operating loss of $146.5 million which included a non-cash gain of $8.5 million offset by depreciation and amortization of $126.7 million and other non-cash charges of $4.2 million. Also contributing to cash outflows for the six months ended June 30, 2001 were decreases in accrued liabilities of $11.0 million, resulting primarily from processing efficiencies from the consolidation of accounting functions in the Company’s corporate headquarters and lower operating expenses. Cash outflows were partially offset by decreases in accounts receivable of $3.4 million and prepaid assets of $1.2 million primarily from the amortization of prepaid maintenance contracts, prepaid insurance and prepaid royalties. Cash outflows for the six months ended June 30, 2000 resulted primarily from the Company’s operating loss of $80.6 million, offset by depreciation and amortization of $34.7 million, non cash restructuring charges of $8.9 million and increases in accounts payable and accrued liabilities of $9.1 million.

Investing activities resulted in net cash outflows of $2.1 million and $47.9 million for the six months ended June 30, 2001 and 2000 respectively. Cash outflows for the six months ended June 30, 2001 resulted primarily from purchases of property and equipment of approximately $2.0 million comprised primarily of computer hardware, software, and certain capitalized web site development costs and payments of $2.0 million related to the settlement of certain liabilities from the acquisition of Total eMed, Inc. Cash outflows were partially offset by net proceeds of $1.9 million from short-term investments. Cash outflows for the six months ended June 30, 2000 resulted primarily from net purchases of short-term investments of $19.6 million and payments related to business combinations of $14.7 million.

Financing activities resulted in net cash inflows of approximately $0.1 million for the six months ended June 30, 2001 and net cash outflows of approximately $0.2 million for the six months ended June 30, 2000. Cash inflows for the six months ended June 30, 2001 resulted from the collection of the remaining $1.0 million in net proceeds from the issuance of preferred stock that closed on January 4, 2001, and the issuance of $1.3 million of common stock from the exercise of options and common stock warrants and sales under the employee stock purchase plan offset by payments of $2.2 million for obligations under capital lease agreements and notes payable. Cash inflows for the six months ended June 30, 2000 resulted primarily from the issuance of common stock in the amount of approximately $0.6 million, offset by payments of approximately $0.8 million for obligations under capital lease agreements.

Medscape currently anticipates that it will continue to see reductions in future operating expenses resulting from improved operations and the full implementation of cost reducing initiatives, including the estimated cost savings derived from the 22% workforce reduction announced in July and the renegotiation of certain key partnership agreements. Management believes that the Company’s current cash balances, combined with the estimated net proceeds from the sale of Total eMed, Inc., will be sufficient to meet its anticipated cash needs for working capital and capital expenditures throughout 2001 without the need for additional funding, based on the Company’s current expectations for relatively flat revenue growth through the remainder of the year. During the three months ended June 30, 2001, the Company retained Lazard Freres & Co. LLC (Lazard Freres) as its financial advisor. Medscape, in conjunction with Lazard Freres, is exploring a variety of strategic and funding options, including the possible sale of parts or all of the Company, to further satisfy Medscape’s long-term liquidity needs. Under current market conditions, proceeds from a sale of all or certain assets of the Company may be below the respective carrying value of such assets. Any projections of future cash needs and cash flows are subject to substantial uncertainty. In the event that the Company must seek additional funding, there is no certainty that Medscape may be able to obtain adequate or favorable financing and any financing the Company obtains may dilute the ownership interest of its shareholders prior to the financing.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), Business Combinations and Goodwill and Other Intangible Assets. FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies criteria that intangible assets acquired in a purchase business combination must meet in order to be recognized and reported separately from goodwill, noting specifically that assembled workforce may not be accounted for separately. FAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives will be amortized over their estimated useful lives and reviewed for impairment in accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

The Company is required to adopt the provisions of FAS 141 immediately and FAS 142 effective January 1, 2002. Upon adoption of FAS 142, the Company is required to evaluate its existing intangible assets and goodwill from previous business combinations and make any necessary reclassifications in order to conform to FAS 141. The Company will also be required to reassess the useful lives and residual values of all intangible assets acquired and make any necessary changes by the end of the first interim period after adoption. Under FAS 142, the Company will be required to perform a transitional goodwill impairment evaluation. The Company will have at least six months from the date of adoption to complete the analysis. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principles. Because of the extensive effort needed to comply with these standards, it is not practicable to reasonably estimate the impact of adopting these standards at this time, including whether or not the Company will be required to recognize any transitional impairment losses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’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 its outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the exposure related to those debt instruments and credit facilities that are tied to market rates. The Company does not plan to use derivative financial instruments in its investment portfolio. The Company intends to maintain the safety and preservation of its invested principal funds by limiting default risk, market risk and investment risk. The Company plans to mitigate default risk by investing in low-risk securities. At June 30, 2001, the Company had an investment portfolio of money market funds, commercial securities and U.S. Government securities, including those classified as short-term investments, of approximately $8.0 million with an average interest rate of 4.3%. The Company had outstanding notes payable of $1.6 million at June 30, 2001 with an average interest rate of 11.6%. If market interest rates were to increase immediately and uniformly by 10% from levels as of June 30, 2001, the decline of the fair market value of the fixed income portfolio and loans outstanding would not be material.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

On August 7, 2001, Dr. Mark Leavitt's ex-wife Sandra Leavitt filed a lawsuit against Dr. Leavitt "individually and in his capacity as Chairman of the Board of MedicaLogic/Medscape." The complaint, filed in Mulmomah County Circuit Court as Case No. 0108-08072, alleges that Dr. Leavitt and the Company defrauded Ms. Leavitt into signing a lock-up agreement with the underwriters of the Company's initial public offering. The lock-up agreement barred Ms. Leavitt, for a period of time, from selling her Company stock without written consent of the lead underwriter on the public offering. Ms. Leavitt alleges that, but for the lock-up agreement, she would have sold her stock in the public market at $50 per share and that, if she had done so, her return would have been $12,625,000. We intend to vigorously defend the lawsuit.

We cannot predict the outcome of the litigation matters described above or the extent to which the costs of defense and any settlement or award will be covered by our insurance policies. An adverse determination on one or more of these matters could result in a material adverse effect on our financial condition and results of operations.

Item 5. Other Information

On July 31, 2001 the Company and Medscape Enterprises, Inc. (the "Seller") entered into a Stock Purchase Agreement with TEM Holdings, LLC, a new entity funded by Parthenon Capital, providing for the sale of the Company's subsidiary, Total eMed, Inc. Pursuant to the terms of the Stock Purchase Agreement, the Company will receive $6 million for all of the issued and outstanding shares of capital stock of Total eMed, Inc. Consumation of the transaction is subject to certain conditions being satisfied or waived. The transaction is expected to close by August 31, 2001.

On August 2, 2001, the Company received notice of a Nasdaq Staff Determination that the Company failed to comply with the $1.00 minimum bid price requirement over the last 30 consecutive trading days for continued listing on The Nasdaq National Market, and that the Company's common stock is, therefore, subject to delisting from the Nasdaq National Market if we are unable to demonstrate compliance with the Nasdaq stock market's $1.00 minimum bid requirement for the 10 consecutive trading days before October 31, 2001. If the staff determines to delist the Company's common stock, the Company plans to request a hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination. According to Nasdaq procedures, the hearing date will be set, to the extent practicable, within 45 days of the request, and the Company's stock will continue to trade on the Nasdaq National Market pending the panel's decision.

Item 6. Exhibits and Reports On Form 8-K

(a) Exhibits

		INDEX TO EXHIBITS

EXHIBIT NO.	DESCRIPTION

10.33.1	Second Amendment, dated May1, 2001, to the Interactive Services Agreement, dated September 3, 1999, by and between America Online, Inc ("AOL") and Medscape, Inc. *

10.34.1	First Amendment, dated July 25, 2001, to the License and Product Development Agreement, dated July 7, 1999 by and between National Data Corporation, Inc., and Medscape, Inc.

10.36	Executive Employment Agreement, dated June 18, 2001, between Medscape, Inc. and David Moffenbeier.

10.37	Executive Employment Agreement, dated June 18, 2001, between Medscape, Inc. and Donald Bloodworth.

10.38	Executive Employment Agreement, dated June 18, 2001, between Medscape, Inc. and Mark Leavitt.

10.39	Executive Employment Agreement, dated June 18, 2001, between Medscape, Inc. and Kevin Hutchinson.

10.40	Stock Purchase Agreement by and between Medicalogic/Medscape, Inc., Medscape Enterprises, Inc. and TEM Holdings, LLC.


(*)	Confidential treatment: Portions of this document are omitted pursuant to a request for confidential treatment and have been filed seperately with the Securities and Exchange Commission.

(b) Reports on Form 8-K:

The Company filed a report under Item 5 of Form 8-K, dated July 13, 2001, announcing its preliminary financial results for the quarter ended June 30, 2001, that it was reducing its work force by 22 percent, that the Company had retained Lazard Freres & Co. LLC as its financial advisor to explore strategic alternatives, including a possible a possible sale of the Company, and that the Company planned to sell Total eMed, Inc., its transcription services segment.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hillsboro, State of Oregon, on August 14, 2001.

	MEDICALOGIC/MEDSCAPE, INC.
	By:	/s/ Donald A. Bloodworth

		Donald A. Bloodworth Chief Financial Officer

EX-10.33.1 3 j1254_ex10d33d1.htm EX-10.33.1 Prepared by MerrillDirect

	EXHIBIT 10.33.1
	EXECUTION COPY
*	Confidential Treatment Requested

SECOND AMENDMENT

This amendment (the “Second Amendment”) effective as of May 1^st, 2001 (the “Second Amendment Effective Date”), amends the Interactive Services Agreement, dated September 3, 1999, by and between America Online, Inc. (“AOL”) and Medscape, Inc. (“Medscape” or “ICP”), as amended.

WITNESSETH:

WHEREAS, AOL and Medscape executed the Interactive Services Agreement, dated September 3, 1999 (“Agreement”); and

WHEREAS, AOL and Medscape executed an amendment to the Agreement on September 27, 2000 (the “First Amendment”); and

WHEREAS, AOL and Medscape mutually desire to change certain terms and conditions of the Agreement, as amended.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:

1.	Exhibit A-1, Carriage Plan, attached to the Agreement is deleted in its entirety and replaced with the attached Revised Exhibit A-1 dated May 1, 2001 (“Revised Exhibit A-1”). To the extent that any obligations of AOL set forth in Exhibit A-2 are inconsistent with AOL’s obligations pursuant to Revised Exhibit A-1, Exhibit A-2 shall be deemed to be amended to delete such obligations. Medscape shall continue to provide Content as set forth in Exhibit A-2 and as necessary for AOL to provide the Promotions set forth in Revised Exhibit A-1.

2.	Beginning on May 1, 2001, AOL shall deliver [ * ] Impressions from ICP’s presence on the AOL Network (the “Amended Impressions Target”). AOL shall have no further obligation to deliver Impressions pursuant to the first sentence of Section 1.5 of the Agreement.

3.	In Section 2.5, any and all references to “Consumer Versions” shall be deleted and shall be replaced with “ICP Internet Site.”

4.	Section 2.5.1.B is deleted in its entirety.

5.	In Section 2.5.1.D, “within a subcategory of paragraphs B or C above” is deleted and inserted in its place shall be “on the ICP Internet Site.” Also in Section 2.5.1.D, the last sentence is deleted in its entirety.

6.	Subject to Section 6(d) below, Section 3.4 of the Agreement is amended as follows:

	(a) “$33,000,000” shall be deleted in the first sentence and replaced with “$19,333,333.32.”

	(b) The following language (added pursuant to the First Amendment) shall be deleted: “$3,083,340 is due January 2, 2001, $2,750,001 is due on May 1, 2001, $2,750,001 is due on August 1, 2001, $2,750,001 is due on November 1, 2001, $2,750,001 is due on February 1, 2002 and $916,656 is due on May 1, 2002” and replaced with the following:
		“$1,000,000 is due on June 20, 2001 for the twelve month period May 1, 2001 to April 30, 2002, and then equal monthly payments of $83,333.33 are due on each of the following dates: May 1, 2002, June 1, 2002, July 1, 2002 and August 1, 2002.”

	(c) AOL acknowledges that Medscape has already made payments of [ * ] towards the Guaranteed Payment amount.

.	(d) [ * ]

7.	In Section 5.3, the following sentence shall be inserted at the end of the paragraph:
		“AOL agrees that it will not place, or require the placement of, any links to a Named Entity’s content on the ICP Internet Site.”

8.	Section 7.1 is deleted in its entirety and inserted in its place shall be the following:
		“Unless earlier terminated as set forth herein, the initial term of this Agreement shall commence on the Effective Date and expire three (3) years from the Effective Date. Upon the expiration or earlier termination of this Agreement, and for one (1) year following such expiration or termination, AOL may, at its discretion, continue to promote one or more ‘pointers’ or links from the AOL Network to the ICP Interactive Site located at URL http://www.cbshealthwatch.com, or any successor site designated by ICP, and continue to use ICP’s trade names, trademarks and service marks in connection therewith.”

9.	Section 7.6 is deleted in its entirety and inserted in its place shall be the following:
		“In the event of a Change of Control of ICP to a Named Entity during the Initial Term, AOL shall have the right to terminate the Agreement by providing fifteen (15) days written notice.”

10.	Section 7.7 is deleted in its entirety and inserted in its place shall be the following:
		“Either party may terminate this Agreement without cause upon sixty (60) days notice to the other party. In the event that either party gives such notice of termination between May 1, 2001 and February 28, 2002, AOL will [ * ] between the effective date of such termination and April 30, 2002.”

11.	The following Section 10 is inserted:
	“ICP agrees to provide the following promotion to AOL:
		10.1	[ * ]. Such placements shall comply with the keyword guidelines attached to the Agreement as Exhibit G, as well as any requirements imposed generally by CBS on its advertising partners. Further, ICP agrees to provide a monthly report detailing all keywords appearing on CBS television advertisements.
		10.2	[ * ]

12.	The following Section 11 is inserted:
		“The parties agree to the following:
		11.1	AOL Contact Person: AOL agrees to assign an individual to answer all reasonable inquiries from ICP clients regarding advertising on the ICP Internet Site, including any concerns the client may have regarding the positioning of ICP content with respect to other AOL health content partners.
		11.2	Press Release: Pursuant to Section 7.9 of the Agreement, prior to distribution of any Press Release, each Party shall obtain the prior written approval of the other Party.
		11.3	Hi-Ethics: Both Parties acknowledge that as of the Second Amendment Effective Date they are members of the Health Internet Ethics group (“Hi-Ethics”). AOL shall not require ICP to take any action that would violate the Hi-Ethics Principles as currently written.
		11.4	AOL agrees that ICP may use promotional tools such as “daughter windows” and “pop-ups” on the ICP Internet Sites consistent with general AOL policies for the applicable AOL Property. ”

13.	The following definition shall be added to Exhibit B of the Agreement:

	“Netbusiness. The targeted, special purpose, business-to-business area, owned and controlled by AOL and marketed under the “Netscape Netbusiness^SM” brand, specifically excluding (a) Netscape Netcenter, the AOL Service and the CompuServe Service, (b) AOL.com, Netscape.com and CompuServe.com, (c) any international versions of such site, (d) “ICQ,” “NetscapeSearch,” “Netscape Instant Messenger,” “Netscape NetMail,” “Netscape Hometown,” “My News,” “Digital City, “ or any similar independent product or service offered by or through such site or any other AOL Interactive Site, (e) any programming or Content area offered by or through such site over which AOL does not exercise complete operational control (including, without limitation, Content areas controlled by other parties and member-created Content areas), (f) any programming or Content area offered by or through such site which was operated, maintained or controlled by the former America Online Studios division (e.g., Electra), (g) any yellow pages, white pages, classifieds or other search, directory or review services or Content offered by or through such site or any other AOL Interactive Site, (h) any property, feature, product or service which AOL or its Affiliates may acquire subsequent to the Second Amendment Effective Date and (j) any other version of an AOL Interactive Site which is materially different from AOL’s primary Internet-based targeted, special purpose, business-to-business area marketed under the “Netscape Netbusiness^SM” brand, by virtue of its branding, distribution, functionality, Content or services, including, without limitation, any co-branded versions or any version distributed through any broadband distribution platform or through any platform or device other than a desktop personal computer.”

14.	Release. Provided that, on or before [ * ], ICP meets its obligation to pay AOL [ * ] pursuant to Section 6(b) of this Second Amendment, AOL and ICP each releases and forever discharges the other and all of its stockholders, employees, agents, successors, assigns, legal representatives, affiliates, directors and officers from and against any and all actions, claims, suits, demands or other obligations or liabilities of any nature whatsoever, whether known or unknown, which the releasing Party or its stockholders, employees, agents, successors, assigns, legal representatives, affiliates, directors or officers have had, now have or may in the future have arising out of or in connection with the performance or failure to perform under the Agreement prior to the Second Amendment Effective Date, including without limitation ICP’s failure to meet its payment obligations under Section 3.4 of the Agreement. This Release shall not operate to relieve either Party of its obligations under the Agreement or this Second Amendment after the Second Amendment Effective Date.

