AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999
REGISTRATION NO. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MEDICALOGIC, INC.
(Exact name of registrant as specified in its charter)
OREGON 7374 93-0890696
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation Classification Number)
or organization) Code Number)
-----------
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(503) 531-7000
(Address, including zip code, and telephone
number, including area code, of
Registrant's principal executive
offices)
-----------
MARK K. LEAVITT
CHIEF EXECUTIVE OFFICER
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(503) 531-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------
COPIES TO:
STEPHEN E. BABSON ROY W. TUCKER
TODD A. BAUMAN Perkins Coie LLP
Stoel Rives LLP 1211 SW Fifth Avenue, Suite 1500
900 SW Fifth Avenue, Suite 2600 Portland, OR 97204
Portland, Oregon 97204 (503) 727-2000
(503) 224-3380
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date
of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. If delivery of the prospectus is expected to be made
pursuant to Rule 434, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class Aggregate Amount of
Of Securities to Be Registered Offering Price(1) Registration Fee
- ------------------------------ ---------------- -----------------
Common Stock $60,000,000 $16,680
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
================================================================================
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1999
Prospectus
, 1999
MEDICALOGIC, INC.
[LOGO]
____________ Shares of Common Stock
- --------------------------------------------------------------------------------
Market & Proposed Symbol: The Offering:
o We have applied for listing on o We are offering __________ shares
the Nasdaq National Market with of our common stock.
the symbol MDLI.
o The underwriters have an option
to purchase an additional
__________ shares from us to
cover over-allotments.
o We anticipate that the initial
public offering price will be
between $______ and $_______ per
share.
- --------------------------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to MedicaLogic:
This investment involves risk. See "Risk Factors" beginning on Page 9.
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
DLJdirect Inc.
TABLE OF CONTENTS
Page Page
Prospectus Summary .............. 3 Business ........................ 40
Risk Factors .................... 9 Management ...................... 60
Use of Proceeds ................. 22 Certain Transactions ............ 70
Dividend Policy ................. 22 Principal Shareholders .......... 72
Capitalization .................. 23 Description of Capital Stock .... 75
Dilution ........................ 24 Shares Eligible for Future Sale . 79
Selected Consolidated Underwriting .................... 81
Financial Data ............... 25 Additional Information .......... 84
Management's Discussion and Legal Matters ................... 84
Analysis of Financial Experts ......................... 84
Condition and Results of Index to Financial Statements ... F-1
Operations ................... 27
"MedicaLogic," "Practice With Knowledge," "Logician," "SIMPL," "Quickstep,"
"ScheduLogic," "LinkLogic," "KnowledgeBank," "AboutMyHealth" and the MedicaLogic
logo are trademarks or service marks of MedicaLogic. Other trademarks or service
marks appearing in this prospectus are the property of their respective holders.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before investing in our common stock. You should read the entire
prospectus carefully. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements for reasons such as those
set forth under "Risk Factors."
MedicaLogic, Inc.
Our Business
Our business is connecting physicians and patients through the Internet.
For physicians, we offer a line of enterprise and Internet-based electronic
medical record products and services for use at the point of care in the exam
room, with configurations suitable for practices of all sizes. For patients, we
will provide a Web site that will allow them to access certain healthcare
information from their physician-generated medical record, enter personal
medical information and effectively communicate with their physician. For both
physicians and patients, we will provide focused healthcare content and commerce
opportunities, keyed to information in a selectively shared database that unites
physicians and patients. Together, these products, services and databases will
comprise our Internet Health Services Center. We believe we can increase the
efficiency and quality of healthcare and enhance the physician-patient
relationship through our Internet Health Services Center.
Founded in 1985, MedicaLogic has been developing, marketing and supporting
electronic medical records for over a decade and has products in daily use by
physicians across the country. While most healthcare information systems have
primarily supported financial and administrative functions, we have focused
exclusively on the challenge of providing clinical solutions that are used by
physicians at the point of care to create and access the electronic medical
record. Our customers include academic medical centers such as Baylor College of
Medicine in Houston, Texas, integrated healthcare delivery systems such as
Providence Health System in Portland, Oregon, and other customers such as the
NASA space shuttle program. More than 7,000 health professionals, including
approximately 3,000 physicians, now maintain electronic medical records with our
enterprise electronic medical record software, constituting an estimated base of
over 7 million electronic patient records. Our technology will use the Internet
to link healthcare consumers to physicians using either our enterprise or
Internet-based electronic medical record. We believe we are the leading provider
of electronic medical record software in the healthcare industry.
3
Our Market Opportunity
The patient medical record developed and maintained by the physician is of
paramount importance in the U.S. healthcare system. Despite increased needs by
the healthcare industry for more accurate and accessible clinical information,
the vast majority of clinical data is still recorded in handwritten or
hand-typed notes filed within paper charts which cannot be accessed, aggregated
or organized electronically. We believe the Internet has made computerized tools
more useful and more affordable than traditional client-server applications to
the 600,000 practicing physicians in the United States and will facilitate the
widespread adoption of an electronic medical record. The Internet is also an
efficient means to distribute medical information to healthcare consumers, whose
interest in such information is growing rapidly. According to a 1997 survey in
the Journal of the American Medical Association, 43% of U.S. adults who used the
Internet were seeking health information. According to Cyber Dialogue, 78% of
Internet users with health insurance are interested in managing their health
insurance benefits online and 23% of all Internet users are interested in
purchasing prescription drugs online. Also according to Cyber Dialogue, 90% of
all Internet users have health insurance.
Our Solution
Our solution is the Internet Health Services Center, which will provide the
following benefits:
Improved Quality of Care. Our solution is designed to increase patient
medical information flows among all healthcare participants, which ultimately
will result in more accurate diagnoses and more timely and appropriate
treatments. Using our solution, physicians will be able to enter and access
patient-specific data online at the point of care, allowing them, for example,
to review data regarding potentially harmful drug interactions, without manually
searching through the often unorganized and incomplete paper records. We believe
this and other benefits provided by our solution will result in improved quality
of care.
Empower Healthcare Consumers with Information Regarding their Healthcare.
Whether they see a physician themselves on a regular or episodic basis, or act
as a coordinator of healthcare for a child, elderly parent or other relative,
healthcare consumers want more information and more control over their
healthcare needs. Through the use of the Internet, our solution is designed to
increase information flows among all healthcare participants, including
patients, which ultimately gives patients greater control. Our solution will
permit consumers to communicate electronically with other healthcare
participants, such as physicians, payers and suppliers, giving them quicker,
more efficient and more effective access to patient records, prescription drugs,
payment services and information and other health-related supplies and services.
Improved Physician-Patient Relationship. Our Internet solution is designed
to facilitate communication between physicians and patients, which has been
reduced by the widespread adoption of managed care. We believe improved
physician access to information at the point of care will result in
higher-quality clinical interaction between physicians and patients. Likewise,
4
providing patients with better access to information and electronic
communication with physicians will result in a better understanding of physician
instructions by patients and, ultimately, a lower risk of treatment error.
Reduced Healthcare Costs. Our solution is designed to reduce healthcare
costs and improve the management of patient records by:
o Reducing the inefficiencies of manual and paper-based transactions;
o Eliminating redundant data entry;
o Reducing transcription costs;
o Reducing hospitalizations related to harmful drug interaction events;
o Reducing duplicative and unnecessary laboratory tests resulting from
inaccurate or misplaced records;
o Rationalizing entry and availability of Health Care Financing
Administration-mandated patient chart and account coding information;
o Decreasing the communication inefficiencies created by isolated
proprietary systems; and
o Improving health maintenance through greater efficiency and better
access to patient medical records.
Our Strategy
Our objective is to be the leading provider of Internet-based electronic
health record information. Our strategy to achieve this objective has the
following key elements:
o Gain rapid adoption by physicians of our electronic medical records
solutions;
o Offer the most compelling Internet destination for healthcare
consumers;
o Become a leading driver of clinical e-commerce transactions; and
o Capitalize on the value of our large, clinically-rich database.
Strategic Relationships
Because our products and services are used at the point of care, we are
well positioned to offer electronic transaction services to both physicians and
their patients. To pursue these opportunities, we will form relationships with
strategic partners who can provide these electronic transaction services,
including electronic processing of claims, automatic filling and refilling of
prescriptions and electronic transmission of laboratory results. In addition, we
will enter into strategic partnerships with vendors who will provide medical
content to our customers as well as partnerships that will allow our physician
customers to have access to computer hardware on which they may use our products
and services. To date, we have entered into the following strategic
relationships:
5
o CVS.com. CVS.com, a leading online pharmacy, will fill orders for
prescriptions received from physicians and patients using our
Internet-based products.
o Dell. Dell is a preferred provider of notebooks, personal computers
and other hardware, and we granted Dell a nonexclusive right and
license to reproduce and install our software programs and related
materials on Dell branded hardware products.
o Envoy. Envoy Corporation, a leader in electronic transaction
processing in the healthcare industry, will provide us with a
nonexclusive and nontransferable license to its services for the
processing of certain healthcare transactions, including patient
eligibility and referral checks and medical claims submissions. These
services will become available in early 2000.
MedicaLogic, Inc. was incorporated in Oregon in May 1985 and commenced
operations that year. Our executive offices are located at 20500 NW Evergreen
Parkway, Hillsboro, Oregon 97124. Our telephone number is (503) 531-7000.
The Offering
Common stock offered by MedicaLogic......... __________ shares
Common stock to be outstanding after
the offering............................. __________ shares
Nasdaq National Market Symbol............... MDLI
Use of proceeds............................. o working capital;
o general corporate purposes;
and
o potential acquisitions.
See "Use of Proceeds" on
page 22.
The number of shares of common stock to be outstanding after the offering
excludes an aggregate of 13,994,384 shares of common stock reserved for issuance
under our stock plans, of which 4,359,651 shares of common stock were subject to
outstanding options as of September 15, 1999 at a weighted average exercise
price of $2.48 per share. See "Management-Stock Incentive Plans," and Notes 7
and 13 of Notes to Consolidated Financial Statements.
Assumptions which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus reflects
the following:
o the conversion of our outstanding preferred stock on a one-for-one
basis into common stock; and
o no exercise by the underwriters of their over-allotment option to
purchase up to ____ additional shares of common stock.
6
Summary Consolidated Financial Data
(In thousands, except per share data)
The summary consolidated historical financial information below was derived
from the Consolidated Financial Statements beginning on page F-1. This summary
should be read together with the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 27.
We completed our acquisition of PrimaCis Health Information Technology,
Inc. in January 1999. The unaudited pro forma consolidated statements of
operations data combine MedicaLogic's and PrimaCis' historical statements of
operations for the year ended December 31, 1998 and give effect to the
acquisition as if it occurred on January 1, 1998. This information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results that would have actually occurred if the acquisition had been
completed as of the dates indicated, nor is it necessarily indicative of the
future operating results of the combined company.
Years Ended December 31, Six Months Ended
---------------------------------------------- June 30,
Pro Forma ----------------------
1996 1997 1998 1998 1998 1999
---------- -------- -------- --------- --------- --------
(unaudited) (unaudited)
Consolidated Statement of Operations
Data:
Revenues................................. $ 9,664 $ 12,807 $ 16,160 $ 16,408 $ 6,659 $ 8,975
Operating expenses:
Cost of revenues.................... 6,120 7,756 6,754 6,770 3,283 3,418
Marketing and sales................. 6,498 7,539 7,579 9,166 3,630 7,946
Research and development............ 6,583 7,047 8,016 8,575 3,858 5,092
General and administrative.......... 718 865 1,044 2,100 451 1,255
---------- -------- -------- --------- --------- --------
Operating loss........................... (10,255) (10,400) (7,233) (10,203) (4,563) (8,736)
Net loss................................. $ (10,315) $(10,670) $ (7,035) $ (10,126) $ (4,497) $ (7,993)
========== ======== ======== ========= ========= ========
Basic and diluted net loss per common
share(1)................................. $ (0.78) $ (0.80) $ (0.51) $ (0.66) $ (0.34) $ (0.47)
========== ======== ======== ========= ========= ========
Weighted average shares used in computing
basic and diluted net loss per common
share(1)................................. 13,153 13,269 13,766 15,231 13,358 16,841
Pro forma basic and diluted net loss per
common share(1).......................... $ (0.20) $ (0.21)
======== ========
Weighted average shares used in computing
pro forma basic and diluted net loss per
common share(1).......................... 34,957 38,919
7
Consolidated Balance Sheet Data: June 30, 1999
-------------
(unaudited)
Actual As Adjusted (2)
--------- ---------------
Cash and cash equivalents.................................. $ 9,922 $
Working capital............................................ 38,424
Total assets............................................... 59,203
Long-term obligations, net of current portion.............. 984
Convertible redeemable preferred stock..................... 83,687
Total stockholders' equity (deficit)....................... (35,841)
(1) For a description of the computation of the net loss per share and number
of shares used in per share calculations, see Note 1 of the Notes to the
Consolidated Financial Statements. Pro forma basic and diluted net loss per
share includes shares of common stock issued on the conversion of our
outstanding preferred stock on a one-for-one basis into common stock.
(2) As adjusted to reflect the conversion of all outstanding shares of
preferred stock into common stock and the sale by us of _____ shares of
common stock offered by this prospectus at an initial public offering price
of $___ per share and after deducting the estimated underwriting discounts
and commissions and offering expenses payable by us.
8
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our financial statements and related notes, before you purchase any
shares of our common stock. If any of the following risks actually occur, our
business, financial condition and results of operations would likely suffer. In
such case, the trading price of our common stock could fall, and you may lose
all or part of the money you paid to buy our common stock.
Risks Related to MedicaLogic
Our Internet-based business model may not be successfully implemented, and it is
difficult to evaluate because it is new and unproven.
We have only recently implemented our Internet-based business model, and we
do not have an operating history with this model upon which you can evaluate our
prospects. In attempting to implement our Internet-based business model, we are
significantly changing our business operations, sales and implementation
practices, customer service and support operations and management focus. We are
also facing new risks and challenges, including a lack of meaningful historical
financial data upon which to plan future budgets, the need to develop strategic
relationships and other risks described below. For each of the last three fiscal
years and the first six months of 1999, all of our revenue was generated from
the sale of licenses on and services related to our enterprise software and no
revenue was derived from our Logician Internet system or other Internet-based
products and services. Accordingly, our operating history is not indicative of
our future performance under our Internet-based business model, and you should
not rely upon our past performance to predict our future performance. We may not
be able to implement our business model successfully.
We may not achieve broad acceptance of our products and services by physicians,
patients and other healthcare stakeholders.
Our business model depends on our ability both to sell our Logician and
Logician Internet systems to physicians and other healthcare providers and to
generate usage by a large number of physicians. Achieving market acceptance for
our products and services will require substantial marketing efforts and the
expenditure of significant financial and other resources to create awareness and
demand by physicians and healthcare consumers. Use of our products and services
requires physicians to adopt different behavior patterns and new methods of
conducting business and exchanging information. Physicians may not choose to
integrate our products and services into their office work flow. Failure to
achieve broad acceptance of our products and services by physicians and other
healthcare stakeholders would have a material adverse effect on our business,
financial condition and results of operations.
9
We are dependent on a small number of customers.
We currently derive and expect to continue to derive a significant portion
of our revenues from a limited number of customers. To the extent that any
significant customer spends less money on licenses for Logician or related
services, or terminates its relationship with us, our revenues could decline
substantially. In 1998, we derived 21% of our revenue from VHA, Inc., a
distribution partner, and in the first six months of 1999, we derived
approximately 50% of our revenue from Baylor College of Medicine. The loss of
any of these large customers could have a material adverse effect on our
business, financial condition and results of operations. In the near term, we
expect to continue to derive a significant portion of our future revenues from
sales of our Logician enterprise product to a limited number of large integrated
healthcare delivery networks. Failure to make such sales during any quarter
could cause our revenues and results of operations to fall short of expectation,
which could adversely affect the price of our common stock.
We have a history of net operating losses and may not be profitable in the
future.
Failure to achieve or maintain profitability could materially and adversely
affect the market price of our common stock. We have experienced net losses of
approximately $10.3 million, $10.7 million, $7.0 million and $8.0 million in
1996, 1997, 1998 and the first six months of 1999, respectively. At June 30,
1999, we had a retained deficit of $43.1 million. We are investing heavily to
develop our Internet-based products and services and expand our sales and
marketing capabilities related to our Internet-based business. To date, we have
not achieved any revenue on Internet-based products or services. We expect to
continue to experience net losses for the foreseeable future, and we are not
certain when we will become profitable, if at all. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis.
Our results of operations are likely to fluctuate significantly.
Because of the emerging nature of our Internet-based business, we may be
unable to forecast accurately our revenues. In addition, the sales cycle for our
products and services varies widely, particularly for sales of our Logician
product to large integrated healthcare delivery networks, and it is difficult
for us to predict the timing of particular sales. Since most of our costs are
based on projected revenue levels, small variations in the timing of revenue
recognition could cause significant variations in results of operations from
quarter to quarter. Sales and results of operations may fluctuate from quarter
to quarter depending on:
o The amount and timing of operating costs and capital expenditures
relating to development and expansion of our business;
o Our introduction of new or enhanced services and products, and similar
introductions by our competitors;
o The budgetary cycles of large healthcare providers and other
healthcare organizations;
o Our ability to upgrade and develop our systems and infrastructure;
o Government regulations; and
o General economic conditions.
10
As a result, we believe that quarter-to-quarter comparisons of our sales
and results of operations are not necessarily meaningful and that such
comparisons may not be accurate indicators of future performance. Since we may
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall, any significant decrease in revenue would likely have an
immediate and material adverse effect on our business, financial condition and
results of operations. In addition, if our future results of operations are
below the expectations of securities analysts or investors our stock price may
decline.
Our business prospects depend on our ability to introduce successfully new
products and services and enhance current products and services.
The implementation of our Internet-based business model depends on our
ability to introduce successfully new products and services. These include
Logician Internet, which we began to offer on a commercial basis in September
1999, and our consumer Web site code-named AboutMyHealth.net, which is currently
being tested in a pilot program and which will be released commercially in late
1999. We may not be able to introduce these products and services or our other
products and services under development on schedule, or at all. Any failure by
us to introduce planned products or to introduce such products on schedule could
have a material adverse effect on our business, financial condition and results
of operations. In addition, early releases of software often contain errors or
defects. Despite our extensive testing, errors could be found in our new product
releases and services before or after commercial release, which would result in
product redevelopment costs and loss of, or delay in, market acceptance.
In addition, we must enhance our product and service offerings to add
functionality in such areas as interfacing with the products of our strategic
partners. Our products and services often must be integrated and customized to
operate with existing customer legacy computer systems. Developing, integrating
and customizing our products and services will be expensive and time consuming.
We are also working on enhancements that will allow our Logician and Logician
Internet products to communicate with each other, thereby facilitating
connections between physicians in integrated healthcare delivery networks, who
primarily use Logician, and physicians who use Logician Internet. Failure to
achieve these goals could have a material adverse effect on our business,
financial condition and results of operations.
We rely on strategic relationships that may not provide anticipated benefits.
To be successful, we must establish and maintain strategic relationships
with leaders in a number of healthcare and Internet industry segments. We will
depend upon these relationships to, among other things, extend the reach of our
products and services to a larger number of participants in the healthcare
industry, develop and deploy new products and generate additional revenue.
To date, we have established only a limited number of strategic
relationships, and these relationships are in the early stages of development.
We have limited experience in establishing and maintaining strategic
relationships with healthcare and Internet industry participants. Entering into
strategic relationships is complicated by several factors, including the
following:
11
o Current or future strategic partners may decide to compete with us in
some or all of our markets;
o Key participants in the healthcare industry may refuse to establish
strategic relationships with us if we have entered into such
relationships with their competitors; and
o Potential strategic partners may be reluctant to work with us until
our products and services have obtained widespread market acceptance.
If we lose any of our existing strategic relationships or fail to establish
additional relationships, or if our strategic relationships fail to benefit us
as expected, we may not be able to execute our business plan, which would have a
material adverse effect on our business, financial condition and results of
operations. See "Business-Sales and Marketing" and "Business-Strategic
Relationships."
Potential integrated healthcare delivery network customers could take a long
time to evaluate the purchase of our products and services and to complete the
purchase even after a decision has been made.
One element of our strategy is to market our services directly to large
healthcare organizations. The sale and implementation of our products and
services are often subject to delays due to these organizations' internal
budgets and procedures for approving large capital expenditures and deploying
new technologies within their networks. We do not control many of the factors
that will influence their buying decisions or affect the timing of
implementation.
Intense competition in our markets may lead to reduced sales of our products and
services.
Our industry is intensely competitive and subject to fragmentation, high
growth and rapid technological change. We may face significant competition from
traditional healthcare information system vendors and Internet healthcare
companies as they expand their product offerings. Many of these companies have
significantly greater financial resources, well-established brand names and
large installed customer bases. We may be unable to compete successfully against
these organizations. We believe that, to be successful, we must gain significant
market share with our products and services before our competitors introduce
alternative products and services with features similar to ours. Failure to
achieve a significant market share may materially reduce our ability to compete
successfully, if at all, with other market participants and could have a
material adverse effect on our business, financial condition and results of
operations.
Our failure to keep pace with advances in technology could harm our business.
If we cannot adapt to changing technologies, our business, financial
condition and results of operations could be materially adversely affected. The
Internet and healthcare information markets are characterized by rapid
technological change, changes in users' and customers' requirements, frequent
new service and product introductions embodying new technologies and
12
the emergence of new industry standards and practices that could make our
existing technology obsolete. Our success will depend, in part, on our ability
to continue to enhance our products and services, develop new technology that
addresses the increasingly sophisticated and varied needs of our prospective
customers, license leading technologies and respond to technological advances
and emerging industry standards and practices on a timely and cost-effective
basis. We may not be successful in using new technologies effectively or
adapting our proprietary technology to evolving customer requirements or
emerging industry standards.
We may not be able to manage our growth effectively.
We will need to expand our operations if we successfully achieve market
acceptance for our products and services. Difficulties in managing any future
growth could have a significant negative impact on our business, financial
condition and results of operations. We cannot be certain that our systems,
procedures, controls and existing space will be adequate to support expansion of
our operations. Our future results of operations will depend on the ability of
our officers and key employees to manage changing business conditions and to
implement and improve our technical, administrative, financial control and
reporting systems. We may not be able to project the rate or timing of increases
in the use of our products and services accurately or to expand and upgrade our
systems and infrastructure to accommodate such increases.
Our success depends on our key personnel.
Our success depends in large part on the continued service of our
management and other key personnel and our ability to continue to attract,
motivate and retain highly qualified employees. In particular, the services of
Mark K. Leavitt, our President and Chief Executive Officer, David C.
Moffenbeier, our Chief Operating Officer, Harvey J. Anderson, our Senior Vice
President, General Manager of Internet Operations, and Cameron Lewis, our Vice
President, Internet Marketing and eCommerce Strategies, are integral to the
execution of our business strategy. If one or more of our key employees leaves
MedicaLogic, we will have to find a replacement with the combination of skills
and attributes necessary to execute our strategy. Because competition for
skilled employees is intense, and the process of finding qualified individuals
can be lengthy and expensive, we believe that the loss of the services of key
personnel could negatively affect our business, financial condition and results
of operations. We do not maintain key person life insurance on any of our
employees.
We may not be able to hire or retain skilled personnel.
Our future success depends on our ability to attract and retain skilled
management and other highly qualified personnel who are responsible for
day-to-day development and maintenance of our products and technologies,
marketing our products and services and servicing our customers. Competition is
intense for employees with experience and expertise related to software and the
Internet. We may not be able to hire and retain sufficiently skilled personnel
to support the development and growth of our business.
13
Our competitive position depends on our ability to protect our intellectual
property rights.
Our ability to compete depends upon our proprietary systems and technology,
including Logician Internet and Logician. We protect our proprietary rights
through a combination of trademark, trade secret and copyright law,
confidentiality agreements and technical measures. In addition, we are preparing
six patent applications for filing with the U.S. Patent and Trademark Office.
Any steps we take to protect our intellectual property may be inadequate, time
consuming and expensive. Despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
Misappropriation of our intellectual property would have a material adverse
effect on our business, financial condition and results of operations. In
addition, we may have to engage in litigation in the future to enforce or
protect our intellectual property rights or to defend against claims of
invalidity, and we may incur substantial costs as a result.
Intellectual property infringement claims against us can be costly and result in
the loss of significant rights.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the functionality of our applications
overlaps with competing products. One party has recently filed a patent
infringement lawsuit against us and several other companies asserting broad
proprietary rights in processes similar to our electronic medical record
solutions. While we do not believe that we have infringed or are infringing on
any valid proprietary rights of third parties, similar infringement claims may
be asserted against us and may be successful. We could incur substantial costs
and diversion of management resources defending any infringement claims. In
addition, a party making a claim against us could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that could
effectively block our ability to provide products or services. This type of
judgment would have a material adverse effect on our business, financial
condition and results of operations. Licenses for intellectual property of third
parties that might be required for our products or services may not be available
on commercially reasonable terms, or at all.
We are vulnerable to interruptions in our operations.
To succeed, we must be able to operate our systems without interruption.
Our operations are vulnerable to interruption from a variety of sources, many of
which are not within our control, including:
o Power loss and telecommunications failures;
o Software and hardware errors, failures or crashes;
o Computer viruses and similar disruptive problems; and
o Fire, flood and other natural disasters.
We have not yet completed comprehensive plans addressing these
contingencies. In addition, certain of our communications and information
services are provided through our service providers. We expect to depend on
independent service providers for many of the services we provide through our
Internet Health Services Center system, including the routing of transaction
data to third-party payers. Any problems experienced by our providers that
result in interruptions of our services or a failure of our services to function
as desired could have a
14
material adverse effect on our business, financial condition and results of
operations. We may have no means of replacing services on a timely basis or at
all if they are inadequate or in the event of a service interruption or failure.
Although we attempt to limit our liability for service interruptions, we may
face liability for the failure of our system to function for any of the above
reasons.
We may be liable for use of data we provide.
We provide data for use by physicians, consumers and other healthcare
stakeholders. This data may be obtained from our physician customers, strategic
partners, other third parties or, with patient consent, from the aggregation of
patient health records. Although no claims have been brought against us to date
regarding injuries related to the use of this data, claims may be made in the
future. While we attempt to limit our liability in our license and service
agreements, these measures may not prove to be adequate, and we may not be able
to insure adequately against these claims. A claim brought against us that is
uninsured or under-insured could materially harm our business, financial
condition and results of operations.
Our Internet infrastructure is unproven and may not accommodate high levels of
use.
To date, we have processed a limited number and variety of Internet-based
transactions. In addition, our Internet products and services have only been
used by a limited number of physicians and healthcare consumers. Our
infrastructure may not accommodate increased use while maintaining acceptable
overall performance. To successfully implement our Internet-based business
model, we must continue to expand and adapt our network infrastructure to
accommodate additional users, increased transaction volumes and changing
customer requirements. An unexpectedly large increase in the volume or pace of
traffic on our Web site, the number of physicians using Logician Internet or our
other Internet-based products and services, or orders placed by customers may
require us to expand and further upgrade our technology. This expansion and
adaptation would be expensive and will divert our attention from other
activities. Failure to expand and adapt our Internet infrastructure could have a
material adverse effect on our business, results of operations and financial
condition.
We may not be able to prevent security breaches.
The difficulty of securely transmitting confidential information over the
Internet has been a significant barrier to conducting e-commerce and engaging in
sensitive communications. We believe that any well-publicized compromise of
Internet security may deter people from using our products and services to
conduct transactions that involve transmitting confidential healthcare
information over the Internet.
It is also possible that third parties could penetrate our network security
or otherwise misappropriate our patient and other information. If this happens,
our operations could be interrupted, and we could be subject to liability. We
may have to devote significant financial and other resources to protect against
security breaches or to alleviate problems caused by breaches. We could face
financial loss, litigation and other liabilities to the extent that our
activities or the
15
activities of third-party contractors involve the storage and transmission of
confidential information like patient records or credit information.
If we are unable to obtain additional financing for our future needs, our
business may be adversely affected.
We expect the net proceeds of this offering, together with our available
cash, to be sufficient to meet our anticipated needs for working capital and
other cash requirements for at least the next 12 months. We may need to raise
additional funds, however, in order to:
o Fund more rapid expansion;
o Develop new or enhance existing services or products;
o Respond to competitive pressures; or
o Acquire complementary products, businesses or technologies.