15.	The provisions of the Agreement not specifically amended herein shall remain in full force and effect as they appear in the Agreement.

16.	Each Party represents and warrants that the individual signing this Second Amendment on its behalf is authorized to do so, and that such individual’s signature binds it to this Second Amendment.

In WITNESS WHEREOF, the Parties have executed this Second Amendment as of the date first above written.

AMERICA ONLINE, INC.




Print Name:

Title:

Date:



MEDSCAPE, INC.



Print Name:

Title:

Date:

Revised Exhibit A-1
May 1, 2001

Integration Detail

Brand Channel/Area		Screen	Placement / Promotion Type	Frequency of Placement / Promotion	Year 1	Year 2

AOL Service					[ * ]	[ * ]
	Health	Today in Health	1 text link	Permanent
	Health	Men's Health	1 text link	Permanent
	Health	Seniors' Health	1 text link	Permanent
	Health	Children's Health	1 text link	Permanent
	Health	Health & Beauty	1 text link	Permanent
	Health	Sexual Health & Relationships	1 text link	Permanent
	Health	Alternative Medicine	1 text link	Permanent
	Parenting/ Pregnancy	Pregnancy: Health	2 text links	Permanent
	Health	Specials; 1 text link in each of 8 specials; each special runs for 6 months
	Health	Fitness & Sports Medicine	1 text link	Permanent
	Health	Conditions & Treatment (main/overall index screen)	AT button	Permanent


AOL.com					[ * ]	[ * ]
	Health	Diet & Nutrition	Feature Module/Logo	Daily
	Health	Health News	Part of Feed	Daily
	Health	Index, Fitness & Sports Medicine, Alternative Medicine, Diet & Nutrition, Doctors, Insurance, HMOs and More, Women's Health, Men's Health, Children's Health, Seniors Health	Essentials Link: Medical Dictionary/Logo	Permanent

	Health	Index, Fitness & Sports Medicine, Alternative Medicine, Diet & Nutrition, Doctors, Insurance, HMOs and More, Women's Health, Men's Health, Children's Health, Seniors Health	Essentials Link: Medical Tests	Permanent

	Health	Index, Fitness & Sports Medicine, Alternative Medicine, Diet & Nutrition, Doctors, Insurance, HMOs and More, Women's Health, Men's Health, Children's Health, Seniors Health	Essentials Link: Self-care Guide	Permanent

	Health	Women's, Men's, Children's, Seniors	Static breakout of advanced information	Permanent

Netscape					[ * ]	[ * ]
	Health Index Page	Disease Centers (text + widget)	Scrolling list box of conditions; branded	Permanent
	Health Index Page	Health Factoid (text w/ link)	Interesting Health fact with link to co-branded site for more information.	Permanent
	Health Index Page	Feature: What Your Doctor is Reading ("In Clinical Terms"; text + links)	Articles link to co-branded pages	Permanent
	Health Index Page	Disease Centers (link)	Disease Centers link lives w/in Nscp Navigation – Departments.
	Health Department pages (where appropriate)	Ask a Doctor (link Placement depends on functionality)	Link will live w/in Nscp Navigation – under a “Health Tools / Resources” section. Links to co-branded pages.	Permanent

CompuServe					[ * ]	[ * ]
	Health Channel Top	Read what your doctor is reading	CBSHW branded	Permanent
	Health Channel Top	News story; teaser and link to second page.	CBSHW branded story	1x per week
	Ailments & Conditions	Top Story: teaser and link to second page	CBSHW branded story	1x per week
	Ailments & Conditions page and each Specialty Center	Links to Databases	Links to Medical Test Handbook, First Aid and Self Care Guide	Permanent
	Ailments & Conditions page and each Specialty Center	Read what your doctor is reading	Branded right nav bar text link.	Permanent
	Ailments & Conditions sub-departments	Text links for more information	Branded; In right or left nav bar.	Permanent
	AIDS/HIV Specialty Center	News Story; teaser and link to second page	CBSHW branded story.	Bi-weekly
	Heart Disease Specialty Center.	News Story; teaser and link to second page	CBSHW branded story.	Bi-weekly
	Pain Management Specialty Center.	News Story; teaser and link to second page	CBSHW branded story.	Bi-weekly
	Multiple Sclerosis Specialty Center.	News Story; teaser and link to second page	CBSHW branded story.	Bi-weekly
	Cancer Specialty Center.	News Story; teaser and link to second page	CBSHW branded story.	Bi-weekly
	Disabilities Specialty Center.	News Story; teaser and link to second page	CBSHW branded story.	Bi-weekly

Digital City					[ * ]	[ * ]
	Condition pages	“Advanced Information”	Text Link with branding	Permanent
	Facilities & Services/Pharmacies	Medication Information	Branded badge and search widget	Permanent

[ * ]

EX-10.34.1 4 j1254_ex10d34d1.htm EX-10.34.1 Prepared by MerrillDirect

Exhibit 10.34.1

FIRST AMENDMENT TO
LICENSE AND PRODUCT DEVELOPMENT AGREEMENT

THIS FIRST AMENDMENT TO LICENSE AND PRODUCT DEVELOPMENT AGREEMENT (the “First Amendment”) effective as of the 25th day of July, 2001, amends the License and Product Development Agreement, dated July 7, 1999 by and between NATIONAL DATA CORPORATION, INC., a Delaware corporation (“NDC”) and MEDSCAPE, INC. (“MEDSCAPE”).

W I T N E S S E T H:

WHEREAS, NDC and MEDSCAPE executed the License and Product Development Agreement dated July 7, 1999 (the “Agreement”); and

WHEREAS, the parties desire to amend certain of the terms of the Agreement, as more particularly set forth in herein.

NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.	In Article V, Web-Enabling of Other NDC Products, all references to “NDC Connect” and “NDC Assist” are deleted.

2.	Section 9.1 of Article IX, Preferred Partner Status, is deleted in its entirety.

3.	In Article X, Marketing, Promotion, Support, (i) all references to “NDC Connect” and “NDC Assist” are deleted, and (ii) the phrase “to other distributors of physician practice management software which market NDC’s EDI Services” shall be deleted from Section 10.1(b) and replaced with “as provided herein.”

4.	Sections 11.5 and 11.6 of Article XI are deleted in their entirety.

5.	Sections 14.3 and 14.4 of Article XIV, Confidentiality, Non-Compete, are deleted in their entirety.

6.	Section 8 (including Annex 2) of Exhibit 11.1 of the Agreement is deleted in its entirety.

7.	The provisions of the Agreement not specifically modified by this First Amendment shall remain unchanged and shall be in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their duly authorized officers.

NATIONAL DATA CORPORATION, INC.

By:

Name:

Title:



MEDSCAPE, INC.

By:

Name:

Title:

EX-10.36 5 j1254_ex10d36.htm EX-10.36 Prepared by MerrillDirect

Exhibit 10.36

This is an agreement between MedicaLogic/Medscape, Inc. (“Medscape” or “the Company”), and the following individual (“Executive”):

Name:	David Moffenbeier
Address	1495 Oak Terrace
	Lake Oswego, OR 97034

Background. Medscape has offered you employment as an executive of the company, and you have indicated your intent to accept our offer. In consideration of your continued employment by Medscape, you agree to the terms contained in this document.

Employment. This document is your employment agreement Medscape hereby employs you as Chief Executive Officer. You agree to perform the job assigned to you in a careful and workmanlike manner and to abide by and enforce all rules established by Medscape.

Compensation. Medscape will pay you a base salary at the rate of $250,000.00 per year, payable in accordance with Medscape’s standard payroll policy. Any future increase in your base salary will be in the sole discretion of the Compensation Committee of the Board of Directors of Medscape. In addition to your base salary, in each year following the first full calendar year of your employment, Medscape will pay you an annual bonus if, in the judgment of the Compensation Committee, the qualifying criteria established by that Committee for payment of a bonus are met. Payment of a bonus is not guaranteed. If you have joined the Company prior to October 1^st of a calendar year, you may also be eligible for payment of a pro-rated bonus for that year subject to the foregoing criteria. In addition, you will be entitled to such benefits as are generally provided to senior executives of Medscape. Your rights with respect to stock options will be covered in separate Stock Option Agreements for each grant.

Services. During normal business hours or, if applicable, the hours you are scheduled to work for Medscape, you agree to devote your full time, attention and energy to our business, and not to engage in any other business activity during that time without the prior written approval of Medscape.

Conflict of Interest. As a publicly-traded company, Medscape takes steps to protect its shareholders from problems caused by conflicts of interest. You must report any conflicts, or anything which might appear to be a conflict, to the General Counsel of Medscape. Examples of potential conflicts include, among other things significant investments in, or consulting services for, competing companies, gifts (other than gifts customary in a particular business, such as pens or shirts bearing a corporate logo) or loans or excessive payments for your services from business partners or customers, or engaging in any activity that may reflect adversely on Medscape's business, operations or reputation. In any conflict of interest situation, Medscape may require you to take measures to protect the Company’s interests, which may include declining to participate in the activity that created the conflict or returning payments, gifts or loans.

Confidential Information. In your performing your job, you will have access to valuable and confidential information belonging to Medscape. Examples of confidential information include, among other things, specialized business techniques, methods, business plans and strategies, ideas, client/account lists, member lists, and employee lists. You acknowledge that it cost us a lot of time, effort and money to develop our confidential information and materials, and that this information and material constitutes a valuable trade/business secret and special asset of Medscape. You agree not to disclose our confidential information and materials to any third party during the term of your employment and for two years afterwards, except as we may specifically authorize you in connection with the business of Medscape. Even in cases where we authorize disclosure (for example, to consider a possible business transaction with another company), you agree to use your best efforts to minimize any risks of inappropriate disclosure of the information through use of nondisclosure agreements and careful handling of materials. Regardless of whether you remain our employee, you may never disclose information that constitutes a trade secret of Medscape.

Goodwill. You acknowledge that the business of Medscape depends on the confidence Medscape’s clients and customers. You agree that any goodwill that you develop because of your work with Medscape is the property of Medscape, and not of you personally.

Term. This agreement will expire on the third anniversary of its signing, unless either of us terminates your employment prior to that date. If you remain an employee of Medscape after the third anniversary of signing, your employment will become “at will.”

Termination of Employment. You may terminate your employment with us at any time by providing us with written notice of your resignation. We may also terminate your employment at any time and for any reason by providing you with written notice. Your employment with us will also terminate in the event of your death or Disability (as defined below). In the event that your employment is terminated other than as described below in the paragraph captioned “Severance Pay,” you or your estate, as the case may be, will be entitled only to your accrued and unpaid base salary as of the date of termination. All other benefits will cease as of the effective date of your termination (unless otherwise required by law).

Survival of Terms. Your obligations under the following sections of this agreement will survive both termination of the agreement and termination of your employment for any reason: Confidential Information, Goodwill, Termination Obligations, Ownership of Intellectual Property, and Miscellaneous. In addition, if this agreement is in effect upon the date of termination of your employment, your rights under the section entitled Severance Pay, and Medscape’s rights under the section entitled Restrictive Covenants, will survive termination of your employment according to their terms.

Disability. “Disability” means a mental or physical condition that renders you incapable of performing your duties and obligations under this agreement for a period of six consecutive months, or more than 210 days in any eight month period, in the written opinion of a competent physician specializing in such condition selected by the Board of Directors who has personally examined and evaluated your condition. Medscape shall have the right to terminate your employment at any time following your Disability.

Severance Pay. During the term of this agreement, if Medscape undergoes a Corporate Change (defined below) and Medscape subsequently terminates your employment (within the three year period from the date of this agreement) for other than Good Cause (defined below), you will receive as severance pay a lump sum amount equal to six month’s base salary (not including bonus) based on your salary as of the date of termination. You will not be entitled to any other payment, and all other benefits will cease as of the effective date of your termination (unless otherwise required by law).The severance pay will be payable within a reasonable amount of time following your termination, and will be contingent upon your execution of a release of claims in favor of Medscape.

•	“Corporate Change” shall mean any circumstance in which (i) Medscape is not the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of Medscape), (ii) Medscape sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of Medscape), (iii) Medscape is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, acquires or gains ownership or control (including, without limitations power to vote) of more than 50% of the outstanding shares of Medscape’s voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of Medscape before such election shall cease to constitute a majority of the Board of Directors of Medscape.
•	“Good Cause” shall mean (i) serious misconduct, including but not limited to misconduct harmful to the interests of Medscape which causes economic damage to the us (for example, misappropriation of Medscape funds), (ii) conduct which significantly interferes with the individual's ability to perform their duties (for example, abuse of alcohol or illicit drugs, or criminal or immoral acts that damage Medscape or its reputation), (iii) a finding of disability as provided in this Agreement under the section on Disability, or (iv) a material breach by you of this agreement that is not substantially cured within 30 days after receipt of written notice from Medscape of the breach. A determination that an employee’s termination by the Company was for Good Cause may only be made by the Company's Compensation Committee or the Board of Directors, which must prepare minutes of its meeting listing the reasons that Good Cause has been established.
•	Any action by the Company or its successors following a Corporate Change that (i) significantly reduces the scope or nature of the authority, powers, functions or duties of the Executive, (ii) lowers the Executive’s base salary by any amount, or (iii) reduces by one level or more the grade represented by the Executive’s then-current title and reporting line shall be deemed a termination of the Executive for the purposes of this section.

Restrictive Covenants. As long as this agreement remains in effect, during your employment with Medscape, you will not: (a) directly or indirectly, either as an employee, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business or organization that is directly competitive with the business of Medscape; (b) solicit, divert or take away, or attempt to solicit, divert or take away, the business of any clients, customers or accounts of Medscape (except on behalf of a business unrelated to the business of Medscape); or (c) encourage or solicit any employee to leave the employ of Medscape for any reason. If you are terminated for Good Cause or under any circumstances which entitle you to severance pay under this agreement, the restrictions under (b) and (c) only will also apply for six months after your termination date. If you are in violation of these restrictions, the six month time period will cease to run during the period of your violation, and will resume once the violation has been cured. You acknowledge that these restrictions are necessary for the protection of the business and goodwill of Medscape and are reasonable. You acknowledge that any breach of these restrictions is likely to cause Medscape substantial and irreparable damage and therefore, in the event of any such breach, Medscape will be entitled to specific performance and injunctive relief in addition to any other remedies that may be available, without proving actual damages.

Medscape Employee Policies. You acknowledge that you have had an opportunity to review the current employee policies of Medscape. We may change the our employee policies at any time without prior notice. You specifically acknowledge that you have read, and you agree to abide by, Medscape policies regarding equal employment opportunity and sexual harassment, and that failure to follow these policies is a material breach of this Agreement. We do not intend that any communications we have with you, other than this agreement, confer on you any legally enforceable rights unless they are a formal written amendment to this agreement signed by both of us.

Insider Trading. You agree not to misuse or disclose to outsiders any confidential information of Medscape that might enable you or others to make money in the stock market. If you have access to non-public knowledge about Medscape or potential Medscape business partners, you may not use this information for personal gain. If you hear any rumors regarding the Medscape or its stock or its dealings with any other publicly-traded corporation which might affect the stock of either corporation, you should report them to the General Counsel as soon as possible. If you are a named “executive officer” of Medscape, you must comply with our insider trading policy, as amended from time to time by our Board of Directors, and you will also be required to report your transactions in Medscape stock to the federal government. Although we retain an outside consultant to assist you with these required filings, you acknowledge that the ultimate responsibility for the making the filings in a timely and accurate fashion and for complying with the laws regarding insider trading resides with you.

Authority. You may not enter into agreements on behalf of Medscape, or take any other actions in our name, unless you are authorized to do so under our signature authority, external communications, and other relevant policies.

Termination Obligations. If you leave Medscape, you agree to return to us, as promptly as possible, any materials, equipment, or money that belongs to us (for example, correspondence, contracts, reports, price lists, manuals, mailing lists, client/account lists, advertising materials, contacts, credit cards, petty cash, checks, supplies, computer equipment, software, and files). Materials that you created using Medscape’s equipment and in the course of your employment as part of your job duties belong to us. Furthermore, after termination, you may not use our name in any public statements about your employment with us that are intended for wide distribution or announcement unless you receive our written permission. This restriction is not intended to prohibit you from using our name as part of your employment history in a resume, biography, or similar document, regardless of how widely that document may be distributed.