We cannot be certain that additional financing will be available on favorable
terms, or at all. If adequate financing is not available or is not available on
acceptable terms, our ability to fund our expansion, take advantage of potential
acquisition opportunities, develop or enhance services or products, or respond
to competitive pressures would be significantly limited. This limitation could
have a material adverse effect on our business, financial condition and results
of operations.
We may not be able to implement our new management information systems in a
timely manner and the new systems may not be adequate to support our operations.
The growth in the complexity of our business has placed and will continue
to place a significant strain on our operational, financial and management
information systems. In June, 1999 we purchased a new management information
system from Oracle Corporation and the required hardware to support it. This
system includes accounting, operations, purchasing and project billing
capability. We must integrate this system with our Internet products and
services and with our existing customer relationship management system. The
successful implementation of this system is expected to be crucial to our
operations. We may not be able to implement this new system in an efficient and
timely manner and the new system may not be adequate to support our operations.
Year 2000 problems may adversely affect us.
We may discover Year 2000 compliance problems that will require substantial
revisions to our systems, products or services. In addition, third-party
software, hardware or services that we rely on may need to be revised or
replaced, all of which could be time consuming and expensive. Failure to address
any problems that may arise on a timely basis could result in lost revenue,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition.
16
In addition, systems and software used by physicians, payers, Internet
access companies, business partners and others outside our control may not be
Year 2000 compliant. The failure of these entities to be Year 2000 compliant
could result in a systemic failure beyond our control, such as a prolonged
Internet or communications failure, which could also prevent us from delivering
our services to customers, decrease the use of the Internet or prevent users
from accessing our services. This failure could have a material adverse effect
on our business, financial condition and results of operations. As the Year 2000
issue has many elements and potential consequences, some of which are not
reasonably foreseeable, the ultimate impact of the Year 2000 on our operations
could differ materially from our expectations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Year 2000 Compliance."
Risks Related to the Healthcare Industry and the Internet
Government regulation of the healthcare industry could adversely affect our
business.
We are subject to government regulation of the healthcare industry.
Existing and new laws and regulations applicable to the healthcare industry
could have a material adverse effect on our business, financial condition and
results of operations. The federal and state governments extensively regulate
the confidentiality and release of patient records. Additional legislation
governing the distribution of medical records has been proposed at both the
state and federal level. It may be expensive to implement security or other
measures designed to comply with any new legislation. Moreover, we may be
restricted or prevented from delivering patient records electronically.
Legislation currently being considered at the federal level could affect
our business. For example, the Health Insurance Portability and Accountability
Act of 1996 mandates the use of standard transactions and identifiers,
prescribed security measures and other provisions within two years after the
adoption of final regulations by the Department of Health and Human Services. We
are designing our platform and applications to comply with these proposed
regulations; however, until these regulations become final, they could change,
which could cause us to use additional resources and lead to delays in order to
revise our platform and applications. In addition, our success depends on other
healthcare participants complying with these regulations.
Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration. We
do not believe that our current applications or services are subject to FDA
regulation. We may, however, expand our application and service offerings into
areas that subject us to FDA regulation. We have no experience in complying with
FDA regulations. We believe that complying with FDA regulations would be time
consuming, burdensome and expensive and could delay our introduction of new
applications or services. See "Business-Governmental Regulation and Healthcare
Reform."
17
A federal law commonly known as the Medicare/Medicaid antikickback law, and
several similar state laws, prohibit payments that are intended to induce
physicians or others to acquire, arrange for or recommend the acquisition of
healthcare products or services. Another federal law, commonly known as the
"Stark" law, prohibits physicians from referring Medicare and Medicaid patients
for designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. The application and interpretation of these laws are complex
and difficult to predict and could constrain our financial and marketing
relationships.
Government regulation of the Internet could adversely affect our business.
Our business is subject to evolving government regulation of the Internet.
Existing as well as new laws and regulations could adversely affect our
business, financial condition and results of operations. Laws and regulations
may be adopted with respect to the Internet or other online services covering
issues such as:
o User privacy;
o Pricing;
o Content;
o Copyrights;
o Distribution; and
o Characteristics and quality of products and services.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for our
applications and services may be affected by additional regulation of the
Internet. For example, until recently Health Care Financing Administration
guidelines prohibited transmission of Medicare eligibility information over the
Internet.
We could be subject to sales or other taxes on Internet transactions.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local levels and by
certain foreign governments that could impose taxes on online sales of goods and
services and certain other Internet activities. A recently enacted federal law
places a temporary moratorium on certain types of taxation on Internet commerce.
We cannot predict the effect of current attempts at taxing or regulating
commerce over the Internet. Any legislation that substantially impairs the
growth of e-commerce could have a material adverse effect on our business,
financial condition and results of operations. See "Business-Government
Regulation and Healthcare Reform."
Consolidation in the healthcare industry could adversely affect our business.
Many healthcare industry participants are consolidating to create
integrated healthcare delivery systems with greater market power. As the
healthcare industry consolidates, competition to provide products and services
to industry participants will become more intense.
18
These industry participants may try to use their market power to negotiate price
reductions for our products and services. If we were forced to reduce our
prices, our business, financial condition and results of operations could suffer
unless we were able to achieve corresponding reductions in our expenses. In
addition, the acquisition by third parties of any of our customers could have an
adverse effect on our relationship with that customer.
We depend on continued improvements in the Internet infrastructure.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it. The Internet may not prove to be a
viable commercial medium because of:
o Inadequate development of the necessary infrastructure;
o Lack of timely development of complementary products like high speed
modems; and
o Delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity or increased
government regulation.
Risks Related to This Offering and Our Common Stock
The public market for our common stock may be volatile.
Prior to this offering, there has been no public market for our common
stock. We cannot guarantee that an active trading market will develop or be
sustained or that the market price of our common stock will not decline. Even if
an active trading market develops, the market price of our common stock is
likely to be highly volatile and could fluctuate significantly in response to
various factors, including:
o Actual or anticipated variations in our quarterly results of
operations;
o Announcements of technological innovations or new services or products
by us or our competitors;
o Timeliness of our introductions of new products;
o Changes in financial estimates by securities analysts;
o Conditions and trends in the electronic healthcare information,
Internet and e-commerce markets; and
o General market conditions and other factors.
In addition, the stock markets, especially the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many technology companies, and Internet-related
companies in particular. These fluctuations have often been unrelated or
disproportionate to operating performance. The trading prices of many technology
companies' stocks are at or near historical highs. These high trading prices may
not be sustained. These broad market factors may materially affect the trading
price of our common stock. General economic, political and market conditions
like recessions and interest rate fluctuations may also have an adverse effect
on the market price of our common stock. In the past, following periods of
volatility in the market price for a company's securities,
19
shareholders have often initiated securities class action litigation. Any
securities class action litigation could result in substantial costs and the
diversion of management's attention and resources, which would have a material
adverse effect on our business, financial condition and results of operations.
We may have substantial sales of our common stock after the offering.
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such sales will occur, could adversely
affect the market price of our common stock and make it more difficult for us to
raise funds through equity offerings in the future. After the offering, based on
shares outstanding on August 31, 1999, the holders of approximately 32,655,933
of our shares of common stock will be entitled to registration rights with
respect to these shares until the holders may sell the shares under Rule 144 or
144(k) of the Securities Act. On the 181st day after the date of this
prospectus, 32,958,907 shares of our common stock, including 22,279,090 of the
shares subject to registration rights, will be eligible for sale in the public
market subject in some cases to volume limitations, based on shares outstanding
on August 31, 1999. In addition, a substantial number of outstanding shares of
common stock and shares issuable upon exercise of outstanding options will
become available for resale in the public market at prescribed times. After the
offering, we intend to register 13,994,384 shares of common stock reserved for
issuance under our stock incentive plans. See "Shares Eligible for Future Sale."
Investors will suffer immediate and substantial dilution.
The initial public offering price will be substantially higher than the net
tangible book value per share of common stock. If we sell _______ shares in the
offering at an assumed initial public offering price of $_______ per share, our
net tangible book value per share will be $_______, which is $_______ below the
assumed initial public offering price. If we issue additional common stock in
the future, or outstanding options to purchase our common stock are exercised,
there will be further dilution. See "Dilution."
The anti-takeover provisions of our articles of incorporation, bylaws and Oregon
law could delay or prevent an acquisition of our company.
Our articles of incorporation, bylaws and the anti-takeover provisions of
Oregon law could make it more difficult for a party to gain control of
MedicaLogic, even if doing so would be beneficial to our shareholders. Our
articles of incorporation and bylaws contain the following anti-takeover
provisions:
o The authority to issue up to 50 million shares of preferred stock,
with preferences, limitations and relative rights fixed by the board
of directors without any vote or action by the shareholders;
o A classified board of directors, which is divided into three classes
with each class standing for election every three years;
20
o The requirement that directors may only be removed for cause or with
the affirmative vote of at least 75% of the voting power of the
outstanding shares of our capital stock; and
o The requirement that the above provisions may only be amended by an
affirmative vote of the holders of not less than 75% of the voting
power of the outstanding shares of our capital stock.
See "Description of Capital Stock."
Forward-looking statements may prove inaccurate.
This prospectus contains forward-looking statements that involve risks and
uncertainties, including those discussed above and elsewhere in this prospectus.
These statements often contain words like believe, expect, anticipate, intend,
contemplate, seek, plan, estimate or similar expressions. Forward-looking
statements do not guarantee future performance. Because we cannot predict all of
the risks and uncertainties that may affect us, or control the ones we do
predict, these risks and uncertainties can cause our results to differ
materially from the results we express in our forward-looking statements.
Recognize these statements for what they are and do not rely on them as facts.
We are not obligated to update forward-looking statements.
21
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $_______
million, or approximately $______ million if the underwriters' overallotment
option is exercised in full, from the sale of shares of common stock offered by
us. These estimates assume an initial public offering price of $____ per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by us.
We expect to use the net proceeds from this offering for working capital
and other general corporate purposes. In addition, although we are not currently
participating in any active negotiations and have no commitments or agreements
with respect to any acquisition, we might in the future use a portion of the
remaining proceeds to pay for acquisitions. We intend to invest the net proceeds
from this offering in short-term, investment grade, interest-bearing instruments
until they are used.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain earnings, if any, to fund the development and growth
of our business.
22
CAPITALIZATION
The following table sets forth as of June 30, 1999 our capitalization (1)
on an actual basis and (2) on an as adjusted basis after giving effect to the
conversion of all outstanding shares of preferred stock into common stock, the
sale by us of the ___________ shares of common stock offered by this prospectus
at an initial public offering price of $______ per share and after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by us and the filing upon the closing of the offering of Amended and Restated
Articles of Incorporation to increase the number of authorized shares of common
stock to 150 million.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes appearing elsewhere in this prospectus.
The shares issued and outstanding do not include 3,883,489 shares issuable on
the exercise of outstanding options.
June 30, 1999
--------------------------
Actual As Adjusted
--------- -----------
(Dollars in thousands)
Cash, cash equivalents and
short-term investments.......................... $ 41,199 $
========= ===========
Capital leases and notes payable,
less current portion............................ $ 984 $
--------- -----------
Convertible redeemable preferred
stock; 50,000,000 shares authorized,
$85,918 aggregate liquidation preference,
46,091,527 shares designated, 29,059,283
issued and outstanding at June 30, 1999,
actual; no shares issued or outstanding,
as adjusted..................................... 83,687
Shareholders' equity (deficit):
Common stock, no par value, 100,000,000
shares authorized, 17,542,422 issued and
outstanding at June 30, 1999, actual;
150,000 shares authorized, _______ shares
issued and outstanding, as adjusted........ 14,211
Common stock notes receivable................ (5,959)
Deferred compensation........................ (956)
Accumulated deficit.......................... (43,137)
--------- -----------
Total shareholders' equity (deficit)..... (35,841)
--------- -----------
Total capitalization..................... $ 48,830 $
========= ===========
23
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$44,046,000 or $0.95 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the total pro forma number of shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of our common stock in this offering and the net tangible book value per
share of our common stock immediately afterwards. After giving effect to our
sale of ________ shares of common stock offered by this prospectus and after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value would have been
approximately $_______, or approximately $_____ per share. This represents an
immediate increase in pro forma net tangible book value of $_____ per share to
existing shareholders and an immediate dilution in pro forma net tangible book
value of $______ per share to new investors.
Assumed initial public offering price per share.............................. $_______
Pro forma net tangible book value per share as of June 30, 1999..... $0.95
Increase attributable to this offering.............................. _____
Pro forma net tangible book value per share after this offering.............. _______
Dilution to new investors.................................................... $
The following table summarizes, as of June 30, 1999 on the pro forma basis
described above, the total number of shares of common stock purchased from us,
the total consideration paid and the average price paid per share by the
existing shareholders and by the new investors based upon an initial public
offering price of $_____ per share before deducting the estimated underwriting
discounts and commissions and offering expenses payable by us:
Shares Purchased Total Consideration
-------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ---------- ------- -------------
(In thousands)
Existing shareholders............ 46,601,705 ______% $ 96,942 _____% $2.08
New investors.................... __________ ______ ________ _____ $_____
Total....................... __________ 100.0% $________ 100.0%
========== ====== ======== =====
These tables exclude all options that will remain outstanding upon
completion of this offering. See Note 7 to Notes to the Consolidated Financial
Statements. The exercise of outstanding options having an exercise price less
than the offering price would increase the dilutive effect to new investors.
24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements and
accompanying Notes, which are included elsewhere in this prospectus. The
consolidated statements of operations data for the three-year period ended
December 31, 1998 and the consolidated balance sheet data as of December 31,
1997 and 1998 are derived from, and are qualified by reference to, the audited
Consolidated Financial Statements included elsewhere in this prospectus. The
consolidated statements of operations data for the two-year period ended
December 31, 1995 and the consolidated balance sheet data as of December 31,
1994, 1995 and 1996 are derived from, and are qualified by reference to, audited
Consolidated Financial Statements that are not included in this prospectus. The
consolidated statements of operations data for the six-month periods ended June
30, 1998 and 1999 and the balance sheet data as of June 30, 1999 are derived
from unaudited financial statements included elsewhere in this prospectus and,
in the opinion of our management, include all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair presentation of the
financial position and results of operations for these periods. Historical
results of operations are not necessarily indicative of results in the future,
and the results for interim periods are not necessarily indicative of the
results that may be expected for the entire year.
Six Months Ended
Years Ended December 31, June 30,
---------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- ---------
(In thousands, except per share data) (Unaudited)
Consolidated Statements of
Operations Data:
Revenues:
Software........................ $ 2,084 $ 6,765 $ 6,845 $ 7,617 $ 10,410 $ 3,989 $ 5,787
Service and support............. 366 772 2,819 5,190 5,750 2,670 3,188
-------- -------- -------- -------- -------- -------- ---------
Total revenues............. 2,450 7,537 9,664 12,807 16,160 6,659 8,975
Operating expenses:
Cost of revenue................. 987 3,141 6,120 7,756 6,754 3,283 3,418
Marketing and sales............. 2,755 5,061 6,498 7,539 7,579 3,630 7,946
Research and development........ 1,024 2,980 6,583 7,047 8,016 3,858 5,092
General and administrative...... 376 582 718 865 1,044 451 1,255
-------- -------- -------- -------- -------- -------- ---------
Total operating expenses... 5,142 11,764 19,919 23,207 23,393 11,222 17,711
-------- -------- -------- -------- -------- -------- ---------
Operating loss............. (2,692) (4,227) (10,255) (10,400) (7,233) (4,563) (8,736)
-------- -------- -------- -------- -------- -------- ---------
Other income (expense):
Interest expense................ (88) (176) (251) (240) (187) (106) (93)
Interest income................. 70 172 456 617 707 313 494
Other, net...................... (22) (30) (265) (647) (322) (141) 342
-------- -------- -------- -------- -------- -------- ---------
Total other income
(expense)................ (40) (34) (60) (270) 198 66 743
-------- -------- -------- -------- -------- -------- ---------
Loss before income taxes... (2,732) (4,261) (10,315) (10,670) (7,035) (4,497) (7,993)
Provision for income taxes.......... - - - - - - -
======== ======== ======== ======== ======== ======== =========
Net loss................... $ (2,732) $ (4,261) $(10,315) $(10,670) $ (7,035) $ (4,497) $ (7,993)
======== ======== ======== ======== ======== ======== =========
Net loss per share:
$
Basic and diluted.............. $ (3.30) $ (0.34) $ (0.78) $ (0.80) $ (0.51) $ (0.34) $ (0.47)
======== ======== ======== ======== ======== ======== =========
Weighted average shares--basic
and diluted.................... 827 12,603 13,153 13,269 13,766 13,358 16,841
25
December 31,
-----------------------------------------------------
1994 1995 1996 1997 1998 June 30, 1999
-------- --------- -------- -------- -------- -------------
Consolidated Balance Sheet (Dollars in thousands) (Unaudited)
Data:
Cash and cash equivalents..... $ 3,545 $ 10,614 $ 18,651 $ 4,924 $ 4,718 $ 9,922
Working capital............... 4,159 10,245 19,096 14,870 16,091 38,424
Total assets.................. 6,242 14,787 26,074 22,072 24,308 59,203
Long-term obligations, net of
current portion............... 406 1,454 977 278 679 984
Convertible redeemable
preferred stock............... 5,698 15,795 35,818 42,593 49,387 83,687
Total shareholders' deficit... (869) (4,995) (15,268) (25,895) (32,044) (35,841)
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of MedicaLogic should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
and related Notes appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of factors that include, but are
not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
MedicaLogic was founded in 1985 and released its first DOS-based electronic
medical record product in 1989. In 1996, we released Logician, our Windows-based
electronic medical record product. From 1994 through 1998, we concentrated on
building our development and implementation capabilities by hiring additional
engineering and sales personnel, improving the functionality of Logician through
the release of three major upgrades, and implementing our product at customer
sites. During the first six months of 1999, we released our current version of
Logician and expect to ship an upgrade in September 1999. Our revenues totaled
approximately $16.2 million and $9.0 million for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively. All of this revenue
was derived from the sale and associated support and services of our Logician
software product, both directly and through resellers, to physicians in
integrated healthcare delivery systems.
We receive software license revenues from licensing our software products
both directly to end-users and indirectly through resellers. We receive service
revenues from two major sources: customer support contracts and consulting
contracts. Customer support revenue, which consists of annual subscription fees
for ongoing support of the product, including upgrades, is recognized ratably
over the term of the contract, which is typically one year. We derive consulting
revenues primarily from the implementation services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of our software products. We recognize revenues from consulting
services as the services are performed.
During 1996, four customers accounted for approximately 41% of total
revenues. During 1997, two customers accounted for approximately 32% of our
total revenues and in 1998, one customer accounted for approximately 21% of our
total revenues. During the first six months of 1999, one customer accounted for
approximately 50% of our total revenues.
Costs of revenues consist of licensing fees paid to third-party software
vendors, the cost of product media, product duplication, order fulfillment
personnel, manuals and implementation and support personnel and third-party
service provider costs related to customer support. Marketing and sales expenses
consist primarily of salaries, commissions and bonuses earned by sales and
marketing personnel, travel and promotional expenses and facility and
communication
27
costs. Research and development expenses consist primarily of salaries and
benefits paid to software developers, quality assurance personnel and technical
writers, equipment for software developers and payments to outside contractors.
General and administrative expenses consist primarily of salaries, benefits and
related costs for our finance and administrative personnel and professional
services fees.
We recognize software license revenue in accordance with Statement of
Position 97-2, Software Revenue Recognition, as amended by Statement of Position
98-4. These statements provide guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and have
been applied to transactions entered into after January 1, 1998. The application
of SOP 97-2 has not had a material impact on our results of operations.
With the implementation of our Internet business model, we expect that our
historical revenue sources, sales of software licenses and services, will
gradually be replaced by sources of revenue related to our Internet business
model. Our first Internet product, Logician Internet, was not commercially
introduced until September 1999. Our consumer Web site code-named
AboutMyHealth.net is being tested in a pilot program and will not be introduced
until late 1999. Because our Internet business model is in an emerging stage,
revenue and income potential from our Internet products and services is
unproven. For this reason, we expect our historical revenue sources will
continue to be major contributors to our overall revenues for the foreseeable
future. Despite the continued importance of our historical revenue sources, you
should not use our past results as a basis to predict our future performance due
to the implementation of our Internet business model.
In addition to our historical revenue sources, we expect to generate future
revenue from the following sources:
o Subscription fees for use of Logician, rather than the one-time
license fees we have historically charged;
o Subscription fees for Logician Internet, our hosted application that
allows physicians and other healthcare providers to create and manage
electronic medical records over the Internet;
o Transaction fees for drug prescriptions transmitted through the
Internet Health Services Center;
o Transaction fees to process payment claims through our Internet Health
Services Center; and
o Fees charged to advertisers for posting banner and other forms of
advertising on our physician- and consumer-oriented Web sites.
Since inception, but increasingly during the past year, we have made
substantial investments in infrastructure and in staffing and management to
accommodate current and anticipated future growth. From January 1, 1999 to
August 31, 1999, we hired 73 employees, or approximately 33% of our current
workforce, and invested approximately $8.5 million in capital assets. A large
portion of these assets is dedicated to the development of our Internet Health
Services Center. Our planned growth will require additional staff and
infrastructure.
28
We have incurred net losses each year since we began operations. We had a
net loss of approximately $7.0 million for the year ended December 31, 1998 and
$8.0 million for the six months ended June 30, 1999 and, as of June 30, 1999,
had an accumulated deficit of $43.1 million. We intend to increase further our
spending on technology infrastructure development, marketing and promotion,
services development and strategic relationships, all of which are related to
the establishment of our Internet Health Services Center. As a result, we expect
to continue incurring net losses and negative cash flows from operations at
least through 2000.
Effective January 1999, we acquired PrimaCis Health Information Technology,
Inc. in a transaction that was accounted for as a purchase. PrimaCis, which was
founded by faculty members of the Baylor College of Medicine, was a developer of
electronic medical record software and had developed in-depth Internet-based
oncology content for its Internet site. We paid PrimaCis shareholders total
consideration of $6.3 million and paid $153,000 in merger-related costs to
acquire the outstanding shares of PrimaCis capital stock. These amounts
consisted of $2.1 million in cash, the issuance of shares of MedicaLogic common
stock valued at $3.3 million and the assumption of $1.1 million in PrimaCis'
liabilities. Goodwill in the amount of $3.2 million, reflecting the excess of
the purchase price for PrimaCis over the fair value of the net tangible and
other intangible assets acquired, will be amortized on a straight-line basis
over a four-year period. Concurrently, in a transaction facilitated by our
acquisition of PrimaCis, Baylor College of Medicine purchased 1,500 licenses of
Logician from us for $4.5 million. Because the PrimaCis transaction facilitated
the Baylor College of Medicine transaction, we allocated approximately $2.3
million of the purchase price for PrimaCis as a sales commission, which was
recognized during the first six months of 1999.
At about the time of the PrimaCis acquisition, we entered into an agreement
with the Baylor College of Medicine providing that for each purchase of licenses
of Logician prior to January 1, 2003 by Baylor College of Medicine or any other
institution or health care provider in the Houston, Texas area, we will issue as
payment to Baylor College of Medicine shares of our common stock having a
then-current fair market value equal to 50% of the license fees received from
that sale, up to an aggregate maximum of $12 million of our stock. Accordingly,
when we sell additional licenses to Baylor College of Medicine, the amount of
revenue we recognize reflects a sales discount equal to 50% of the license fee.
When we sell licenses covered by this agreement to others, we reflect the
payment to Baylor College of Medicine in the form of a sales commission.
At June 30, 1999, we recorded aggregate deferred compensation of $956,000
for the grant of stock options at exercise prices less than the deemed fair
value on the grant date. We expect to record additional deferred compensation of
approximately $1.0 million in the third quarter of 1999 to reflect additional
option grants at exercise prices less than the deemed fair value of common stock
on the grant date through September 1999. The deferred compensation is being
amortized over the vesting period of the options, which is generally three
years. Of the total deferred compensation, none was amortized in the second
quarter and approximately $127,000 will be amortized in the third quarter of
1999.
29
Results of Operations
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(Unaudited)
Revenues:
Software 70.8 % 59.5 % 64.4 % 59.9 % 64.5 %
Service and support 29.2 40.5 35.6 40.1 35.5
--------- --------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of revenue 63.3 60.6 41.8 49.3 38.1
Marketing and sales 67.2 58.9 46.9 54.5 88.5
Research and development 68.1 55.0 49.6 57.9 56.7
General and administrative 7.4 6.8 6.5 6.8 14.0
--------- --------- --------- --------- ---------
Total operating expenses 206.1 181.2 144.8 168.5 197.3
Operating loss (106.1) (81.2) (44.8) (68.5) (97.3)
Other income (expense):
Interest expense (2.6) (1.9) (1.2) (1.6) (1.0)
Interest income 4.7 4.8 4.4 4.7 5.5
Other, net (2.7) (5.1) (2.0) (2.1) 3.8
--------- --------- --------- --------- ---------
Total other income (expense): (0.6) (2.1) 1.2 1.0 8.3
Loss before income taxes (106.7) (83.3) (43.5) (67.5) (89.1)
Provision for income taxes - - - - -
--------- --------- --------- --------- ---------
Net loss (106.7)% (83.3)% (43.5)% (67.5)% (89.1)%
--------- --------- --------- --------- ---------
Six Months Ended June 30, 1999 and 1998
Revenues
Total revenues, which consisted of software licenses and service revenues,
increased to $9.0 million for the first six months of 1999 from $6.7 million for
the first six months of 1998. This increase primarily resulted from an increase
of $1.8 million in software revenue, which in turn was primarily attributable to
increases in the average selling price of Logician, partly offset by a decrease
in the total licenses sold. The increase in the average selling price resulted
primarily from a higher percentage of products sold through direct channels
versus products sold through reseller channels.
Total service revenue increased to $3.2 million for the first six months of
1999 from $2.7 million for the first six months of 1998, due primarily to an
increase in our Logician installed base to 6,790 users on June 30, 1999 from
4,740 users on June 30, 1998. Service revenue represented 36% of our total
revenues for the first six months of 1999 and 40% for the same period in 1998.
The decrease as a percentage of total revenue was due primarily to the
relatively higher increase in software license revenue compared to service
revenue.
30
Operating Expenses
Costs of Revenues
Costs of revenues increased slightly to $3.4 million for the first six
months of 1999 from $3.3 million for the first six months of 1998. Costs of
revenues as a percentage of revenues was 38% for the six months ended June 30,
1999 and 49% for the six months ended June 30, 1998. The decrease in cost of
revenues as a percentage of revenue resulted primarily from an average decrease
of 53% in a third-party's licensing fees which took effect April 1, 1998 and
from the decreasing marginal cost of service on each additional installed
license. The cost of providing service to customers as a percentage of
associated revenues often varies between periods because the costs of
implementation and support personnel are relatively fixed and, at any given
time, the staff may not be fully utilized. If we are required to hire additional
support staff to service installed licenses on support contracts, we may
experience short term increases in costs relative to the revenue produced.
Marketing and sales
Marketing and sales expenses increased to $7.9 million for the first six
months of 1999 from $3.6 million for the first six months of 1998. Marketing and
sales expenses represented 89% of our total revenues for the six months ended
June 30, 1999 and 55% of our total revenues for the six months ended June 30,
1998. The increase in dollar amount and percentage of our marketing and sales
expenses resulted primarily from sales commissions of $2.3 million associated
with our sale of licenses to Baylor College of Medicine, incremental expenses of
$1.5 million related to our new Internet business, including the hiring of 19
new employees and an increase in other marketing activities, including trade
shows and public relations. We believe that we need to increase significantly
our sales and marketing efforts to expand our market penetration and increase
acceptance of our Internet products and services. Accordingly, we anticipate
that marketing and sales expenses will continue to increase in future periods.
Research and development
Research and development expenses increased to $5.1 million for the first
six months of 1999 from $3.9 million for the first six months of 1998. The
increase resulted from an increase in the number of software developers and
quality assurance personnel to 65 as of June 30, 1999 from 52 as of June 30,
1998 and the use of outside contractors to support our product development and
testing activities. Research and development costs represented 57% of total
revenue for the six months ended June 30, 1999 and 58% of total revenues for the
six months ended June 30, 1998.
General and administrative
General and administrative expenses increased to $1.3 million for the first
six months of 1999 from $451,000 for the first six months of 1998. The increase
resulted from amortization of $335,000 of goodwill related to the PrimaCis
acquisition and an increase in finance and administrative personnel to 17 as of
June 30, 1999 from 11 as of June 30, 1998, to support the
31
growth of our business. General and administrative cost represented 14% of our
total revenues for the six months ended June 30, 1999 and 7% of our total
revenues for the six months ended June 30, 1998. We believe our general and
administrative expenses will continue to increase as we expand our
administrative staff and incur expenses associated with becoming a public
company, including, but not limited to, annual and other public reporting costs,
director and officer liability insurance, investor relations programs and
professional services fees.