Ownership of Intellectual Property. You agree that any materials you produce as a result of your employment are “works for hire,” and you assign all your rights in these materials, including copyright and any moral or artists’ rights, to Medscape. You agree that Medscape will have complete title to (a) any invention or improvement that you make or reduce to practice while employed by us that relates in any way to our business or to our services, materials, procedures or methods, and (b) any idea, information or conception that you devise or suggest for Medscape’ use while employed by Medscape. You agree to reasonably cooperate with us in making any filings necessary to protect Medscape’s rights in such materials or inventions.

Miscellaneous.

1.	You agree that any violation by you of our agreement would result in irreparable damage to Medscape, and you agree that in such a case we are entitled (at a minimum) to an injunction to restrain your violation. We remain entitled to any other remedies under law.

2.	If a court holds any term of our agreement unenforceable, then it is our mutual intent that the court either limit that term in a way that makes it enforceable (for example, by reducing a time period), or sever that term from the agreement while enforcing the other terms.

3.	We may waive any terms of our agreement with respect to a violation by you without waiving our right to take action based on future violations (even if they are of the same type).

4.	This agreement requires your personal services, and you agree not to assign it to any other person. Medscape, however, may assign the agreement to any of our affiliates, divisions, or successors.

5.	We both agree that this document constitutes the sole and complete agreement between us relating to the subject matter hereof. Neither of us may make any modifications to our agreement except in writing.

Your signature below indicates that you have read and understood the terms of this document, and that you agree to them as a condition of your employment by Medscape.

MEDICALOGIC/MEDSCAPE, INC.

By:

Name:
Title:

Employee:

	David Moffenbeier

Dated as of June 18, 2001.

EX-10.37 6 j1254_ex10d37.htm EX-10.37 Prepared by MerrillDirect

Exhibit 10.37

This is an agreement between MedicaLogic/Medscape, Inc. (“Medscape” or “the Company”), and the following individual (“Executive”):

Name:	Donald Bloodworth
Address	3356 NW 14^th Avenue
	Camas, WA 98607

Employment. This document is your employment agreement Medscape hereby employs you as Chief Financial Officer. You agree to perform the job assigned to you in a careful and workmanlike manner and to abide by and enforce all rules established by Medscape.

Compensation. Medscape will pay you a base salary at the rate of $200,000.00 per year, payable in accordance with Medscape’s standard payroll policy. Any future increase in your base salary will be in the sole discretion of the Compensation Committee of the Board of Directors of Medscape. In addition to your base salary, in each year following the first full calendar year of your employment, Medscape will pay you an annual bonus if, in the judgment of the Compensation Committee, the qualifying criteria established by that Committee for payment of a bonus are met. Payment of a bonus is not guaranteed. If you have joined the Company prior to October 1^st of a calendar year, you may also be eligible for payment of a pro-rated bonus for that year subject to the foregoing criteria. In addition, you will be entitled to such benefits as are generally provided to senior executives of Medscape. Your rights with respect to stock options will be covered in separate Stock Option Agreements for each grant.

•	“Corporate Change” shall mean any circumstance in which (i) Medscape is not the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of Medscape), (ii) Medscape sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of Medscape), (iii) Medscape is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, acquires or gains ownership or control (including, without limitations power to vote) of more than 50% of the outstanding shares of Medscape’s voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of Medscape before such election shall cease to constitute a majority of the Board of Directors of Medscape.
•	“Good Cause” shall mean (i) serious misconduct, including but not limited to misconduct harmful to the interests of Medscape which causes economic damage to the us (for example, misappropriation of Medscape funds), (ii) conduct which significantly interferes with the individual's ability to perform their duties (for example, abuse of alcohol or illicit drugs, or criminal or immoral acts that damage Medscape or its reputation), (iii) a finding of disability as provided in this Agreement under the section on Disability, or (iv) a material breach by you of this agreement that is not substantially cured within 30 days after receipt of written notice from Medscape of the breach. A determination that an employee’s termination by the Company was for Good Cause may only be made by the Company's Compensation Committee or the Board of Directors, which must prepare minutes of its meeting listing the reasons that Good Cause has been established.
•	Any action by the Company or its successors following a Corporate Change that (i) significantly reduces the scope or nature of the authority, powers, functions or duties of the Executive, (ii) lowers the Executive’s base salary by any amount, or (iii) reduces by one level or more the grade represented by the Executive’s then-current title and reporting line shall be deemed a termination of the Executive for the purposes of this section.

Miscellaneous.

1.	You agree that any violation by you of our agreement would result in irreparable damage to Medscape, and you agree that in such a case we are entitled (at a minimum) to an injunction to restrain your violation. We remain entitled to any other remedies under law.

2.	If a court holds any term of our agreement unenforceable, then it is our mutual intent that the court either limit that term in a way that makes it enforceable (for example, by reducing a time period), or sever that term from the agreement while enforcing the other terms.

3.	We may waive any terms of our agreement with respect to a violation by you without waiving our right to take action based on future violations (even if they are of the same type).

4.	This agreement requires your personal services, and you agree not to assign it to any other person. Medscape, however, may assign the agreement to any of our affiliates, divisions, or successors.

5.	We both agree that this document constitutes the sole and complete agreement between us relating to the subject matter hereof. Neither of us may make any modifications to our agreement except in writing.

Your signature below indicates that you have read and understood the terms of this document, and that you agree to them as a condition of your employment by Medscape.

MEDICALOGIC/MEDSCAPE, INC.

By:

Name:
Title:

Employee:

	Donald Bloodworth

Dated as of June 18, 2001.

EX-10.38 7 j1254_ex10d38.htm EX-10.38 Prepared by MerrillDirect

Exhibit 10.38

This is an agreement between MedicaLogic/Medscape, Inc. (“Medscape” or “the Company”), and the following individual (“Executive”):

Name:	Mark Leavitt
Address	18407 NW Keller Road
	North Plains, OR 97133

Employment. This document is your employment agreement Medscape hereby employs you as Chairman. You agree to perform the job assigned to you in a careful and workmanlike manner and to abide by and enforce all rules established by Medscape.

•	“Corporate Change” shall mean any circumstance in which (i) Medscape is not the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of Medscape), (ii) Medscape sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of Medscape), (iii) Medscape is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, acquires or gains ownership or control (including, without limitations power to vote) of more than 50% of the outstanding shares of Medscape’s voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of Medscape before such election shall cease to constitute a majority of the Board of Directors of Medscape.
•	“Good Cause” shall mean (i) serious misconduct, including but not limited to misconduct harmful to the interests of Medscape which causes economic damage to the us (for example, misappropriation of Medscape funds), (ii) conduct which significantly interferes with the individual's ability to perform their duties (for example, abuse of alcohol or illicit drugs, or criminal or immoral acts that damage Medscape or its reputation), (iii) a finding of disability as provided in this Agreement under the section on Disability, or (iv) a material breach by you of this agreement that is not substantially cured within 30 days after receipt of written notice from Medscape of the breach. A determination that an employee’s termination by the Company was for Good Cause may only be made by the Company's Compensation Committee or the Board of Directors, which must prepare minutes of its meeting listing the reasons that Good Cause has been established.
•	Any action by the Company or its successors following a Corporate Change that (i) significantly reduces the scope or nature of the authority, powers, functions or duties of the Executive, (ii) lowers the Executive’s base salary by any amount, or (iii) reduces by one level or more the grade represented by the Executive’s then-current title and reporting line shall be deemed a termination of the Executive for the purposes of this section.

Miscellaneous.

1.	You agree that any violation by you of our agreement would result in irreparable damage to Medscape, and you agree that in such a case we are entitled (at a minimum) to an injunction to restrain your violation. We remain entitled to any other remedies under law.

2.	If a court holds any term of our agreement unenforceable, then it is our mutual intent that the court either limit that term in a way that makes it enforceable (for example, by reducing a time period), or sever that term from the agreement while enforcing the other terms.

3.	We may waive any terms of our agreement with respect to a violation by you without waiving our right to take action based on future violations (even if they are of the same type).

4.	This agreement requires your personal services, and you agree not to assign it to any other person. Medscape, however, may assign the agreement to any of our affiliates, divisions, or successors.

5.	We both agree that this document constitutes the sole and complete agreement between us relating to the subject matter hereof. Neither of us may make any modifications to our agreement except in writing.

Your signature below indicates that you have read and understood the terms of this document, and that you agree to them as a condition of your employment by Medscape.

MEDICALOGIC/MEDSCAPE, INC.

By:

Name:
Title:

Employee:

	Mark Leavitt

Dated as of June 18, 2001.

EX-10.39 8 j1254_ex10d39.htm EX-10.39 Prepared by MerrillDirect

Exhibit 10.39

This is an agreement between MedicaLogic/Medscape, Inc. (“Medscape” or “the Company”), and the following individual (“Executive”):

Name:	Kevin Hutchinson
Address	42 Hendrie Ave
	Riverside, CT 06878

Employment. This document is your employment agreement Medscape hereby employs you as Chief Operating Officer. You agree to perform the job assigned to you in a careful and workmanlike manner and to abide by and enforce all rules established by Medscape.

•	“Corporate Change” shall mean any circumstance in which (i) Medscape is not the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of Medscape), (ii) Medscape sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of Medscape), (iii) Medscape is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, acquires or gains ownership or control (including, without limitations power to vote) of more than 50% of the outstanding shares of Medscape’s voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of Medscape before such election shall cease to constitute a majority of the Board of Directors of Medscape.
•	“Good Cause” shall mean (i) serious misconduct, including but not limited to misconduct harmful to the interests of Medscape which causes economic damage to the us (for example, misappropriation of Medscape funds), (ii) conduct which significantly interferes with the individual's ability to perform their duties (for example, abuse of alcohol or illicit drugs, or criminal or immoral acts that damage Medscape or its reputation), (iii) a finding of disability as provided in this Agreement under the section on Disability, or (iv) a material breach by you of this agreement that is not substantially cured within 30 days after receipt of written notice from Medscape of the breach. A determination that an employee’s termination by the Company was for Good Cause may only be made by the Company's Compensation Committee or the Board of Directors, which must prepare minutes of its meeting listing the reasons that Good Cause has been established.
•	Any action by the Company or its successors following a Corporate Change that (i) significantly reduces the scope or nature of the authority, powers, functions or duties of the Executive, (ii) lowers the Executive’s base salary by any amount, or (iii) reduces by one level or more the grade represented by the Executive’s then-current title and reporting line shall be deemed a termination of the Executive for the purposes of this section.

Miscellaneous.

1.	You agree that any violation by you of our agreement would result in irreparable damage to Medscape, and you agree that in such a case we are entitled (at a minimum) to an injunction to restrain your violation. We remain entitled to any other remedies under law.

2.	If a court holds any term of our agreement unenforceable, then it is our mutual intent that the court either limit that term in a way that makes it enforceable (for example, by reducing a time period), or sever that term from the agreement while enforcing the other terms.

3.	We may waive any terms of our agreement with respect to a violation by you without waiving our right to take action based on future violations (even if they are of the same type).

4.	This agreement requires your personal services, and you agree not to assign it to any other person. Medscape, however, may assign the agreement to any of our affiliates, divisions, or successors.

5.	We both agree that this document constitutes the sole and complete agreement between us relating to the subject matter hereof. Neither of us may make any modifications to our agreement except in writing.

Your signature below indicates that you have read and understood the terms of this document, and that you agree to them as a condition of your employment by Medscape.

MEDICALOGIC/MEDSCAPE, INC.

By:

Name:	Mark Boulding
Title:	General Counsel, Executive Vice President and Secretary

Employee:

	Kevin Hutchinson

Dated as of June 18, 2001.

EX-10.40 9 j1254_ex10d40.htm EX-10.40 Prepared by MerrillDirect

Exhibit 10.40

STOCK PURCHASE AGREEMENT

by and among

MEDICALOGIC/MEDSCAPE, INC.,

MEDSCAPE ENTERPRISES, INC.

and

TEM HOLDINGS, LLC

Dated as of July 31, 2001

TABLE OF CONTENTS

ARTICLE I SALE AND TRANSFER OF SHARES; PURCHASE PRICE; CLOSING; PURCHASE PRICE ADJUSTMENT

	Section 1.01	Sale and Transfer of Shares; Purchase Price
	Section 1.02	Delivery of Shares and Payment of Purchase Price
	Section 1.03	Closing

ARTICLE II REPRESENTATIONS AND WARRANTIES AS TO THE COMPANY, THE SELLER AND THE SHARES

	Section 2.01	Organization, Qualifications and Corporate Power; Subsidiaries
	Section 2.02	Authorization of Agreements, Etc.
	Section 2.03	Validity
	Section 2.04	Capitalization of the Company
	Section 2.05	Financial Statements
	Section 2.06	Absence of Undisclosed Liabilities
	Section 2.07	Absence of Certain Changes or Events
	Section 2.08	Governmental Approvals
	Section 2.09	Title to Properties, Absence of Liens and Encumbrances
	Section 2.10	Intellectual Property
	Section 2.11	Status of Contracts
	Section 2.12	Litigation, Etc.
	Section 2.13	Taxes
	Section 2.14	Governmental Authorizations and Regulations
	Section 2.15	Labor Matters
	Section 2.16	Insurance
	Section 2.17	Employee Benefit Plans
	Section 2.18	Related Party Transactions
	Section 2.19	Brokers’ or Finders’ Fees

ARTICLE III REPRESENTATIONS AND WARRANTIES AS TO THE PARENT

	Section 3.01	Organization and Corporate Power; Ownership of the Seller; Authorization of Agreements, Etc.
	Section 3.02	Validity
	Section 3.03	Governmental Approvals
	Section 3.04	Litigation Relating to the Transactions Contemplated Hereby

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

	Section 4.01	Power and Authority
	Section 4.02	Authorization of Agreements, Etc.
	Section 4.03	Validity
	Section 4.04	Governmental Approvals
	Section 4.05	Litigation Relating to the Transactions Contemplated Hereby
	Section 4.06	Brokers’ or Finders’ Fees
	Section 4.07	Purchase for Investment

ARTICLE V COVENANTS

	Section 5.01	Certain Covenants of the Parent and the Seller
	Section 5.02	Books and Records
	Section 5.03	Certain Tax Matters

ARTICLE VI CONDITIONS PRECEDENT

	Section 6.01	Conditions Precedent to the Obligations of the Purchaser
	Section 6.02	Conditions Precedent to the Obligations of the Seller

ARTICLE VII Survival

	Section 7.01	Survival of Representations and Warranties

ARTICLE VIII TERMINATION OF AGREEMENT

	Section 8.01	Termination of Agreement Prior to Closing
	Section 8.02	Method and Effect of Termination
	Section 8.03	Termination Fees

ARTICLE IX MISCELLANEOUS

	Section 9.01	Specific Performance
	Section 9.02	Expenses, Etc.
	Section 9.03	Execution in Counterparts
	Section 9.04	Notices
	Section 9.05	Waivers
	Section 9.06	Amendments, Supplements, Etc.
	Section 9.07	Entire Agreement
	Section 9.08	Applicable Law; Consent to Jurisdiction
	Section 9.09	Further Assurances
	Section 9.10	Interpretation
	Section 9.11	Binding Effect; Benefits
	Section 9.12	Assignability

INDEX TO EXHIBITS AND SCHEDULES

Schedule	Description


2.01(c)	Subsidiaries
2.07	Absence of Certain Events
2.07(A)	Affiliates of Parent and Seller
2.10	Real Property
2.11	Intellectual Property
2.12	Status of Contracts
2.15	Customers
2.16	Litigation
2.17	Tax Matters
2.18	Permits
2.19	Labor Matters
2.20	Insurance
2.21	Employee Benefit Plans
2.23	Related Party Transactions
2.24	Bank Accounts


Exhibit	Description


6.01(i)	Escrow Agreement
6.01(j)	Transition Services Agreement
6.01(k)	Opinion of Stoel Rives LLP

INDEX TO DEFINED TERMS

THIS INDEX IS INCLUDED FOR CONVENIENCE ONLY
AND DOES NOT CONSTITUTE A PART OF THE AGREEMENT

Term	Reference


“Affiliate”	2.07
“Ancillary Agreements”	2.02(a)
“Balance Sheet”	2.05
“Balance Sheet Date”	2.05
“Claims”	7.05
“Closing”	1.03
“Closing Date”	1.03
“Code”	2.13(d)
“Company”	Recitals
“Company Common Stock”	Recitals
“Contracts”	2.11
“Damages”	7.03
“Employee Benefit Plans”	2.17
“Expenses”	9.02(a)
“Financial Statements”	2.05
“GAAP”	2.05
“Intellectual Property Rights”	2.10
“Liens”	2.01(g)
“Marks”	5.06(a)
“Material Adverse Effect”	2.07
“Non-Solicitation Agreement”	8.02
“Parent”	Recitals
“Permitted Cash Distribution”	5.01(d)
“Permitted Liens”	2.09
“Person”	2.11(c)
“Purchase Price”	1.01(b)
“Purchaser”	Recitals
“Related Party”	2.18
“Returns”	2.13(a)
“Seller”	Recitals
“Shares”	Recitals
“Subsidiary”	2.01(h)
“Taxes”	2.13(a)
“Taxing Authorities”	2.13(a)
“Third Party Claims”	7.05(a)(A)

STOCK PURCHASE AGREEMENT

STOCK PURCHASE AGREEMENT dated as of July 31, 2001 by and among MEDICALOGIC/MEDSCAPE, INC., an Oregon corporation (the “Parent”), MEDSCAPE ENTERPRISES, INC., a Delaware corporation and wholly-owned subsidiary of the Parent (the “Seller”), and TEM Holdings, LLC, a Delaware limited liability company (the “Purchaser”).