Other Income (Expense)
Other income consists of earnings on our cash and cash equivalents and
short-term investment balances offset by interest expense associated with debt
obligations and other non-operating costs. Other income was $743,000 for the
first six months of 1999 compared to an expense of ($66,000) for the first six
months of 1998. The increase in other income is mainly attributable to an
increase of $200,000 in interest earned on cash and cash equivalents and short
term investments and the settlement of litigation related to two customer
contracts for $350,000 less than we had reserved for that expense.
Provision for Income Taxes
As a result of our net operating losses, no provision for income taxes
during the six month periods ended June 30, 1999 and 1998 was recorded.
Years Ended December 31, 1996, 1997, and 1998
Revenues
Total revenues increased from $9.7 million in 1996 to $12.8 million in
1997, and to $16.2 million in 1998. Software revenue increased from $6.8 million
in 1996 to $7.6 million in 1997, and to $10.4 million in 1998. The increase in
software revenues from 1996 to 1997 primarily resulted from an increase in the
average selling price from 1996 to 1997 due to more sales through direct rather
than reseller channels. The increase in software revenues from 1997 to 1998
continued the trend of realizing higher average selling prices through our
direct sales channel.
Service revenues increased from $2.8 million in 1996 to $5.2 million in
1997, and to $5.8 million in 1998. The increase in the dollar value of service
revenues is the result of support contracts on newly installed licenses that
have been added each year. Service revenue represented 29% of total revenues in
1996, 41% in 1997 and 36% in 1998. The fluctuation in service revenues as a
percentage of total revenues reflects purchasing and implementation cycles of
our customers and a lower level of revenues during the early period of our
business.
32
Operating Expenses
Costs of Revenues
Costs of revenues increased from $6.1 million in 1996 to $7.8 million in
1997, and decreased to $6.8 million in 1998. Costs of revenues as a percentage
of revenues was 63% in 1996, 61% in 1997 and 42% in 1998. The decrease in dollar
amounts and percentage of revenue amounts from 1997 to 1998 reflects the more
favorable license fee terms negotiated with a third-party software product
provider and the reorganization of our consulting practice, which included
personnel changes, the relocation of personnel to in-home offices from rented
space and the reduction of our use of third-party contractors and the decreasing
marginal cost of service on each additional installed license.
Marketing and sales
Marketing and sales expenses increased from $6.5 million in 1996 to $7.5
million in 1997, and to $7.6 million in 1998. The increases in marketing and
sales expenses from 1996 to 1998 resulted primarily from an increase in
commissions paid to sales staff based on increased sales and marketing
activities, including trade shows and public relations. Marketing and sales
expenses represented 67% of our total revenues in 1996, 59% in 1997 and 47% in
1998. The decrease in marketing and sales expenses as a percentage of total
revenues reflects the more rapid growth in our revenues compared to the growth
of marketing and sales expenses due to our early investment in marketing
activities to create product awareness.
Research and development
Research and development expenses increased from $6.6 million in 1996 to
$7.0 million in 1997, and to $8.0 million in 1998. The increases in research and
development expenses from 1996 to 1998 resulted from an increase in the number
of software developers and quality assurance personnel and the use of outside
contractors to support our product development and testing activities. Research
and development costs represented 68% of total revenues for 1996, 55% in 1997
and 50% in 1998. The decrease in research and development expenses as a
percentage of total revenues primarily reflects the higher increase in revenues
relative to the increase in research and development staff to develop and
enhance our Logician product.
General and administrative
General and administrative expenses increased from $718,000 in 1996 to
$865,000 in 1997, and to $1.0 million in 1998. The increases from 1996 to 1998
resulted primarily from the addition of finance and administrative personnel and
professional services to support the growth of our business during these
periods. General and administrative expenses represented approximately 7% of
total revenues in 1996, 1997 and 1998.
33
Other Income (Expense)
Other expense increased from ($60,000) in 1996 to ($270,000) in 1997,
compared to other income of $198,000 in 1998. The increased expense in 1997
primarily reflects an accrual of $450,000 for litigation costs related to two
customer contracts. Excluding the impact of this accrual, net other income has
improved over time due to interest on investments of cash, cash equivalents and
short term investments and improved financing rates.
Provision for Income Taxes
As a result of our net operating loss in 1998 and prior years, we made no
provision or benefit for federal or state income taxes. As of December 31, 1998
we had net operating loss carryforwards for tax reporting purposes of
approximately $33.7 million and research and experimentation credits of
approximately $1.3 million which expire through 2018. Approximately $7.1 million
of the net operating losses is subject to an annual utilization limitation due
to ownership changes in prior years.
34
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for 1998 and the first six months of 1999. You should read the following table
in conjunction with our Consolidated Financial Statements and related Notes
included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited Consolidated Financial Statements.
This table includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and results of operations for the quarters presented. You should not
draw any conclusions about our future results from the results of operations for
any quarter.
Three Months Ended
------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
----------- ----------- ------------ ------------- ------------ ------------
(Dollars in thousands)
Revenues:
Software $ 1,417 $ 2,572 $ 2,545 $ 3,876 $ 2,137 $ 3,650
Service and support 1,394 1,276 1,555 1,525 1,490 1,698
----------- ----------- ------------ ------------- ------------ ------------
Total revenues 2,811 3,848 4,100 5,401 3,627 5,348
Operating expenses:
Costs of revenue 1,654 1,629 1,679 1,792 1,602 1,816
Marketing and sales 1,742 1,888 1,962 1,987 3,211 4,735
Research and development 1,886 1,972 2,068 2,090 2,292 2,800
General and administrative 203 248 284 309 462 793
----------- ----------- ------------ ------------- ------------ ------------
Total operating expenses 5,485 5,737 5,993 6,178 7,567 10,144
----------- ----------- ------------ ------------- ------------ ------------
Loss from operations (2,674) (1,889) (1,893) (777) (3,940) (4,796)
Other income (expense), net 36 29 144 (11) 538 205
----------- ----------- ------------ ------------- ------------ ------------
Loss before income taxes (2,638) (1,860) (1,749) (788) (3,402) (4,591)
Income tax provision - - - - - -
----------- ----------- ------------ ------------- ------------ ------------
Net loss $ (2,638) $ (1,860) $ (1,749) $ (788) $ (3,402) $ (4,591)
=========== =========== ============ ============= ============ ============
35
Liquidity and Capital Resources
Since our inception, we have primarily financed our operations through
private placements of equity securities with investors such as Continental
Casualty Company; Dell Computer Corporation; Franklin Capital Associates III,
L.P.; Furman Selz SBIC, L.P.; Glynn Ventures III, L.P.; New Enterprise
Associates VI, Limited Partnership; Sequoia funds; Soros investment funds; and
VHA, Inc. As of August 31, 1999, net proceeds from these private placements
totaled $97.0 million.
As of August 31, 1999, we had cash and cash equivalents of $13.2 million
and short term investments of $33.1 million. We have a $3.3 million term loan
facility with General Electric Capital Business Asset Funding Corporation to
finance the purchase of new capital equipment. We have borrowed $1.7 million
under this facility, and $1.6 million remains available. Notes issued under this
facility are payable in two years if they relate to the purchase of computer
equipment and in three years if they relate to other office equipment. Interest
accrues annually at rates ranging from 9.4% to 10.4%. Principal and interest are
payable monthly in arrears and amortized over the term of the note.
In August 1999, we entered into a leasing arrangement for the purpose of
leasing computer equipment for the development of our Internet products and
services. The cost of the financed equipment totaled $1.8 million with a lease
term of two years. We paid $430,000 of this amount as a down payment. The
remaining principal and interest is amortized over the life of the lease.
Our operating activities resulted in net cash inflows of $3.4 million for
the first six months of 1999 and in cash outflows of $6.8 million in 1998 and
$11.6 million in 1997. The net cash inflow during the first six months of 1999
resulted from improved collections on customer contracts and an increase in
accounts payable due to the timing of invoice due dates. Cash outflows in 1997
and 1998 resulted from our continued investment in research and development,
consulting services and sales and marketing, which led to operating losses.
Investing activities used cash of $33.7 million in the first six months of
1999. Of that amount, $6.3 million was used to purchase fixed assets, $3.2
million was used for the acquisition of PrimaCis and $24.2 million was invested
in short term investment instruments. Financing activities provided cash of
$35.5 million in the six months ended June 30, 1999, $7.8 million in 1998 and
$5.6 million in 1997, primarily through the issuance of equity securities and
partially offset by payments on capital equipment lease and note obligations.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we:
o Enter new markets for our products and services;
o Increase marketing activities;
o Increase research and development spending;
o Develop new distribution channels;
36
o Expand our infrastructure; and
o Improve our operational and financial systems.
These operating expenses will consume a material amount of our cash
resources, including a large portion of the proceeds of this offering. We
believe the net proceeds of this offering, together with our existing cash and
cash equivalents, and available bank borrowings, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. Thereafter, we may require additional funds to support our
working capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financing or from other
sources. We may not be able to obtain adequate or favorable financing at that
time. Any financing we obtain may dilute your ownership interest.
Year 2000 Compliance
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries including technology, transportation, utilities,
finance and telecommunications, will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change. We recognize the need to ensure our operations will not be adversely
affected by Year 2000 software failures. We are assessing the potential overall
impact of the impending century change on our business, financial condition and
results of operations.
Based on our assessment to date, we believe the current versions of our
software products are Year 2000 compliant; that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
our products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that may not be Year 2000
compliant.
We may face claims based on Year 2000 problems in other companies' products
or issues arising from the integration of multiple products within an overall
system. Although we have not been a party to any litigation or arbitration
proceeding involving our products or services on Year 2000-related disputes, any
liability we have for Year 2000 related damages, including consequential
damages, could materially adversely affect our business, financial condition and
results of operations. In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those we offer. To the extent Year 2000 issues cause a significant delay
in, or cancellation of, decisions to purchase our products or services, our
business, financial condition and results of operations would be materially
adversely affected.
We periodically review our internal management information and other
systems to identify any products, services or systems that are not Year 2000
compliant and to take
37
corrective action. To date, we have not encountered any material Year 2000
problems with our computer systems or any other equipment that might be subject
to such problems. We also verify compliance by external vendors that supply us
with any material software and information systems and communicate with
significant suppliers to determine their Year 2000 readiness. As part of our
assessment, we periodically evaluate the level of validation we require of third
parties to ensure their Year 2000 readiness. To date, we have not encountered
any material Year 2000 problems with software and information systems provided
to us by third parties.
The majority of our Internet development and marketing groups will be
moving into a new facility in the fourth quarter of 1999 at a location currently
under construction. Before the relocation, we will complete our evaluation of
whether the infrastructure and building systems associated with the facility,
such as security and sprinkler systems, and all information technology systems,
such as telephone and computer network systems, are Year 2000 compliant.
We do not expect the total cost of these Year 2000 compliance activities to
be material to our business, financial condition and results of operations. To
date, we have spent approximately $450,000 on Year 2000 compliance issues and
expect to incur approximately $200,000 in additional expenses to evaluate and
address these issues. These costs and the timing of when we plan to complete our
Year 2000 modifications and testing processes are based on our management's
estimates. However, we may not identify and correct all significant Year 2000
problems before January 1, 2000. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could materially
adversely affect our business, financial condition and results of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. Because we
currently hold no derivative financial instruments and do not currently engage
in hedging activities, adoption of SFAS No. 133 is expected to have no material
impact on our financial condition or results of operations. In June 1999, the
FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133." Statement No. 137 defers the effective
date of Statement No. 133 for one year. Statement No. 133, as amended, is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000.
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal use software once
certain criteria have been met. We are required to implement SOP 98-1 for the
year ending December 31, 1999. Adoption of SOP 98-1 is expected to have no
material impact on our financial condition or results of operations.
38
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
requires recognition of revenue using the "residual method" in a
multiple-element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP 97-2. We are required to implement SOP 98-9 for the year
ending December 31, 2000. SOP 98-9 also extends the deferral of the application
of SOP 97-2 to certain other multiple-element software arrangements through our
fiscal year ending December 31, 1999. Adoption of SOP 98-9 is expected to have
no material impact on our financial condition or results of operations.
39
BUSINESS
Overview
Our business is connecting physicians and patients through the Internet.
For physicians, we offer a line of enterprise and Internet-based electronic
medical record products and services for use at the point of care in the exam
room, with configurations suitable for practices of all sizes. For patients, we
will provide a Web site that will allow them to access certain healthcare
information from their physician-generated medical record, enter personal
medical information and effectively communicate with their physician. For both
physicians and patients, we will provide focused healthcare content and commerce
opportunities, keyed to information in a selectively shared database that unites
physicians and patients. Together, these products, services and databases will
comprise our Internet Health Services Center. We believe we can increase the
efficiency and quality of healthcare and enhance the physician-patient
relationship through our Internet Health Services Center.
Founded in 1985, MedicaLogic has been developing, marketing and supporting
electronic medical records for over a decade and has products in daily use by
physicians across the country. While most healthcare information systems have
primarily supported financial and administrative functions, we have focused
exclusively on the challenge of providing clinical solutions that are used by
physicians at the point of care to create and access the electronic medical
record. Our customers include academic medical centers such as Baylor College of
Medicine in Houston, Texas, integrated healthcare delivery systems such as
Providence Health System in Portland, Oregon, and other customers such as the
NASA space shuttle program. More than 7,000 health professionals, including
approximately 3,000 physicians, now maintain electronic medical records with our
enterprise electronic medical record software, constituting an estimated base of
over 7 million electronic patient records. Our technology will use the Internet
to link healthcare consumers to physicians using either our enterprise or
Internet-based electronic medical record. We believe we are the leading provider
of electronic medical record software in the healthcare industry.
The Internet, with its open architecture and broadening availability at
home, in the workplace and at the point of care, makes it possible for us to
create our Internet Health Services Center and make electronic medical records
more useful and cost-effective for physicians who practice alone, in small
groups or with integrated healthcare delivery networks. As a result, we believe
we can substantially accelerate the rate of adoption of electronic medical
record technology by physicians. As these electronic medical records are
created, our Internet Health Services Center will make available to consumers
for the first time accurate and timely access to their physician-created medical
information. By connecting physicians and consumers around this shared database
of Internet health records, we can enhance the physician-patient relationship
and make common communications processes, such as prescription refills or
appointment requests, much more convenient. Finally, we will be able to offer
healthcare consumers a combination of health news, education, goods and services
that will be precisely tailored to their health status and interests because it
will be based on the physician-created clinical information included in their
personal health record.
40
The products and services that will comprise our Internet Health Services
Center are:
o Logician, our proprietary client-server electronic medical record
enterprise software;
o Logician Internet, our product for creating and managing electronic
medical records over the Internet;
o AboutMyHealth.net, our code-named Web site for healthcare consumers
currently being tested in a pilot program, through which patients will
be able to maintain their own personal health portfolio based on their
physician-created electronic medical record and access specific
healthcare information as well as commerce opportunities; and
o MedicaLogic.com, our Web site for physicians and other medical
professionals, providing for physician access to patient electronic
medical records and, over time, a range of healthcare information and
commerce opportunities and services.
Historically, we sold Logician to integrated healthcare delivery networks.
Going forward, we will offer both Logician and Logician Internet to these
customers depending on their needs. We intend to allow Logician and Logician
Internet to communicate with each other, thereby facilitating connections
between physicians in such networks and affiliated physicians who use Logician
Internet. Logician and Logician Internet will also support communications
between physicians and consumers who use our Web site for healthcare consumers
code-named AboutMyHealth.net, which we expect to introduce commercially in late
1999.
Industry Background
Overview of the Healthcare Industry. According to the Health Insurance
Association of America, healthcare is the largest single sector of the U.S.
economy, consuming approximately $1 trillion annually, or 14% of the country's
gross domestic product. The participants include:
o Patients: the individual consumers of healthcare services.
o Providers: physicians and organizations such as hospitals,
rehabilitation centers and nursing homes.
o Suppliers: manufacturers and distributors of goods such as
pharmaceuticals, medical devices and healthcare supplies, and
providers of ancillary services such as laboratories and others.
o Payers: the Medicare and Medicaid programs, indemnity insurers, health
plans, employers, individuals, government agencies, insurance
companies, managed care organizations and other enterprises that pay
the bills for healthcare.
In the midst of this complex industry, and despite additional complexity
introduced by managed care programs, the physician remains the ultimate
decision-maker. Based on data contained in 1999 Environmental Assessment, a
joint publication of VHA and Deloitte & Touche, 85% of the dollars spent on
healthcare, such as admitting patients and ordering lab tests, are initiated by
the attending physician. However, the information the physician relies upon to
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make healthcare decisions is largely contained in a paper record that often is
unorganized and cannot be sorted or retrieved easily or effectively.
Inefficiencies within the healthcare system consume enormous amounts of
time, resources and money. In a recent report to Congress and the General
Accounting Office dated November 1998, the Health Care Financing Administration,
or HCFA, estimated that over $250 billion, or 25% of every healthcare dollar, is
wasted through the delivery of unnecessary care, performance of redundant tests
and procedures and excessive administrative costs. As a result, HCFA has
instituted a program to monitor physician billing practices, which has forced
physicians to spend more time writing and dictating to comply with strict
documentation requirements. Because of this regulatory burden and other
administrative burdens created by managed care, the length of a typical
physician-patient encounter has been reduced.
The Patient Medical Record. The patient medical record developed and
maintained by the physician is of paramount importance in the U.S. healthcare
system. This medical record chronicles all patient history, encounters,
medication orders, procedures, referrals and vital statistics. All transactions,
from the order of laboratory tests, medical procedures and medication
prescriptions to invoice generation, payment requests, payer documentation
compliance and clinical research data compilation are recorded in the patient's
medical record. Physicians require this information about specific patients to
diagnose accurately and prescribe appropriate treatments.
Despite increasing needs by the healthcare industry for information about
its processes and outcomes, the vast majority of clinical data is still recorded
today in handwritten or hand-typed notes filed within paper charts which cannot
be accessed or aggregated and organized electronically. Recent studies have
demonstrated that paper charts are unavailable for patient encounters up to 30%
of the time, and that the data within them is frequently inaccurate and
incomplete, missing diagnoses, allergies, medication details, and plans for
follow-up. Studies show that six out of every 100 hospital admissions are the
result of an adverse drug event of which 28% were preventable. Besides the
obvious impact on quality, studies have also shown cost consequences, such as
laboratory tests being unnecessarily duplicated 11% of the time solely because
results have been misfiled.
Growth of the Internet and Applicability to Healthcare. The Internet's open
architecture, accessibility and growing acceptance make it an increasingly
important means of information exchange for both business-to-business and
business-to-consumer interaction. Use of the Internet is rapidly expanding from
simple information publishing, messaging and data gathering to critical business
transactions and confidential communications.
We believe that the Internet has changed the electronic medical records
software environment and made computerized tools more useful and acceptable to
physicians. In the past, several factors have limited the rate of adoption by
physicians of computerized tools for creating and accessing the medical record.
First, the cost of acquiring, installing and maintaining the workstations,
servers and networks required for a conventional client-server product exceeds
the capital budgets of most physician practices. Second, there has been a
shortage of personnel skilled in implementing advanced information technology
within the physician office sector.
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Internet-hosted applications have the potential to dramatically lower the
capital and resources required of customers, insulating them from the cost and
complexity of server configuration and administration. In addition, the
availability and falling cost of personal computers, and the simple
point-and-click paradigm of the Internet have raised the level of computer usage
within the general population and clearly shown the benefit of easily accessible
digital information. Physicians have not been left behind in this diffusion of
new technology: a 1998 survey published in Modern Physician magazine reported
that 84% of doctors surveyed used the Internet for e-mail and 78% used the
Internet for educational purposes. Moreover, reports indicate that this trend
will continue as a new generation of physicians who are more familiar with
Internet technology enter the profession.
Consumer Interest in Healthcare Information. Consumer interest in
healthcare information is growing rapidly, driven in part by consumers' needs to
form their own opinions about treatment options and restrictions imposed by
their health plan, as well as a perception that physicians have less time to
explain their health conditions and treatments to them. According to a 1997
survey in the Journal of the American Medical Association, 43% of U.S. adults
who used the Internet were seeking health information. According to Cyber
Dialogue, 78% of Internet users with health insurance are interested in managing
their health insurance benefits online and 23% of all Internet users are
interested in purchasing prescription drugs online. Also according to Cyber
Dialogue, 90% of all Internet users have health insurance. In addition, the
Department of Health and Human Services has recently adopted guidelines
stipulating that individuals have a right to access their own or their
dependents' medical information. Finally, as healthcare payment models shift
more of the financial responsibility for healthcare to the consumer, we expect
consumer interest in healthcare information and treatment options to increase.
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The MedicaLogic Solution
Our solution is the Internet Health Services Center, which will integrate
the following:
o Electronic Medical Records - for physicians, Internet-hosted
applications and Internet-enabled client-server applications, used at
the point of care to document physician-patient encounters and manage
clinical information.
o Personal Health Portfolio - for consumers, a compelling Internet
application that will let them maintain a personal health portfolio,
combining portions of their physician-created electronic medical
record with personally entered information.
o Context-specific Content and eCommerce - for both consumers and
physicians, health information content and e-commerce opportunities,
precisely tailored to the patient's clinical conditions and needs
based on data in the Internet Health Record. The content and
e-commerce will be provided through strategic relationships with our
e-healthcare partners.
o Internet Health Record - a highly secure, clinically rich and deeply
structured core database for use by physicians, patients and our
strategic partners that will combine data from the electronic medical
record, the personal health portfolio and our strategic partners. This
core database will allow for the sharing of selective data among all
the participants in the Internet Health Services Center.
The MedicaLogic Internet Health Services Center
[Graphic omitted]
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The MedicaLogic solution provides the following key benefits:
Improved Quality of Care. Our solution is designed to increase patient
medical information flows among all healthcare participants, which ultimately
will result in more accurate diagnoses and more timely and appropriate
treatments. Online access to ccurate, up-to-date healthcare records will
facilitate timely and accurate determinations by physicians regarding a
patient's condition and appropriate treatment. In particular, this access could
significantly enhance the ability of providers in remote areas to provide
quality care. Using our solution, physicians will be able to enter and access
patient-specific data online at the point of care, allowing them, for example,
to review data regarding potentially harmful drug interactions, without manually
searching through the often unorganized and incomplete paper records. We believe
these and other benefits provided by our solution will result in improved
quality of care.
Empower Healthcare Consumers with Information Regarding their Healthcare.
Whether they see a physician themselves on a regular or episodic basis, or act
as a coordinator of healthcare for a child, elderly parent or other relative,
healthcare consumers want more information and more control over their
healthcare needs. Through the use of the Internet, our solution is designed to
increase information flows among all healthcare participants, including
patients, which ultimately gives patients greater control. For healthy adults,
our solution will help them gather their medical and family history and set and
achieve wellness goals. For those with significant illness together with these
persons' healthcare coordinators, our solution will allow them to manage
multiple patient records generated by different physicians, provide a
physician-patient communication channel for managing disease, deliver
educational information and offer a convenient way to purchase healthcare
products. With the adoption of legislation and guidelines that will require
providers to give patients access to their medical records, the electronic
access to healthcare records that will be provided to patients and others
through our solution is timely and significant. Likewise, our solution will
permit consumers to communicate electronically with other healthcare
participants, such as payers and suppliers, giving them quicker, more efficient
and more effective access to prescription drugs, payment services and
information and other health-related supplies and services.
Improved Physician-Patient Relationship. Our Internet solution is designed
to facilitate communication between physicians and patients. We believe improved
physician access to information at the point of care will result in
higher-quality clinical interaction between physicians and patients. Likewise,
providing patients with better access to information and electronic
communication with physicians will result in a better understanding of physician
instructions by patients and, ultimately, a lower risk of treatment error.
Reduced Healthcare Costs. Our solution is designed to reduce healthcare
costs and improve the management of patient records by reducing the
inefficiencies of manual and paper-based transactions, eliminating redundant
data entry, reducing transcription costs, reducing hospitalizations related to
harmful drug interaction events, reducing repetitive and unnecessary laboratory
tests resulting from inaccurate or misplaced records, rationalizing entry and
availability of Health Care Financing Administration-mandated patient chart and
account coding information and decreasing the communication inefficiencies
created by isolated proprietary
45
systems. In addition, through greater efficiency and better access to patient
medical records, health maintenance should be improved, thereby reducing the
costs of treatment.
Our Growth Strategy
Our objective is to be the leading provider of Internet-based electronic
health record information. Our strategy to achieve this objective has the
following key elements:
Gain Rapid Adoption by Physicians of our Electronic Medical Records
Solutions. We intend to build on our position as the leading provider of
electronic medical record solutions to define the industry standard for this
service. Using Internet technology, we are delivering a solution at a
dramatically lower cost than was previously possible, which will allow the
physician to reduce his or her operating costs from the first month of use. We
believe the value of our solution to physicians will increase and its adoption
rate will accelerate as physicians standardize on electronic records and it
becomes possible to exchange electronic medical records in the course of
referrals and transfers of care. Another key component of creating
physician-friendly software is our unique KnowledgeBank, an Internet-based
community repository that allows physicians to submit their ideas for the design
and layout of clinical encounter forms. The best ideas are implemented and then
made available to all physician customers at no additional cost. As a result of
KnowledgeBank, the refinement and applicability of our product for specific
practices has been continually increasing. As of August 31, 1999, our electronic
medical record solutions were being used by more that 7,000 health
professionals, including approximately 3,000 physicians, constituting an
estimated base of over 7 million electronic patient records.
Offer the Most Compelling Web Destination for Healthcare Consumers. We
believe that our Web-site, code-named AboutMyHealth.net, will be highly valued
by consumers. This Web site is currently being tested in a pilot program and
will be released commercially in late 1999. The Web site will provide consumers
with access to portions of their physician-generated medical records, enable
consumers to communicate with physicians and contain highly personalized content
surrounding a patient's personal health data. We also believe that as word
spreads among consumers of this new level of healthcare service, consumers'
usage will increase physician interest in adopting the electronic medical
records solutions that make the Internet Health Record possible.
Become a Leading Driver of Clinical e-Commerce Transactions. Because of our
unique position at the point of care, where clinical decisions are made that
influence the majority of healthcare expenditures, our systems can provide
decision support that makes healthcare more consistent and efficient. For
example, in Logician, the physician can quickly select a drug, screen the
patient's medical record for harmful drug interactions, check the cost and
confirm the acceptability of the chosen drug within the formulary of that
patient's health plan, all before the physician has released the prescription to
the patient. Without electronic medical records, none of the automatic checks
are made, and prescriptions may be rejected when the patient arrives at the
pharmacy, creating inefficiencies and frustrations. The desirability of using
our systems at the point of care will position us to become a leading driver of
clinical e-commerce transactions,
46
which will be completed through strategic partnerships with the appropriate
healthcare stakeholders, such as pharmacies, laboratories and electronic claims
clearinghouses.
Capitalize on the Value of our Large, Clinically-Rich Database. As
physicians and patients use our systems, we will develop a large and
clinically-rich database. With the consent of providers and patients, and in
accordance with legal requirements, the aggregated statistical and
epidemiological data may be marketed to a range of interested parties in the
healthcare industry. These include clinical research organizations,
pharmaceutical companies and governmental agencies. We believe that the
information in this database has the potential to become one of the most
valuable resources in the healthcare industry.
Products and Markets
The primary target markets for our solution consist of healthcare providers
and healthcare consumers. The healthcare provider market is divided into two
segments: physicians in private practice and physicians in integrated healthcare
delivery systems. In addition, with appropriate patient consent, and in
compliance with applicable law, we intend to aggregate anonymous data contained
in the Internet Health Record and market the information to a variety of parties
in the healthcare industry.
Physicians in Private Practice. There are approximately 450,000 physicians
in private practice, constituting approximately 75% of the practicing physician
population in the United States. Our product offering for this market is
Logician Internet, which we introduced commercially in September 1999. Logician
Internet provides the following benefits:
o The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
o The ability to verify automatically compliance with Health Care
Financing Administration documentation guidelines for the level of
service billed;
o The ability to obtain secure and rapid access to key patient clinical
information from any Web browser;
o The ability to be used at the point of care in the exam room, without
requiring a continuous Internet connection;
o The ability to securely store electronic records at our data center;
and
o Additional planned benefits in future releases including integration
of laboratory results, electronic prescription transmission, claims
submission and eligibility checking as well as the ability of
physicians to communicate with patients using AboutMyHealth.net by
sharing records data and exchanging messages via patients' Personal
Health Portfolios.
To minimize the challenges for nontechnical users in installing software
and obtaining Internet access, Logician Internet will be available as a
complete, ready-to-run solution. For a monthly fee, a physician will receive a
complete package that includes an ultramobile laptop computer from Dell Computer
Corporation, pre-installed voice recognition software, Internet access service
and the Logician Internet hosted application with storage for an unlimited
number
47
of charts. For users who already have a suitable computer and Internet access,
the hosted application and storage service will be made available at a lower
monthly fee.
Physicians in Integrated Healthcare Delivery Systems. Integrated healthcare
delivery systems currently employ approximately 150,000 physicians. Our
solutions for this market include Logician, a comprehensive client-server based
electronic medical record software solution, and Logician Internet, depending on
the needs of the institution. Clients will be able to migrate between Logician
and Logician Internet in future releases. After delivering first-generation
electronic medical record products for the PC-DOS environment from 1990 to 1995,
we released Logician for the Windows client-server environment in 1996 and have
delivered three major upgrade releases since then. Our current customers include
Allina Health System, Baylor College of Medicine, Carilion Health System,
Providence Health System, Riverside Health System and more than 30 others.
Logician provides the following benefits specially designed for this
market:
o Extensive clinical decision support to improve outcomes, including
preventive care reminders, drug interaction and allergy checking and
formulary management;
o Enhanced ability to measure and manage patient populations using
query, reporting and intervention tools;
o The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
o The ability to automatically verify compliance with Health Care
Financing Administration documentation guidelines for the level of
service billed, which will help capture revenue for which physicians
are not being adequately reimbursed today; and
o The ability to be used at the point of care, in the exam room.
In the future, Logician will also provide the following benefits:
o The ability to obtain secure and rapid access to key patient clinical
information from any Web browser;
o The ability to store electronic records at our data center securely;
o The ability of physicians to communicate with patients using
AboutMyHealth.net by sharing records data and exchanging messages via
their Personal Health Portfolio; and
o Additional planned benefits in future releases including integration
of laboratory results, electronic prescription transmission, claims
submission and eligibility checking.
Logician interfaces have been developed and implemented with major vendor
systems encountered in the integrated healthcare delivery system environment,
including laboratory systems, practice management systems and transcription
systems. We intend to expand the interfacing capabilities of Logician to include
e-commerce transaction capabilities such as electronic prescription
transmission. We will continue to deliver an enterprise-wide electronic
48
medical record solution to this market, evolving from its traditional
license-based pricing to monthly subscription pricing. We also expect to enhance
the enterprise product's compatibility with the Internet and the
interconnectivity between Logician and Logician Internet.
Healthcare Consumers. We estimate that at least 75% of Americans are
healthcare consumers, whether they see a physician themselves on a regular or
episodic basis, or act as a coordinator of healthcare for a child, elderly
parent, or other relative. Healthcare consumers want more information and more
control over their healthcare. To provide this, we will offer a Web site
code-named AboutMyHealth.net, which is currently in a pilot program and which we
expect to be commercially available in late 1999. AboutMyHealth.net will provide
the following benefits for healthcare consumers:
o The ability to securely view summary data from the physician,
including medications, diagnoses, allergies, health directives and
laboratory results;
o The ability to enter information about medical and family history,
wellness goals and behaviors into a Personal Health Portfolio;
o The ability to integrate these two sources of data into the Internet
Health Record, providing useful information that can be shared
selectively with other individuals and health professionals;
o The ability to conveniently communicate with their personal physician,
to request appointments, obtain medication refills, ask questions or
clarify their records;
o The ability to access health information content that is tailored to
their personal needs through data in the Internet Health Record; and
o The ability to engage in commerce, which would also be tailored to
specific medical needs through data in the Internet Health Record.
The Personal Health Portfolio will have the appeal of a personalized Web
page while providing specialized tools for health data entry and display, and
specific viewing privileges controlled by the individual. For a child, it will
provide a visual record of growth and development as well as a timeline of
medical incidents. For healthy adults, it will help them gather their medical
and family history and set and achieve wellness goals. For those with
significant illness together with these persons' healthcare coordinators, it
will allow them to manage multiple patient records generated by different
physicians, provide a physician-patient communication channel for managing
disease, deliver educational information and offer a convenient way to purchase
medical products.
Other Healthcare Stakeholders. As a result of our position as a provider
and custodian of personal and professional health data on the Internet, we have
the opportunity to become a driver of healthcare e-commerce transactions, such
as placing prescription orders with pharmacies, and to become a healthcare
infomediary, providing aggregated and anonymous health data to organizations
such as clinical research organizations. Subject to the consent of individual
patients and physicians, and compliance with applicable legal requirements,
these opportunities include:
49
o Pharmacy - delivery of new and refill prescription orders from
physicians and patients to pharmacies and/or pharmacy benefit
managers;
o Laboratory - delivery of orders and return of results to physicians
and patients;
o Payers - direct submission of claims from physicians via electronic
data interchange claims clearinghouses and electronic bill
presentment/payment for patients via their Personal Health Portfolio;
o Clinical research organizations - enhanced recruitment of patients for
studies through automated screening and notification;
o Healthcare organizations (government and private) - aggregated and
anonymous data about the health of certain populations for
epidemiologic research, planning and management;
o Pharmaceutical marketing research - more accessible data on the use
and outcomes of drugs; and
o Advertising/sponsorship - highly personalized and targeted marketing
to consumers and physicians for healthcare-related products or
services.
Customer Service and Support
We believe effective customer service is essential to both attracting and
retaining physician usage of our electronic healthcare applications as well as
attracting consumers and retaining them as customers of our Internet-based
services. We are acutely sensitive to the demands for person-to-person
responsiveness of the healthcare community. We provide a wide range of customer
support services through a staff of customer service personnel, multiple call
centers and an e-mail help desk. We also offer Web-based support services that
are available 24 hours a day, seven days a week and are frequently updated to
improve existing information and to support new services. Our ongoing telephone
support is accessible by a toll-free telephone number and is available from
either 5 a.m. to 6 p.m. Pacific Time, Monday through Friday or, for an
additional charge 24 hours a day, seven days a week. Our operators screen all
requests for telephone support and direct the call to the appropriate customer
service personnel. Technical support personnel are responsible for consulting
with our strategic partners regarding technical support issues and for resolving
technical problems encountered by users, strategic partners or other parties. We
also employ technical support personnel who work closely with our direct sales
force, distribution partners and customers. We provide our customers with the
ability to purchase maintenance for our applications and services, which
includes technical support and upgrades. We also provide training programs for
our customers.
In addition, we provide enterprise planning, site evaluation, work flow
preparation, hardware and software installation, interface development and
installation and training of physicians and their staff in connection with the
implementation of our Logician application. Enterprise and site evaluation helps
us understand how best to implement our Logician application within the
enterprise and physician's office work flow. The objective of the implementation
process is to maximize the value of electronic medical records to the enterprise
and the physician's practice.
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Significant Customers
We market our products and services to physicians and large integrated
healthcare delivery networks. See "-Products and Markets." Because of our
historical reliance on large integrated healthcare delivery networks, a large
portion of our revenue has been derived from relatively few customers. In 1997,
we derived approximately 20% of our revenue from VHA, Inc., one of our
distribution partners, and approximately 12% from Wake Forest Baptist Medical
Center. In 1998, we derived approximately 21% of our revenue from VHA. In the
first six months of 1999, we derived approximately 50% of our revenue from
Baylor College of Medicine.
Our products and services are currently being used by 40 integrated
healthcare delivery networks, including:
o Allina Health System;
o Baylor College of Medicine;
o Carilion Health System;
o Christiana Care Health System;
o Eastern Maine Healthcare;
o MeritCare Health System;
o Promina Health System;
o Providence Health System;
o Riverside Physician Services; and
o Wake Forest University Baptist Medical Center.
Sales and Marketing
Our sales and marketing programs are organized around our main customer
segments: integrated healthcare delivery systems, physicians in private practice
and healthcare consumers. Our products and services are distributed by a
nationwide direct sales force, a complementary inside sales team and a select
number of strategic distribution partners, and directly through the Internet. We
also partner with national consulting firms and systems integrators to deliver
complete information technology solutions for large system customers.
Physicians in Private Practice. We promote our products and services to
physicians in private practice with programs designed to take advantage of the
value of peer-to-peer relationships in the physician community. In contrast to
the national image-building campaign required for sales to large health systems,
we are building our individual physician sales and marketing campaign around
activities that will stimulate physician referrals of Logician Internet. Sales
will be offered primarily through online subscription capabilities supported by
an inside telephone sales team. Programs for this market segment will include:
o A team of physicians who use our products and who are trained and
compensated to present at more than 200 national, state and local
physician society meetings from the fourth quarter of 1999 through
2000;
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o Promotion of free trial periods and low cost bundled hardware
packages;
o A physician incentive program that offers every physician subscribing
to Logician Internet a points-based redeemable reward for referring
fellow physicians;
o An affiliate program for e-commerce partners and professional
associations;
o A media relations campaign targeted at physician publications and
local media; and
o Online and offline brand and product advertising aimed at early
adopters and high volume specialties.
Integrated Healthcare Delivery Systems. We approach the integrated
healthcare delivery system market primarily through direct sales and
distribution partners. Our access to premier reference accounts plays a large
part in the success of the sales process. Direct sales are supported by
marketing programs that include:
o Participation at national health information technology trade
conferences;
o A speakers program placing current customers and executives before key
decision makers of prospective customers;
o An editorial and news presence in the healthcare information
technology press supported by targeted advertising of our brand;
o Publication of industry-reference briefs and texts addressing critical
adoption issues; and
o Internet access to online product and service information,
demonstrations and promotional trials and offline publications.
Healthcare Consumers. Marketing programs for the healthcare consumer market
are likely to be more successful when they are supported by the existing
relationship between the physician or local health system and their patients.
Based on that premise, we will be launching a Web site code-named
AboutMyHealth.net, which is currently being tested in a pilot program and which
we expect to release commercially in late 1999, that is co-branded with local
integrated healthcare delivery networks. In addition, promotion of
AboutMyHealth.net will include a national brand building campaign designed to
create interest by healthcare consumers through physicians. Consumers will
register for membership at no charge at the AboutMyHealth.net site or through a
co-branded provider partner site. Marketing programs will include:
o Co-branded direct mail and point of service promotional campaigns
developed and sponsored by us and executed with provider partners;
o Consumer brand building in communities with a high concentration of
physician users of electronic medical record products that can be
interfaced to AboutMyHealth.net;
o Online advertising with consumer e-commerce and content partners; and
o An aggressive, locally-based media relations campaign targeting people
with chronic disease and women, who tend to be the primary health
coordinators of their families.
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Our executive sales and marketing management is located in our Hillsboro,
Oregon office with significant Internet marketing and business development
resources located in our San Francisco, California facilities, while our account
representatives are deployed across the United States. As of August 31, 1999, we
employed 60 people in the areas of sales and marketing.
Strategic Relationships
Because our products and services are used at the point of care, we are
well positioned to offer electronic transaction services to both physicians and
their patients. To pursue these opportunities, we will form relationships with
strategic partners who can provide these electronic transaction services,
including electronic processing of claims, automatic filling and refilling of
prescriptions and electronic transmission of laboratory results. In addition, we
will enter into strategic partnerships with vendors who will provide medical
content to our customers as well as partnerships that will allow our physician
customers to have access to computer hardware on which they may use our products
and services.
To date, we have entered into strategic relationships with the following
companies:
CVS.com. CVS.com, a subsidiary of CVS Corporation, is a leading online
pharmacy and source of health, beauty and wellness products. We have entered
into an agreement with CVS.com that provides access to an online licensed
pharmacy that will receive and fill orders for prescriptions generated from
physicians and patients using our Internet-based products. The one year
agreement provides that CVS will pay a transaction fee to us for each
prescription filled by its pharmacy pursuant to an order received through our
Internet-based products. The agreement may be renewed for subsequent one-year
terms.
Dell. Dell Marketing L.P. is a subsidiary of Dell Computer Corporation, a
leading manufacturer of personal computers and related equipment and a
shareholder of our company. We have entered into a nonexclusive agreement with
Dell Marketing L.P. providing for a mutual marketing relationship to promote our
respective products and services, including hyperlinks between our respective
Web sites and cooperative marketing efforts which may include trade shows,
direct mail campaigns and sales training. Pursuant to the agreement, we
designated Dell as a preferred provider of notebooks, personal computers and
other hardware, and we granted Dell a nonexclusive right and license to
reproduce and install our software programs and related materials on Dell
branded hardware products. We will promote the Dell products with our
pre-installed software programs.
Envoy. Envoy Corporation is a leader in electronic transaction processing
in the healthcare industry. We have entered into an agreement with Envoy that
provides us with a nonexclusive and nontransferable license to Envoy's services
for the processing of certain healthcare transactions, including patient
eligibility and referral checks and medical claims submissions. Envoy will also
provide technical assistance in developing new functionality to facilitate
claims submission. Envoy will charge us transaction fees for use of its
services. These fees will be passed on to our Logician Internet customers who
elect to subscribe to this premium service, for which we will charge an
additional fee.
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Pursuant to the agreement, Envoy will rebate to us a portion of the transaction
fees received by Envoy for batch electronic transactions generated through
Logician Internet that are submitted by Envoy to its participating payers. We
expect this service to become available to our Logician Internet subscribers in
early 2000.
Competition
High growth, intense competition, and technological change characterize the
market for electronic healthcare information services and e-commerce. In
addition to direct competitors in the electronic medical records market, none of
which has a significant share of the market, we face competition from many
companies with significantly greater financial resources, well-established brand
names and large installed customer bases. We expect significant competition
from:
Traditional Healthcare Information System Vendors. These vendors, including
Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC,
Medic, a division of Misys PLC, and Shared Medical Systems Corporation, focus on
providing information systems to large healthcare enterprises and physician
practice groups. They have large installed bases of customers. Although they
have not traditionally focused on providing electronic medical record solutions,
they have begun to pursue a variety of Internet strategies, some of which could
provide functions competitive with our products and services.
Internet Healthcare Companies. Internet healthcare companies are focusing
on a wide variety of areas, including:
o Automating financial, administrative and clinical transactions, such
as Healtheon Corporation and CareInsite, Inc.;
o Attracting physicians with journalistic content, such as Medscape,
Inc. and Physicians Online, Inc.; and
o Targeting the health consumer area, including drkoop.com, Inc. and
iVillage Inc. for content, as well as online pharmacies, such as
drugstore.com, Inc.
Each of these companies can be expected to compete with us within certain
segments of the evolving Internet healthcare market, but it is also likely that
some of them will serve in the role of our partner or vendor. Major Internet
companies, including those not currently specializing in the healthcare
industry, may also enter our markets.
We may be unable to compete successfully against these companies. The most
significant competitive factors include clinical focus, service reliability,
breadth of product offerings, price/performance, network security, ease of
access and use, content bundling, customer support, brand recognition and
operating experience. We believe we will be able to compete favorably with
respect to these factors.
54
Technology
Our Internet Health Services Center consists of a fault tolerant
configuration of Web and database server computers interconnected through
redundant, high speed network components. The Center is currently located at a
secure third-party data center. A new, state-of-the-art data center is being
constructed at our San Francisco office, together with backup facilities at our
corporate headquarters in Hillsboro, Oregon. All data centers incorporate
advanced technology to provide a high degree of security in the transmission of
highly sensitive and confidential patient medical record data over the Internet.
This includes strict authentication, sophisticated data encryption techniques,
strong network firewalls, stringent personnel policies, tightly controlled
physical access to the data centers and independent overall security audits of
those sites. All of our services will be linked to advanced storage systems that
provide data protection through techniques such as replication. We also will
maintain on-site backup power systems in the San Francisco data center and will
install similar facilities in our back-up data center in Oregon. These
safeguards are designed to provide a reliable and secure environment for the
storage and exchange of confidential patient and customer data. Although we
believe our facilities are highly resistant to systems failure and sabotage, we
are developing, and are in the process of implementing, a disaster recovery and
contingency operations plan.
Development and Engineering
We believe our future success will depend on our ability to continue to
maintain and enhance our Internet Health Services Center, Logician applications
and collateral services. We have developed applications and services in house,
although future extensions to our products and services may come through
acquisitions as well. In any event, we will continue to work closely with other
companies in our development efforts.
We have several significant projects currently in development. These
include the continued enhancement of Logician, development of new services such
as Logician Internet and our physician and consumer oriented Web sites and
development of interfaces with our strategic partners' and others' technology.
As of August 31, 1999, we employed 100 people in the areas of applications
design, research and development, quality assurance and technical support.
Rapid technological developments and evolving industry standards
characterize the emerging market for Internet-based electronic medical records
and associated transaction processing. The emerging nature of this market and
its rapid evolution will require that we continually improve the performance,
features and reliability of Logician and the Internet Health Services Center,
particularly in response to competing offerings.
55
We must maintain a high standard and appetite for the most effective and
innovative technologies. The success of new product and service introductions is
dependent on several factors, including:
o Proper definition of new applications or services;
o Appropriate staffing of expertise on the particular assignment;
o Timely completion and introduction of new products and services; and
o Differentiation of new products and services from those of our
competitors.
Government Regulation and Healthcare Reform
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare organizations. Proposals to reform the U.S. healthcare system have
been and will continue to be considered by the U.S. Congress. These programs may
contain proposals to increase or decrease government involvement in healthcare
or otherwise change the operating environment for our potential customers.
Healthcare organizations may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments, including
those for our products and services. On the other hand, changes in the
regulatory environment have in the past increased and may continue to increase
the needs of healthcare organizations for cost-effective information management
and thereby enhance the marketability of our applications and services. We
cannot predict with any certainty what impact, if any, such proposals or
healthcare reforms might have on our business, financial condition and results
of operations.
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions and identifiers, prescribed security measures
and other provisions within two years after the adoption of final regulations by
the Department of Health and Human Services. It will be necessary for our
products and services to be in compliance with the proposed regulations.
Congress is also likely to consider legislation that would establish uniform,
comprehensive federal rules about individuals' rights to access their own or
someone else's medical information within a "Patient Bill of Rights." This
legislation would likely define what is to be considered protected health
information and outline steps to ensure the confidentiality of this information.
The proposed Health Information Modernization and Security Act would provide for
establishing standards and requirements for the electronic transmission of
health information. In addition, the Department of Health and Human Services has
recently adopted guidelines stipulating that individuals have a right to access
their own or their dependents' medical information.
The United States Food and Drug Administration is responsible for assuring
the safety and effectiveness of medical devices under the Federal Food, Drug and
Cosmetic Act. Computer applications and software are considered medical devices
and subject to regulation by the FDA when they are indicated, labeled or
intended to be used in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. We do not believe that any of our current
applications or services are subject to FDA jurisdiction or regulation; however,
we plan to expand our
56
application and service offerings into areas that may subject us to FDA
regulation. We have no experience in complying with FDA regulations. Our
compliance with FDA regulations could prove to be time consuming, burdensome and
expensive, which could have a material adverse effect on our ability to
introduce new applications or services in a timely manner.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial regulation by the federal and state governments. State laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Regulations governing patient confidentiality rights
are evolving rapidly. Additional legislation governing the dissemination of
medical record information has been proposed at both the state and federal
level. This legislation may require holders of this information to implement
security measures that may require substantial expenditures by us. Changes to
state or federal laws may materially restrict the ability of healthcare
providers to submit information from patient records using our applications.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as online content, user privacy,
pricing and characteristics and quality of applications and services. For
example, although it was held unconstitutional, the Communications Decency Act
of 1996 prohibited the transmission over the Internet of some types of
information and content.
Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. The United States or any
state may adopt legislation purporting to protect such privacy. Any such
legislation could affect the way in which we are allowed to conduct our
business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business,
financial condition and results of operations. Moreover, it may take years to
determine the extent to which existing laws governing issues such as property
ownership, libel, negligence and personal privacy are applicable to the
Internet.
International regulations with respect to the Internet, privacy and
transborder data flows are considerably more developed than regulations in the
United States. We intend to develop applications and services to be used on a
worldwide basis and, consequently, will be required to comply with international
regulations regarding the Internet and electronic commerce, as well as with U.S.
regulations. We have not evaluated the effect that these regulations would have
on our business. These regulations also may have an adverse effect on our
ability to compete internationally.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and by
certain foreign governments that could impose taxes on the sale of goods and
services and some other Internet activities. A recently passed law places a
temporary moratorium on certain types of taxation on Internet commerce. We
cannot predict the effect of current attempts at taxing or regulating commerce
57
over the Internet. Any legislation that substantially impairs the growth of
e-commerce could have a material adverse effect on our business, financial
condition and results of operations.
We expect to conduct our healthcare e-commerce business in substantial
compliance with all material federal, state and local laws and regulations
governing our operations. However, the impact of regulatory developments in the
healthcare industry is complex and difficult to predict. We cannot assure you
that we will not be materially adversely affected by existing or new regulatory
requirements or interpretations. These requirements or interpretations could
also limit or prohibit our ability to use the Internet for the methods of
healthcare e-commerce we are developing.
Intellectual Property Rights
We believe patent, trade secret and copyright protection are less
significant to our success than our ability to develop new products and
services. We rely on a combination of trademark, trade secret and copyright law,
and contractual restrictions to protect the proprietary aspects of our
technology. We presently have several federal trademark registrations, including
"MedicaLogic," "Practice With Knowledge," "Logician," "SIMPL" and "LinkLogic"
and numerous pending trademark applications, including "KnowledgeBank,"
"AboutMyHealth," "Quickstep" and "ScheduLogic." We are currently preparing six
applications for U.S. patents. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We presently have nine pending copyright applications for our
software, tools and KnowledgeBank forms, reports and templates. We license our
software under signed license agreements, which impose restrictions on the
licensee's ability to utilize the software. Finally, we seek to avoid disclosure
of our intellectual property by requiring employees and consultants with access
to our proprietary information to execute confidentiality agreements with us and
by restricting access to our source code.
The steps taken by us to protect our proprietary rights may be inadequate,
we may not be able to secure trademark or service mark registrations for marks
in the United States or in foreign countries and third parties may infringe upon
or misappropriate our copyrights, trademarks, service marks and similar
proprietary rights. In addition, effective copyright and trademark protection
may be unenforceable or limited in certain foreign countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of our services. Our competitors or others may adopt product or service names
similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion. Moreover, because domain names derive
value from the individual's ability to remember such names, our domain name may
lose its value if, for example, users begin to rely on mechanisms other than
domain names to access online resources. Our inability to protect our marks
adequately could have a material adverse effect on the acceptance of our brand
and on our business, financial condition and results of operations. In the
future, litigation may be necessary to enforce and protect our trade secrets,
copyrights and other intellectual property rights. Litigation would divert
management resources and be expensive and may not effectively protect our
intellectual property.
58
Employees
As of August 31, 1999, we employed 225 persons on a full-time basis, of
whom there were 100 in technical development and support, 60 in sales and
marketing, 26 in professional services, 17 in operations and networks and 22 in
finance and administration. None of our employees is a member of a labor union
or is covered by a collective bargaining agreement and we have never experienced
a work stoppage. We believe we have good relations with our employees.
Facilities
Our executive offices are located in Hillsboro, Oregon in approximately
103,000 square feet of leased space under a lease that expires in December 2007.
We also lease approximately 38,000 square feet of office space in San Francisco,
California under a lease that expires in May 2009. We believe our facilities are
adequate for our current operations.
Legal Proceedings
We have been named as a defendant in an action filed by AllCare Health
Management Systems, Inc. in the United States District Court for the Northern
District of Texas. The complaint alleges that MedicaLogic and eleven other named
defendants are infringing a patent relating to an integrated healthcare system.
Pursuant to the complaint, the plaintiff is seeking to recover damages in an
unspecified amount. We believe the suit against MedicaLogic is without merit and
intend to vigorously defend against such claims.
This litigation, whether or not determined in our favor or settled by us,
may be costly and may divert the efforts and attention of our management from
normal business operations.
We are not currently subject to any other material legal proceedings.
59
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth information with respect to our executive
officers, directors and key employees as of August 31, 1999.
Name Age Position
---- --- --------
Mark K. Leavitt....................... 49 Chairman of the Board and Chief Executive Officer
David C. Moffenbeier.................. 48 Chief Operating Officer and Director
Harvey J. Anderson.................... 35 Senior Vice President, General Manager of Internet
Operations
Blackford Middleton................... 41 Senior Vice President, Clinical Informatics
Richard L. Samco...................... 49 Senior Vice President and Chief Technology Officer
Thomas M. Watson...................... 49 Senior Vice President, Worldwide Sales and Professional
Services
Eliot H. Bergson...................... 40 Vice President, Internet Content Programming
Guy E. Field.......................... 44 Vice President, Finance
Joseph M. Godsil...................... 34 Vice President, Network Architecture and Data Center
Operations
D. Cameron Lewis...................... 48 Vice President, Internet Marketing and eCommerce
Strategies
C. Sue Reber.......................... 53 Vice President, Marketing and Corporate Communications
Charles D. Burwell.................... 54 Director
Bruce M. Fried........................ 49 Director
Ronald H. Kase........................ 41 Director
Neal Moszkowski....................... 33 Director
Mark A. Stevens....................... 39 Director
Ronald R. Taylor...................... 51 Director
David W. Wroe......................... 52 Director
Mark K. Leavitt founded MedicaLogic in 1985 and has served as its Chairman
of the Board and Chief Executive Officer since its inception. From December 1997
to June 1998, Dr. Leavitt served as a director of Physician Partners, Inc., a
physician practice management company. From 1992 to 1996, Dr. Leavitt served as
a faculty member for St. Vincent Internal Medicine Practice and concurrently
served as Medical Director and Regional Information Systems Director for Sisters
of Providence Health System from 1992 to 1994. Dr. Leavitt operated a private
practice of internal medicine from 1982 to 1992. Dr. Leavitt received a B.S.
from the University of Arizona and an M.S. and a Ph.D. in electronic engineering
from Stanford University. Dr. Leavitt received an M.D. from the University of
Miami and served as a resident in internal medicine at Oregon Health Sciences
University from 1979 to 1982.
60
David C. Moffenbeier has served as Chief Operating Officer and as a
Director since 1994. From 1993 to 1994, Mr. Moffenbeier served as chairman of
the board of directors of Summit Design Inc., a supplier of software tools for
integrated circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics
Corp., a manufacturer of hardware and software for electronic design automation,
where he served as a director from 1981 to 1993 and the company's chief
financial officer from 1981 to 1984, its vice president of international sales
from 1985 to 1988 and its vice president of worldwide sales from 1989 to 1993.
He currently serves on the board of directors of Providence Good Health Plan, a
health care management organization, and North Pacific Group, Inc., a wholesale
distributor of commodities. Mr. Moffenbeier received a B.A. from Wesleyan
University and an M.B.A. from Harvard University. Mr. Moffenbeier is a certified
public accountant.
Harvey J. Anderson has served as Senior Vice President, General Manager of
Internet Operations since March 1999. From 1996 to 1999, Mr. Anderson served as
the assistant general counsel for Netscape Communications Corp., a provider of
software, services and Web site resources for the Internet. From 1993 to 1996,
Mr. Anderson practiced intellectual property law with McCutchen Doyle Brown &
Enersen, LLP, a law firm in San Francisco, California. Mr. Anderson received a
B.S. from Marquette University and a J.D. from the University of San Francisco
School of Law.
Blackford F. Middleton has served as Senior Vice President, Clinical
Informatics since March 1999. From 1994 to 1999, Dr. Middleton served as our
Vice President, Clinical Informatics. From 1992 to 1994, Dr. Middleton served as
the medical director for information management and technology at Stanford
University. Since 1995, Dr. Middleton has served on the Computer-based Patient
Record Institute board of directors and currently serves as its chairman. Dr.
Middleton is a general internist who practiced in academic medical centers for
over 15 years and received a B.A. from the University of Colorado and an M.D.
from Stanford University and additional training in epidemiology and public
health at Yale University.
Richard L. Samco has served as Senior Vice President and Chief Technology
Officer since March 1999. From 1991 to 1999, Mr. Samco served as our Vice
President, Engineering and Vice President, Product Development. Mr. Samco was a
co-founder of Mentor Graphics Corp. in 1981 and served in various engineering
and management positions from 1981 to 1991. Prior to 1981, Mr. Samco held
various engineering management positions with Tektronix Inc., a maker of high
technology products, and Burroughs Corp., a leading computer corporation now
known as Unisys Corporation. Mr. Samco received a B.S. from Stanford University.