W I T N E S S E T H:

WHEREAS, the Seller owns all of the issued and outstanding shares of capital stock of Total eMed, Inc., a Delaware corporation (the “Company”), consisting of 100 shares of Common Stock, par value $.01 per share (“Company Common Stock”); and

WHEREAS, on the terms and subject to the conditions hereinafter set forth, the Seller desires to sell to the Purchaser, and the Purchaser desires to purchase from the Seller, all 100 issued and outstanding shares of Company Common Stock (the “Shares”);

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I
SALE AND TRANSFER OF SHARES; PURCHASE PRICE;
CLOSING; PURCHASE PRICE ADJUSTMENT

Section 1.01 Sale and Transfer of Shares; Purchase Price.

(a) In reliance upon the representations and warranties contained herein, and subject to the terms and conditions set forth herein, the Seller shall sell and transfer to the Purchaser, and the Purchaser shall purchase from the Seller, on the Closing Date (as hereinafter defined), all of the Shares.

(b) The purchase price for the Shares (the “Purchase Price”) shall be $60,000 per Share, or $6,000,000 in the aggregate.

(d) “Closing Debt” means the aggregate outstanding indebtedness for borrowed money (including any intercompany receivables owed by the Company or the Subsidiaries (as hereafter defined) to the Seller, Parent or any of their affiliates) and the deferred purchase price of property of the Company and the Subsidiaries as of immediately prior to the Closing (but not including any capital leases or other deferred purchase price of property set forth on Schedule 2.12 hereto), including all principal, interest, prepayment fees and other amounts required to be paid in order to discharge fully all such amounts at Closing.

(e) At least two days prior to the Closing, the Seller shall furnish to the Purchaser (i) wire transfer instructions for the Purchase Price (less the Escrow Amount), (ii) wire transfer instructions from the Escrow Agent for the Escrow Amount and (iii) evidence satisfactory to the Purchaser of payment or release of all Closing Debt, including, in the case of intercompany debt from the Seller, Parent or an affiliate, evidence of the contribution to capital of the Company of all such amounts.

Section 1.02 Delivery of Shares and Payment of Purchase Price.

(a) On the Closing Date, against delivery of the Purchase Price, the Seller shall deliver to the Purchaser one or more certificates in definitive form, registered in the name of the Purchaser, evidencing the Shares being purchased by the Purchaser hereunder, duly endorsed for transfer or accompanied by a stock transfer power duly endorsed in blank.

(b) On the Closing Date, against delivery of the certificates evidencing the Shares as aforesaid, the Purchaser shall pay, by wire transfer of immediately available funds in accordance with the wire transfer instructions referenced above, (i) the Purchase Price (less the Escrow Amount) to the Seller and (ii) the Escrow Amount to the Escrow Agent.

Section 1.03 Closing. The closing of the sale and transfer of the Shares pursuant to Sections 1.01 and 1.02 above (the “Closing”) shall take place at the offices of Choate, Hall & Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109, or at such other location as the parties mutually agree, at 10:00 (EST) on the second business day following the satisfaction or waiver of all of the conditions set forth in Article VI of this Agreement (other than those conditions that by their nature are to be satisfied at such Closing, subject to the fulfillment or waiver of such conditions at such Closing), or at such other time and on such other date as the parties mutually agree (such date and time of Closing being herein called the “Closing Date”). The Closing shall be deemed to be effective for tax and accounting purposes as of the close of business on the Closing Date.

ARTICLE II
REPRESENTATIONS AND WARRANTIES
AS TO THE COMPANY, THE SELLER AND THE SHARES

The Parent and the Seller hereby jointly and severally represent and warrant to the Purchaser that each of the statements contained in this Article II is true and correct and will be true and correct as of the Closing Date:

Section 2.01 Organization, Qualifications and Corporate Power; subsidiaries.

(a) Each of the Seller and the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company is duly licensed or qualified as a foreign corporation to do business, and is in good standing, in each other jurisdiction in which the failure to be so licensed or qualified has had or could reasonably be expected to have a Material Adverse Effect. Each of the Seller and the Company has all requisite corporate power and authority to own or lease and operate its properties and assets and to carry on its business as currently conducted and as currently proposed by the Seller and the Company to be conducted.

(b) The Seller has previously made available to the Purchaser or its counsel complete and correct copies of the Certificate of Incorporation and Bylaws of the Company, each as in effect on the date hereof and which shall be in effect on the Closing Date. The Company is not in default in the performance, observance or fulfillment of any provision of its Certificate of Incorporation or Bylaws.

(c) Except as set forth on Schedule 2.01(c), the Company has no subsidiaries. The entities indicated on such Schedule as subsidiaries are referred to herein as the “Subsidiaries” and each as a “Subsidiary”. Except as set forth on Schedule 2.01(c), neither the Company nor any of the Subsidiaries directly or indirectly owns or has the right or obligation to acquire any equity interest, or any security convertible or exchangeable into any equity interest, in any other corporation, partnership, limited liability company, joint venture, trust or other business enterprise, except in the ordinary course of business and except for the interests of the Company in the Subsidiaries. Neither the Company nor any Subsidiary is subject to any obligation or requirement to make any investment (in the form of a loan or capital contribution) in any corporation, partnership, limited liability company, joint venture, trust or other business enterprise.

(d) Schedule 2.01(c) sets forth the name and jurisdiction of organization of each Subsidiary. There are no authorized or outstanding subscriptions, warrants, options, convertible or exchangeable securities or other rights (contingent or other) to purchase or acquire any shares of any class of capital stock (or membership interests) of any of the Subsidiaries or commitments of any such Subsidiary (contingent or other) to issue any shares of capital stock or membership interests or any subscriptions, warrants, options, convertible securities or other rights in respect thereof.

(e) Each Subsidiary is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite corporate (or comparable) power and authority to own or lease and operate its properties and assets and to carry on its business as currently conducted and as currently proposed by the Company to be conducted. Each Subsidiary is duly licensed or qualified as a foreign corporation or limited liability company to do business, and is in good standing, in each other jurisdiction in which the failure to be so licensed or qualified has had or could reasonably be expected to have a Material Adverse Effect.

(f) The Seller has previously made available to the Purchaser or its counsel complete and correct copies of the Certificates or Articles of Incorporation and Bylaws (or comparable governing documents) of each of the Subsidiaries, each as in effect on the date hereof and which shall be in effect on the Closing Date. No Subsidiary is in default in the performance, observance or fulfillment of any provision of such governing documents.

(g) All of the outstanding shares of capital stock or membership interests, as applicable, of each Subsidiary are validly issued, fully paid and nonassessable and are owned beneficially and of record by the Company or by a wholly-owned Subsidiary as set forth on Schedule 2.01(c), free and clear of any liens, pledges, security interests, mortgages, charges or other encumbrances or adverse claims (“Liens”), and there are no proxies outstanding or restrictions on voting with respect to any such shares. None of such shares or membership interests are subject to, nor were any of them issued in violation of, any preemptive rights or any right of first refusal, right of first offer or other similar right in favor of any person.

Section 2.02 Authorization of Agreements, Etc.

(a) The Seller has all requisite corporate power and authority to execute and deliver this Agreement and all related documents, certificates, instruments and agreements to be delivered at Closing or otherwise in connection with this Agreement to which it is a party (collectively, the “Ancillary Agreements”), and to perform its obligations hereunder and thereunder.

(b) The execution, delivery and performance of this Agreement by the Seller and the Parent, including the sale and transfer of the Shares hereunder, and of the Ancillary Agreements to which they are a party have been duly authorized by all requisite corporate action on the part of the Seller and the Parent (including all requisite action of the Board of Directors of the Seller and of the Parent, as the sole stockholder of the Seller). Neither the execution and delivery by the Parent and the Seller of this Agreement and the Ancillary Agreements to which they are party nor the performance by the Parent and the Seller of their respective obligations hereunder and thereunder, including the sale and transfer of the Shares hereunder, will (A) violate (i) any provision of law or any governmental regulation or order of any court or other agency of government that is applicable to the Seller, the Company or any Subsidiary, (ii) the Certificate or Articles of Incorporation or Bylaws (or equivalent governing document of each noncorporate Subsidiary) of the Seller, the Parent, the Company or any Subsidiary, or (iii) any judgment, award or decree applicable to the Seller, the Parent, the Company or any Subsidiary, or (B) cause a material default, breach or penalty under any Material Contract or under any material contract, indenture, agreement or note to which the Seller or the Parent is a party, or (D) result in the creation or imposition of any Lien upon any of the properties or assets of the Seller, the Company or any Subsidiary, or (E) result in any suspension, revocation, impairment, forfeiture or nonrenewal of any Permit (as hereinafter defined) of the Company or any Subsidiary.

Section 2.03 Validity. This Agreement has been duly executed and delivered by the Seller and constitutes, and each of the Ancillary Agreements to which the Seller is to be a party, when executed and delivered by the Seller as contemplated hereby, will constitute, the legal, valid and binding obligation of the Seller, enforceable against it in accordance with their respective terms.

Section 2.04 Capitalization of the Company.

(a) The authorized capital stock of the Company consists of 100 shares of Company Common Stock, all of which are validly issued and outstanding, fully paid and nonassessable and owned beneficially and of record by the Seller free and clear of all Liens and adverse claims. The Seller has good and marketable title to the Shares. Upon the delivery by the Seller of certificates evidencing the Shares, duly endorsed for transfer or accompanied by stock transfer powers duly endorsed in blank, to the Purchaser pursuant to Section 1.02(a) above, against payment of the Purchase Price as provided in Section 1.02(b) above, the Seller will transfer good and marketable title to said Shares to the Purchaser, free and clear of any and all Liens or adverse claims. None of the Shares are subject to, nor were any of them issued in violation of, any preemptive rights or any right of first refusal, right of first offer or other similar right in favor of any person.

(b) (i) No subscription, warrant, option, convertible security or other right (contingent or other) to purchase or acquire any shares of any class of capital stock of the Company is authorized or outstanding, (ii) there is not any commitment (contingent or other) of the Company to issue any shares, warrants, options or other such rights or to distribute to holders of any class of its capital stock any evidences of indebtedness or assets, (iii) the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any shares of the capital stock of the Company or any Subsidiary or any interest therein or to pay any dividend or make any other distribution in respect thereof and (iv) there is not any agreement (contingent or other) relating to the voting, transfer or registration under any securities laws of any shares of any class of capital stock of the Company or any Subsidiary nor any outstanding proxies with respect thereto.

Section 2.05 Financial Statements. The Parent and the Seller have previously delivered to the Purchaser (i) the unaudited consolidated balance sheet of the Company (the “Balance Sheet”) as of December 31, 2000 (the “Balance Sheet Date”) and the related unaudited consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year then ended, (ii) the audited consolidated balance sheet of the Company as of December 31, 1999 and the related audited consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year then ended, together with the report thereon of Arthur Andersen LLP, the Company’s independent certified public accountants for the year then ended, (iii) the audited consolidated balance sheet of the Company as of December 31, 1998 and the related audited consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the period from March 4, 1998 (inception) through December 31, 1998, together with the report thereon of Arthur Andersen LLP, the Company’s independent certified public accountants for the period then ended, and (iv) the unaudited consolidated balance sheet of the Company as of June 30, 2001 and the related unaudited consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the six month period then ended, certified by the principal financial officer of the Company (collectively, the “Financial Statements”). The Financial Statements (i) were prepared in accordance with United States generally accepted accounting principals, applied on a consistent basis in accordance with the Company’s historical methods, policies, practices, estimations and judgments (“GAAP”), from the books and records of the Company and its Subsidiaries and (ii) fairly present the financial position of the Company and its Subsidiaries as of the respective dates specified therein and the results of operations, shareholders’ equity (deficit) and cash flows for the respective periods then ended (subject to, in the case of the Financial Statements referred to in (iv) above, normal, nonmaterial year-end adjustments).

Section 2.06 Absence of Undisclosed Liabilities. Except as and to the extent reflected or reserved against in the Balance Sheet, or incurred since the Balance Sheet Date in the ordinary course of business and consistent with past practice, the Company and its Subsidiaries have no material liabilities, debts or obligations of any kind or nature whatsoever (whether fixed, absolute, accrued, contingent, secured or unsecured, known or unknown or otherwise, and whether due or to become due), including, without limitation, any tax liabilities due or to become due, or whether incurred in respect of or measured by the assets, sales, income or receipts of the Company and its Subsidiaries for any period.

Section 2.07 Absence of Certain Changes or Events. (a) Since June 30, 2001, other than as shown on Schedule 2.07, the Company and each Subsidiary has operated only in the usual and ordinary course (and consistent with the provisions of Section 5.01(a)(i-v), and there has been no (i) acquisition or disposition of assets or securities, or commitment therefor by the Company or any Subsidiary, except in the ordinary course of business, (ii) liens, security interests or encumbrances placed upon any of the Company’s or any Subsidiary’s assets, except in the ordinary course of business, (iii) increase in the compensation or commission rates payable by the Company or any Subsidiary to any officer, director, employee with annual compensation of at least $70,000, (iv) except for the Permitted Cash Distribution, dividend, distribution, redemption, recapitalization or other transaction involving the capital stock of the Company or any Subsidiary or non-cash distribution or payment to any of the Parent, the Seller or their Affiliates or (v) other event or condition which has had or could reasonably be expected to have a material adverse effect on the business as currently conducted, assets, liabilities, condition (financial or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole (a “Material Adverse Effect”). As used in this Agreement, “Affiliate” means the direct and indirect majority-owned subsidiaries of Parent other than the Company and the Subsidiaries, all of which are listed on Schedule 2.07(A).

Section 2.08 Governmental Approvals. No order, authorization, approval or consent from, or filing with, any federal or state governmental or public body, non-governmental self-regulatory or standard-setting authorities or other authority having jurisdiction over the Seller, the Company or any Subsidiary is required for the execution, delivery and performance by the Parent and/or the Seller of this Agreement or any of the Ancillary Agreements to which either the Parent or the Seller is a party, is necessary in order to ensure the legality, validity, binding effect or enforceability against the Parent or the Seller of this Agreement or any such Ancillary Agreement, or is necessary in order that the business of the Company and its Subsidiaries can be conducted following the Closing Date substantially in the same manner as heretofore conducted.

Section 2.09 Title to Properties, Absence of Liens and Encumbrances. The Company and each Subsidiary has good and marketable title to, or a valid leasehold or license interest in, all assets and properties used by it in connection with its business (including good and marketable title to all assets reflected on the Balance Sheet, except for accounts receivable collected in the ordinary course since the Balance Sheet Date), in each case free and clear of all Liens other than (x) liens for taxes not yet due and payable, (y) imperfections of title that do not detract from the value or impair the use of the property subject thereto and (z) materialmen’s, mechanics’, and other like liens arising in the ordinary course of business and for which related payments are not past due (the Liens described in clauses (x), (y) and (z) above being referred to herein as “Permitted Liens”). All material assets of the Company and each Subsidiary are in good operating condition and repair, normal wear and tear excepted. The assets and properties of the Company and each Subsidiary include all assets currently used in the conduct of their businesses and are adequate to conduct the operations of the Company and the Subsidiaries.

Section 2.10 Real Property. Neither the Company nor any Subsidiary owns any real property. Schedule 2.10 sets forth each interest in real property leased by the Company or any Subsidiary, the lessor of such leased property, the annual rent payable by the Company or any Subsidiary in respect of such leased property, and each lease or any other arrangement under which such property is leased. To the knowledge of Parent, Seller and the Company (and, for all purposes hereunder, the knowledge of the Parent, Seller and/or the Company shall include the knowledge of each of the Subsidiaries), the Company or any Subsidiary, as applicable, enjoys peaceful and quiet possession of its leased premises and is not in material default under any such leasehold, and neither the Company nor any Subsidiary has been informed that the lessor under any of the leases has taken action or threatened to terminate the lease before the expiration date specified in the lease. There is no pending nor, to the knowledge of Parent, Seller or the Company, threatened condemnation, eminent domain or similar proceeding with respect to any real property occupied by the Company or any Subsidiary. All real property leased by the Company or any Subsidiary is in compliance in all material respects with all building, zoning, subdivision, health, safety and other applicable foreign, federal, state and local laws and regulations.