Thomas M. Watson has served as Senior Vice President, Worldwide Sales and
Professional Services since March 1999. From 1997 to 1999, Mr. Watson served as
our Vice President, Sales. From 1989 to 1997, Mr. Watson served as vice
president of sales at Phamis Inc., a leading provider of healthcare information
systems solutions. Mr. Watson received a B.A. from Drexel University.
Eliot H. Bergson has served as Vice President, Internet Content Programming
since May 1999. From 1998 to 1999, Mr. Bergson served as acting director of
content and production at Network Associates, Inc., a network security and
management software company. From 1995 to
61
1998, he served as editor-in-chief at Netscape Communications Corp. From 1994 to
1995, Mr. Bergson served as editor for both Online Design, a publication for
professional designers, photographers and illustrators, and HotWired, an
Internet site on Web technology and culture. From 1992 to 1994, Mr. Bergson
served as editor for NeXTWORLD, a publication covering the NEXT and NEXTSTEP
markets. Mr. Bergson received a B.A. from the University of Vermont.
Guy E. Field has served as Vice President, Finance since 1998. From 1994 to
1997, Mr. Field served as the Corporate Controller of MedicaLogic. From 1983 to
1994, Mr. Field held management positions in treasury, finance, marketing and
major account management with Mentor Graphics Corp. He has served on the board
of directors of the Software Association of Oregon since 1998. Mr. Field
received a B.A. from Loyola University in Los Angeles and is a certified public
accountant.
Joseph M. Godsil has served as Vice President, Network Architecture and
Data Center Operations since May 1999. From 1996 to 1999, Mr. Godsil served as
area engineering manager at Netscape Communications Corp. From 1994 to 1996, he
served as regional engineer for Sun Microsystems, Inc., a leading provider of
hardware, software and services for the Internet. Mr. Godsil received a B.S.
from Millikin University in Decatur, Illinois.
D. Cameron Lewis has served as Vice President, Internet Marketing and
eCommerce Strategies since May 1999. From 1998 to 1999, Mr. Lewis served as
director of electronic commerce and Internet operations at Network Associates,
Inc. From 1995 to 1998, Mr. Lewis served as group manager of the electronic
commerce group and acting vice president of customer marketing at Netscape
Communications Corp. From 1994 to 1995, Mr. Lewis served as vice president of
sales and marketing for Magellan Interactive. Mr. Lewis received a B.A. from
the University of Western Ontario and an executive business degree from the
University of Toronto.
C. Sue Reber has served as Vice President, Strategic Marketing and
Corporate Communications since March 1999. From 1993 to 1999, Ms. Reber served
as Vice President of Marketing. Prior to joining MedicaLogic, Ms. Reber had more
than 15 years of experience in healthcare sales and marketing in managed care,
medical equipment distribution and hospital management. She received a nursing
degree from the Johns Hopkins Hospital School of Nursing and received an M.B.A.
from St. Mary's College in Emmitsburg, Maryland.
Charles D. Burwell has been a director since 1997. Since 1993, Mr. Burwell
has served as Senior Vice President of VHA, Inc., a healthcare alliance. As head
of Information Services, he oversees activities associated with VHA's healthcare
information technologies and VHA's management information systems team. Mr.
Burwell received a B.A. from Northeastern Oklahoma University.
Bruce M. Fried has been a director since 1998. Mr. Fried is a partner and
chair of the healthcare practice group at Shaw Pittman Potts & Trowbridge, a law
firm in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care
Financing Administration's Director of the Center for Health Plans and
Providers, where he was responsible for policy development and execution and
operations for the Medicare program. From 1994 to 1995, Mr. Fried was vice
62
president of federal affairs at FHP International Corporation, one of the
nation's largest managed care organizations. Mr. Fried received a B.A. and a
J.D. from the University of Florida.
Ronald H. Kase has been a director since July 1994. Mr. Kase joined New
Enterprise Associates, a venture capital investment firm in 1990 and has been a
general partner since May 1995. Mr. Kase serves on the board of directors of
Endocardial Solutions, Inc., a manufacturer of minimally invasive diagnostic
healthcare equipment, and several privately-held information technology and
healthcare companies. Mr. Kase received a B.S. from Purdue University and
received an M.B.A. from the University of Chicago.
Neal Moszkowski has been a director since May 1999. Since 1998, Mr.
Moszkowski has served as a partner of Soros Private Equity Partners, LLC, a
venture capital investment firm. From 1993 to 1998, Mr. Moszkowski was an
executive director in the Principal Investment Area of Goldman, Sachs
International and a vice president of Goldman, Sachs & Co. Mr. Moszkowski serves
on the board of directors of Integra Life Sciences Holdings Corporation, a
developer and marketer of medical products, implants and biomaterials, Crystal
Gas Storage, Inc., a natural gas storage company, Bluefly, Inc., an off-price
apparel Internet retailer, and several private companies. Mr. Moszkowski earned
his B.A. from Amherst College and an M.B.A. from Stanford University.
Mark A. Stevens has been a director since 1994. Since 1989, Mr. Stevens has
been a principal of Sequoia Capital venture funds. Mr. Stevens serves on the
boards of directors of Aspect Development, Inc., a provider of solutions for
component and supplier management, Nvidia Corp., a supplier of 3D graphics
processors and software, Pixelworks, Inc., an electronic media production
company, StratumOne Communications, Inc., a broadband networking company,
MP3.com, Inc., a digital music Internet company, Terayon Communication Systems,
Inc., a provider of cable modem systems, Medibuy.com, an Internet healthcare
commerce company, Billpoint, Inc., an Internet credit card payment processor,
and Teragen Pty. Ltd., an Internet networking company. Mr. Stevens received a
B.S.E.E., a B.A. and an M.S. in Computer Engineering from the University of
Southern California and an M.B.A. from Harvard University.
Ronald R. Taylor has been a director since 1995. Since 1998, Mr. Taylor has
been a general partner of Enterprise Partners, a venture capital firm. In 1987,
Mr. Taylor founded Pyxis Corporation, a medical information systems company, and
served as its chairman and chief executive officer until it merged with Cardinal
Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson
Pharmaceuticals, Inc., a pharmaceutical company, and Cavanaugh's Hospitality
Corporation, a leading owner of full service hotels in the Northwest. He
received a B.A. from the University of Saskatchewan and an M.A. from the
University of California at Irvine.
David W. Wroe has been a director since 1999. Since 1996, he has served as
a senior vice president and chief technology officer for Continental Casualty
Company, an insurance company. From 1983 to 1996, Mr. Wroe served as chief
executive officer of Agency Management Services, Inc., a CCC majority-owned
automation company, and Mr. Wroe continues to serve as the chairman of its board
of directors. Mr. Wroe serves on the boards of directors of Rogers & Gray
Insurance Company, an insurance company, Home Financial
63
Network, a software company, and Healthware Solutions International, Inc., a
software company. Mr. Wroe earned a B.A. from Providence College.
Executive officers serve at the discretion of the board of directors and
hold office until their successors have been duly elected and qualified. There
are no family relationships among any of the directors, officers or key
employees of MedicaLogic.
Directors are elected at the annual shareholders meeting and hold office
until their successors are elected and qualified.
Committees of the Board of Directors
The board of directors has an audit committee and a compensation committee.
The audit committee, among other things, reviews and makes recommendations
to the board of directors concerning our internal accounting procedures, reviews
and consults with our independent accountants on the accounting principles and
auditing practices used for our financial statements and makes recommendations
to the board of directors concerning the engagement of independent accountants
and the scope of the audit to be undertaken by such accountants. The current
members of the audit committee are Bruce M. Fried, Neal Moszkowski and Ronald R.
Taylor.
The compensation committee reviews and makes recommendations to the board
of directors concerning the policies, practices and procedures relating to the
compensation and benefits of our officers and managerial employees. The
compensation committee exercises all authority under our stock incentive plans
and advises and consults with our officers regarding personnel policies. The
current members of the compensation committee are Charles D. Burwell, Ronald H.
Kase and Mark A. Stevens.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more directors serving as an executive officer of our company. See
"Certain Transactions."
Director Compensation
Generally, directors do not receive any cash compensation from us for their
service as members of the board of directors, but directors are reimbursed for
expenses incurred in connection with their attendance at board and committee
meetings. Under our stock incentive plan, non-employee directors are granted a
one-time option to purchase 60,000 shares of our common stock upon initial
election to the board. In addition, we have entered into an arrangement pursuant
to which we pay Enterprise Partners, of which Ronald R. Taylor serves as a
general partner, $2,000 for each directors meeting attended by Mr. Taylor.
Directors' fees
64
totaling $4,000 have been paid to Enterprise Partners for Mr. Taylor's
attendance at board meetings. We carry an insurance policy for the protection of
our officers and directors against any liability asserted against them in their
official capacities. See "-Stock Incentive Option Plans" and "-Limitations on
Directors' Liability and Indemnification."
Executive Compensation
The following table sets forth the total compensation paid or accrued for
services rendered to us in all capacities by our Chief Executive Officer and our
four other most highly compensated executive officers whose salary and bonus
exceeded $100,000 during the year ended December 31, 1998 (collectively, the
"Named Executive Officers").
Summary Compensation Table
Annual Compensation
----------------------- All Other
Name and Principal Position Salary Bonus Compensation (1)(2)
- --------------------------- --------- --------- -------------------
Mark K. Leavitt, Chairman of the Board and
Chief Executive Officer..................... $ 210,000 --- ---
David C. Moffenbeier, Chief Operating
Officer..................................... $ 190,000 --- $ 50,000
Blackford Middleton, Senior Vice President,
Clinical Informatics........................ $ 160,000 $ 20,000 $ 48,621
Richard L. Samco, Senior Vice President and
Chief Technology Officer.................... $ 185,000 --- ---
Thomas M. Watson, Senior Vice President,
Worldwide Sales and Professional Services... $ 150,000 $ 75,559 (3) ---
- --------------
(1) Comprised of commission payments.
(2) See "Long-Term Incentive Plans-Awards in Last Fiscal Year."
(3) Includes $20,000 payment for 1997 performance.
We have entered into an employment agreement with Dr. Leavitt. The
agreement is terminable at will on 60-days notice.
65
Long-Term Incentive Plans-Awards in Last Fiscal Year
Percent of Total
Restricted Stock Per Share Restriction
Name and Principal Position Number of Shares(1) Granted Price Expiry(4)
- --------------------------- ------------------- ---------------- --------- ------------
Mark K. Leavitt, Chairman of the
Board and Chief Executive Officer... 30,000 18% $ 2.00 July 1, 2000
David C. Moffenbeier, Chief
Operating Officer................... 30,000 18% $ 2.00 July 1, 2000
Blackford Middleton, Senior Vice
President, Clinical Informatics..... 15,000 (2) 9% $ 2.00 July 1, 2000
Richard L. Samco, Senior Vice
President and Chief Technology
Officer............................. 30,000 18% $ 2.00 July 1, 2000
Thomas M. Watson, Senior Vice
President, Worldwide Sales and
Professional Services............... 30,000 (3) 18% $ 2.00 July 1, 2000
- --------------
(1) Except as otherwise provided, shares of restricted stock are subject to
MedicaLogic's right of repurchase if specific performance criteria are not
met. Our option to repurchase is exercisable for all of the shares in the
event the holder voluntarily terminates his or her employment within two
years of the date the shares were originally granted unless we complete
an initial public offering, release an Internet version of Logician and
release a consumer based Internet product prior to December 31, 1999. If
all performance criteria are met on or before December 31, 1999, the shares
will be released from the repurchase option. As of December 31, 1998, the
named executive officers beneficially owned 469,000 shares of restricted
stock with an aggregate value of $779,000.
(2) Does not include 25,000 shares of restricted stock issued to Mr. Middleton
on July 1, 1998 upon his surrender of 25,000 outstanding options to
purchase common stock. Of these 25,000 shares of restricted stock, 11,111
were not subject to a right of repurchase, and 13,889 shares were subject
to a right of repurchase by MedicaLogic and have been released from the
repurchase option ratably over a period of 20 months beginning July 1,
1998.
(3) Does not include 150,000 shares of restricted stock issued to Mr. Watson on
July 1, 1998 upon his surrender of 150,000 outstanding options to purchase
common stock. Of these 150,000 shares of restricted stock, 66,667 shares
were not subject to a right of repurchase, and 83,333 were subject to a
right of repurchase by MedicaLogic and have been released from the
repurchase option ratably over a period of 20 months beginning July 1,
1998.
(4) Unless the repurchase option is terminated earlier upon satisfaction of
performance criteria.
Option Grants in Last Fiscal Year
No options were granted to, or exercised by, any of the Named Executive
Officers during the year ended December 31, 1998.
66
Stock Incentive Plans
An aggregate of 13,994,384 shares of common stock have been reserved for
issuance under our three stock incentive plans described below.
The Stock Incentive Plan was adopted February 9, 1993 and, as amended,
allowed for issuance of 4,494,384 shares. Under the 1996 Stock Incentive Plan,
adopted December 27, 1996, 1,000,000 shares were originally reserved for
issuance. The 1996 Plan was amended in 1998 to reserve an additional 700,000
shares for issuance and in 1999 to reserve an additional 3,800,000 shares for
issuance, bringing the total number of shares reserved under the 1993 Plan and
the 1996 Plan to 9,994,384. The stock option plans were approved by the board of
directors and the shareholders. The 1996 Plan provides for the granting to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, for the granting to employees and
consultants of nonstatutory stock options and for the issuance of stock bonuses,
restricted stock and stock appreciation rights. Unless terminated earlier, the
1996 stock incentive plan will terminate automatically in December 2006.
As of August 31, 1999, options to purchase 4,359,651 shares of common stock
at a weighted average exercise price of $2.48 per share were outstanding and
1,525,000 shares of restricted stock had been issued under the stock incentive
plans.
The stock incentive plans are administered by the board of directors. The
board has the power to determine the terms of the options or rights granted,
including the exercise price, the number of shares subject to each option or
right, the character of the grant, the exercisability of the grant and the form
of consideration payable upon exercise of options. The board of directors may
delegate administration of the stock incentive plans to a committee.
The exercise price of incentive stock options must not be less than the
fair market value of the common stock at the date of the grant or, in the case
of incentive stock options issued to holders of more than 10% of the outstanding
common stock, 110% of the fair market value. The maximum term of incentive stock
options is 10 years, or five years in the case of 10% shareholders. The
aggregate fair market value, on the date of the grant, of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000.
Options become exercisable over a period of time in accordance with the
terms of the option agreements entered into at the time of grant. Options issued
to existing employees become exercisable ratably over a 36-month period. Before
March 1, 1999, stock options awarded to new employees vested ratably over 30
months beginning six months from the date of hire. For options granted to an
employee hired after March 1, one-sixth of the shares vest on the six-month
anniversary of the hire date, and the remaining five-sixths of the options vest
ratably over the remaining 30 months. These new hire options also include an
acceleration clause, which allows 100% of the shares to become exercisable upon
termination without cause. Stock option awards to non-employee directors also
generally become exercisable over a 36-month period.
67
Options granted under the stock incentive plans are generally
nontransferable by the optionee and, unless otherwise determined by the board of
directors, must be exercised by the optionee during the period of the optionee's
employment or service with MedicaLogic or within 90 days of termination thereof.
The stock incentive plans provide that in the event we merge with or into
another corporation, or we sell substantially all of our assets, each
outstanding option will be assumed by the successor corporation.
The 1999 Stock Incentive Plan authorizes the issuance of 4 million shares
of our common stock. The 1999 Plan was approved by the board of directors and
the shareholders. The 1999 Plan provides for the granting to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, for the granting to employees and consultants
of nonstatutory stock options and for the issuance of stock bonuses, restricted
stock and stock appreciation rights. Unless terminated earlier, the 1999 Plan
will terminate automatically in September 2009.
The 1999 Plan is administered by the board of directors. The board has the
power to determine the terms of the options or rights granted, including the
exercise price, the number of shares subject to each option or right, the
character of the grant, the exercisability of the grant and the form of
consideration payable upon exercise of options. The board of directors has
delegated administration of the stock incentive plans to the compensation
committee.
The exercise price of incentive stock options must not be less than the
fair market value of the common stock at the date of the grant or, in the case
of incentive stock options issued to holders of more than 10% of the outstanding
common stock, 110% of the fair market value. The maximum term of incentive stock
options is 10 years, or five years in the case of 10% shareholders. The
aggregate fair market value, on the date of the grant of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000.
Options become exercisable over a period of time in accordance with the
terms of the option agreements entered into at the time of grant.
Options granted under the 1999 Plan are generally nontransferable by the
optionee and, unless otherwise determined by the board of directors, must be
exercised by the optionee during the period of the optionee's employment or
service with MedicaLogic or within 90 days of termination thereof.
The 1999 Plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each outstanding option
will be assumed by the successor corporation.
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Limitations on Directors' Liability and Indemnification
Our articles of incorporation eliminate, to the fullest extent permitted by
Oregon law, liability of a director to MedicaLogic or its shareholders for
monetary damages resulting from conduct as a director. Although liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his or her responsibilities under any other law, including the federal
securities laws.
Our articles of incorporation require us to indemnify our directors to the
fullest extent permitted by law. We believe that the limitation of liability
provisions in our articles of incorporation enhance our ability to attract and
retain qualified individuals to serve as directors.
We carry an insurance policy for the protection of our officers and
directors against any liability asserted against them in their official
capacities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of MedicaLogic pursuant to the foregoing provisions, or otherwise,
MedicaLogic has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
69
CERTAIN TRANSACTIONS
We have accepted promissory notes from the following persons in the amounts
set forth below as consideration for restricted stock issued to such persons:
Principal
Name Amount of Note Date of Note
---- -------------- ------------
Harvey J. Anderson $385,000 March 31, 1999
Harvey J. Anderson 66,000 March 31, 1999
Guy E. Field 30,000 February 2, 1995
Guy E. Field 100,000 July 1, 1998
Guy E. Field 30,000 July 1, 1998
Guy E. Field 33,000 March 31, 1999
Mark K. Leavitt 60,000 July 1, 1998
Mark K. Leavitt 66,000 March 31, 1999
Berkeley T. Merchant 125,000 June 29, 1994
Berkeley T. Merchant 120,000 July 1, 1998
Blackford F. Middleton 159,000 August 11, 1995
Blackford F. Middleton 50,000 July 1, 1998
Blackford F. Middleton 30,000 July 1, 1998
Blackford F. Middleton 33,000 March 31, 1999
David C. Moffenbeier 60,000 July 1, 1998
David C. Moffenbeier 66,000 March 31, 1999
Richard L. Samco 60,000 July 1, 1998
Richard L. Samco 66,000 March 1, 1999
Thomas M. Watson 300,000 July 1, 1998
Thomas M. Watson 60,000 July 1, 1998
Thomas M. Watson 66,000 March 1, 1999
All of the above non-negotiable promissory notes accrue interest at 6% per
annum on the unpaid principal balance from the date of the note until the
principal balance is paid in full. Interest is payable quarterly in arrears. The
notes are payable in full 10 years from the date of the loan and each note can
be prepaid without penalty.
We loaned Harvey Anderson $103,800 to pay for relocation expenses pursuant
to an unsecured promissory note that accrues interest at 6% per annum on the
unpaid principal balance from the date of the note until the principal is paid
in full. The entire unpaid principal balance and all accrued interest is due and
payable on the earlier to occur of (1) the closing of the sale of a residence
located in Portland, Oregon, (2) the cessation or termination of his employment
by us for any reason, or (3) July 1, 2001. The note is prepayable in full
without penalty. In September 1999, we entered into a separate agreement with
Mr. Anderson in consideration of Mr. Anderson relocating to San Francisco,
California. Under the terms of this agreement, we agreed to (1) reimburse Mr.
Anderson for a specified amount in improvements to his Portland, Oregon
residence, any shortfall between the sales price on his Portland, Oregon
residence and the original purchase price paid by Mr. Anderson and any
transaction costs not covered by the sales
70
price of this residence, unless the sales price is greater than the purchase
price, (2) forgive the interest accrued on the unsecured promissory note
referred to above, which will be repaid from the proceeds of the sale of the
Portland, Oregon residence and (3) pay the mortgage payment on Mr. Anderson's
residence in Portland, Oregon until it is sold.
In connection with our Series C Preferred Stock financing, we sold an
aggregate of 2,505,970 additional shares of Series C Preferred Stock at a price
of $2.25 per share in May 1996, including 514,445 shares of Series C Preferred
Stock to New Enterprise Associates IV Limited Partnership, a beneficial owner of
greater than 5% of our common stock on a converted basis, and an aggregate of
514,445 shares of Series C Preferred Stock to entities associated with Sequoia
Funds, a group of affiliated entities beneficially owning greater than 5% of our
common stock on a converted basis. See "Principal Shareholders."
In August 1998, we entered into Stock Purchase Agreements with Enterprise
Partners IV Associates, L.P. and Enterprise Partners IV, L.P. for the issuance
of an aggregate of 350,000 shares of our common stock at a price of $2.00 per
share. We also granted an option to purchase 16,000 shares of our common stock
at a price of $2.00 per share to Enterprise Partners IV Associates, L.P. and
granted an option to purchase 184,000 shares of common stock to Enterprise
Partners IV, L.P. The options were exercised on April 14, 1999. Directors Ronald
R. Taylor and Ronald H. Kase are affiliated with the Enterprise funds. See
"Principal Shareholders."
In connection with our Series J Preferred Stock financing, we sold an
aggregate of 1,052,632 shares of Series J Preferred Stock in May 1999 to Sequoia
Capital Franchise Fund and Sequoia Capital Franchise Partners, both of which are
affiliates of Mark A. Stevens, a director of the Company. See "Principal
Shareholders."
Bruce M. Fried, a member of our board of directors, is a partner in a law
firm retained by us to provide legal counsel regarding certain regulatory and
intellectual property issues.
71
PRINCIPAL SHAREHOLDERS
The following table presents the beneficial ownership of our common stock
as of August 31, 1999 and as adjusted to reflect the common stock offered by
this prospectus, by (a) each person known by us to be the beneficial owner of
more than 5% of the outstanding shares of our common stock on a converted basis;
(b) each director and named executive officer; and (c) all directors and
officers as a group.
Shares Beneficially Owned(1)
----------------------------
Percentage Percentage
Name Number Prior to Offering After Offering
---- --------- ----------------- --------------
Entities associated with Sequoia
Funds........................... 5,607,679(2) 11.3%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
New Enterprise Associates......... 4,707,189 9.5%
2490 Sand Hill Road
Menlo Park, CA 94025
Continental Casualty
Company......................... 4,000,000(3) 8.1%
CNA Insurance
CNA Plaza
Chicago, IL 60685
Quantum Industrial
Partners LDC.................... 3,136,842 6.3%
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
SFM Domestic
Investment LLC.................. 3,136,842 6.3%
c/o Soros Fund Management LLC
888 Seventh Avenue
New York, NY 10016
Mark A. Stevens................... 5,661,012(4) 11.4%
3000 Sand Hill Rd.,
Bldg.4, Ste. 280
Menlo Park, CA 94025
Ronald H. Kase.................... 4,760,522(5) 9.6%
2490 Sand Hill Road
Menlo Park, CA 94025
David W. Wroe..................... 4,000,000(3) 8.1%
CNA Insurance
CNA Plaza
Chicago, IL 60685
Mark K. Leavitt................... 3,040,000(6) 6.1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
72
Shares Beneficially Owned(1)
----------------------------
Percentage Percentage
Name Number Prior to Offering After Offering
---- --------- ----------------- --------------
Richard L. Samco.................. 1,940,606(7) 3.9%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
David C. Moffenbeier.............. 1,317,903(8) 2.7%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
Ronald R. Taylor.................. 1,042,111(9) 2.1%
Enterprise Partners
7979 Ivanhoe Ave., Ste. 550
La Jolla, CA 92037
Blackford F. Middleton............ 216,500(10) *
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
Thomas M. Watson.................. 210,000 *
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
Bruce M. Fried.................... 3,333(11) *
2300 N. Street, NW
Washington, DC 20037
Charles D. Burwell................ 53,333(12) *
220 East Las Colinas Blvd.
Irving, TX 75039
Neal Moszkowski................... 0(13) *
888 Seventh Avenue
Suite 3300
New York, NY 10106
All Executive Officers
and Directors as a
group (14 persons).............. 22,632,389(14) 45.7%
- --------------
* Less than 1%.
(1) Shares that the person or entity has the right to acquire within 60 days
after August 31, 1999 are deemed to be outstanding in calculating the
percentage ownership of the person or entity but are not deemed to be
outstanding as to any other person or entity.
(2) Includes 3,550,016 shares of common stock held of record by Sequoia Capital
Growth Fund; 716,541 shares of common stock held of record by Sequoia
Capital VI; 31,497 shares of common stock held of record by Sequoia 1995;
39,370 shares of common stock held of record by Sequoia Technology Partners
VI; 217,623 shares of common stock held of record by Sequoia Technology
Partners III; 894,737 shares of common stock held of record by Sequoia
Capital Franchise Fund; and 157,895 shares of common stock held of record
by Sequoia Capital Franchise Partner.
(3) Includes 4,000,000 shares of common stock held of record by Continental
Casualty Company. Mr. Wroe is Senior Vice President and Chief Technology
Officer of Continental Casualty Company.
(4) Includes 5,607,679 shares of common stock held of record by entities
associated with Sequoia funds, of which Mr. Stevens disclaims beneficial
ownership, except to the extent of his pecuniary interest therein. See note
(2). Mr. Stevens is a general partner of Sequoia Capital VI and Sequoia
Technology Partners VI and is a managing member of Sequoia Capital
Franchise Fund and Sequoia Capital Franchise Partners. Mr. Stevens
participates in the voting control of the shares held of record by Sequoia
Capital Growth Fund,
73
Sequoia 1995 and Sequoia Technology Partners III. The share amount also
includes 5,000 shares subject to an option held of record by Mr. Stevens
that is exerciseable within 60 days of August 31, 1999.
(5) Includes 4,726,268 shares of common stock held of record by New Enterprises
Associates VI, LP, of which Mr. Kase disclaims beneficial ownership.
Includes 53,333 shares subject to an option held of record by Mr. Kase that
is exerciseable within 60 days of August 31, 1999.
(6) Includes 505,000 shares of common stock held of record by Sandra Leavitt,
Dr. Leavitt's former wife, which are voted by Dr. Leavitt as trustee of a
voting trust, 10,000 shares of common stock held of record by Amy Elizabeth
Leavitt and 170,000 shares of common stock held in trust for Amy Elizabeth
Leavitt.
(7) Includes 10,000 shares of common stock held of record by Courtaney E. Samco
and 10,000 shares of common stock held of record by Mark R. Samco.
(8) Includes 500,000 shares of common stock held of record by Elizabeth
Moffenbeier.
(9) Includes 950,000 shares of common stock held of record by entities
associated with Enterprise Partners, for which Mr. Taylor disclaims
beneficial ownership, except to the extent of his pecuniary interest
therein. Of those shares for which beneficial ownership is disclaimed, Mr.
Taylor has the right to acquire beneficial ownership of 55,555 shares at
any time. Also includes 57,777 shares subject to an option held of record
by Mr. Taylor that is exerciseable within 60 days of August 31, 1999
and an aggregate of 9,000 shares of common stock of which 3,000 shares each
are held of record by his children, Luke Rand Williams, Leah Williams
Barbieri and Tiffany Marie Taylor.
(10) Includes 5,000 shares of common stock held of record by Allie Middleton.
(11) Includes 3,333 shares subject to an option held of record by Mr. Fried that
is exerciseable within 60 days of August 31, 1999.
(12) Consists of 53,333 shares subject to an option held of record by Mr.
Burwell that is exerciseable within 60 days of August 31, 1999. Mr. Burwell
disclaims beneficial ownership of the shares underlying these options. Mr.
Burwell is a Senior Vice President of VHA, Inc, which holds of record
1,587,302 shares of common stock. Mr. Burwell disclaims beneficial
ownership in shares of common stock held of record by VHA as he does not
have voting or dispositive power over such shares.
(13) Mr. Moszkowski is an employee of Soros Fund Management LLC, which is the
principal investment advisor to Quantum Industrial Partners LDC. Mr.
Moszkowski is also a non-managing member of SFM Domestic Investments LLC.
Mr. Moszkowski does not have voting or dispositive power over shares held
of record by Quantum Industrial Partners LDC or SFM Domestic Investments
LLC.
(14) Includes 232,359 shares subject to options that are exercisable within 60
days of August 31, 1999.