Section 2.11 Intellectual Property.(a) As used herein “Intellectual Property” means all (i) patents, patent applications, patent disclosures and inventions, (ii) trademarks, service marks, trade dress, trade names, logos and corporate names (in each case, whether registered or unregistered) and registrations and applications for registration thereof together, to the extent applicable, with all of the goodwill associated therewith, (iii) copyrights (registered or unregistered) and copyrightable works and registrations and applications for registration thereof, (iv) computer software, data, data bases and documentation thereof, (v) trade secrets and other confidential information (including, without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information), and (vi) domain name registrations. As used herein “Company Intellectual Property” means Intellectual Property owned or used by the Company or any Subsidiary for the conduct of its current business.

(b) Schedule 2.11 hereto contains a complete and accurate list of all Company Intellectual Property included in clauses (i) – (iii) of the definition of Intellectual Property. Schedule 2.11 also contains a complete and accurate list of all material licenses and other rights granted by the Company or any Subsidiary to any third party with respect to any Company Intellectual Property and all material licenses and other rights granted by any third party to the Company or any Subsidiary with respect to any Company Intellectual Property (excluding “off-the-shelf” programs or products or other software licensed in the ordinary course of business) identifying the subject Intellectual Property. To the knowledge of Parent, Seller and the Company, there is no reasonably foreseeable loss or expiration of any material Company Intellectual Property. The Company and each Subsidiary has taken commercially reasonable and appropriate actions to maintain and protect the Company Intellectual Property.

(c) To the knowledge of Parent, Seller and the Company: (i) the Company and each Subsidiary own or possess sufficient legal rights to all Company Intellectual Property used in its business as now conducted, without any infringement of the rights of others; (ii) neither the Company nor any Subsidiary has violated or is violating or infringing any Intellectual Property of any other natural person, corporation, limited liability company, partnership, trust or other entity (each, a “Person”), (iii) no Person has violated or is violating or infringing any Company Intellectual Property and (iv) no employee of the Company or any Subsidiary is obligated under any agreement or commitment, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with such employee’s duties to the Company or any Subsidiary or that would conflict with any of their businesses as now conducted and as currently proposed to be conducted.

Section 2.12 Status of Contracts. Schedule 2.12 sets forth a complete and accurate list of all:

(a) contracts with respect to which the Company or any Subsidiary has any liability or obligation involving more than $50,000, contingent or otherwise, or which may extend for a term of more than one year after the Closing;

(b) material contracts under which the amount payable by the Company or any Subsidiary is calculated based on the revenue, income or similar measure of the Company, the Subsidiaries or any other Person;

(c) material licenses, leases, contracts and other arrangements with respect to property of the Company or any Subsidiary, including without limitation, real estate leases, material licenses relating to Company Intellectual Property (other than as listed on Schedule 2.10 and 2.11), and material sales and supply contracts;

(d) material contracts or instruments to which the Company or any Subsidiary is a party relating to the borrowing of money, the capital lease or purchase on an installment basis of any asset, or the guarantee of any of the foregoing;

(e) material (either individually or, if related to a similar set of rights or benefits provided for under such contracts, in the aggregate) contracts of the Company or any Subsidiary with employees, officers or directors of the Company or any Subsidiary, including employment, consulting or severance agreements; material (either individually or, if related to a similar set of circumstances or conditions, in the aggregate) contracts of the Company or any Subsidiary with the Parent or any Affiliate (other than as listed on Schedule 2.23, which contracts on Schedule 2.23 shall be considered Material Contracts as defined below);

(f) contracts which contain any noncompete or similar provision, including any contract that limits the geographical area in which the Company’s or any Subsidiary’s business may be conducted or the type, scope or method of business to be conducted by any of them;

(g) contracts under which the Company or any Subsidiary provides transcription services;

(h) collective bargaining, deferred compensation, benefit and similar plans and agreements involving the Company or any Subsidiary; and

(i) other material (either individually or, if related to a similar set of circumstances or conditions, in the aggregate) contracts, instruments and commitments of the Company or any Subsidiary, other than those relating to the categories of contracts described above.

All the foregoing, including all amendments or modifications thereto, are referred to as “Material Contracts”. The Seller and the Parent have furnished to the Purchaser copies of all Material Contracts. To the knowledge of Parent, Seller and the Company: (i) each Material Contract sets forth the entire agreement and understanding between the Company and/or each Subsidiary and the other parties thereto; (ii) each Material Contract is valid, binding and in full force and effect, and (iii) there is no event which has occurred or exists, which constitutes or which, with notice, the happening of any event and/or the passage of time, would constitute a material default or breach under any such contract by the Company and/or any Subsidiary or any other party thereto, or would cause the acceleration of any obligation of any party thereto or give rise to any right of termination or cancellation thereof. The Seller and the Company have no reason to believe that the parties to any Material Contract will not fulfill their obligations thereunder in all material respects.

Section 2.13 Accounts Receivable. All of the accounts receivable of the Company and each Subsidiary as of the Closing will be valid and enforceable claims, collectable and subject to no set-off or counterclaim, except to the extent of the allowance for doubtful accounts with respect to accounts receivable reflected in the June 30, 2001 balance sheet of the Company referred to in Section 2.05. All accounts receivable of the Company and each Subsidiary are determined in accordance with GAAP and arose out of bona fide transactions in the ordinary course of business.

Section 2.14 Warranty Claims. There are, and since May 11, 2000 there have been, no material claims against the Company or any Subsidiary alleging any material defects in the Company’s services or products, or alleging any failure of the Company’s services or products to meet specifications. The warranty reserve included in the Balance Sheet will be adequate to cover all warranty claims relating to services and products sold prior to the Closing.

Section 2.15 Customers and Suppliers. Schedule 2.15 sets forth a list of all current customers of the Company or any Subsidiary. To the knowledge of Parent, Seller and the Company, all customers listed on Schedule 2.15 and the Company’s and the Subsidiaries’ other customers will in the aggregate continue purchasing such services from the Company and any Subsidiary. To the knowledge of Parent, Seller or the Company, the Company’s and the Subsidiaries’ suppliers will continue to provide supplies consistently to the Company and any Subsidiary.

Section 2.16 Litigation, Etc. Except as listed on Schedule 2.16, no action, suit, litigation, proceeding or investigation is pending before any court, arbitrator or governmental authority or, to the Parent’s, the Seller’s or the Company’s knowledge, is threatened against or relates to the Company or any of its Subsidiaries, their respective officers or directors in their capacities as such, or any of their respective properties or businesses.

Section 2.17 Taxes.

(a) Except as set forth on Schedule 2.17 hereto, the Company, and each of its Subsidiaries have (i) duly and timely filed all returns, declarations, reports, estimates, schedules, amendments and statements (“Returns”) required to be filed by them in respect of any Taxes, all of which Returns were true and correct as filed (or as subsequently amended) and correctly reflect the facts regarding the income, business, assets, operations, activities and status of the Company and its Subsidiaries as well as any Taxes required to be paid or collected by the Company and its Subsidiaries, (ii) timely paid or withheld all Taxes that are or were due and payable with respect to the Returns referred to in clause (i) whether or not shown as due on such Returns, (iii) established, consistent with past practice, an adequate reserve, if any, on their books and records for the payment of all Taxes with respect to any taxable period (or portion thereof) ending on or prior to the Closing Date for which a Return or payment of Tax is not yet due, and (iv) complied with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and has timely withheld from employee wages and paid over to the proper governmental authorities when due all amounts required to be so withheld and paid over.

For purposes of this Agreement, “Tax” and “Taxes” shall mean (i) all taxes, charges, fees, levies or other assessments, including any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, license, withholding on amounts paid or received, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit taxes, or custom duties or other taxes, together with any interest or any penalty, addition to tax or additional amount imposed on the Company or any of its Subsidiaries by any governmental authority responsible for the imposition of any such taxes (domestic or foreign) (“Taxing Authorities”), (ii) liability for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated (including without limitation by operation of Treas. Reg. § 1.1502-6), combined or unitary group, or being a party to any agreement or arrangement whereby liability for payments of such amounts was determined or taken into account with reference to the liability of any other person for any period prior to the Closing Date and (iii) liability with respect to the payment of any amounts described in (i) as a result of any express or implied obligation to indemnify any other person.

(b) Except as set forth on Schedule 2.17 hereto, since May 11, 2000, and, to the knowledge of Parent, Seller and the Company, prior to May 11, 2000, no Federal, state, local or foreign Returns of the Company or any of its Subsidiaries have been audited or examined by any Taxing Authority and neither the Company nor any Subsidiary have received any written notice of any proposed audit or examination.

(c) Except as set forth on Schedule 2.17 hereto, the Company and its Subsidiaries have not incurred any liabilities for Taxes other than liabilities arising in the ordinary course of business since the Balance Sheet Date.

(d) Except as set forth on Schedule 2.17 hereto, the Company and each of its Subsidiaries have never (i) requested or received a Tax ruling (other than a determination with respect to a qualified employee benefit plan) or entered into a legally binding agreement (such as a closing agreement) with any Taxing Authority, which ruling or agreement could have an effect on the Taxes of the Company or any of its Subsidiaries on or after the Closing Date, (ii) been a partner in a partnership or a member of a limited liability company or any other entity treated as a partnership for federal, state or foreign income tax purposes or (iii) filed any election or caused any deemed election under Section 338 of the Internal Revenue Code of 1986, as amended (the “Code”), or any similar state or local provision. Neither Company nor any Subsidiary (A) is liable, contractually or otherwise, for the Taxes of any other Person (other than withholding Taxes arising in the ordinary course of business and other than as arising from the consolidated federal income tax regulations and comparable state, local and foreign tax laws), (B) is a “consenting corporation” under Section 341(f) of the Code or (C) has agreed to or is required to make any adjustment under Code Section 481(a) or 263A (as a result of any examination by a taxing authority). Each of the Seller and the Company is a “United States person” as such term is used in Section 1445 of the Code.

(e) No property used by the Company or the Subsidiaries is “tax-exempt use property” within the meaning of Section 168(h) of the Code; (ii) none of the assets of the Company or the Subsidiaries secures any debt the interest on which is tax-exempt under Section 103(a) of the Code; and (iii) neither the Company nor any Subsidiary is a party to the safe harbor lease within the meaning of Section 168(f)(8) of the Code, as in effect prior to the Tax Equity and Fiscal Responsibility Act of 1982.

(f) Except as set forth on Schedule 2.17 hereto, (i) no extensions of time have been granted to the Company or any of its Subsidiaries to file any Return, (ii) no deficiency or adjustment for any Taxes has been proposed, asserted or assessed in writing against the Company or any of its Subsidiaries, (iii) there have never been any, and no Federal, state, local or foreign audits or other administrative proceedings or court proceedings are currently in progress or pending against the Company or any of its Subsidiaries with respect to any Taxes owed by the Company or any of its Subsidiaries, and (iv) no waiver or consent extending any statute of limitations for the assessment or collection of any Taxes owed by the Company or any of its Subsidiaries, has been executed by the Company or any of its Subsidiaries or on behalf of the Company or any of its Subsidiaries, nor are any requests for such waivers or consents pending.

(g) Except as set forth on Schedule 2.17 hereto, neither the Company nor any of its Subsidiaries has ever been a party to any Tax sharing or allocation agreement.

(h) Neither the Company nor any of its Subsidiaries is a party to any agreement, contract or arrangement that will result in the payment of any “excess parachute payment” within the meaning of Section 280G of the Code as a result of the sale of the Shares pursuant to this Agreement.

(i) The Purchaser has been supplied with true and complete copies of each Tax Return of the Company and the Subsidiaries, including each franchise or excise Tax Return based on income filed for the last three taxable years.

Section 2.18 Governmental Authorizations and Regulations.

(a) The business of the Company and its Subsidiaries is being conducted in compliance in all material respects with all applicable laws, ordinances, rules and regulations of all governmental authorities relating to its properties or applicable to their business. Neither the Company nor any of its Subsidiaries has received any notice of any alleged violation of any of the foregoing. Neither the Company nor any of its Subsidiaries nor any of their assets or properties, operations or businesses are subject to any court or administrative order, judgment, injunction or decree specific to the Company or any of the Subsidiaries.

(b) Schedule 2.18 sets forth all licenses, permits, authorizations and certifications of governmental authorities and non-governmental self-regulatory or standard-setting authorities held by the Company or any Subsidiary which are material to the Company, any Subsidiary or their business (each a “Permit”). The Company and each Subsidiary is in material compliance with all Permits, all of which are in full force and effect. There are no other such licenses, permits, authorizations or certifications which are material to the Company, any Subsidiary or their business as currently conducted which the Company has not obtained and which, in good industry practice, the Company or any Subsidiary should hold for the conduct of its business.

Section 2.19 Labor Matters.

(a) Neither the Company nor any of its Subsidiaries is a party to any labor or collective bargaining agreement, and there are no labor or collective bargaining agreements that pertain to any of their employees. No employees of the Company or any of its Subsidiaries are represented by any labor organization. No labor organization or group of employees of the Company or any of its Subsidiaries has made a pending demand for recognition, and there are no representation proceedings or petitions seeking a representation proceeding presently pending or, to the knowledge of the Parent, the Seller, the Company or any Subsidiary, threatened to be brought or filed with the National Labor Relations Board or other labor relations tribunal. There is no organizing activity involving the Company or any of its Subsidiaries pending or, to the knowledge of the Parent, the Seller, the Company or any Subsidiary, threatened by any labor organization or group of employees of the Company or any of its Subsidiaries. There are no (x) strikes, work stoppages, slowdowns, lockouts or arbitrations or (y) material grievances or other material labor disputes pending or, to the knowledge of the Parent, the Seller, the Company and the Subsidiaries of the Company, threatened against or involving the Company or any of its Subsidiaries. There are no unfair labor practice charges, grievances or complaints pending or, to the knowledge of the Parent, the Seller, the Company or any Subsidiary, threatened against or involving the Company or any of its Subsidiaries or any group of employees of the Company or any of its Subsidiaries. There are no complaints, charges or claims against the Company or any of its Subsidiaries pending or, to the knowledge of the Parent, the Seller, the Company or any Subsidiary, threatened to be brought or filed with any governmental body based on, arising out of, in connection with, or otherwise relating to the employment by the Company or any of its Subsidiaries of any individual, including any claim for workers’ compensation. Hours worked by and payments made to employees of the Company and its Subsidiaries have not been in violation of the federal Fair Labor Standards Act or any other law dealing with such matters.

(b) The Company and each of its Subsidiaries have complied in all material respects with all laws, statutes, rules, regulations, orders, decrees and other governmental requirements relating to the hiring and retention of all employees, leased employees and independent contractors, including those relating to wages, hours, labor, employment and employment practices, terms and conditions of employment, equal employment opportunity, collective bargaining and the payment of social security and other employment taxes.

(c) Schedule 2.19 sets forth a complete list of all employees of the Company and each Subsidiary, with annual compensation in excess of $70,000, showing date of hire, hourly rate or salary or other basis of compensation and other benefits accrued as of a recent date, and job function of salaried employees.

Section 2.20 Insurance. All policies of fire, liability, workers’ compensation and other forms of insurance providing insurance coverage to or for the Company and its Subsidiaries are listed on Schedule 2.20 hereto, together with the scheduled expiration date of such policies, and (i) the Company and each of its Subsidiaries are named insureds under all such policies, (ii) all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, (iii) no notice of cancellation or termination has been received with respect to any such policy, and (iv) such policies provide insurance in such amounts and against such risks as are customary for companies of similar size in the same business as the Company and its Subsidiaries. All such policies are in full force and effect and will remain in full force and effect to the Closing Date.

Section 2.21 Employee Benefit Plans.

(a) Schedule 2.12 sets forth all employee compensation and benefit plans, agreements, commitments, practices or arrangements of any type (including, but not limited to, plans described in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) offered, maintained or contributed to by the Company or any Subsidiary for the benefit of current or former employees or directors of the Company or any Subsidiary, or with respect to which the Company or any Subsidiary has or may have any liability, whether direct or indirect, actual or contingent (including, but not limited to, liabilities arising from affiliation under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA) (collectively, the “Benefit Plans”).

(b) With respect to each Benefit Plan, the Company and each Subsidiary has delivered to the Purchaser true and complete copies of: (i) any and all plan texts and agreements (including, but not limited to, trust agreements, insurance contracts and investment management agreements); (ii) any and all material written employee communications by or on behalf of the Parent, the Seller, the Company or any Subsidiary (including all summary plan descriptions and material modifications thereto); (iii) the two most recent annual reports, if applicable; (iv) the most recent annual and periodic accounting of plan assets, if applicable; (v) the most recent determination letter received from the Internal Revenue Service (the “Service”), if applicable; and (vi) in the case of any unfunded or self-insured plan or arrangement, a current estimate of accrued and anticipated liabilities thereunder.