74
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
150,000,000 shares of common stock, no par value, and 50,000,000 shares of
undesignated preferred stock, no par value. The following description of our
capital stock does not purport to be complete and is subject to and qualified in
its entirety by our articles of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Oregon law.
Common Stock
As of August 31, 1999, there were 46,601,705 shares of our common stock
outstanding, which were held of record by approximately 260 shareholders, after
giving effect to the conversion of the outstanding series of preferred stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. In the event we liquidate, dissolve or wind up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the prior distribution rights of preferred stock, if
any, then outstanding. The holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to our common stock. The outstanding shares
of common stock are, and the shares of common stock offered by this prospectus
when issued will be, fully paid and nonassessable. See "Dividend Policy."
Preferred Stock
The board of directors has the authority, without action by the
shareholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of our common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of our common stock until the board of directors determines the
specific rights of the holders of preferred stock. However, the effects might
include, among other things:
o Restricting dividends on our common stock;
o Diluting the voting power of our common stock;
o Impairing the liquidation rights of our common stock; and
o Delaying or preventing a change in control of our company without
further action by the shareholders.
75
Upon the completion of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
Registration Rights
After this offering, the holders of 32,655,933 shares of common stock will
be entitled to rights with respect to the registration of these shares under the
Securities Act. Under the terms of the agreements between us and the holders of
these shares, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, these holders are entitled to notice of
registration and are entitled to include their shares of common stock in the
registration. These holders of registrable securities are also entitled to
specified demand registration rights under which they may require us to file a
registration statement under the Securities Act at our expense with respect to
their shares of our common stock, and we are required to use our best efforts to
effect this registration. Further, some of the holders of these demand
registration rights may require us to file additional registration statements.
All of the registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares included in the registration and our right not to effect a requested
registration within sixty days following the effectiveness of a registration
statement registering any of our stock or other securities in connection with
the public offering of those securities solely for cash.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
Oregon Control Share and Business Combination Statutes
Upon completion of this offering, we will become subject to the Oregon
Control Share Act. The Oregon Control Share Act generally provides that a person
who acquires voting stock of an Oregon corporation in a transaction, other than
a transaction in which voting shares are acquired from the issuing public
corporation, that results in the acquiror holding more than 20%, 33 1/3% or 50%
of the total voting power of the corporation cannot vote the shares it acquires
in the acquisition unless voting rights are accorded to the control shares by:
o A majority of each voting group entitled to vote; and
o The holders of a majority of the outstanding voting shares, excluding
the control shares held by the acquiror and shares held by the
company's officers and inside directors.
The term "acquiror" is broadly defined to include persons acting as a group.
The acquiror may, but is not required to, submit to the target company a
statement setting forth certain information about the acquiror and its plans
with respect to the company. The statement may also request that the company
call a special meeting of shareholders to determine whether voting rights will
be accorded to the control shares. If the acquiror does not request a
76
special meeting of shareholders, the issue of voting rights of control shares
will be considered at the next annual or special meeting of shareholders. If the
acquiror's control shares are accorded voting rights and represent a majority or
more of all voting power, shareholders who do not vote in favor of voting rights
for the control shares will have the right to receive the appraised "fair value"
of their shares, which may not be less than the highest price paid per share by
the acquiror for the control shares.
Upon completion of this offering, we will become subject to certain
provisions of the Oregon Business Corporation Act that govern business
combinations between corporations and interested shareholders. The Oregon
Business Corporation Act generally provides that if a person or entity acquires
15% or more of the outstanding voting stock of an Oregon corporation, the
corporation and the acquiring shareholder, or any affiliated entity of the
acquiring shareholder, may not engage in certain business combination
transactions for three years following the date the person acquired the shares.
Business combination transactions for this purpose include:
o A merger or plan of share exchange;
o Any sale, lease, mortgage or other disposition of 10% or more of the
assets of the corporation; and
o Certain transactions that result in the issuance or transfer of
capital stock of the corporation to the acquiring shareholder.
These restrictions do not apply if:
o The acquiring shareholder, as a result of the transaction in which
such person acquired the shares, owns at least 85% of the outstanding
voting stock of the corporation (disregarding shares owned by
directors who are also officers and certain employee benefits plans);
o The board of directors approves the business combination or the
transaction that resulted in the shareholder acquiring the shares
before the acquiring shareholder acquires 15% or more of the
corporation's voting stock; or
o The board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation (disregarding shares owned
by the acquiring shareholder) approve the business combination after
the acquiring shareholder acquires 15% or more of the corporation's
voting stock.
Staggered Board; Removal of Directors only for Cause
Our articles and restated bylaws contain provisions that:
o Classify the board of directors into three classes as nearly equal in
number as possible, each of which will serve for three years with one
class being elected each year; and
o Provide that directors may be removed by shareholders only for cause
and only upon the vote of 75 percent of the votes then entitled to be
cast for the election of directors.
77
The classified board provisions may have the effect of lengthening the time
required for a third party to acquire control of MedicaLogic through a proxy
contest or the election of a majority of the board of directors and may deter
any potential unfriendly offers or other efforts to obtain control of the
company. These provisions could deprive you of opportunities to realize a
premium for your shares and could make removal of incumbent directors more
difficult. At the same time, these provisions may have the effect of inducing
any third parties seeking control of MedicaLogic to negotiate terms acceptable
to the board of directors. In addition, the provisions regarding removal of
directors will make the removal of any director more difficult, even if you
believe such removal is in your best interests. Since these provisions make the
removal of directors more difficult, they increase the likelihood that incumbent
directors will retain their position and, since the board has the power to
retain and discharge management, could perpetuate incumbent management.
78
SHARES ELIGIBLE FOR FUTURE SALE
If our shareholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity related
securities in the future and at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
__________ shares of our common stock, assuming no exercise of outstanding
options or warrants. As of August 31, 1999, we had approximately 260 holders of
common stock, after giving effect to the conversion of the convertible preferred
stock. All of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves 46,601,705 shares eligible for sale in the
public market as follows:
Number of Shares Date
- ---------------- ----
32,958,907 After 180 days from the date of this
prospectus (subject, in some cases, to
volume limitations).
13,642,798 At various times after 181 days from the
date of this prospectus (subject, in some
cases, to volume limitations).
Lock-up Agreements
All of our officers and directors and shareholders holding substantially
all of our outstanding shares of common stock have signed lock-up agreements
with our underwriters under which they agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock,
for a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
o 1% of the number of shares of our common stock then outstanding, which
will equal approximately _________ shares immediately after this
offering; or
o the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to that sale.
79
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
MedicaLogic, Inc.
Rule 144(k)
Under Rule 144(k) as currently in effect, a person who is not deemed to
have been one of our affiliates at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner other than an affiliate,
is entitled to sell those shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, Rule 144(k) shares may be sold
immediately upon the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares of our common
stock from us in connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares 90 days after the effective
date of this prospectus in reliance on Rule 144, but without compliance with
some of the restrictions, including the holding period, contained in Rule 144.
Registration Rights
After this offering, the holders of 32,655,933 shares of our common stock,
or their transferees, will be entitled to rights with respect to the
registration of those shares under the Securities Act. If these shares are
registered, they will become freely tradeable without restriction under the
Securities Act. These sales could have a material adverse effect on the trading
price of our common stock.
Stock Options
Shortly after this offering, we intend to file a registration statement on
Form S-8 covering the shares of common stock reserved for issuance under our
stock option plans. Shares of common stock registered under any registration
statement will, subject to Rule 144 volume limitations applicable to affiliates,
be available for sale in the open market, unless the shares are subject to
vesting restrictions or the lock-up agreements described above.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement,
dated _____________, 1999, the underwriters named below, for whom Donaldson,
Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens Inc.,
U.S. Bancorp Piper Jaffray Inc. and DLJdirect Inc. are acting as
representatives, have severally agreed to purchase from MedicaLogic the number
of shares of common stock set forth opposite each of their names below.
Number
Underwriters of Shares
------------ ---------
Donaldson, Lufkin & Jenrette Securities Corporation ..
BancBoston Robertson Stephens Inc. ...................
U.S. Bancorp Piper Jaffray Inc. ......................
DLJdirect Inc. .......................................
---------
Total.......................................... =========
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered by this
prospectus (other than those shares covered by the over-allotment option
described below) if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $_____ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $______ per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of ________ additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the
preceding table.
The following table shows the underwriting fees to be paid to the
underwriters by us in this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our common stock to cover over-allotments.
81
No Full
Exercise Exercise
-------- --------
Per Share.....................................
Total.........................................
We will pay the offering expenses, estimated to be $_________________.
An electronic prospectus is available on the Internet site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
such Internet site relating to our offering is not a part of this prospectus,
has not been approved or endorsed by us or any underwriter and should not be
relied on by prospective purchasers.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect thereof.
Each of MedicaLogic, its executive officers and directors and certain of
our shareholders has agreed, subject to certain exceptions, not to (a) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of common stock or any securities convertible into or exercisable or
exchangeable for common stock or (b) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any common stock (regardless of whether any of the transactions
described in clause (a) or (b) are to be settled by the delivery of common
stock, or other securities, in cash or otherwise) for a period of 180 days after
the date of this prospectus without the prior written consent of Donaldson
Lufkin & Jenrette Securities Corporation. In addition, during such period, we
have also agreed not to file any registration statement with respect to, and
each of our executive officers, directors and certain of our shareholders has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson Lufkin & Jenrette Securities Corporation.
Prior to this offering, there has been no established trading market for
our common stock. The initial public offering price for the shares of common
stock offered by this prospectus will be determined by negotiation among us and
the representatives. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the industry
in which we compete, our past and present operations, our historical results of
operations, our prospects for future earnings, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of this offering.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "MDLI."
82
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock offered by this prospectus in any
jurisdiction in which such an offer or a solicitation is unlawful.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short position
or to stabilize the price of our common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed common stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
83
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules that are part of the registration
statement. For further information on us and our common stock, you should review
the registration statement and its exhibits and schedules. Any document we file
may be read and copied at the Commission's public reference rooms at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commissioner located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Commission at 1-800-SEC-0330 for further
information about the public reference rooms. Our filings with the Commission
are also available to the public from the Commission's Web site at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms and the Web site of the Commission referred to above.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Stoel Rives LLP, Portland, Oregon. Certain legal matters will be
passed upon for the underwriters by Perkins Coie LLP, Portland, Oregon. As of
the date of this prospectus, partners and employees of Stoel Rives LLP
beneficially owned an aggregate of 50,000 shares of our common stock.
EXPERTS
The financial statements of MedicaLogic, Inc. as of December 31, 1997 and
1998 and for each of the years in the three-year period ended December 31, 1998
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in auditing and
accounting.
84
MEDICALOGIC, INC.
AND SUBSIDIARIES
Index to Financial Statements
Page
MedicaLogic, Inc. - Consolidated Financial Statements:
Report of KPMG LLP........................................................F-2
Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Shareholders' Equity (Deficit).................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-7
PrimaCis Health Information Technology, Inc. - Financial Statements:
Report of KPMG LLP.......................................................F-26
Balance Sheet............................................................F-27
Statement of Operations..................................................F-28
Statement of Shareholders' Deficit.......................................F-29
Statement of Cash Flows..................................................F-30
Notes to Financial Statements............................................F-31
Pro Forma Financial Information:
Summary...................................................................F-41
Unaudited Pro Forma Condensed Combined Balance Sheet......................F-42
Unaudited Pro Forma Condensed Combined Statement of Operations............F-43
Notes to the Unaudited Pro Forma Condensed Combined Financial Information.F-44
F-1
Independent Auditors' Report
The Board of Directors
MedicaLogic, Inc.:
We have audited the accompanying consolidated balance sheets of
MedicaLogic, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MedicaLogic, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Portland, Oregon
April 23, 1999
F-2
MEDICALOGIC, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31
-------------------------------
Assets 1997 1998 June 30, 1999
------------- ------------- -----------------------------
(Unaudited) (Unaudited)
(Pro forma)
Current assets:
Cash and cash equivalents $ 4,924 $ 4,718 $ 9,922
Short-term investments 7,116 7,030 31,277
Accounts receivable, net 7,663 10,084 6,219
Prepaid expenses and other current assets 263 545 1,379
------------- ------------- ------------
Total current assets 19,966 22,377 48,797
Property and equipment, net 1,969 1,804 6,619
Other assets 137 127 3,787
------------- ------------- ------------
Total assets $ 22,072 $ 24,308 $ 59,203
============= ============= ============
Liabilities, Redeemable Preferred Stock
and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable 667 557 5,803
Accrued and other liabilities 2,187 2,286 1,204
Deferred revenue 1,396 2,701 2,338
Current portion of capital leases 846 215 104
Current portion of notes payable -- 527 924
------------- ------------- ------------
Total current liabilities 5,096 6,286 10,373
Non-current portion of capital leases 278 92 151
Non-current portion of notes payable -- 587 833
------------- ------------- ------------
Total liabilities 5,374 6,965 11,357
------------- ------------- ------------
Convertible redeemable preferred stock; 50,000,000
shares authorized; aggregate liquidation preference
$50,128 at December 31, 1998 and $85,918 at June 30,
1999 (unaudited); issued and outstanding 19,525,545,
21,524,545, and 29,059,283 at December 31, 1997 and
1998, and June 30, 1999 (unaudited), respectively;
pro forma no shares issued and outstanding 42,593 49,387 83,687 $ --
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; authorized 100,000,000
shares; issued and outstanding 13,308,561, 14,255,122
and 17,542,422 shares at December 31, 1997 and
1998 and June 30, 1999 (unaudited), respectively;
pro forma 46,601,705 shares issued and outstanding 3,202 5,139 14,211 97,898
Common stock notes receivable (988) (2,039) (5,959) (5,959)
Deferred compensation -- -- (956) (956)
Accumulated deficit (28,109) (35,144) (43,137) (43,137)
------------- ------------- ------------ ------------
Total shareholders' equity (deficit) (25,895) (32,044) (35,841) $ 47,846
------------- ------------- ------------ ============
Total liabilities, redeemable preferred stock
and shareholders' equity (deficit) $ 22,072 $ 24,308 $ 59,203
============= ============= ============
See accompanying notes to consolidated financial statements.
F-3
MEDICALOGIC, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Six Months Ended
Years Ended December 31, June 30,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
Revenues:
Software $ 6,845 $ 7,617 $ 10,410 $ 3,989 $ 5,787
Service and support 2,819 5,190 5,750 2,670 3,188
----------- ----------- ----------- ----------- -----------
Total revenues 9,664 12,807 16,160 6,659 8,975
Operating expenses:
Cost of revenue 6,120 7,756 6,754 3,283 3,418
Marketing and sales 6,498 7,539 7,579 3,630 7,946
Research and development 6,583 7,047 8,016 3,858 5,092
General and administrative 718 865 1,044 451 1,255
----------- ----------- ----------- ----------- -----------
Total operating
expenses 19,919 23,207 23,393 11,222 17,711
----------- ----------- ----------- ----------- -----------
Operating loss (10,255) (10,400) (7,233) (4,563) (8,736)
Other income (expense):
Interest expense (251) (240) (187) (106) (93)
Interest income 456 617 707 313 494
Other, net (265) (647) (322) (141) 342
----------- ----------- ----------- ----------- -----------
Total other income
(expense) (60) (270) 198 66 743
----------- ----------- ----------- ----------- -----------
Loss before income
taxes (10,315) (10,670) (7,035) (4,497) (7,993)
Provision for income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss $ (10,315) $ (10,670) $ (7,035) $ (4,497) $ (7,993)
=========== =========== =========== =========== ===========
Historical net loss per share:
Basic and diluted $ (0.78) $ (0.80) $ (0.51) $ (0.34) $ (0.47)
=========== =========== =========== =========== ===========
Weighted average shares - basic
and diluted 13,152,557 13,269,082 13,766,073 13,357,891 16,840,576
Pro forma net loss per share:
Basic and diluted $ (0.20) $ (0.21)
Weighted average shares - basic =========== ===========
and diluted 34,957,284 38,919,064
See accompanying notes to consolidated financial statements.
F-4
MEDICALOGIC, INC.
AND SUBSIDIARIES
Consolidated Statements of
Shareholders' Equity (Deficit)
(Dollars in thousands)
Common Total
Common stock stock shareholders'
---------------------- notes Deferred Accumulated equity
Shares Amount receivable compensation deficit (deficit)
---------- ---------- ------------ -------------- -------------- -----------
Balance at December 31, 1995 13,056,224 $ 2,812 $ (683) $ -- $ (7,124) $ (4,995)
Issuance of common stock in exchange
for a promissory note 105,000 210 (210) -- -- --
Issuance of common stock in
exchange for services 25,000 50 -- -- -- 50
Issuance of common stock for cash 5,000 10 -- -- -- 10
Options exercised 36,500 26 -- -- -- 26
Interest accrued on common stock
notes receivable -- -- (44) -- -- (44)
Net loss -- -- -- -- (10,315) (10,315)
---------- ---------- ------------ -------------- -------------- -----------
Balance at December 31, 1996 13,227,724 3,108 (937) -- (17,439) (15,268)
Issuance of common stock in
exchange for services 28,700 51 -- -- -- 51
Options exercised 52,137 43 -- -- -- 43
Interest accrued on common stock
notes receivable -- -- (51) -- -- (51)
Net loss -- -- -- -- (10,670) (10,670)
---------- ---------- ------------ -------------- -------------- -----------
Balance at December 31, 1997 13,308,561 3,202 (988) -- (28,109) (25,895)
Issuance of common stock for acquisition 27,500 55 -- -- -- 55
Issuance of common stock for cash 350,000 700 -- -- -- 700
Issuance of restricted common stock
in exchange for promissory notes 500,000 1,000 (1,000) -- -- --
Non-cash stock compensation -- 110 -- -- -- 110
Options exercised 69,061 72 -- -- -- 72
Interest accrued on common stock
notes receivable -- -- (51) -- -- (51)
Net loss -- -- -- -- (7,035) (7,035)
---------- ---------- ------------ -------------- -------------- -----------
Balance at December 31, 1998 14,255,122 5,139 (2,039) -- (35,144) (32,044)
Issuance of common stock for
acquisition (unaudited) 1,500,000 3,300 -- -- -- 3,300
Issuance of restricted common stock in
exchange for promissory notes (unaudited) 1,360,000 3,790 (3,790) -- -- --
Issuance of common stock in exchange for
services (unaudited) 47,500 105 -- -- -- 105
Warrants exercised (unaudited) 45,000 14 -- -- -- 14
Options exercised (unaudited) 334,800 598 -- -- -- 598
Stock compensation expense (unaudited) -- 309 -- -- -- 309
Interest accrued on common stock notes
receivable (unaudited) -- -- (130) -- -- (130)
Deferred compensation related to
stock options (unaudited) -- 956 -- (956) -- --
Net loss (unaudited) -- -- -- -- (7,993) (7,993)
---------- ---------- ------------ -------------- -------------- -----------
Balance at June 30, 1999 (unaudited) 17,542,422 $ 14,211 $ (5,959) $ (956) (43,137) $ (35,841)
========== ========== ============ ============== ============== ===========
See accompanying notes to consolidated financial statements.
F-5
MEDICALOGIC, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six Months Ended
Years Ended December 31, June 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
Cash flows from operating activities:
Net loss $ (10,315) $ (10,670) $ (7,035) $ (4,497) $ (7,993)
Adjustments to reconcile net loss to net cash
(used by) provided by operating activities:
Depreciation and amortization 912 1,464 1,537 762 2,082
Non-cash expenses 50 51 110 110 2,664
Provision for doubtful accounts 304 829 756 40 437
Loss (gain) on disposition of assets -- 14 (2) (4) (2)
Other non-cash expenses (44) (51) (51) (25) (130)
Changes in assets and liabilities:
Accounts receivable (3,027) (3,630) (3,177) 491 3,428
Prepaid expenses and other current assets (25) (133) (239) (423) (858)
Other assets 300 (35) -- (70) (13)
Accounts payable 1,131 (906) (110) (96) 5,246
Accrued and other liabilities 80 1,314 99 (295) (1,082)
Deferred revenue (250) 113 1,305 509 (363)
---------- ---------- ---------- ---------- ----------
Net cash (used by) provided by
operating activities (10,884) (11,640) (6,807) (3,498) 3,416
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets (263) (525) (1,280) (823) (6,322)
Purchase of business -- -- (12) (12) (3,152)
Proceeds from sale of fixed assets -- -- 6 29 6
Purchase of short-term investments -- (15,261) (28,248) (15,715) (31,277)
Purchase from maturities of short-term investments -- 8,145 28,334 11,048 7,030
---------- ---------- ---------- ---------- ----------
Net cash used by investing activities (263) (7,641) (1,200) (5,473) (33,715)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock 20,023 6,775 6,794 6,794 34,300
Net proceeds from issuance of common stock 36 43 772 13 612
Proceeds from issuance of notes payable -- -- 1,264 150 792
Principal payments under capital lease (875) (1,264) (879) (503) (52)
Principal payments under note obligations -- -- (150) (22) (149)
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 19,184 5,554 7,801 6,432 35,503
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 8,037 (13,727) (206) (2,539) 5,204
Cash and cash equivalents at beginning of period 10,614 18,651 4,924 4,924 4,718
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 18,651 $ 4,924 $ 4,718 $ 2,385 $ 9,922
========== ========== ========== ========== ==========
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable $ 210 $ -- $ 1,000 $ 1,000 $ 3,790
Issuance of common stock for purchase of a business -- -- 55 55 3,300
Assets acquired or exchanged under capital leases 1,451 593 62 -- --
See accompanying notes to consolidated financial statements.
F-6
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) Company
MedicaLogic, Inc. (the Company) develops, markets and supports
electronic medical record software used by physicians at the point of
care, throughout the U.S.
The accompanying consolidated financial statements include the
accounts of the Company and subsidiaries. All significant intercompany
balances have been eliminated in consolidation.
(b) Unaudited Quarterly Information
The financial information included herein for the six-month periods
ended June 30, 1998 and 1999 is unaudited; however, such information
reflects all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a
fair presentation of the financial position, results of operations and
cash flows for the interim periods. The interim consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes included in the consolidated
financial statements. The results of operations for the interim period
presented are not necessarily indicative of the results to be expected
for the full year.
(c) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or
less to be cash equivalents.
(d) Short-Term Investments
Short-term investments include various corporate debt instruments and
have been classified as available-for-sale securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities at
December 31, 1997 and 1998. Short-term investments are carried at
amortized cost, which approximates market. At December 31, 1998,
contractual maturities of short-term investments ranged from
seventy-two to one hundred and thirty-three days. At June 30, 1999
(unaudited), contractual maturities of short-term investments ranged
from 104 to 296 days.
F-7 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(e) Accounts Receivable
Accounts receivable are shown net of allowance for doubtful accounts
of $852, $1,360 and $1,514 at December 31, 1997 and 1998 and June 30,
1999 (unaudited), respectively. The following table presents a
rollforward of the allowance for doubtful accounts:
1996 1997 1998
---------- ---------- ----------
Balance - beginning of period $ 30 $ 165 $ 852
Provision 304 829 756
Charge offs (169) (142) (248)
---------- ---------- ----------
Balance - end of period $ 165 $ 852 $ 1,360
========== ========== ==========
(f) Property and Equipment
Property and equipment are stated at cost. Property and equipment
under capital leases are stated at the lower of the present value of
minimum lease payments at the beginning of the lease term or fair
value of the leased assets at the inception of the lease. The cost of
repairs and maintenance is expensed as incurred.
Depreciation on furniture, equipment and leasehold improvements is
calculated on a straight-line basis over the estimated useful lives of
the assets, five years for furniture and two to three years for
equipment. Property and equipment held under capital leases are
amortized on a straight-line basis over the shorter of the lease term
or estimated useful life of the asset. Amortization of leasehold
improvements is recognized over the shorter of the life of the
improvement or the remaining life of the lease using the straight-line
method.
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
management reviews long-lived assets and the related intangible assets
for impairment whenever events or changes in circumstances indicate
the carrying amount of such assets may not be recoverable.
Recoverability of these assets is determined by comparing the
forecasted undiscounted net cash flows of the operation to which the
assets relate, to the carrying amount including associated intangible
assets of such operation. If the operation is determined to be unable
to recover the carrying amount of its assets, then intangible assets
are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted
cash flows or appraised values, depending upon the nature of the
assets.
F-8 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(g) Goodwill
Goodwill represents the excess of the aggregate purchase price over
the fair value of the tangible and intangible assets acquired in
various acquisitions. Goodwill costs are being amortized on a
straight-line basis, over periods ranging from two to four years.
Amortization expense for the years ended December 31, 1996, 1997 and
1998 and for the six months ended June 30, 1999 (unaudited) was $-0-,
$-0-, $34 and $361, respectively. Accumulated amortization at December
31, 1997 and 1998 and at June 30, 1999 (unaudited) was $-0-, $34 and
$395, respectively.
(h) Software Development Costs
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
Under the standard, capitalization of software development costs
begins upon the establishment of technological feasibility, subject to
net realizable value considerations. To date, the period between
achieving technological feasibility and the general availability of
such software has been short; therefore, software development costs
qualifying for capitalization have been immaterial. Accordingly, the
Company has not capitalized any software development costs and charged
all costs to research and development expense.
(i) Revenue Recognition
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition. Subsequently, in March 1998, the Financial
Accounting Standards Board ("FASB") approved SOP 98-4, Deferral of the
Effective Date of a Provision of 97-2, Software Revenue Recognition.
SOP 98-4 defers for one year, the application of several paragraphs
and examples in SOP 97-2 that limit the definition of vendor specific
objective evidence (VSOE) of the fair value of various elements in a
multiple element arrangement. The provisions of SOP's 97-2 and 98-4
have been applied to transactions entered into by the Company
beginning January 1, 1998. Prior to 1997, the Company's revenue policy
was in accordance with the preceding authoritative guidance provided
by SOP No. 91-1, Software Revenue Recognition.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on
VSOE of the relative fair values of each element in the arrangement.
The revenue allocated to software products is generally recognized by
the Company upon the delivery of the products. The revenue allocated
to extended support agreements is recognized ratably over the term of
the maintenance agreement and revenue allocated to service elements is
recognized as the services are performed.
F-9 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions.
This SOP amends SOP 97-2 to require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the
residual method, revenue is recognized as follows: (1) the total fair
value of undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections of
SOP 97-2 and (2) the difference between the total arrangement fee and
the amount deferred for the undelivered elements is recognized as
revenue related to the delivered elements.
SOP 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will
continue to be deferred until the date SOP 98-9 becomes effective.
(j) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that
include the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
(k) Stock-Based Employee Compensation
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting
for employee stock options and similar equity instruments. As is
permitted under SFAS No. 123, the Company has elected to continue to
account for its stock-based compensation plans under APB Opinion No.
25 and provide the pro forma disclosures as prescribed by SFAS No.
123.
(l) Advertising
The Company expenses costs of advertising when the costs are incurred.
Advertising expense was approximately $700, $836 and $896 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-10 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(m) Net Loss Per Share
The Company has adopted SFAS No. 128, Earnings Per Share, which
provides that "basic net income (loss) per share" and "diluted net
income (loss) per share" for all prior periods presented are to be
computed using the weighted average number of common shares
outstanding during each period, with diluted net income per share
including the effect of potentially dilutive common shares. The
reconciliation of shares used to calculate basic and diluted income
per share consists of the following as of December 31:
June 30,
--------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
Basic weighted average
shares of common
stock 13,152,557 13,269,082 13,766,073 13,357,891 16,840,576
Effect of dilutive
securities:
Stock options and
warrants -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Diluted weighted average
shares of common
stock 13,152,557 13,269,082 13,766,073 13,357,891 16,840,576
=========== =========== =========== =========== ===========
Common stock equivalents related to stock options and warrants of
839,853, 1,830,568, 2,259,447, 2,274,118 and 3,059,283 are
anti-dilutive in a net loss year and, therefore, are not included
during the years ended December 1996, 1997 and 1998, and the six
months ended June 30, 1998 and 1999 (unaudited) net loss per share.
(n) Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(o) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate
fair value due to the short-term nature of these instruments. The
carrying amounts of capital leases and notes payable approximate fair
value as the stated interest rates reflect current market rates. Fair
value estimates are made at a specific point in time, based on
relevant market information about the financial instrument when
available. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
F-11 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(p) Contingencies and Factors that Could Affect Future Results
A substantial portion of the Company's revenues each year are
generated from the development and release to market of computer
software products. In the extremely competitive industry environment
in which the Company operates, such product generating, development
and marketing processes are uncertain and complex, requiring accurate
prediction of market trends and demand as well as successful
management of various development risks inherent in such products. In
light of these dependencies, it is possible that failure to
successfully manage a significant product introduction could have a
severe near term impact on the Company's growth and results of
operations.
(q) Pro Forma Shareholders Equity (Unaudited)
Pro forma net loss per share has been computed as described above and
also gives effect to common equivalent shares from preferred stock
that will automatically convert upon the closing of the Company's
initial public offering (using the as-if-converted method). If the
Company's initial public offering is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 29,059,283 shares of
common stock based on the shares of convertible preferred stock
outstanding at June 30, 1999. Unaudited pro forma shareholders' equity
at June 30, 1999, as adjusted for the conversion of the convertible
preferred stock, is disclosed on the balance sheet.
(2) Acquisition
On January 5, 1998, the Company paid $12 in cash and issued 27,500
shares of common stock valued at $2.00 per share to acquire certain
intangible assets of Health Outcome Technologies, Inc. (HOT). This
acquisition was accounted for as a purchase and results of operations
for the acquired company are included only from the date of
acquisition forward. In connection with this acquisition, the Company
recorded goodwill of $67, which is being amortized over two years, the
estimated economic life of the goodwill. The separate results of
operations of HOT were not material compared to the Company's overall
results of operations and as such, pro forma financial information has
been omitted.
F-12 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(3) Balance Sheet Components
(a) Property and Equipment
Property and equipment, including equipment under capital leases,
consist of the following:
December 31,
------------------------------ June 30,
1997 1998 1999
------------- ------------- -------------
(Unaudited)
Furniture and equipment $ 3,850 $ 4,565 $ 9,343
Leasehold improvements 876 1,267 1,347
------------- ------------- -------------
4,726 5,832 10,690
Less accumulated depreciation
and amortization (2,757) (4,028) (4,071)
------------- ------------- -------------
$ 1,969 $ 1,804 $ 6,619
============= ============= =============
(b) Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
-------------------------
1997 1998
----------- -----------
Royalties $ 947 $ 843
Payroll and related liabilities 674 627
Litigation accruals 301 488
Other 265 328
----------- -----------
$ 2,187 $ 2,286
=========== ===========
(4) Leases
The Company leases certain office furniture and equipment under long-term
capital leases, which expire over the next two years. At December 31, 1997
and 1998, the net book value of leased furniture and equipment included in
property and equipment was $1,122 and $307, respectively.
The Company also leases its office facilities under non-cancelable
operating lease agreements.
F-13 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Future minimum lease payments under non-cancelable operating leases and the
capital leases as of December 31, 1998 are as follows:
Capital Operating
Leases Leases
----------- -----------
Year ending December 31:
1999 $ 267 $ 821
2000 65 945
2001 40 945
2002 -- 953
2003 -- 1,044
Thereafter -- 4,090
----------- -----------
Total minimum lease payments 372 $ 8,798
===========
Less amount representing interest (65)
-----------
Present value of net minimum capital
lease payments 307
Less current portion of capital leases (215)
-----------
Non-current portion of capital leases $ 92
===========
Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled
approximately $600, $611 and $1,073, respectively.
F-14 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) Notes Payable
Notes payable consists of the following:
December 31,
------------------------- June 30,
1997 1998 1999
----------- ----------- -----------
(Unaudited)
Notes payable, monthly principal and interest
payments of $47; interest at two-year treasury
constant maturities plus 5% per annum (10.4%
as of December 31, 1998 and 9.53% at June 30,
1999 (unaudited)); maturing between September
2000 and September 2001; secured by equipment
purchased thereunder $ -- $ 1,007 $ 774
Note payable, monthly principal and interest
payments of $1; interest at 11% per annum;
final payment due December 31, 2008; unsecured -- 70 68
Note payable, monthly principal and interest
payments of $3; interest at 11% per annum;
final payment due December 31, 2000; unsecured -- 37 --
Notes payable, monthly principal and interest
payments of $25; interest at two-year treasury
constant maturities plus 5% per annum (9.45%
at June 30, 1999); maturing between March 2001
and July 2001; secured by equipment purchased
thereunder, (unaudited) -- -- 529
Note payable, monthly principal and interest
payments of $3; interest at 11% per annum;
final payment due December 1999; unsecured;
(unaudited) -- -- 17
Note payable, monthly principal and interest
payments of $13; interest at 7.96% per annum;
final payment due April 2001; secured by
equipment purchased thereunder, (unaudited) -- -- 369
----------- ----------- -----------
-- 1,114 1,757
Less current portion of long-term debt -- 527 924
----------- ----------- -----------
$ -- $ 587 $ 833
=========== =========== ===========
Future minimum payments as of December 31, 1998 are as follows:
Year ending December 31:
1999 $ 527
2000 465
2001 69
2002 7
2003 7
Thereafter 39
---------
Total minimum payments $ 1,114
=========
F-15 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(6) Convertible Redeemable Preferred Stock
The Company has authorized several series of convertible redeemable
preferred stock. The title, carrying amount, and number of shares issued
and outstanding are as follows:
December 31,
---------------------------- June 30,
1997 1998 1999
------------ ------------ ------------
(Unaudited)
Series A, $1.00 liquidation preference; issued
and outstanding 5,750,001 at December 31,
1997 and 1998 and June 30, 1999 (unaudited) 5,698 5,698 5,698
Series A-1, $10.00 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
Series C, $2.25 liquidation preference; issued
and outstanding 7,012,637 shares at
December 31, 1997 and 1998 and June 30, 1999
(unaudited) 15,697 15,697 15,697
Series C-1, $22.50 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
Series E, $3.15 liquidation preference; 4,761,907
shares issued and outstanding at December 31,
1997 and 1998 and June 30, 1999 (unaudited) 14,423 14,423 14,423
Series E-1, $31.50 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
Series F, $3.40 liquidation preference; 2,000,000,
4,000,000, and 4,000,000 shares issued and
outstanding at December 31, 1997 and 1998
and June 30, 1999 (unaudited) 6,775 13,569 13,569
Series F-1, $34.00 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
Series I, $3.80 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
Series I-1, $38.00 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
Series J, $4.75 liquidation preference; 7,534,738
shares issued and outstanding at June 30, 1999
(unaudited) -- -- 34,300
Series J-1, $47.50 liquidation preference; no
shares issued and outstanding at June 30,
1999 (unaudited) -- -- --
------------ ------------ ------------
Total convertible redeemable
preferred stock 42,593 49,387 83,687
============ ============ ============
See note 13 for unaudited recent developments.
F-16 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The terms for each series of preferred stock are similar and are summarized
below:
Dividends
---------
Preferred shareholders are entitled to receive dividends when and if
declared by the Board of Directors at an annual rate of $.10 and $1 per
share for Series A and A-1, $.225 and $2.25 per share for Series C and C-1,
$.315, $3.15 for Series E and E-1, $.340 and $3.40 for Series F and F-1,
and $.380 and $3.80 for Series I and I-1, respectively. The right to
receive dividends on preferred stock is not cumulative and no right to
receive dividends accrues to holders of the preferred stock in the event
the Board of Directors does not declare dividends. No dividends may be
declared or paid on common stock until all declared dividends on preferred
stock have been paid. As of December 31, 1998, no dividends had been
declared or paid.
Liquidation Preferences
-----------------------
Upon dissolution, liquidation or winding up of the affairs of the Company,
either voluntarily or involuntarily, the preferred shareholders receive
preference in liquidation over the common shareholders of the Company. The
liquidation value for each outstanding share is $1 and $10 for Series A and
A-1, $2.25 and $22.50 for Series C and C-1, $3.15 and $31.50 for Series E
and E-1, $3.40 and $34.00 for Series F and F-1 and $3.80 and $38.00 for
Series I and I-1, respectively, adjusted for any stock dividends. The
holders of Series E and E-1, Series F and F-1 and Series I and I-1, on a
parity basis among these Series, are entitled to receive their liquidation
value prior to and in preference to any distribution to the holders of
Series A and A-1 and Series C and C-1 preferred stock. The holders of
Series C and C-1 preferred stock are entitled to receive their liquidation
value prior to and in preference to any distribution to the holders of
Series A and A-1.
Redemption
----------
The preferred stock is subject to certain mandatory redemption features
following the affirmative vote of a majority of the outstanding shares of
the preferred stock, effective no earlier than December 31, 2001. Upon the
majority vote of the outstanding shares, the Company is required to redeem
all of the then outstanding preferred stock or an amount determined by the
Company for which funds are available for redemption. The per share
redemption price for each series of preferred stock is equal to its per
share liquidation value for each respective series discussed above.
In the event of a redemption of only a portion of the total outstanding
preferred stock, the Company is required to redeem Series E and E-1, Series
F and F-1 and Series I and I-1 prior to and in preference to the holders of
Series A and A-1 and Series C and C-1 preferred stock. In addition, the
holders of Series C and C-1 will have preference over the holders of Series
A and A-1 preferred stock.
F-17 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Voting
------
The holder of each share of each series of preferred stock is entitled to
the number of votes such holder would be entitled to if the shares of
preferred stock were converted to common stock.
Conversion
----------
Each share of preferred stock is voluntarily convertible into common stock
at any time after the date of issuance at a rate that equals the original
issue price divided by the conversion price at the time in effect, subject
to certain adjustments as set forth in the purchase agreements. Automatic
conversion to common stock at the then effective conversion rate will occur
for Series A, A-1, C, C-1, E and E-1, following the effectiveness of a
registration statement under the Securities Act of 1933 in which the
aggregate price to the public equals or exceeds $7,500,000 and in which the
public offering price per share of common stock equals or exceeds $5. The
public offering price of the Company's common stock that will trigger
automatic conversion of the Series F and F-1 and the Series I and I-1
preferred stock is $5.40 and $5.79 per share, respectively.
(7) Shareholders' Equity
(a) Shareholders' Agreement
The Company and certain of its shareholders have an agreement that
includes restrictions on the purchase and sale of the Company's stock.
Except as expressly provided, no shareholder is allowed to transfer
ownership of stock without the prior written consent of the other
shareholders that are party to the agreement. These restrictions lapse
upon the effectiveness of a registration of common stock under the
Securities Act of 1933, as amended, and the consummation of the sale
of common stock pursuant to that registration statement.
The agreement also requires the Company to purchase a shareholder's
stock under specific conditions and entitles the Company to purchase a
shareholder's stock under certain other conditions. The acquisition
price is equal to the fair value of the shares to be purchased.
F-18 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(b) Stock Incentive Plan
On February 9, 1993, the Company adopted a Stock Incentive Plan which
allowed for the issuance of 4,499,384 shares of common stock. Under
the 1996 Stock Incentive Plan, adopted December 31, 1996, together
with the 1993 Stock Incentive Plan (the Plans), 1,000,000 shares of
common stock were reserved for issuance. The 1996 Plan was amended in
1998 to reserve an additional 700,000 shares of common stock for
issuance, bringing the total under the Plans to 6,194,384. Pursuant to
the terms of the Plans, the Board of Directors is authorized to grant
incentive stock options, non-statutory stock options and to sell
restricted stock to employees or others providing services or benefits
to the Company. The Plans also allow granting of stock bonuses, stock
appreciation rights, and other forms of stock based incentives,
although none have been granted to date. Option prices for incentive
stock options are set at not less than the fair market value of the
common stock at the date of grant. Options vest over periods
determined by the Board of Directors. Options to employees are
contingent upon continued employment with the Company and, unless
otherwise specified, expire ten years from the date of grant. As of
March 1998, the Company extended the term of all outstanding options
from five years to ten years, which constituted a new measurement
date. The Company recorded a compensation charge of $110 in connection
with this change in option terms.
The per share weighted average fair market value, as determined by
applying the Black-Scholes option pricing model to stock options
granted under the Plans during 1996, 1997 and 1998 was $1.44, $1.45
and $1.72, respectively, on the date of grant, with the following
weighted average assumptions:
Years Ended December 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
Risk-free interest rate 6.3% 6.5% 6.0%
Expected dividend yield 0% 0% 0%
Expected life (in years) 4 4 7
Expected volatility 100% 100% 100%
The Company continues to apply APB Opinion No. 25 in accounting for
the Plan and, accordingly, compensation cost is generally not
recognized for its stock options in the financial statements. The
effect on the Company's net loss, had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123 is as follows:
Years Ended December 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
Net loss $ (10,315) $ (10,670) $ (7,035)
Pro forma net loss (10,859) (11,772) (8,145)
Net loss per share (0.78) (0.80) (0.51)
Pro forma net loss
per share (0.83) (0.89) (0.59)
F-19 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Transactions involving the Plans are summarized as follows:
Weighted
Average
Number Exercise
of shares Price
------------- -------------
Options outstanding, December 31, 1995 591,040 $ 1.20
Granted 496,300 2.00
Exercised (36,500) 0.75
Forfeited (42,700) 1.25
------------- -------------
Options outstanding, December 31, 1996 1,008,140 1.54
Granted 1,072,950 2.00
Exercised (52,137) 0.82
Forfeited (80,923) 1.95
------------- -------------
Options outstanding, December 31, 1997 1,948,030 1.84
Granted 960,986 2.02
Exercised (69,061) 1.05
Forfeited (413,153) 1.99
------------- -------------
Options outstanding, December 31, 1998 2,426,802 1.90
Granted (unaudited) 1,820,500 2.86
Exercised (unaudited) (334,800) 1.79
Forfeited (unaudited) (29,013) 1.96
------------- -------------
Options outstanding, June 30, 1999
(unaudited) 3,883,489 $ 2.36
============= =============
At December 31, 1998, the range of exercise prices and weighted
average remaining contractual life of outstanding options were $0.20
to $2.00 and eight years, respectively. At December 31, 1998 1,509,146
options were exercisable with a weighted average exercise price of
$1.84.
At December 31, 1998, 193,024 shares were available for grant. See
note 13 for unaudited recent developments.
F-20 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(c) Stock Warrants
In 1994, the Company entered into a Stock Purchase Warrant Agreement
(the Agreement) with Indius, Inc. (II). Pursuant to the Agreement, the
Company issued II warrants to purchase up to 45,000 shares of common
stock at $.31 per share, conditioned on II meeting certain software
development and licensing requirements. At December 31, 1998 all of
the warrants were exercisable. These warrants were exercised in March
1998.
(d) Restricted Stock Purchase Agreement
As of December 1998, the Company had sold 500,000 shares of common
stock for $2.00 per share to senior management of the Company under
agreements which allow the Company, at its option, to repurchase these
shares of common stock at $2.00 per share. In accordance with the
Company repurchase agreements associated with 335,000 of these shares,
the shares subject to repurchase are reduced in equal increments over
36 months from the original vesting dates which range from February
28, 1996 to February 13, 1997. 165,000 of these shares of common stock
are released from the Company's repurchase rights if certain key
business performance criteria are met. See note 13 for Unaudited
Recent Developments.
(8) Income Taxes
The Company incurred a loss for both financial reporting and tax return
purposes for the years ended December 31, 1996, 1997 and 1998. As such,
there was no current or deferred tax provision for those years.
The actual income tax expense differs from the expected tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
net income (loss) before income taxes) as follows:
Years Ended December 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
Computed expected income tax
(benefit) expense (34.0)% (34.0)% (34.0)%
Increase (reduction) in income tax
expense (benefit) resulting from:
State income tax (benefit) expense (4.3) (4.3) (4.3)
Increase in valuation allowance 39.0 43.8 44.7
Research and development credits (0.7) (3.1) (8.3)
Other -- (2.4) 1.9
------------ ------------ ------------
Income tax expense --% --% --%
============ ============ ============
F-21 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
December 31,
-------------------------------
1997 1998
-------------- --------------
Deferred tax assets:
Furniture and equipment due to differences
in depreciation $ 165 $ 229
Net operating loss and research and
experimentation credit carryforwards 11,221 14,169
Allowance for doubtful accounts 326 234
Other accruals 173 215
-------------- --------------
Gross deferred tax assets 11,885 14,847
Less valuation allowance (11,406) (14,559)
-------------- --------------
Net deferred tax assets 479 288
-------------- --------------
Deferred tax liabilities:
Change in method of accounting (467) (280)
Other (12) (8)
-------------- --------------
Net deferred tax liabilities (479) (288)
-------------- --------------
Net deferred tax assets and liabilities $ -- $ --
============== ==============
The valuation allowance for deferred tax assets as of December 31, 1998 was
approximately $14,559. The net change in the total valuation allowance for
the years ending December 31, 1996, 1997 and 1998 was an increase of
approximately $4,067, $4,668 and $3,153, respectively.
The Company has available federal and state net operating loss
carryforwards for tax purposes of approximately $33,671 and research and
experimentation credits of approximately $1,259, which expire through 2018.
Approximately $7,100 of the net operating losses are subject to annual
utilization limitation due to ownership changes in prior years.
(9) Contingencies
The Company is involved in various claims and legal actions in the normal
course of business. In the opinion of management, the ultimate disposition
of these matters will not have a material effect on the Company's
consolidated financial position, results of operations or liquidity.
F-22 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(10) Segment Information
MedicaLogic derives its revenue from a single operating segment, electronic
medical records, and the service and support related to these products.
Geographic Information
MedicaLogic operates solely within the United States and to date has
derived all of its revenue from within the United States.
Major Customers
During 1996, the Company had sales to four customers which accounted for
approximately 41% of total revenues.
During 1997, the Company had sales to two customers which accounted for
approximately 32% of total revenues. The Company had accounts receivable
from these customers representing approximately 36% of trade accounts
receivable at December 31, 1997.
During 1998, the Company had sales to one customer which accounted for
approximately 21% of total revenues. The Company had accounts receivable
from this customer representing approximately 20% of trade accounts
receivable at December 31, 1998.
(11) 401(k) Plan
The Company sponsors a 401(k) deferred savings plan for all employees.
Employees become eligible to participate in the plan upon employment.
Employees may contribute up to 15% of their pay to the plan, subject to the
limitation of $10 by the Internal Revenue Code. All employee contributions
vest immediately. The Company has not made any matching contributions but
does pay administrative costs for the Plan. These costs were not
significant for any period presented.
F-23 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(12) Subsequent Event
On January 29, 1999, the Company acquired PrimaCis Health Information
Technology, Inc. (PrimaCis), a Delaware corporation. The total purchase
price, including acquisition costs, was $6,453 and consisted of $3,153 in
cash and the issuance of 1,500,000 shares of common stock. In connection
with this transaction, the Company entered into a separate agreement under
which it will receive a purchase order from a customer for 1,500 licenses.
Also related to this separate agreement, the Company has agreed to issue
common stock at fair market value up to $12 million, contingent upon sales
of additional licenses. The contingent stock agreement expires December 31,
2002.
Approximately $2,300 of the total purchase price for PrimaCis related to a
prepayment for a commission related to the purchase order from a customer
for 1,500 licenses. The purchase accounting allocations resulted in
goodwill of approximately $3,200 and other intangible assets of $1,000.
Goodwill costs will be amortized on a straight-line basis over a four year
period. Other intangible assets will be amortized on a straight-line basis
over a two year period.
The pro forma results shown below assume the acquisition described above
occurred as of the beginning of 1998.
Revenues $ 16,408
Net loss (10,126)
Diluted net loss per share (0.66)
The pro forma results are not necessarily indicative of what actually would
have occurred had the acquisition been in effect for the periods presented.
In addition, they are not intended to be a projection of future results
that may be achieved from the combined operations.
(13) Unaudited Recent Developments
(a) Issuance of Preferred Stock
On May 28, 1999, the Company amended its Articles of Incorporation to
authorize 8,421,050 shares of Series J preferred stock and 842,105
shares of Series J-1 preferred stock. The terms of Series J and J-1
preferred stock are substantially identical to Series I and I-1
preferred stock as described in note 6 except that the dividend
preference for Series J and J-1 preferred stock is $0.475 and $4.75
per share, respectively; the liquidation preference and redemption
price for Series J and J-1 preferred stock are $4.75 and $47.50 per
share, respectively; and the public offering price of the Company's
common stock that will trigger automatic conversion of the Series J
and J-1 preferred stock is $5.40 per share. There are 7,534,738 and
-0- shares of Series J and J-1 preferred stock outstanding as of June
30, 1999.
F-24 (Continued)
MEDICALOGIC, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(b) Lease Transactions
On May 12, 1999 the Company entered into a ten year operating lease
agreement for office space. The lease requires a letter of credit in
lieu of a cash security deposit in the amount of $1,750. In
consideration for the lessor's agreement to enter into the lease, the
Company irrevocably granted options to purchase up to 50,000 shares of
common stock, at a price of $3.25 per share. The lessor is required to
exercise the option at any time within three years of the Company's
initial public offering. In addition, at the time of the Company's
initial public offering the lessor will have the right to purchase the
greater of 100,000 shares of common stock or 1% of the number of
shares offered at the initial offering price.
(c) Stock Incentive Plan
On April 30, 1999, the Company's 1996 Stock Incentive Plan was amended
to reserve an additional 3,800,000 shares of common stock, bringing
the total under the 1993 and 1996 Plans to 9,994,384.
The Company adopted, subject to shareholder approval, the MedicaLogic,
Inc. 1999 Stock Incentive Plan, which authorizes the issuance of
4,000,000 shares of common stock.
(d) Employee Stock Purchase Plan
The Company adopted, subject to shareholder approval, the MedicaLogic,
Inc. 1999 Employee Stock Purchase Plan.
(e) Term Loan Facility and Leasing Arrangement
The Company entered into a term loan facility to finance the purchase
of new capital equipment in the amount of $3,300. These loans are
secured by the equipment purchased thereunder. $1,672 is outstanding
under this facility at June 30, 1999.
In August 1999, the Company entered into a leasing arrangement for the
purpose of leasing computer equipment. These leases are secured by the
equipment obtained thereunder.
(f) Restricted Stock Purchase Agreement
During the first six months of 1999, the Company sold an additional
1,360,000 shares of common stock to senior management at prices
between $2.20 per share and $3.25 per share. 1,090,000 of these shares
are subject to a repurchase option which lapses in equal increments
over 36 months from the purchase date. An additional 270,000 shares
are subject to repurchase if certain key business performance criteria
are not met. In connection with these stock issuances the Company
recorded compensation expense of $309 for the first six months of
1999.
F-25
Independent Auditors' Report
The Board of Directors
PrimaCis Health Information
Technology, Inc.:
We have audited the accompanying balance sheet of PrimaCis Health Information
Technology, Inc. as of December 31, 1998, and the related statements of
operations, stockholders' deficit, and cash flows for the year ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PrimaCis Health Information
Technology, Inc. as of December 31, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
Portland, Oregon
July 23, 1999
F-26
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Balance Sheet
(Dollars in thousands, except per share data)
December 31,
Assets 1998
-----------
Current assets:
Cash and cash equivalents $ 50
Accounts receivable 51
Other receivables 10
-----------
Total current assets 111
Property and equipment, net 58
Other assets 11
-----------
Total assets $ 180
===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable 19
Accrued liabilities 72
Deferred revenue 225
Current portion of capital leases 10
Notes payable to related party 381
-----------
Total current liabilities 707
Non-current portion of capital leases 10
-----------
Total liabilities 717
-----------
Stockholders' deficit:
Common stock, par value $0.001 per share; authorized
15,000,000 shares; issued and outstanding 11,361,425
shares at December 31, 1998 11
Additional paid in capital 3,005
Notes from shareholders (39)
Warrants 109
Accumulated deficit (3,623)
-----------
Total stockholders' deficit (537)
-----------
Total liabilities and stockholders' deficit $ 180
===========
See accompanying notes to financial statements.
F-27
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Statement of Operations
(Dollars in thousands, except per share data)
Year Ended
December 31,
1998
-----------
Revenues:
Software $ 70
Maintenance and service 178
-----------
Total revenues 248
Operating expenses:
Cost of revenue 16
Marketing and sales 282
Research and development 559
General and administrative 1,063
-----------
Operating loss (1,672)
Other income (expense):
Interest expense (116)
Interest income 2
Other (7)
-----------
Loss before income taxes (1,793)
Provision for income taxes --
Net loss $ (1,793)
===========
Net loss per share - basic and diluted $ (0.16)
===========
Shares used in computing net loss
per share - basic and diluted 11,481,704
See accompanying notes to financial statements.
F-28
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Statement of Stockholders' Deficit
Year ended December 31, 1998
(Dollars in thousands)
Common stock Additional Total
---------------------- paid in Notes from Accumulated shareholders'
Shares Amount capital shareholders Warrants deficit deficit
---------- --------- ---------- ------------ ---------- ----------- -------------
Balances at December 31, 1997 9,458,093 $ 9 $ 1,687 $ -- $ -- $ (1,830) $ (134)
Issuance of common stock 3,203,332 3 1,329 (39) -- -- 1,293
Cancellation of common stock (1,300,000) (1) (11) -- -- -- (12)
Issuance of stock warrants -- -- -- -- 109 -- 109
Net loss -- -- -- -- -- (1,793) (1,793)
---------- --------- ---------- ------------ ---------- ----------- -------------
Balances at December 31, 1998 11,361,425 $ 11 $ 3,005 $ (39) $ 109 $ (3,623) $ (537)
========== ========= ========== ============ ========== =========== =============
See accompanying notes to financial statements.
F-29
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Statement of Cash Flows
(Dollars in thousands)
Year Ended
December 31,
1998
-----------
Cash flows from operating activities:
Net loss $ (1,793)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 37
Other non-cash expense 91
Changes in assets and liabilities:
Accounts receivable (22)
Prepaid expenses and other current assets 5
Accounts payable 16
Accrued and other liabilities (128)
Deferred revenue 200
-----------
Net cash used by operating activities (1,594)
-----------
Cash flows from investing activities:
Purchase of fixed assets (37)
-----------
Net cash used by investing activities (37)
-----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,293
Proceeds from issuance of notes payable 381
Principal payments under capital lease (7)
-----------
Net cash provided by financing activities 1,667
-----------
Net increase in cash and
cash equivalents 36
Cash and cash equivalents at beginning of year 14
-----------
Cash and cash equivalents at end of year $ 50
===========
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable $ 39
Assets acquired or exchanged under capital leases 23
===========
See accompanying notes to financial statements.
F-30
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) Company
PrimaCis Health Information Technology, Inc. (the Company), located in
Houston, Texas, was formed in April 1996. The Company develops,
supports and markets its electronic medical record software and its
Internet-based oncology content for its Internet site.
(b) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or
less to be cash equivalents.
(c) Property and Equipment
Property and equipment are stated at cost. Property and equipment
under capital leases are stated at the lower of the present value of
minimum lease payments at the beginning of the lease term or fair
value of the leased assets at the inception of the lease. The cost of
repairs and maintenance is expensed as incurred.
Depreciation on property and equipment is calculated on a
double-declining basis over the estimated useful lives of the assets,
generally five to seven years. Property and equipment held under
capital leases is amortized on the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
Amortization of leasehold improvements is recognized over the shorter
of the life of the improvement or the remaining life of the lease
using the straight-line method.
(d) Software Development Costs
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
Under the standard, capitalization of software development costs
begins upon the establishment of technological feasibility, subject to
net realizable value considerations. To date, the period between
achieving technological feasibility and the general availability of
such software has been short; therefore, software development costs
qualifying for capitalization have been immaterial. Accordingly, the
Company has not capitalized any software development costs and charged
all such costs to research and development expense.
F-31 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(e) Revenue Recognition
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition. Subsequently, in March 1998, the Financial
Accounting Standards Board ("FASB") approved SOP 98-4, Deferral of the
Effective Date of a Provision of 97-2, Software Revenue Recognition.
SOP 98-4 defers for one year, the application of several paragraphs
and examples in SOP 97-2 that limit the definition of vendor specific
objective evidence (VSOE) of the fair value of various elements in a
multiple element arrangement. The provisions of SOP's 97-2 and 98-4
have been applied to transactions entered into beginning January 1,
1998. Prior to 1997, the Company's revenue policy was in accordance
with the preceding authoritative guidance provided by SOP No. 91-1,
Software Revenue Recognition.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on
VSOE of the relative fair values of each element in the arrangement.
The revenue allocated to software products is generally recognized
upon the delivery of the products. The revenue allocated to extended
support agreements is recognized ratably over the term of the
maintenance agreement and revenue allocated to service elements is
recognized as the services are performed. Deferred revenue consists of
payments received or owed from customers for support or other services
not yet performed.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions.
This SOP amends SOP 97-2 to require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the
residual method, revenue is recognized as follows: (1) the total fair
value of undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections of
SOP 97-2 and (2) the difference between the total arrangement fee and
the amount deferred for the undelivered elements is recognized as
revenue related to the delivered elements.