(c) With respect to each Benefit Plan, except as set forth on Schedule 2.21: (i) if intended to qualify under Section 401(a) of the Code, such plan so qualifies, and its trust is exempt from taxation under Section 501(a) of the Code; (ii) such plan has been administered and enforced in accordance with its terms and all applicable laws, regulations and rulings in all material respects; (iii) no breach of fiduciary duty has occurred with respect to which the Company or any Subsidiary or any Benefit Plan may be liable or otherwise damaged in any material respect; (iv) no material disputes nor any audits or investigations by any governmental authority are pending or, to the knowledge of Parent, Seller or the Company, threatened; (v) no “prohibited transaction” (within the meaning of either Section 4975(c) of the Code or Section 406 of ERISA) has occurred with respect to which the Company or any Subsidiary may be liable or otherwise damaged in any material respect; (vi) all contributions, premiums, and other payment obligations have been recognized on the consolidated financial statements of the Company and each Subsidiary in accordance with generally accepted accounting principles in the United States, and, to the extent due, have been made on a timely basis, in all material respects; (vii) all nonforfeitable contributions or benefit payments made or required to be made under each Benefit Plan with respect to which a deduction is available meet the requirements for deductibility under the Code or will meet such requirements with the passage of time; (viii) there is nothing that would prevent the Company and each participating Subsidiary from amending, modifying or terminating such plan, or any portion of it, at any time without liability to itself; and (ix) no Benefit Plan requires the Company to continue to employ any employee or director.

(d) No Benefit Plan is, or has ever been, subject to Title IV of ERISA.

(e) With respect to each Benefit Plan which provides welfare benefits of the type described in Section 3(1) of ERISA: no such plan provides medical or death benefits with respect to current or former employees or directors of the Company beyond their termination of employment, other than coverage mandated by Sections 601-608 of ERISA and 4980B(f) of the Code, (ii) each such plan has been administered in compliance with Sections 601-609 of ERISA and 4980B(f) of the Code where applicable; (iii) no such plan is or is provided through a “multiple employer welfare arrangement” within the meaning of Section 3(40) of ERISA; and (iv) no such plan has reserves, assets, surpluses or prepaid premiums in excess of the qualified asset account limits under Code Section 419A.

(f) The consummation of the transactions contemplated by this Agreement and the Ancillary Agreements (except as specifically provided in the Ancillary Agreements) will not, solely as a result of the sale of the Shares and the resulting change of control of the Company, (i) entitle any individual to severance pay, (ii) accelerate the time of payment or vesting under any Benefit Plan, or (iii) increase the amount of compensation or benefits due to any individual.

Section 2.22 Environmental Matters. The ownership or use of the Company’s and each Subsidiary’s premises and assets, the occupancy and operation thereof, and the conduct of the Company’s and each Subsidiary’s operations and businesses are in material compliance with all applicable foreign, federal, state and local laws, ordinances, regulations, standards and requirements relating to pollution, environmental protection, hazardous substances and related matters. To the knowledge of Parent, Seller and the Company, there is no material liability attaching to such premises or assets or the ownership or operation thereof as a result of any hazardous substance that may have been discharged on or released from such premises, or disposed of on-site or off-site, or any other circumstance occurring prior to the Closing or existing as of the Closing. For purposes of this Section, “hazardous substance” shall mean oil or any other substance which is included within the definition of a “hazardous substance”, “pollutant”, “toxic substance”, “toxic waste”, “hazardous waste”, “contaminant” or other words of similar import in any foreign, federal, state or local environmental law, ordinance or regulation.

Section 2.23 Related Party Transactions. Except as set forth on Schedule 2.23 hereto and except as contemplated by this Agreement and the Ancillary Agreements, there are no existing, and have not been since the Balance Sheet Date, any agreements individually or in the aggregate in an amount greater than $50,000 which are (i) between the Company or any of its Subsidiaries, (ii) between the Company or any of its Subsidiaries, on the one hand, and either (A) the Parent, Seller or an Affiliate, on the other hand, or (B) any officer or director of the Company, any Subsidiary, the Parent or the Seller. For purposes of this section, agreements within each subpart (i), (ii)(A) or (ii)(B) are aggregated to determine whether the $50,000 threshold is met.

Section 2.24 Bank Accounts. Schedule 2.24 contains a true and compete list of (i) all banks, trust companies, savings and loan associations and brokerage firms with which the Company or any Subsidiary has an account or safe deposit box and (ii) the names of all persons authorized to draw thereon, to have access thereto or to authorize transactions therein.

Section 2.25 Brokers’ or Finders’ Fees. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried out directly with the Purchaser, without the intervention of any person on behalf of the Parent, the Seller, the Company or any Subsidiary in such manner as to give rise to any claim by any person against the Purchaser or the Company or any of its Subsidiaries for a finder’s fee, brokerage commission or similar payment.

Section 2.26 Disclosure. The representations and warranties contained in this Agreement do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein not misleading.

ARTICLE III
REPRESENTATIONS AND WARRANTIES
AS TO THE PARENT

The Parent represents and warrants to the Purchaser that each of the statements contained in this Article III is true and correct and will be true and correct as of the Closing Date:

Section 3.01 Organization and Corporate Power; Ownership of the Seller; Authorization of Agreements, Etc.

(a) The Parent is a corporation duly organized and validly existing under the laws of the State of Oregon. The Parent has all requisite corporate power and authority to own or lease and operate its properties and assets and to carry on its business as currently conducted and to execute and deliver this Agreement and each of the Ancillary Agreements to which it is a party and to perform its obligations hereunder and thereunder. The Parent is the beneficial and record owner of all of the issued and outstanding shares of capital stock of the Seller.

(b) The execution, delivery and performance of this Agreement by the Parent has been duly authorized by all requisite corporate action on the part of the Parent (including all requisite action of the Board of Directors and stockholders of the Parent). Neither the execution and delivery by the Parent of this Agreement and the Ancillary Agreements to which it is a party nor the performance by the Parent of its obligations hereunder and thereunder will (A) violate (i) any provision of law or any governmental regulation or order of any court or other agency of government that is applicable to the Parent, (ii) the Articles of Incorporation or Bylaws of the Parent, (iii) any judgment, award or decree applicable to the Parent, or (iv) any provision of any note, indenture, agreement, lease or other instrument to which the Parent is a party, or by which the Parent or any of its properties or assets are bound or affected, or (B) conflict with, give rise to a right of acceleration or termination under, result in any payment or benefit becoming due thereunder, result in the increase of any payment or benefit due thereunder, result in a breach of or constitute (with due notice or lapse of time or both) a default under any note, indenture, agreement, lease or other instrument to which the Parent is a party, or (C) result in the creation or imposition of any Lien upon any of the properties or assets of the Parent.

Section 3.02 Validity. This Agreement has been duly executed and delivered by the Parent and constitutes, and each of the Ancillary Agreements to which the Parent is a party, when executed and delivered by the Parent as contemplated hereby, will constitute, the legal, valid and binding obligation of the Parent, enforceable against the Parent in accordance with their respective terms.

Section 3.03 Governmental Approvals. No order, authorization, approval or consent from, or filing with, any federal or state governmental or public body or other authority having jurisdiction over the Parent is required for the execution, delivery and performance by the Parent of this Agreement or any Ancillary Agreement to which the Parent is a party, or is necessary in order to ensure the legality, validity, binding effect or enforceability against the Parent of this Agreement or any such Ancillary Agreement.

Section 3.04 Litigation Relating to the Transactions Contemplated Hereby. There are no actions, suits, proceedings or claims pending before any court, arbitrator or government agency against or affecting the Parent which might enjoin or prevent the consummation of the transactions contemplated by this Agreement.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER

The Purchaser represents and warrants to the Parent and the Seller that each of the statements contained in this Article IV is true and correct and will be true and correct as of the Closing Date:

Section 4.01 Power and Authority. The Purchaser has full power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party, and to perform its obligations hereunder and thereunder.

Section 4.02 Authorization of Agreements, Etc. The execution, delivery and performance of this Agreement by the Purchaser has been duly authorized by all requisite action on the part of the Purchaser. Neither the execution and delivery by the Purchaser of this Agreement and the Ancillary Agreements to which the Purchaser is a party nor the performance by the Purchaser of its obligations hereunder and thereunder will violate (i) any provision of law or any governmental regulation or order of any court or other agency of government that is applicable to the Purchaser, (ii) the Certificate of Formation of the Purchaser, (iii) any judgment, award or decree applicable to the Purchaser, or (iv) any provision of any note, indenture, agreement, lease or other instrument to which the Purchaser is a party, or by which the Purchaser or any of its properties or assets are bound or affected.

Section 4.03 Validity. This Agreement has been duly executed and delivered by the Purchaser and constitutes, and the Ancillary Agreements to which the Purchaser is a party, when executed and delivered by the Purchaser as contemplated hereby, will constitute, the legal, valid and binding obligation of the Purchaser, enforceable against it in accordance with their respective terms.

Section 4.04 Governmental Approvals. No order, authorization, approval or consent from, or filing with, any federal or state governmental or public body or other authority having jurisdiction over the Purchaser is required for the execution, delivery and performance by the Purchaser of this Agreement or any Ancillary Agreement to which the Purchaser is a party, or is necessary in order to ensure the legality, validity, binding effect or enforceability against the Purchaser of this Agreement or any such Ancillary Agreement.

Section 4.05 Litigation Relating to the Transactions Contemplated Hereby. There are no actions, suits, proceedings or claims pending before any court, arbitrator or government agency against or affecting the Purchaser that might enjoin or prevent the consummation of the transactions contemplated by this Agreement.

Section 4.06 Brokers’ or Finders’ Fees. All negotiations relative to this Agreement and the transactions contemplated hereby and thereby have been carried out by the Purchaser and its stockholders directly with the Parent and the Seller, without the intervention of any person on behalf of the Purchaser in such manner as to give rise to any claim by any person against the Parent or the Seller for a finder’s fee, brokerage commission or similar payment.

Section 4.07 Purchase for Investment; Related Party. Purchaser is an accredited investor within the meaning of Rule 501 issued under the Securities Act of 1933, as amended. Purchaser will acquire the Shares for its own account for the purpose of investment, it being understood that the right to dispose of the Shares shall be within the discretion of Purchaser. Purchaser shall not transfer or otherwise dispose of any of the Shares, or any interest therein, in any manner as to cause the Parent or the Seller or any affiliate thereof to be in violation of the registration requirements of the Securities Act of 1933, as amended, or applicable states securities or blue sky laws. Mr. Scott Steele is a principal of Parthenon Capital, LLC and will be so at Closing.

ARTICLE V
COVENANTS

Section 5.01 Certain Covenants of the Parent and the Seller.

(a) Except as otherwise agreed to in writing by the Purchaser, at all times between the date hereof and the Closing Date, the Parent and the Seller agree that they shall cause the Company and its Subsidiaries to:

(i) operate the Company’s and its Subsidiaries’ business only in the usual, regular and ordinary manner and on a basis consistent with past practice, and use commercially reasonable efforts to preserve the Company’s and its Subsidiaries’ current business organization, keep available the services of the officers and employees of the Company and its Subsidiaries and preserve the Company’s and its Subsidiaries’ present relationships with their customers and all other persons having business dealings with the Company and its Subsidiaries;

(ii) maintain the Company’s and its Subsidiaries’ assets and properties in good repair, order and condition, reasonable wear and tear excepted;

(iii) maintain the Company’s and its Subsidiaries’ books of account and records in the usual, regular and ordinary manner, on a basis consistent with past practice, and to use commercially reasonable efforts to comply with all laws applicable to the Company and/or its Subsidiaries and perform all the Company’s and its Subsidiaries’ contractual obligations without default;

(iv) not change the character of the Company’s and its Subsidiaries’ businesses in any manner (including their corporate or limited liability existence); and

(v) not, with respect to the Company and/or its Subsidiaries:

(A) incur any obligation, debt or liability of any kind or nature whatsoever (whether fixed, absolute, accrued, contingent, secured or unsecured, known or unknown or otherwise, and whether due or to become due), except trade payables and/or other business obligations (other than guarantees, obligations in respect of letters of credit or debt for borrowed money) incurred in the ordinary course of business and consistent with past practice;

(B) discharge or satisfy any Lien or pay any obligation, debt or liability of any kind or nature whatsoever (whether fixed, absolute, accrued, contingent, secured or unsecured, known or unknown or otherwise, and whether due or to become due), other than payments of obligations, debts or liabilities (other than guarantees, obligations in respect of letters of credit or debt for borrowed money) in the ordinary course and consistent with past practice;

(C) mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the assets or properties of the Company and/or its Subsidiaries;

(D) other than Permitted Cash Distributions (as defined below), transfer, lease or otherwise dispose of any of its assets or properties except to persons other than Related Parties for fair consideration in the ordinary course of business and consistent with past practice or, except for fair consideration in the ordinary course of business and consistent with past practice and from persons other than Related Parties, acquire any assets or properties;

(E) other than Permitted Cash Distributions, declare, set aside or pay any distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock or redeem or otherwise acquire any of its capital stock or split, combine or otherwise similarly change its capital stock or authorize the creation or issuance of or issue or sell any capital stock or any securities or obligations convertible into or exchangeable therefor, or give any person any right to acquire any capital stock from the Company or any of its Subsidiaries, or agree to take any such action;

(F) make any loan or investment of a capital nature, whether by purchase of stock or securities, contributions to capital, property transfers or otherwise, in any other partnership, corporation or other entity;

(G) cancel or compromise any debt or claim, except, with respect to debts of or claims against persons other than Related Parties, in the ordinary course of business and consistent with past practice;

(H) waive or release any rights of material value, including, or surrender or cause to be revoked or otherwise terminated any license, approval, authorization or consent from any court, administrative agency or other governmental authority;

(I) other than in the case of one employee as disclosed verbally to Purchaser, make or grant any wage, salary or benefit increase or bonus payment applicable to any group or classification of employees generally, enter into or amend the terms of any employment contract with, or make any loan to, or grant any severance benefits to, or enter into or amend the terms of any transaction of any other nature with, any Related Party;

(J) enter into any other transaction, contract or commitment, except in the ordinary course and consistent with past practice;

(K) except for modifications to contracts with persons who are not Related Parties made in the ordinary course and consistent with past practice, amend or modify in any way adverse to the interests of the Company or any of its Subsidiaries any contract or amend or modify in any way the Certificate or Articles of Incorporation or Bylaws or comparable governing documents of the Company or any of its Subsidiaries; or

(L) take any other action which could reasonably be expected to have a Material Adverse Effect.

(b) Between the date of this Agreement and the Closing Date, the Parent and the Seller shall afford, and shall cause the Company and its Subsidiaries to afford, the representatives of the Purchaser reasonable access during normal business hours to the offices, facilities, books and records of the Company and its Subsidiaries and the opportunity to discuss the affairs of the Company and its Subsidiaries with officers, employees, accountants, customers, suppliers and landlords of the Company and its Subsidiaries familiar therewith.

(c) Between the date hereof and the Closing Date, Parent and the Seller (x) shall not permit the Company and its Subsidiaries to enter into any transaction or make any agreement or commitment, or permit any event to occur, which would result in any of the representations, warranties or covenants of the Parent or the Seller contained in Articles II and III of this Agreement not being true and correct in any material respect at and as of the time immediately after the occurrence of such transaction or event and (y) shall use commercially reasonable efforts to promptly apply for and cause the Company and its Subsidiaries to promptly apply for and seek to obtain all authorizations, consents, waivers and approvals required in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements, and to seek the fairness opinion referred to in Article VI.

Section 5.02 Books and Records. Parent and the Seller shall cause the Company to deliver to the Purchaser or shall cause to be held at the principal office or other office of the Company where such principal records are normally kept, all books and records used in the operation of the business of the Company and its Subsidiaries and all files, documents, papers, agreements, books of account and other records pertaining to the business of the Company and its Subsidiaries, to the extent that such books, records, files and other materials are not theretofore located at the office of the Company. Notwithstanding the foregoing, the Purchaser waives, and shall cause the Company and its Subsidiaries to waive, any and all rights with respect to any of the following, which the Purchaser agrees will belong to the Seller and its Parent: (a) all of the books, files, documents and records of attorneys or accountants relating to their respective representations of the Seller or the Parent in connection with the negotiation, execution and delivery of this Agreement and the transactions contemplated by this Agreement; and (b) the Company’s tax returns, tax and financial records and reports, and other documents that Company is required by law to retain, or that will be necessary or advisable for the Parent or the Seller to retain, in their reasonable discretion, for tax or related purposes, provided that the Company shall be given a copy of all such returns, records and reports.