SOP 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will
continue to be deferred until the date SOP 98-9 becomes effective.
F-32 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(f) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that
include the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
(g) Stock-Based Employee Compensation
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting
for employee stock options and similar equity instruments. As is
permitted under SFAS No. 123, the Company has elected to continue to
account for its stock-based compensation plans under APB Opinion No.
25 and provide the pro forma disclosures as prescribed by SFAS No.
123.
(h) Net Loss Per Share
The Company has adopted SFAS No. 128, Earnings Per Share, which
provides that "basic net income (loss) per share" and "diluted net
income (loss) per share" for all prior periods presented are to be
computed using the weighted average number of common shares
outstanding during each period, with diluted net income per share
including the effect of potentially dilutive common shares. The
reconciliation of shares used to calculate basic and diluted income
per share consists of the following as of December 31, 1998:
Basic weighted average shares
of common stock 11,481,704
Effect of dilutive securities:
Stock options and warrants 400,000
------------
Diluted weighted average share
of common stock 11,881,704
============
Common stock equivalents related to stock options and warrants are
anti-dilutive in a net loss year and, therefore, are not included in
the 1998 net loss per share.
F-33 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(i) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value due to the
short-term nature of these instruments. The carrying amounts of
capital leases and notes payable approximate fair value as the stated
interest rates reflect current market rates. Fair value estimates are
made at a specific point in time, based on relevant market information
about the financial instrument when available. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
(j) Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(k) Other Assets
Other assets consist primarily of legal costs related to the
organization of the Company. The organizational costs are being
amortized on a straight-line basis over a period of five years.
Amortization expense for the year ended December 31, 1998 was $5.
Accumulated amortization at December 31, 1998 was $14.
(l) Contingencies and Factors that Could Affect Future Results
A substantial portion of the Company's revenues each year are
generated from the development and release to market of computer
software products. In the extremely competitive industry environment
in which the Company operates, such product generating, development
and marketing processes are uncertain and complex, requiring accurate
prediction of market trends and demand as well as successful
management of various development risks inherent in such products. In
light of these dependencies, it is possible that failure to
successfully manage a significant product introduction could have a
sever near term impact on the Company's growth and results of
operations.
F-34 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(2) Property and Equipment
Property and equipment, including equipment under capital leases, consist
of the following at December 31, 1998:
Furniture $ 74
Equipment 27
----------
101
Less accumulated depreciation
and amortization 43
----------
$ 58
==========
(3) Leases
The Company leases certain office furniture and equipment under a long-term
capital lease, which expires on December 2, 2000. At December 31, 1998, the
net book value of leased furniture and equipment included in property and
equipment was $20.
The Company also leases its office facilities under non-cancelable
operating lease agreements.
F-35 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
Future minimum lease payments under non-cancelable operating leases and the
capital leases as of December 31, 1998 are as follows:
Capital Operating
Leases Leases
----------- -----------
Year ending December 31:
1999 $ 12 $ 42
2000 12 12
2001 -- --
2002 -- --
2003 -- --
Thereafter -- --
----------- -----------
Total minimum lease payments 24 $ 54
===========
Less amount representing interest 4
-----------
Present value of net minimum capital
lease payments 20
Less current portion of capital leases 10
-----------
Non-current portion of capital leases $ 10
===========
Rent expense for the year ended December 31, 1998, totaled approximately
$35.
(4) Notes Payable
During 1998, the Company received an unsecured loan of $381 from an officer
and shareholder of the Company. The loan was evidenced by promissory note
payable and other supporting documentation, and was paid in full during
1999. In conjunction with this loan, the Company granted the shareholder
the option to purchase 300,000 shares of common stock of the Company at an
exercise price of $0.06 per share. The Company recorded the option at fair
value, as determined by the Black-Scholes method, as additional interest
expense over the life of the loan.
(5) Stockholders' Equity
(a) Stockholders' Agreement
The Company and its stockholders have an agreement that includes
restrictions on the purchase and sale of the Company's stock. Except
as expressly provided, no stockholder is allowed to transfer ownership
of stock without the prior written consent of all stockholders.
F-36 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(b) Stock Incentive Plan
In 1997, the Company adopted an Incentive Stock Option Plan (the
Plan). Pursuant to the terms of the Plan, the Board of Directors is
authorized to grant incentive stock options, non-statutory stock
options and restricted stock to employees or non-employees. Option
prices for incentive stock options are generally set at not less than
the fair market value of the common stock at the date of grant.
Options vest over periods determined by the Board of Directors.
Options are contingent upon continued employment with the Company and,
unless otherwise specified, expire ten years from the date of grant.
The Company has reserved 500,000 shares of its common stock for
issuance under the Plan.
The per share weighted average fair market value, as determined by
applying the Black-Scholes method to stock options granted under the
Plan during 1998, was $0.37 on the date of grant with the following
weighted average assumptions:
Year Ended December 31, 1998
----------------------------------------------------
Risk free interest rate 6.0%
Expected dividend yield 0%
Expected life (in years) 10.0
Expected volatility 100%
The Company continues to apply APB Opinion No. 25 in accounting for
its Plan and, accordingly, compensation cost is generally not
recognized for its stock options in the financial statements. For the
year ended December 31, 1998, the Company recognized $282 in
compensation costs with respect to stock based compensation awards as
valued under APB No. 25. The effect on the Company's net loss, had the
Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, for the year
ended December 31, 1998 is as follows:
Net loss $ (1,793)
Pro forma net loss (1,801)
Net loss per share $ (0.16)
Pro forma net loss per share (0.16)
F-37 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
Transactions involving the Plan are summarized as follows:
Weighted
Average
Number Exercise
of shares Price
------------ ------------
Options outstanding, December 31, 1997 -- $ --
Granted 270,000 0.48
Exercised -- --
Forfeited (205,000) 0.59
------------ ------------
Options outstanding, December 31, 1998 65,000 $ 0.14
============ ============
At December 31, 1998, the range of exercise prices and weighted
average remaining contractual life of outstanding options were $.05 to
$.09 and ten years, respectively. At December 31, 1998, 65,000 options
were exercisable with a weighted average exercise price of $0.14.
At December 31, 1998, 435,000 shares were available for grant.
(c) Warrants
During fiscal 1998, the Company issued warrants to investors. At
December 31, 1998 warrants to purchase 300,000 and 35,000 shares of
common stock at exercise prices of $0.06 and $0.40, respectively, were
outstanding.
(6) Income Taxes
The Company incurred a loss for both financial reporting and tax return
purposes and, as such, there was no current or deferred tax provision for
the year ended December 31, 1998.
F-38 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
The actual income tax expense differs from the expected tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
net income (loss) before income taxes) as follows (in thousands):
1998
------------
Computed expected income tax (benefit) expense (34.0)%
Increase (reduction) in income tax expense
(benefit) resulting from:
State income tax (benefit) expense --
Increase in valuation allowance 34.0
Research and development credits --
------------
Income tax expense --%
============
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax
assets and deferred tax liabilities at December 31, 1998 are as follows:
Deferred tax assets:
Net operating loss and research and
experimentation credit carryforwards $ 1,362
------------
Gross deferred tax assets 1,362
Less valuation allowance (1,362)
------------
Net deferred tax assets $ --
============
The net change in the total valuation allowance for the year ended December
31, 1998 was an increase of $687.
The Company has available federal and state net operating loss
carryforwards for tax purposes of approximately $3,537 which expire through
2018. Approximately $3,537 of the net operating losses are subject to
annual utilization limitation due to the change in ownership in 1999.
(7) Significant Customers
The Company had two customers that accounted for approximately 98% of the
total revenue for the year ended December 31, 1998.
F-39 (Continued)
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
(8) Subsequent Events
On January 29, 1999, the Company entered into a reorganization and merger
agreement with MedicaLogic, Inc. The purchase price consisted of $3,000 in
cash and 1,500,000 shares of MedicaLogic common stock at $2.20 per share.
F-40
Pro Forma Financial Information
The following unaudited pro forma condensed combined financial statements have
been prepared to give effect to the acquisition of PrimaCis Health Information
Technology, Inc. (PrimaCis). The historical financial information has been
derived from the respective historical financial statements of MedicaLogic, Inc.
and PrimaCis, and should be read in conjunction with such financial statements
and the related notes included herein. The unaudited pro forma condensed
combined statements of operations combine MedicaLogic's and PrimaCis' historical
statements of operations and give effect to the acquisition, including the
amortization of goodwill and other tangible assets resulting from the
acquisition, as if it occurred on January 1, 1998. The unaudited pro forma
condensed combined statement of operations for the period from December 31, 1998
through June 30, 1999 have not been presented as the results of operations
presented for MedicaLogic during this period include PrimaCis' operating
results. The unaudited pro forma condensed combined balance sheet as of December
31, 1998 gives effect to the acquisition of PrimaCis as if it had occurred on
December 31, 1998.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
acquisition had been consummated as of the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
the combined companies. The pro forma adjustments are based upon available
information and certain assumptions that MedicaLogic believes are reasonable
under the circumstances.
F-41
MEDICALOGIC, INC.
Unaudited Pro Forma Condensed
Combined Balance Sheet
(Dollars in thousands)
December 31, 1998
---------------------------------------------------------------
Pro forma Pro forma
Assets MedicaLogic PrimaCis adjustments combined
------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 4,718 $ 50 $ (3,153)(1) $ 1,615
Short-term investments 7,030 -- 7,030
Accounts receivable, net 10,084 51 10,135
Other current assets 545 10 2,250 (3) 2,805
------------ ------------ ------------
Total current assets 22,377 111 21,585
Property and equipment, net 1,804 58 (15)(3) 1,847
Other assets 127 11 4,755 (3) 4,893
------------ ------------ ------------
Total assets $ 24,308 $ 180 $ 28,325
============ ============ ============
Liabilities, Redeemable Preferred Stock
and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 557 $ 19 $ 576
Accrued and other liabilities 2,286 72 2,358
Deferred revenue 2,701 225 2,926
Current portion of capital leases 215 10 225
Current portion of notes payable 527 381 908
------------ ------------ ------------
Total current liabilities 6,286 707 6,993
Non-current portion of capital leases 92 10 102
Notes payable 587 -- 587
------------ ------------ ------------
Total liabilities 6,965 717 7,682
------------ ------------ ------------
Convertible redeemable preferred stock;
50,000,000 shares authorized; aggregate
liquidation preference $50,128; issued
and outstanding 21,524,545 at December 31,
1998 49,387 -- 49,387
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; authorized
10,000,000 shares; issued and outstanding
13,308,561 shares at December 31, 1998 5,139 11 3,289 (1,2) 8,439
Additional paid in capital -- 3,114 (3,114)(2) --
Common stock notes receivable (2,039) (39) 39 (2) (2,039)
Accumulated deficit (35,144) (3,623) 3,623 (2) (35,144)
------------ ------------ ------------
Total shareholders' equity (deficit) (32,044) (537) (28,744)
------------ ------------ ------------
Total liabilities, redeemable preferred
stock and shareholders' equity
(deficit) $ 24,308 $ 180 $ 28,325
============ ============ ============
See notes to unaudited pro forma condensed combined financial information.
F-42
MEDICALOGIC, INC.
Unaudited Pro Forma Condensed Combined
Statement of Operations
(Dollars in thousands, except per share data)
Year Ended December 31, 1998
---------------------------------------------------------------
Pro forma Pro forma
MedicaLogic PrimaCis adjustments combined
------------ ------------ ------------ ------------
Revenues:
Software $ 10,410 $ 70 $ 10,480
Service and support 5,750 178 5,928
------------ ------------ ------------
Total revenues 16,160 248 16,408
------------ ------------ ------------
Operating expenses:
Cost of revenue 6,754 16 6,770
Marketing and sales 7,579 282 $ 1,305 (4) 9,166
Research and development 8,016 559 8,575
General and administrative 1,044 1,063 (7)(4) 2,100
------------ ------------ ------------
Total operating expenses 23,393 1,920 26,611
------------ ------------ ------------
Operating loss (7,233) (1,672) (10,203)
Other income (expense):
Interest expense (187) (116) (303)
Interest income 707 2 709
Other, net (322) (7) (329)
------------ ------------ ------------
Loss before income taxes (7,035) (1,793) (10,126)
Provision for income taxes -- -- --
------------ ------------ ------------
Net loss $ (7,035) $ (1,793) $ (10,126)
============ ============ ============
Net loss per share:
Basic and diluted $ (0.51) $ (0.16) $ (0.66)
============ ============ ============
Shares used in computing net loss per share:
Basic and diluted 13,766,073 11,481,704 15,230,789
============ ============ ============
See notes to unaudited pro forma condensed combined financial information.
F-43
Medicalogic, inc.,
Notes to the Unaudited Pro Forma Condensed
Combined Financial Information
(Dollars in thousands, except per share data)
The unaudited pro forma condensed financial information reflects the
acquisition by MedicaLogic, Inc. of PrimaCis Health Information Technology,
Inc. (PrimaCis) and gives effect to certain reclassifications to the
historical financial statements to conform the presentation of the
historical operations of the merged companies.
The adjustments to the unaudited pro forma condensed combined balance sheet
have been calculated as if the acquisition occurred on December 31, 1998.
The adjustments to the unaudited pro forma condensed combined statement of
operations have been calculated as if the acquisition occurred on January
1, 1998.
Pursuant to the merger agreement, a total of $3,000 in cash and 1,500,000
shares of common stock, valued at $2.20 per share, was issued in connection
with the acquisition of PrimaCis in exchange for all outstanding common
shares and vested options of PrimaCis. In addition, MedicaLogic paid $153
in merger related costs which is included in the total purchase price. The
pro forma adjustments to record the purchase of PrimaCis are as follows:
(1) To record the cash paid and stock issued in exchange for all
outstanding shares of PrimaCis capital stock.
(2) To reflect the elimination of the historical stockholders' equity
accounts of PrimaCis.
(3) To record allocation of the purchase price and adjust PrimaCis'
balance sheet for purchase accounting entries:
Total consideration $ 6,453
Book value of assets acquired $ 537
Write down of property and
equipment to fair value 15
Write down of startup costs 11
----------
Net book value allocated to
tangible assets 563
Record prepaid commission (2,250)
----------
Goodwill and other intangibles $ 4,766
==========
F-44 (Continued)
Medicalogic, inc.,
Notes to the Unaudited Pro Forma Condensed
Combined Financial Information
(Dollars in thousands, except per share data)
The adjustments to the net book value of assets acquired relate to
allocation of the purchase price to the assets acquired based on their
relative fair values and are summarized as follows:
o To write down PrimaCis' property and equipment to the fair value of
the property and equipment acquired.
o To eliminate PrimaCis intangibles consisting of start up costs to
their fair value.
o To allocate a portion of the purchase price to prepaid commission
related to the sale of MedicaLogic software to a PrimaCis customer.
o To record the allocation of the excess purchase price over the fair
value of net tangible assets acquired, totaling approximately $4,800,
which has been recorded as goodwill and other intangible assets which
consists primarily of a customer list. Goodwill, totaling $3,800, is
amortized on a straight line basis, over a four year period. Other
intangible assets, totaling $1,000, are amortized on a straight-line
basis, over a two year period.
(4) To record amortization of goodwill and other intangible assets recorded as
a result of the acquisition and to reduce depreciation expense to reflect
new asset fair values.
F-45
- --------------------------------------------------------------------------------
1999
MEDICALOGIC, INC.
________________ Shares
---------------
PROSPECTUS
---------------
Donaldson, Lufkin & Jenrette
BancBoston Robertson Stephens
U.S. Bancorp Piper Jaffray
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of MedicaLogic,
Inc. have not changed since the date hereof.
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the Common Stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
fee.
Registration fee................................... $ 16,680
NASD filing fee.................................... 6,500
Blue Sky fees and expenses (including legal fees).. 5,000 (1)
Nasdaq National Market entry fee................... 95,000 (1)
Accounting fees and expenses....................... 250,000 (1)
Other legal fees and expenses...................... 200,000 (1)
Transfer agent and registrar fee................... 5,000 (1)
Printing and engraving............................. 90,000 (1)
Miscellaneous...................................... 31,820 (1)
-------
Total............. $700,000 (1)
=======
- --------------
(1) Estimated expense.
Item 14. Indemnification of Directors and Officers
Article IV of the Registrant's 1994 Restated Articles of Incorporation
requires indemnification of current or former directors of the Company to the
fullest extent not prohibited by the Oregon Business Corporation Act. The Oregon
Business Corporation Act permits or requires indemnification of directors and
officers in certain circumstances. The effects of the indemnification provisions
are as follows:
(a) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding (other than an action by or in the right of the
Company), if the person concerned acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
Company, was not adjudged liable on the basis of receipt of an improper personal
benefit and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The termination of a
proceeding by judgment, order, settlement, conviction or plea of nolo
contendere, or its equivalent, is not, of itself, determinative that the person
did not meet the required standards of conduct.
(b) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding by or in the right of the Company against the expenses
(including attorney fees) actually and reasonably incurred if the person
concerned acted in good faith and in a manner the person reasonably
II-1
believed to be in or not opposed to the best interests of the Company, except
that no right of indemnification will be granted if the person is adjudged to be
liable to the Company.
(c) Every person who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the person was a party
because of the person's status as a director or officer is entitled to
indemnification as a matter of right.
(d) Because the limits of permissible indemnification under Oregon law are
not clearly defined, the Indemnification Provisions may provide indemnification
broader than that described in (a) and (b).
(e) The Registrant may advance to a director or officer the expenses
incurred in defending any proceeding in advance of its final disposition if the
director or officer affirms in writing in good faith that he or she has met the
standard of conduct to be entitled to indemnification as described in (a) or (b)
above and undertakes to repay any amount advanced if it is determined that the
person did not meet the required standard of conduct.
The Registrant has obtained insurance for the protection of its directors
and officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise.
Item 15. Recent Sales of Unregistered Securities
Within the last three years, the Registrant has issued and sold the
following unregistered securities on the dates and for the consideration
indicated:
In December 1996, the Registrant issued an aggregate of 4,761,907 shares of
Series E Preferred Stock to 24 investors for total consideration of
$15,000,007.05. The Series E Preferred Stock was offered and sold by the
Registrant in reliance upon the exemptions from registration pursuant to Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the
Securities Act.
In November 1997, the Registrant issued 2,000,000 shares of Series F
Preferred Stock to one investor for total consideration of $6,800,000. The
shares of Series F Preferred Stock was offered and sold by the Registrant in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act. In connection with the same transaction, the Registrant granted to the
investor an option to purchase an additional 2,000,000 shares of Series F
Preferred for $3.40 a share and an option to purchase 4,129,665 shares of Series
G Preferred Stock for $3.65 a share. The Registrant also issued to the investor
an option to purchase one share of Series H Preferred Stock, which option was
exercisable upon the failure of the Registrant to reach specific revenue
targets. On March 31, 1998, the investor exercised its option to purchase
2,000,000 shares of Series F Preferred Stock for a total purchase price of
$6,800,000. The investor and the Registrant agreed to extend the exercise period
for the Series G option agreement to June 1, 1998. The Series G option has
expired and will not be exercised. The Series H option has also expired and will
not be exercised. The Series F Preferred Stock was offered and sold, and the
Series F option, the Series G option and the Series H option were issued and, in
the case of the Series G option, extended by the Registrant, in reliance upon
the exemptions from registration pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated under the Securities Act.
In January 1998, the Company issued an aggregate of 27,500 shares of Common
Stock at a deemed value of $2.00 a share to Health Outcome Technologies, Inc.
("HOT") in consideration for the acquisition of certain intangible assets of
HOT. These shares of Common Stock were offered and sold by
II-2
the Registrant in reliance upon the exemptions from registration pursuant to
Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated
under the Securities Act.
In March 1998, the Registrant issued 45,000 shares of Common Stock to an
investor for a total purchase price of $13,950, pursuant to the exercise of a
warrant issued in 1994. The Common Stock issued pursuant to the warrant was
offered and sold by the Registrant in reliance upon the exemptions from
registration pursuant to Section 4(2) of the Securities Act.
In August 1998, the Registrant issued an aggregate of 350,000 shares of
Common Stock to Enterprise Partners IV Associates, L.P. and Enterprise Partners
IV, L.P., for a total purchase price of $700,000. In addition, the Registrant
granted an option to purchase 16,000 shares of Common Stock at a price of $2.00
a share to Enterprise Partners IV Associates, L.P. and granted an option to
purchase 184,000 shares of Common Stock at a price of $2.00 a share to
Enterprise Partners IV, L.P. The options were exercised on April 14, 1999. The
shares of Common Stock and the options were offered and sold and issued in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act.
In February 1999, the Registrant issued 1,500,000 shares of Common Stock to
the shareholders of PrimaCis Information Technology, Inc., at a deemed value of
$2.20 a share, as partial consideration for the acquisition of PrimaCis. The
shares of Common Stock were offered and sold by the Registrant in reliance upon
the exemptions from registration pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated under the Securities Act.
In May 1999, the Registrant issued shares of its Series J Preferred Stock
to four investors. The Registrant offered and sold an aggregate of 7,326,316
shares of Series J Preferred Stock to the investors at a price of $4.75 a share,
for a total purchase price of $34,800,000. The shares of Series J Preferred
Stock were offered and sold by the Registrant in reliance upon the exemptions
from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act.
In August 1999, the Registrant issued an additional 3,050,527 shares of its
Series J Preferred Stock to 11 investors. The Registrant offered and sold the
shares of Series J Preferred Stock to the investors at a price of $4.75 a share,
for $13,499,998.75 in cash, and services from three of the investors valued at
$990,004.50. The shares of Series J Preferred Stock were offered and sold by the
Registrant in reliance upon the exemptions from registration pursuant to Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the
Securities Act.
Options, Restricted Stock and Grants under Stock Incentive Plan
As set forth in the chart below, between September 1996 and September 1999
the Registrant granted to employees, consultants and directors stock options
under the Registrant's Stock Incentive Plans in reliance on the exemption from
registration provided by either (i) Section 4(2) of the Securities Act, or (ii)
Rule 701 promulgated under the Securities Act.
II-3
Number of
Shares
Subject to Exercise
Options Price
---------- --------
September 1, 1996 to October 28, 1998.............. 1,901,636 $ 2.00
October 29, 1998 to May 25, 1999................... 743,000 $ 2.20
May 26, 1999 and thereafter........................ 1,719,500 $ 3.25
Of the options granted during the period from September 1, 1996 to
October 28, 1998 to purchase 1,901,636 shares of Common Stock, 1,752,189 were
outstanding as of September 10, 1999. Of the options granted during the period
from October 29, 1998 to May 25, 1999 to purchase 743,000 shares of Common
Stock, 742,631 remain outstanding. Of the options granted after May 26, 1999 to
purchase 1,719,500 shares of Common Stock, all were outstanding as of September
10, 1999.
In the past three years, the Registrant from time to time offered and sold
the following shares of Common Stock as incentive compensation to senior
management of the Registrant, subject to repurchase or performance requirements,
pursuant to Registrant's Stock Incentive Plans. Such restricted Common Stock was
issued in reliance on the exemption from registration provided by either (i)
Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the
Securities Act.
Number of
Shares of
Restricted Sale
Common Price
---------- ------
September 1, 1996 to October 28, 1998........... 500,000 $ 2.00
October 29, 1998 to May 25, 1999................ 600,000 $ 2.20
May 26, 1999 and thereafter..................... 885,000 $ 3.25
In the past three years, the Registrant from time to time has granted
shares of its Common Stock to employees or consultants in exchange for services
rendered to the Registrant, pursuant to the Registrant's Stock Incentive Plans,
as set forth in the table below in reliance upon the
II-4
exemption from registration provided by either (i) Section 4(2) of the
Securities Act, or (ii) Rule 701 promulgated under the Securities Act.
Deemed Per
Number of Shares Share Value at
Date of Common Date of Grant
---- ---------------- ---------------
September 1, 1996 to October 28, 1998.... 58,700 $ 2.00
October 29, 1998 to May 25, 1999......... 47,500 $ 2.20
May 26, 1999 and thereafter.............. 70,000 $ 3.25
II-5
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1(2) Form of Underwriting Agreement
3.1 1994 Restated Articles of Incorporation, as amended
3.2 Restated Bylaws
4.1 See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
4.2(2) Specimen Stock Certificate
5.1(2) Opinion of Stoel Rives LLP
10.1 1999 Amended and Restated Investor Rights Agreement
10.2 1993 Stock Incentive Plan
10.3 1996 Stock Incentive Plan, as amended
10.4 1999 Stock Incentive Plan
10.5 Form of Incentive Stock Option Agreement
10.6(2) Form of Restricted Stock Purchase Agreement (Performance)
10.7 Form of Restricted Stock Purchase Agreement
10.8 Equipment Financing Agreement between the Company and GE Capital
Financing dated June 5, 1998
10.8.1 Industrial Business Park Lease between the Company and Evergreen
Corporate Center LLC dated January 15, 1997, as amended July 15,
1999
10.8.2 Office Lease between 945 Battery LLC, and the Company, dated May
9, 1999
10.9 Agreement to Issue Shares of Common Stock between the Company and
Baylor College of Medicine dated as of February 16, 1999
10.10 Software Deposit Agreement with Fidex Americas Corporation dated
April 15, 1996
10.11(1) Oracle Alliance Agreement between the Company and Oracle
Corporation dated April 1, 1998, as amended
10.12 Employment Agreement between the Company and Mark Leavitt, dated
August 1, 1985
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
- --------------
(1) Certain portions of this Exhibit have been omitted based on a request for
confidential treatment; such portions have been filed separately with the
Commission.
(2) To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-6
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Hillsboro, State of Oregon, on September 17, 1999.
MEDICALOGIC, INC.
By DAVID C. MOFFENBEIER
--------------------------------------
David C. Moffenbeier
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed below by the following
persons in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Mark K. Leavitt and David C. Moffenbeier
his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any amendments (whether pre-effective or
post-effective) to this registration statement for the same offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
each of said attorney-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or their substitute or substitutes, may do or
cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
MARK K. LEAVITT Chairman of the Board September 17, 1999
----------------------------- and Chief Executive
Mark K. Leavitt, M.D. Officer Principal
Executive Officer
II-8
Signature Title Date
--------- ----- ----
DAVID C. MOFFENBEIER Chief Operating Officer September 17, 1999
----------------------------- and Director Principal
David C. Moffenbeier Financial and Accounting
Officer
CHARLES D. BURWELL Director September 17, 1999
-----------------------------
Charles D. Burwell
BRUCE M. FRIED Director September 17, 1999
-----------------------------
Bruce M. Fried
RONALD H. KASE Director September 17, 1999
-----------------------------
Ronald H. Kase
Director September 17, 1999
-----------------------------
Neal Moszkowski
MARK A. STEVENS Director September 17, 1999
-----------------------------
Mark A. Stevens
RONALD R. TAYLOR Director September 17, 1999
-----------------------------
Ronald R. Taylor
DAVID W. WROE Director September 17, 1999
-----------------------------
David W. Wroe
II-9
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1(2) Form of Underwriting Agreement
3.1 1994 Restated Articles of Incorporation, as amended
3.2 Restated Bylaws
4.1 See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
4.2(2) Specimen Stock Certificate
5.1(2) Opinion of Stoel Rives LLP
10.1 1999 Amended and Restated Investor Rights Agreement
10.2 1993 Stock Incentive Plan
10.3 1996 Stock Incentive Plan, as amended
10.4 1999 Stock Incentive Plan
10.5 Form of Incentive Stock Option Agreement
10.6(2) Form of Restricted Stock Purchase Agreement (Performance)
10.7 Form of Restricted Stock Purchase Agreement
10.8 Equipment Financing Agreement between the Company and GE Capital
Financing dated June 5, 1998
10.8.1 Industrial Business Park Lease between the Company and Evergreen
Corporate Center LLC dated January 15, 1997, as amended July 15,
1999
10.8.2 Office Lease between 945 Battery LLC, and the Company, dated May
9, 1999
10.9 Agreement to Issue Shares of Common Stock between the Company and
Baylor College of Medicine dated as of February 16, 1999
10.10 Software Deposit Agreement with Fidex Americas Corporation dated
April 15, 1996
10.11(1) Oracle Alliance Agreement between the Company and Oracle
Corporation dated April 1, 1998, as amended
10.12 Employment Agreement between the Company and Mark Leavitt, dated
August 1, 1985
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
- --------------
(1) Certain portions of this Exhibit have been omitted based on a request for
confidential treatment; such portions have been filed separately with the
Commission.
(2) To be filed by amendment.