Section 5.03 Certain Tax Matters.

(a) Transfer Taxes. All stamp, documentary, transfer, real property gains, sales, use and other such Taxes and fees (including any penalties and interest) imposed upon or incurred by any of the parties hereto in connection with the transfer of the Shares to the Purchaser under this Agreement, and any legal and other expenses relating thereto, shall be borne by the Purchaser. The Seller and the Purchaser shall, each at their own expense, prepare and file all necessary Tax Returns and other documents with respect to all such stamp, documentary, transfer, real property gains, sales, use and other such Taxes and fees.

(b) The Purchaser shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company and its Subsidiaries for all periods ending on or prior to the Closing Date which are filed after the Closing Date (other than income or similar Tax Returns with respect to periods for which a consolidated, unitary or combined Income Tax Return of the Seller will include the operations of the Company and its Subsidiaries, in which case the Seller shall prepare or cause to be prepared and file or cause to be filed all such Tax Returns for the Company and its Subsidiaries). The Purchaser shall permit the Parent and the Seller to review and comment on each such Tax Return prepared by or at the direction of the Purchaser described in the preceding sentence prior to filing and shall make such revisions to such Income Tax Returns as are reasonably requested by the Parent and the Seller. The Parent and the Seller shall be liable for and shall indemnify the Purchaser against all Taxes of the Company and its Subsidiaries with respect to any period ending on or before the Closing Date, in all such cases within fifteen (15) days after payment by the Purchaser or the Company and its Subsidiaries of such Taxes.

(c) The Purchaser shall prepare or cause to be prepared and file or cause to be filed all Tax Returns of the Company and its Subsidiaries for Tax periods which begin before the Closing Date and end after the Closing Date. The Parent and the Seller shall be liable for and indemnify the Purchaser against, prior to the date on which Taxes are paid with respect to such periods, an amount equal to the portion of such Income Taxes which relates to the portion of such Taxable period ending on the Closing Date. For purposes of this Section, in the case of any Taxes based on gross or net income that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such Taxable period ending on the Closing Date shall be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. For purposes of this Section, any transactions not in the ordinary course of business occurring on the Closing Date after the Purchaser’s purchase of the Shares shall be deemed to relate to the Taxable period beginning after the Closing Date. Any Tax that is not based on gross or net income (such as real property or other ad valorem Taxes) for any Taxable period that begins before and ends after the Closing Date shall be allocated between the Purchaser and the Seller based on the relative numbers of days within such period that are (i) before or on the Closing Date, to be borne by the Seller, and (ii) after the Closing Date, to be borne by the Purchaser. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company and its Subsidiaries.

(d) From and after the Closing Date, the Parent and the Seller, on the one hand, and the Purchaser, the Company and its Subsidiaries, on the other hand, shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information that are reasonably relevant to any such filing, audit, litigationor other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any materials provided hereunder. Each party agrees to retain all books and records with respect to Tax matters pertinent to the Company and its Subsidiaries relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by the other party, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority.

(e) To the extent consistent with the regulations promulgated under Section 338(h)(10) of the Code, the Purchaser and the Seller agree to report all transactions not in the ordinary course of business occurring on the Closing Date after the Purchaser’s purchase of the Company stock on the Purchaser’s federal income tax return to the extent permitted by Treas. Reg. § 1.1502-76(b)(1)(B).

(f) No Election To Reattribute Losses. Neither the Parent nor the Seller shall make, or seek to cause the Company or any of its Subsidiaries to make, any election under Treas. Reg. § 1.1502-20(g) that would have the effect of reattributing any portion of any net operating loss carryover or any net capital loss carryover from the Company or any of its Subsidiaries to the Parent or the Seller.

(g) Tax Sharing Agreements. Any Tax sharing agreement between or among the Company (and any Subsidiary) and any other person shall be terminated immediately before the Closing Date and shall have no further effect for any Taxable period.

(h) Section 338(h)(10) Election. At the request of the Purchaser, the Parent and the Seller will join with the Purchaser in making an election under Section 338(h)(10) of the Code and the regulations thereunder (and any corresponding elections under state, local or foreign law) with respect to the transactions contemplated hereby (collectively, a “Section 338(h)(10) Election”). A request by Purchaser for a Section 338(h)(10) Election will be valid only if made within sixty (60) days of the Closing Date, in writing, to the Seller. If Purchaser makes a request for a 338(h)(10) election, Purchaser will prepare and furnish to Seller a draft Form 8023 prepared in accordance with Section 338(h)(10) of the Code and regulations thereunder, no later than 60 days before the filing date for such Form 8023, for Seller’s review and comment. Purchaser shall prepare the final Form 8023 and furnish it to Seller no later than 20 days before the filing date. Purchaser shall not be required to make any payment to Seller with respect to Taxes attributable to the making of the Section 338(h)(10) Election.

Section 5.04 Confidentiality. Following the Closing, (i) the Parent, the Seller and the Affiliates shall not, directly or indirectly, disclose, divulge or make use of any trade secrets or other information of a business, financial, marketing, technical or other nature pertaining to the transcription services business of Company or the Subsidiaries, including information of others relating thereto that the Company or the Subsidiaries has agreed to keep confidential and (ii) the Purchaser, the Company and the Subsidiaries shall not, directly or indirectly, disclose, divulge or make use of any trade secrets or other information of a business, financial, marketing, technical or other nature pertaining to the Electronic Medical Record (as defined below) business and the Internet Portal (as defined below) business of the Parent, the Seller or the Affiliates, including information of others relating thereto that the Parent, the Seller or the Affiliates has agreed to keep confidential, except, in each case, to the extent that such information shall have become public knowledge other than by breach of this Agreement by the party wishing to disclose, divulge or make use of such information, and except as necessary to file tax returns or other required reports with governmental agencies or as otherwise required by law. As used herein, “Electronic Medical Record” means the entire line of Logician software products and Medscape Mobile software products. As used herein, “Internet Portal” means the current business of medscape.com solely to the extent that it provides accredited continuing medical education and peer reviewed medical publications to physicians and other health professionals.

Section 5.05 Noncompetition; Nonsolicitation and Use of Trade Name.

(a) Noncompetition. For a period of two years after the Closing Date, Parent, Seller and the Affiliates will not, directly or indirectly, or as a stockholder, partner, employee, consultant or other owner or participant in any Person, engage in the business of medical record transcription anywhere in the United States or anywhere the Company or any Subsidiary currently engages in this business, subject to the following limitations:

(1) the applicability of this covenant will terminate as to Parent, Seller, an Affiliate or a business division of Parent upon the closing of a transaction involving a sale of more than 50% of the outstanding securities or assets or merger of that entity or division to or with an unrelated party; and

(2) this covenant shall not apply with respect to (i) the ownership or acquisition by Parent, Seller or an Affiliate of up to ten percent of any Person which is engaged in the business described in the foregoing covenant; or (ii) the acquisition by Parent, Seller or an Affiliate of a majority of the stock or a majority of the assets of a Person that engages in the business described in the foregoing covenant, provided that the portion of the business of such Person that so competes does not exceed ten percent of the total business of the Person as of the date of acquisition.

(b) Nonsolicitation. For a period of two years after Closing Date, the Parent, the Seller and the Affiliates will not, directly or indirectly, solicit or endeavor to entice away from the Company or any Subsidiary any person who is, or was within the one-year period prior thereto, an employee of the Company or any Subsidiary, subject to the following limitations:

(1) the foregoing nonsolicitation provision will not prevent Parent, Seller or any Affiliate from employing any such person who contacts Parent, Seller or an Affiliate on his or her own initiative without any direct or indirect solicitation by, or encouragement (not including a general solicitation of employment not specifically directed towards employees of the Company) from Parent, Seller or an Affiliate; and

(2) the applicability of foregoing nonsolicitation provision will terminate as to Parent, Seller, an Affiliate or a business division of Parent upon the closing of a transaction involving a sale of more than 50% of the outstanding securities or assets or merger of that entity or division to or with an unrelated party.

(c) Use of Trade Name. For a period of one year after the Closing Date, Parent, Seller and the Affiliates will not and will not permit any of their affiliates (as such term is defined in Rule 405 under the Securities Act of 1933, as amended), to use the name “Medscape Transcription” or any name confusingly similar to such name, provided that this provision shall not limit the use of the name “Medscape” other than in connection with the term “Transcription” or any term confusingly similar thereto.

Section 5.06 No Use of Names or Marks.

(a) Agreement by Parent and Seller. Following the Closing, the Parent, the Seller and the Affiliates shall not use (i) the corporate names of the Company or any Subsidiary as set forth on their respective charters, as amended, or (ii) the trademarks, service marks, trade dress, trade names, logos (in each case, whether registered or unregistered) of the Company or any Subsidiary listed on Schedule 2.11 or use the names of any of the Company’s or any Subsidiary’s employees, stockholders or members, in any press releases, advertising, promotional or sales literature without prior written consent from the Company in each case and, if applicable, from such employee, stockholder or member in each case.

(b) Agreement by the Purchaser. Following the Closing and except as provided in the Transition Services Agreement (as hereafter defined), the Purchaser and its Affiliates shall not use any trademarks, service marks, trade dress, trade names, logos and corporate names (in each case whether registered or unregistered) of Parent, Seller or any Affiliate or use the names of any of employee or stockholder of Parent, Seller or any Affiliate, in any press releases, advertising, promotional or sales literature without prior written consent from the Parent in each case and, if applicable, from such employee or stockholder in each case.

Section 5.07 Injunctive Relief. The Parent and the Seller on the one hand, and the Purchaser on the other hand, acknowledge that any breach or threatened breach of the provisions of Sections 5.04, 5.05 or 5.06 of this Agreement will cause irreparable injury to the other party for which an adequate monetary remedy does not exist. Accordingly, in the event of any such breach or threatened breach, such other party shall be entitled, in addition to the exercise of other remedies, to seek and (subject to court approval) obtain injunctive relief, without necessity of posting a bond, restraining such other party from committing such breach or threatened breach.

ARTICLE VI
CONDITIONS PRECEDENT

Section 6.01 Conditions Precedent to the Obligations of the Purchaser. The obligation of the Purchaser to consummate the purchase of the Shares contemplated by this Agreement are subject, at the option of the Purchaser, to the satisfaction at or prior to the Closing of each of the following conditions:

(a) Accuracy of Representations and Warranties. The representations and warranties of the Parent and the Seller contained in Articles II and III of this Agreement shall be true and correct in all material respects (except that the representations and warranties in Section 2.01(a), (d), (e) and (g) and in Section 2.04, and each other representation to the extent qualified by materiality, shall be true and correct in all respects) on and as of the Closing Date as though made at and as of that date (except for those representations and warranties that specifically relate to an earlier date, which shall be as though made at and as of such earlier date), and the Parent and the Seller shall have each so certified to the Purchaser in writing.

(b) Compliance with Covenants. The Parent and the Seller shall have each performed and complied in all material respects with all terms, agreements, covenants and conditions of this Agreement to be performed or complied with by it at or prior to the Closing, and the Parent and the Seller shall have each so certified to the Purchaser in writing.

(c) No Material Adverse Change. Since June 30, 2001, there shall not have occurred any event which could reasonably be expected to have a Material Adverse Effect, and the Parent and the Seller shall have each so certified to the Purchaser in writing.

(d) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted by any party or threatened in writing by any governmental department, agency or authority, in either case seeking to restrain, prohibit, invalidate or otherwise materially affect the consummation of the transactions contemplated hereby or which could, whether or not adversely decided, adversely affect the operation of the business of the Company and its Subsidiaries after the Closing.

(e) Licenses, Consents, etc. Received. The Parent and the Seller shall have obtained and delivered to the Purchaser copies of all consents, licenses, approvals and permits of other parties required to be obtained for the transactions contemplated hereby as to which the failure to obtain the same could reasonably be expected to have a Material Adverse Effect or interfere with the Company’s right or ability to consummate such transactions, or the Company’s and its Subsidiaries’ ability to carry on any of their businesses, as now conducted, after the Closing, and no such consent, license, approval or permit shall have been withdrawn or suspended.

(f) Management Arrangements. The Company shall have entered into employment, stockholder and other agreements with Dr. Richard Rehm with respect to his continued employment by the Company, his agreement not to compete with the Company or any Subsidiary, and his economic interests in the Company in a form reasonably required by the Purchaser.

(g) Stock Certificates. The Purchaser shall have received certificates from the Seller evidencing the Shares duly endorsed for transfer and free and clear of all liens, claims, encumbrances and restrictions.

(h) Certificates; Documents. The Purchaser shall have received copies of the following for each of the Seller and the Company certified by its Secretary to the Purchaser’s satisfaction: (i) its Certificate of Incorporation, certified by the Secretary of State of Delaware; (ii) a certificate of the Secretary of State of Delaware as to its legal existence and good standing; (iii) its bylaws; and (iv) votes adopted by its stockholders if necessary and resolutions adopted by its directors authorizing the execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated hereby. The Purchaser shall have also received each Subsidiary’s organizational documents, certified by the appropriate governmental authority, a certificate as to each Subsidiary’s legal existence and good standing certified by the appropriate governmental authority and each Subsidiary’s bylaws. The Purchaser shall also have received such other certificates, documents and materials as it shall reasonably request.

(i) Escrow Agreement. The Seller and the escrow agent, Boston Safe Deposit and Trust (the “Escrow Agent”), shall have entered into an Escrow Agreement (the “Escrow Agreement”), in substantially the form attached hereto as Exhibit 6.01(i).

(j) Transition Services Agreement. The Parent and the Seller shall have entered into a Transition Services Agreement (the “Transition Services Agreement”) , in substantially the form attached hereto as Exhibit 6.01(j).

(k) Opinion of Counsel to the Company and the Sellers. The Purchaser shall have received an opinion of Stoel Rives LLP, counsel to the Parent, the Seller and the Company, dated as of the date of the Closing, to the effect set forth in Exhibit 6.01(k).

(l) Certificates of Officers of the Parent and Seller. The Purchaser shall have received a certificate from an officer of each of the Parent and the Seller, dated as of the date of the Closing, to the effect of the second sentence of Section 2.02(b).

(m) Leases. The real property leases (the “Leases”) with Highwoods/Tennessee Holdings, L.P. and Weeks Realty, L.P., as landlords for premises located at 5301 Virginia Way, Suite 250, Brentwood, TN and Airpark Business Center XIV, 5259 Harding Place, Nashville, TN, shall be assigned to and assumed by the Parent, and, to the extent reasonably practicable, the Company and the Subsidiaries shall be released therefrom by the landlords, in a form satisfactory to the Purchaser.

(n) Actions and Proceedings. Prior to the Closing, all actions, proceedings, instruments and documents required to carry out the transactions contemplated hereby or incident hereto and all other legal matters required for such transactions shall have been reasonably satisfactory to counsel for the Purchaser.

(o) Due Diligence. The Purchaser shall be satisfied with the scope and results of its investigation and due diligence review of the Company, the Subsidiaries and their assets, affairs, condition (financial and otherwise), businesses and prospects.

Section 6.02 Conditions Precedent to the Obligations of the Seller. The obligation of the Seller to consummate the sale and transfer of the Shares contemplated by this Agreement is subject, at the option of the Seller, to the satisfaction at or prior to the Closing of each of the following conditions:

(a) Accuracy of Representations and Warranties. The representations and warranties of the Purchaser contained in Article IV of this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made on and as of that date (except for those representations and warranties that specifically relate to an earlier date, which shall be true and correct in all material respects as of such earlier date) and the Purchaser shall have so certified to the Parent and the Seller in writing.

(b) Compliance with Covenants. The Purchaser shall have performed and complied in all material respects with all terms, agreements, covenants and conditions of this Agreement to be performed or complied with by the Purchaser at or prior to the Closing, and the Purchaser shall have so certified to the Parent and the Seller in writing.

(c) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted by any party or threatened in writing by any governmental department, agency or authority, in either case seeking to restrain, prohibit, invalidate or otherwise materially affect the consummation of the transactions contemplated hereby.

(d) Purchase Price. The Purchaser shall have paid the Purchase Price.

(e) Certificates; Documents. The Parent and the Seller shall have received such certificates, documents and materials as they shall reasonably request.

(f) Escrow Agreement. The Purchaser and the Escrow Agent shall have entered into the Escrow Agreement.

(g) Transition Services Agreement. The Purchaser shall have entered into the Transition Services Agreement.

(h) Actions and Proceedings. Prior to the Closing, all actions, proceedings, instruments and documents required to carry out the transactions contemplated hereby or incident hereto and all other legal matters required for such transactions shall have been reasonably satisfactory to counsel for the Parent and the Seller.

Section 6.03 Condition Precedent to the Obligations of the Seller and the Purchaser. The obligation of the Seller and the Purchaser to consummate the sale and transfer of the Shares contemplated by this Agreement is subject to the condition that the Parent shall have received an opinion addressed to its Board of Directors that the consideration to be received by the Parent from the Purchaser in connection with the transaction is fair as to the Parent from a financial point of view.

ARTICLE VII
SURVIVAL; INDEMNIFICATION

Section 7.01 Survival. The representations, warranties, covenants and agreements contained herein shall survive the Closing and any investigation made by the Purchaser, the Seller or the Parent. No action for a breach of the representations and warranties contained herein, or any covenant contained herein to be performed prior to the Closing Date, shall be brought more than one year following the Closing Date, except for (a) claims arising out of the representations and warranties contained in Sections 2.01(d), 2.01(g) (Capitalization of the Subsidiaries), 2.04 (Capitalization of the Company), 2.12(c) (Indebtedness), 2.17 (Taxes) and 2.23 (Related Party Transactions) and the covenants contained in Article V (except Section 5.01) (collectively, the “Specified Representations and Covenants”), which shall not be brought after the expiration of the applicable statute of limitations, (b) claims of which the Seller has been notified with reasonable specificity by the Purchaser, or claims of which the Purchaser has been notified with reasonable specificity by the Seller, within such one-year period and (c) claims arising out of fraud by Parent or Seller.

Section 7.02 Limits on Claims. If the Closing occurs, the Purchaser shall not be entitled to recover any damages for a breach of the representations and warranties contained in Article 2 or for the breach of any covenant to be performed prior to the Closing unless and until the Purchaser’s aggregate claims therefor exceed $50,000, at which time the Purchaser shall be entitled to receive damages for all claims in excess of the $50,000 threshold. In addition, the aggregate recovery of Purchaser for all claims under this Agreement shall not exceed $3,000,000, other than claims arising out of breach of the Specified Representations and Covenants and in respect of claims arising out of fraud by Parent or Seller. In the case of a breach of a Specified Representation and Covenant, the aggregate liability of Parent and Seller to Purchaser, together with any liability for breach of any other of the representations, warranties and covenants of Parent and Seller under this Agreement shall not exceed the Purchase Price, except for any breach of representation or warranty or obligation under any covenant concerning Taxes for which there shall be no limit. In addition, Parent and Seller shall not have any liability for damages resulting from a breach of a representation or warranty if both (i) Parthenon Capital, LLC or any of the owners, members, managers or principals of Parthenon Capital, LLC (which in any event shall include Mr. Scott Steele) had actual knowledge of the breach or inaccuracy of the representation or warranty on or prior to the Closing Date and (ii) none of the Seller, the Parent or the Company had actual knowledge of such breach or inaccuracy on or prior to the Closing Date.

Section 7.03 Indemnification by the Company and the Sellers. Subject to any applicable limitations set forth in Sections 7.01 and 7.02, the Parent, the Seller and the Company hereby jointly and severally indemnify and hold the Purchaser harmless from and against all claims, liabilities, obligations, costs, damages, losses and expenses of any nature (including reasonable attorneys fees) (“Damages”) arising out of or relating to (a) any breach of the representations, warranties, covenants or agreements of the Parent or the Seller set forth herein, (b) the failure of any portion of the Closing Debt to be paid or otherwise satisfied at Closing, (c) the failure of the Company and the Subsidiaries to have at least $1,723,000 of net working capital (defined as the excess of current assets over current liabilities, without giving effect to the transactions at or related to the Closing, any capital infusion by the Purchaser or any write-up of assets), determined as of immediately prior to Closing in accordance with GAAP, (d) the Leases or (e) a breach of fiduciary duty with respect to the Network Health Services, Inc. 401(k) Profit Sharing Plan occurring before the Closing Date. After the Closing, all indemnification obligations will be the responsibility of the Parent and the Seller, and the Company shall have no liability for any breach of representations, warranties or covenants.

Section 7.04 Indemnification by the Purchaser. The Purchaser hereby indemnifies and holds Parent and the Seller harmless from and against all Damages arising out of or relating to any breach of the representations, warranties, covenants or agreements of the Purchaser set forth herein.

Section 7.05 Indemnification Procedure.

(a) Third Party Claims.

(i) Each indemnified party shall, with reasonable promptness after obtaining knowledge thereof, provide any indemnifying party against whom a claim for indemnification is to be made under this Article VII with written notice of all third party actions, suits, proceedings, claims, demands or assessments that may be subject to the indemnification provisions of this Article VII (collectively, “Third Party Claims”), including, in reasonable detail, the basis for the claim, the nature of Damages and a good faith estimate of the amount of Damages.

(ii) Each indemnifying party shall have 15 days after its receipt of the claim notice to notify the indemnified party in writing whether the indemnifying party agrees that the claim is subject to this Article VII and, if so, whether the indemnifying party elects, jointly with any other indemnifying party notified under this Section to undertake, conduct and control, through counsel of its choosing (subject to the consent of the indemnified party, such consent not to be withheld unreasonably) and at its or their sole risk and expense, the good faith settlement or defense of the Third Party Claim.

(iii) If within 15 days after its receipt of the claim notice an indemnifying party notifies the indemnified party that it elects to undertake the good faith settlement or defense of the Third Party Claim, the indemnified party shall cooperate reasonably with the indemnifying party in connection therewith including, without limitation, by making available to the indemnifying party all relevant information material to the defense of the Third Party Claim. The indemnified party shall be entitled to participate in the settlement or defense of the Third Party Claim through counsel chosen by the indemnified party, at its expense, and to approve any proposed settlement that would impose any obligation or duty on the indemnified party, which approval may, in the sole discretion of the indemnified party, be withheld. So long as an indemnifying party is contesting the Third Party Claim in good faith and with reasonable diligence, the indemnified party shall not pay or settle the Third Party Claim. Notwithstanding the foregoing, the indemnified party shall have the right to pay or settle any Third Party Claim at any time, provided that in such event it waives any right to indemnification therefor by the indemnifying party.

(iv) If an indemnifying party does not provide notice that it elects to undertake the good faith settlement or defense of the Third Party Claim, or if an indemnifying party fails to contest the Third Party Claim or undertake or approve settlement, in good faith and with reasonable diligence, the indemnified party shall thereafter have the right to contest, settle or compromise the Third Party Claim at its exclusive discretion, at the risk and expense of the indemnifying party, and the indemnifying party will thereby waive any claim, defense or argument that the indemnified party’s settlement or defense of such Third Party Claim is in any respect inadequate or unreasonable.

(v) A party’s failure to give timely notice will not constitute a defense, in part or in whole, to any claim for indemnification by such party, except if, and only to the extent that, such failure results in any material prejudice to the indemnifying party.

(b) Non-Third Party Claims.

(i) Each indemnified party shall, with reasonable promptness, deliver to any indemnifying party against whom a claim for indemnification is to be made under this Article VII written notice of all claims for indemnification under this Article VII, other than Third Party Claims, including, in reasonable detail, the basis for the claim, the nature of Damages and a good faith estimate of the amount of Damages.

(ii) Each indemnifying party shall have 30 days after its receipt of the claim notice to notify the indemnified party in writing whether the indemnifying party accepts liability for all or any part of the Damages described in the claim notice. If the indemnifying party does not so notify the indemnified party, the indemnifying party shall be deemed to accept liability for all the Damages described in the claim notice.

(iii) A party’s failure to give timely notice will not constitute a defense, in part or in whole, to any claim for indemnification by such party, except if, and only to the extent that, such failure results in any material prejudice to the indemnifying party.

ARTICLE VIII
TERMINATION OF AGREEMENT

Section 8.01 Termination of Agreement Prior to Closing. This Agreement may be terminated and the sale and transfer of the Shares contemplated hereby may be abandoned at any time prior to the Closing:

(a) by the mutual written consent of the Parent, the Seller and the Purchaser;

(b) by either (A) the Purchaser if there shall have been a material breach of any of the representations, warranties, covenants or agreements of the Parent and/or the Seller contained in this Agreement or (B) the Parent and the Seller if there shall have been a material breach of any of the representations, warranties, covenants or agreements of the Purchaser contained in this Agreement, in either case, only if (x) such breach would result in the failure to satisfy one or more of the conditions set forth in Section 6.01 (in the case of a breach by the Parent and/or the Seller) or Section 6.02 (in the case of a breach by the Purchaser) and (y) such breach (1) by its nature is not capable of being cured or (2) shall not have been cured within 15 days after written notice thereof shall have been given by the terminating parties to the party or parties alleged to be in breach; or

(c) by either the Purchaser, on the one hand, or the Parent and the Seller, on the other hand, if the Closing shall not have occurred prior to the close of business on August 31, 2001, provided that (A) the right to terminate this Agreement under this Section 8.01(c) shall not be available to the Purchaser if any breach of the representations, warranties, covenants or agreements of the Purchaser contained in this Agreement then exists and (B) the right to terminate this Agreement under this Section 8.01(c) shall not be available to the Parent and the Seller if any breach of the representations, warranties, covenants or agreements of the Parent and/or the Seller contained in this Agreement then exists.

Section 8.02 Method and Effect of Termination.

(a) Any party desiring to terminate this Agreement pursuant to Section 8.01 shall give notice to each of the other parties hereto in accordance with Section 9.03.

(b) In the event of the termination of this Agreement pursuant to Section 8.01, this Agreement, except for the provisions of this Article VIII and Article IX, shall become void and have no further effect, with no liability on the part of any party hereto or its partners, directors, officers or stockholders, provided that nothing in this Section 8.02 or in that certain Non-Solicitation Agreement dated as of June 26, 2001 by and between Parthenon Capital and the Parent (the “Non-Solicitation Agreement”) shall relieve any party of liability under this Agreement for a breach of any provision hereof occurring prior to such termination, and provided further that nothing herein shall relieve any party for any willful breach of this Agreement.

ARTICLE IX
MISCELLANEOUS

Section 9.01 Expenses, Etc. All costs and expenses, including fees and disbursements of counsel, advisors, accountants and consultants, incurred in connection with the negotiation, preparation, execution and delivery of this Agreement, the Ancillary Agreements and the closing of the transactions contemplated hereby and thereby (collectively, “Expenses”) shall be paid by the party incurring such Expenses, whether or not the transactions contemplated by this Agreement are consummated (except as provided in the Non-Solicitation Agreement), provided, however, that all Expenses incurred by the Company shall be borne by the Parent and the Seller. In the event of a termination of this Agreement pursuant to Section 8.01, the obligation of each party to pay its own Expenses shall be subject to any rights that such party may have arising out of a breach of this Agreement by any other party or parties hereto.

Section 9.02 Execution in Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Section 9.03 Notices. All notices, requests, instructions and other documents that are required to be or may be given or delivered pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if delivered by hand or national overnight courier service, transmitted by facsimile (confirmed by another method of delivery permitted hereunder) or mailed by registered or certified mail, postage prepaid, as follows:

	if to either the Parent or the Seller, to it at:

		224 West 30^th Street
		New York, NY 10001
		Attention: Mark Boulding, General Counsel
		Facsimile: (212) 760-3222
		With an electronic copy to: legal@medscapeinc.com

	with a copy to:

		Stoel Rives LLP
		900 SW Fifth Avenue, Suite 2600
		Portland, OR 97204-1268
		Attention: John Schweitzer, Esq.
		Facsimile: (503) 220-2480
		With an electronic copy to: jmschweitzer@stoel.com

	if to the Purchaser to it at:

		TEM Holdings, LLC
		c/o Parthenon Capital, Inc.
		200 State Street
		Boston, MA 02109
		Attention: Scott Steele
		Facsimile: (617) 478-7010
		With an electronic copy to: scotts@parthenoncapital.com

	with a copy to:

		Choate, Hall & Stewart
		Exchange Place
		53 State Street
		Boston, MA 02109
		Attention: Stephen M. L. Cohen, Esq.
		Facsimile: (617) 248-4000
		With an electronic copy to: scohen@choate.com

or such other address or addresses as any party hereto shall have designated by notice in writing to the other parties hereto. Such notices, requests, instructions and other documents shall be deemed given or delivered (i) five business days following sending by registered or certified mail, postage prepaid, (ii) one business day following sending by national overnight courier service, (iii) when sent, if sent by facsimile (but only if such facsimile is promptly confirmed by such other method of delivery) or (iv) when delivered, if delivered by hand.

Section 9.04 Waivers. The Parent and the Seller, on the one hand, and the Purchaser, on the other hand, may, by written notice to the other, (i) extend the time for the performance of any of the obligations or other actions of the other under this Agreement; (ii) waive any inaccuracies in the representations or warranties of the other contained in this Agreement or in any document delivered pursuant to this Agreement; (iii) waive compliance with any of the conditions or covenants of the other contained in this Agreement; or (iv) waive performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including without limitation any investigation by or on behalf of the Parent and the Seller, on the one hand, and the Purchaser, on the other hand, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by the Parent and the Seller, on the one hand, and the Purchaser, on the other hand, of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach.

Section 9.05 Amendments, Supplements, Etc. At any time this Agreement may be amended or supplemented by such additional agreements, articles or certificates as may be determined by the parties hereto to be necessary, desirable or expedient to further the purposes of this Agreement, or to clarify the intention of the parties hereto, or to add to or modify the covenants, terms or conditions hereof or to effect or facilitate the consummation of any of the transactions contemplated hereby. Any such instrument must be in writing and signed by the Parent, the Seller and the Purchaser.

Section 9.06 Entire Agreement. This Agreement, its exhibits and schedules, and the Ancillary Agreements constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof, except for the Non-Solicitation Agreement. The Holding Period (as defined in the Non-Solicitation Agreement) shall extend to the later of (i) the Holding Period as defined in the Non-Solicitation Agreement and (ii) the termination of this Agreement.

Section 9.07 Applicable Law; Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflict of laws principals thereof.

Section 9.08 Further Assurances. The parties hereto agree (i) to furnish upon request to each other such further information, (ii) to execute and deliver to each other such other documents and (iii) to do or cause to be done such other acts and things, all as the other parties hereto may from time to time reasonably request for the purpose of carrying out the intent of this Agreement and the Ancillary Agreements.

Section 9.09 Interpretation.

(a) As used herein, the words “hereof”, “herein”, “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and the words “Article”, “Section” and “Schedule” references are to the articles, sections and schedules of this Agreement unless otherwise specified. Whenever the words “include”, “includes” or “including” are used in this Agreement they shall be deemed to be followed by the words “without limitation”. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. Any agreement, instrument or statute defined or referred to herein means such agreement, instrument or statute as from time to time amended, qualified or supplemented, including (in the case of agreements and instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes. References to a person are also to its successors and permitted assigns.

(b) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

Section 9.10 Binding Effect; Benefits. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns and nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement.

Section 9.11 Assignability. Neither this Agreement nor any of the parties’ rights hereunder shall be assignable by any party hereto without the prior written consent of the other parties hereto.

Section 9.12 Release. Effective as of the Closing, the Parent, the Seller and the Affiliates each release the Company and the Subsidiaries, from any and all claims, liabilities, obligations, damages, expenses and other amounts of every kind or description arising or existing prior to the Closing Date, except that this release shall not apply as specifically set forth herein. In addition, effective as of the Closing, Parent, Seller and the Affiliates each release the officers, directors and employees of the Company and the Subsidiaries from obligations to or agreements with Parent, Seller or the Affiliates that, if enforced, would materially interfere with such individual’s ability to conduct the business of the Company and the Subsidiaries after Closing.

Section 9.13 Schedules. Disclosure by Parent, Seller or the Company of any fact or item in any schedule hereto shall be deemed to have been disclosed in any other schedule hereto made by Parent, Seller or the Company, provided that disclosure of such fact or item on such schedule contains fair disclosure of the facts that would otherwise be required to be disclosed in such other schedule. In the view of the Parent and the Seller, matters reflected in the schedules hereto are not necessarily limited to matters required by this Agreement to be disclosed. Such additional matters are provided for information purposes only.

Section 9.14 Assignment of Certain Employment Contracts. The parties acknowledge that certain employees of the Company or the Subsidiaries inadvertently entered into employment agreements with the Parent or the Seller rather than the Company or a Subsidiary. Effective as of the Closing, the Parent and the Seller will be deemed to have assigned to the Company all of their rights under the employment agreements between the Parent or the Seller and any employee of the Company or any Subsidiary, including without limitation all rights which may have arisen at any time under any assignment of invention or similar provisions contained in such agreements.

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IN WITNESS WHEREOF, this Stock Purchase Agreement has been duly executed and delivered by the parties hereto as of the date first above written.

	THE PARENT:

	MEDICALOGIC/MEDSCAPE, INC.


	By

		Name:
		Title:


	THE SELLER:

	MEDSCAPE ENTERPRISES, INC.


	By

		Name:
		Title:


	THE PURCHASER:

	TEM HOLDINGS, LLC


	By

		Name:
		Title: