AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999
REGISTRATION NO. 333-87285
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
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 jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification 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)
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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)
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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. / /
--------------------------
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.
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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 OCTOBER 29, 1999
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PROSPECTUS
, 1999
MEDICALOGIC, INC.
[MEDICALOGIC LOGO]
______ SHARES OF COMMON STOCK
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MARKET AND PROPOSED SYMBOL: THE OFFERING:
- - We have applied for listing on the - The underwriters have an option to
Nasdaq National Market with the purchase an additional shares
symbol MDLI. from us to cover over-allotments.
- We anticipate that the initial
public offering price will be between
$12.00 and $14.00 per share.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to MedicaLogic:
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
TABLE OF CONTENTS
Page
----
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use Of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations....................... 20
Business.............................. 30
Page
----
Management............................ 46
Related-Party Transactions............ 54
Principal Shareholders................ 56
Description Of Capital Stock.......... 59
Shares Eligible For Future Sale....... 62
Underwriting.......................... 64
Where You Can Find More Information... 66
Legal Matters......................... 66
Experts............................... 66
Index to Financial Statements......... F-1
2
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING MEDICALOGIC AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS AND OUR RISK FACTORS BEGINNING ON PAGE 8.
MEDICALOGIC, INC.
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 in early 2000 a Web site that will allow them to access 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.
For over a decade, MedicaLogic has developed, marketed and supported
electronic medical record software used by physicians at the point of care
throughout the United States. 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. 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. 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. We believe we are a leading provider of electronic medical record
software in the healthcare industry.
The vast majority of clinical data is still recorded in handwritten or
hand-typed notes filed within paper charts that 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. We believe the Internet is
also an efficient means to distribute medical information to healthcare
consumers.
Our solution to the market opportunity provided by the Internet is the
Internet Health Services Center. The products and services that will comprise
our Internet Health Services Center are:
- LOGICIAN, our proprietary client-server electronic medical record
enterprise software, which has been commercially available since 1996;
- LOGICIAN INTERNET, our product for creating and managing electronic
medical records over the Internet, which became commercially available in
October 1999;
- 98POINT6, our Web site for healthcare consumers, which is currently being
tested in a pilot program and will be commercially available in early
2000, 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
- MEDICALOGIC.COM, our Web site for physicians and other medical
professionals, which has been commercially available since 1996 although
further engineering is necessary to provide some
3
features, providing for physician access to patient electronic medical
records and, upon further development, a range of healthcare information
and commerce opportunities and services.
We believe the Internet Health Services Center will provide the following
benefits:
- Improve the quality of care by increasing the flow of patient medical
information among all healthcare participants, which ultimately will
result in more accurate diagnoses and more timely and appropriate
treatments;
- Empower healthcare consumers by giving them quicker, more efficient and
more effective access to pertinent medical information through electronic
communication with other healthcare participants, such as physicians,
payers and suppliers;
- Improve the physician-patient relationship by facilitating communication
between physicians and patients; and
- Reduce healthcare costs by, among other things:
- Reducing the inefficiencies of manual and paper-based transactions;
- Reducing transcription costs;
- Reducing duplicative and unnecessary laboratory tests resulting from
inaccurate or misplaced records;
- Facilitating compliance with Health Care Financing Administration account
coding regulations; and
- Reducing hospitalizations related to harmful drug interaction events.
Our objective is to be the leading provider of Internet-based electronic
medical record information. Our strategy to achieve this objective has the
following key elements:
- Gain rapid adoption by physicians of our electronic medical record
solutions;
- Offer the most compelling Internet destination for healthcare consumers;
- Become a catalyst of clinical e-commerce transactions; and
- Utilize our large, clinically-rich database.
To provide the electronic transaction services that will form part of the
Internet Health Services Center, we will form relationships with strategic
partners who can provide these services. These services will include 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 pursue this strategy, we have recently entered into strategic
relationships with CVS.com, a leading online pharmacy, Dell Computer
Corporation, Envoy Corporation, a leader in electronic transaction processing in
the healthcare industry, and Lernout & Hauspie Speech Products, a provider of
speech recognition software.
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.
MedicaLogic, Practice With Knowledge, Logician, SIMPL, Quickstep,
ScheduLogic, LinkLogic, KnowledgeBank, AboutMyHealth, 98point6 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 holders.
4
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.............................. - working capital;
- general corporate purposes; and
- potential acquisitions.
The number of shares of common stock to be outstanding after the offering
excludes an aggregate of 7,997,192 shares of common stock reserved for issuance
under our stock plans, of which 2,829,826 shares of common stock were subject to
outstanding options as of October 15, 1999 at a weighted average exercise price
of $6.10 per share.
ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus reflects
the following:
- completion of a one-for-two reverse stock split of shares of our common
stock;
- the conversion of our outstanding preferred stock on a two-for-one basis
into common stock; and
- no exercise by the underwriters of their over-allotment option to purchase
up to additional shares of common stock.
5
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 20.
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
our future operating results.
YEARS ENDED DECEMBER 31,
-------------------------------------------- NINE MONTHS ENDED
PRO SEPTEMBER 30,
FORMA ----------------------
1996 1997 1998 1998 1998 1999
-------- -------- -------- ----------- ----------- --------
(UNAUDITED) (UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.............................. $ 9,664 $ 12,807 $16,160 $ 16,408 $10,759 $ 14,992
Operating expenses:
Cost of revenues.................... 6,120 7,756 6,754 6,875 4,962 5,724
Marketing and sales................. 6,667 7,681 7,882 9,814 5,647 12,300
Research and development............ 6,583 7,047 8,071 8,525 5,981 8,495
General and administrative.......... 718 1,315 1,151 3,014 735 2,511
-------- -------- ------- -------- ------- --------
Operating loss........................ (10,424) (10,992) (7,698) (11,820) (6,566) (14,038)
Net loss attributed to common
shareholders........................ $(10,364) $(10,819) $(7,232) $(11,278) $(6,394) $(13,381)
======== ======== ======= ======== ======= ========
Basic and diluted net loss per common
share(1)............................ $ (1.58) $ (1.63) $ (1.05) $ (1.48) $ (0.93) $ (1.61)
======== ======== ======= ======== ======= ========
Weighted average shares used in
computing basic and diluted net loss
per common share(1)................. 6,576 6,635 6,883 7,633 6,882 8,331
Pro forma basic and diluted net loss
per common share(1)................. $ (0.41) $ (0.63)
======= ========
Weighted average shares used in
computing pro forma basic and
diluted net loss per common
share(1)............................ 17,479 21,084
6
SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED(2)
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(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 7,081 $
Working capital........................................... 43,151
Total assets.............................................. 67,727
Long-term obligations, net of current portion............. 1,659
Convertible redeemable preferred stock.................... 97,825
Total stockholders' equity (deficit)...................... (40,564)
- ------------------------
(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 two-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.
7
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. IF
THAT HAPPENS, 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 nine 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. 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. Failure to achieve broad
acceptance of our products and services by physicians and other healthcare
stakeholders would severely limit our ability to implement our Internet-based
business model. 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
integrate our products and services into their office work flow and to adopt
different behavior patterns and new methods of conducting business and
exchanging information. Physicians may not choose to use our products and
services.
WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OUR
REVENUES COULD DECLINE SUBSTANTIALLY.
We currently derive and expect to continue to derive a significant portion
of our revenues from a limited number of customers. If 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 nine months of 1999, we derived approximately 41% of our revenue from
Baylor College of Medicine and Carilion Health Systems. 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 these sales during any quarter could cause our
revenues and results of operations to fall short of expectations, which could
adversely affect the price of our common stock.
8
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 in 1996, $10.7 million in 1997, $7.0 million in 1998
and $13.1 million in the first nine months of 1999. At September 30, 1999, we
had a retained deficit of $48.9 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 from our Internet-based products or services. We expect to
continue to experience net losses, 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, WHICH MAY HAVE
A NEGATIVE IMPACT ON OUR STOCK PRICE.
We may experience significant variations in results of operations from
quarter to quarter primarily because most of our costs are based on projected
revenue levels and our revenues are difficult to predict. These variations in
our results may negatively affect our stock price. Sales and results of
operations may fluctuate from quarter to quarter depending on:
- The amount and timing of operating costs and capital expenditures relating
to development and expansion of our business;
- Acceptance of our emerging business;
- Our introduction of new or enhanced services and products, and similar
introductions by our competitors; and
- The budgetary cycles of large healthcare providers and other healthcare
organizations.
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.
As a result, we believe that quarter-to-quarter comparisons of our sales and
results of operations are not necessarily meaningful and that these comparisons
may not be accurate indicators of future performance.
OUR FAILURE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND SERVICES AND ENHANCE
CURRENT PRODUCTS AND SERVICES COULD ADVERSELY AFFECT THE IMPLEMENTATION OF OUR
INTERNET-BASED BUSINESS MODEL.
Any failure by us to introduce planned products or to introduce these
products on schedule could make it difficult for us to implement our
Internet-based business model. These include LOGICIAN INTERNET, which we began
to offer on a commercial basis in October 1999, and our consumer Web site
98POINT6, which is currently being tested in a pilot program and will be
released commercially in early 2000. We may not be able to introduce these
products and services or our other products and services under development on
schedule, or at all. For example, LOGICIAN INTERNET was introduced one month
after its planned release date. 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. Past releases of LOGICIAN have contained errors and defects
that required us to provide corrections and other upgrades.
Our products and services often must be integrated and customized to operate
with existing customer legacy computer systems. For example, we are working on
enhancements that will allow our LOGICIAN and LOGICIAN INTERNET products to
communicate with each other to facilitate connections
9
between physicians in integrated healthcare delivery networks, who primarily use
LOGICIAN, and physicians who use LOGICIAN INTERNET. Failure to enhance our
product and service offerings to add functionality in areas such as interfacing
with the products of our strategic partners could make it more difficult for us
to implement our Internet-based business model. Developing, integrating,
enhancing and customizing our products and services will be expensive and time
consuming.
WE RELY ON ESTABLISHING AND MAINTAINING STRATEGIC RELATIONSHIPS THAT MAY NOT
PROVIDE ANTICIPATED BENEFITS.
We will depend upon our strategic relationships to 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. 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.
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:
- Current or future strategic partners may decide to compete with us in some
or all of our markets;
- Key participants in the healthcare industry may refuse to establish
strategic relationships with us if we have entered into relationships with
their competitors; and
- Potential strategic partners may be reluctant to work with us until our
products and services have obtained widespread market acceptance.
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. As a result, sales of our products and
services to new integrated healthcare delivery network customers may grow slowly
and unevenly due to those organizations' purchasing cycles. If the time and
resources required to sell our products and services to new integrated
healthcare delivery network customers materially exceed our expectations, it may
adversely affect our share price.
The average period from our first contact with an integrated healthcare
delivery network customer and its implementation of our products and services is
two years and the average period between a sale and implementation is four
months. We do not control many of the factors that will influence our customers'
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
10
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 may lead to reduced sales of our products and services.
OUR FAILURE TO KEEP PACE WITH ADVANCES IN TECHNOLOGY COULD HARM OUR BUSINESS.
If we cannot adapt to changing technologies, we may not be able to compete
effectively in our industry. 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 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.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HAVE A SIGNIFICANT NEGATIVE
IMPACT ON OUR BUSINESS OPERATIONS.
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 operations,
increase our costs and make it more difficult for us to achieve profitability.
We cannot be certain that our systems, procedures, controls and existing space
will be adequate to support expansion of our operations. We may not be able to
project the rate or timing of increases in the use of our products and services
accurately or to expand and upgrade our systems and infrastructure to
accommodate these increases. Our future results of operations will depend on the
ability of our officers and key employees to manage changing business conditions
and to implement and improve our technical, administrative, financial control
and reporting systems.
OUR FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL COULD SIGNIFICANTLY HINDER THE
EXECUTION OF OUR BUSINESS STRATEGY.
Our success depends in large part on the continued service of our management
and other key personnel and our ability to continue to attract, motivate and
retain highly qualified employees. 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 e-commerce strategies, are integral to the execution of our
business strategy. If one or more of our key employees leaves MedicaLogic and we
are unable to find a replacement with the combination of skills and attributes
necessary to execute our strategy, we may be unable to execute our strategy
successfully. Competition for skilled employees is intense, and the process of
finding qualified individuals can be lengthy and expensive. We do not maintain
key person life insurance on any of our employees.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE
POSITION MAY BE ADVERSELY AFFECTED.
Our ability to compete depends upon our proprietary systems and technology,
including LOGICIAN INTERNET and LOGICIAN. The steps we currently take to protect
our intellectual property rights may prove to 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 may make us less competitive and require us to
engage in expensive litigation to enforce or protect our intellectual property
rights or to defend against claims of invalidity.
11
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 products and
services 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. 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. 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, WHICH COULD HARM OUR
ABILITY TO ATTRACT CUSTOMERS TO OUR WEB SITES.
Failure of our Internet services to function as desired could harm our
ability to attract physicians and consumers to our Web sites. Our operations are
vulnerable to interruption from a variety of sources, many of which are not
within our control, including:
- Power loss and telecommunications failures;
- Software and hardware errors, failures or crashes; and
- Computer viruses and similar disruptive problems.
We have not yet completed comprehensive plans addressing these
contingencies. In addition, some 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, including the routing of transaction data to third-party
payers.
We may have no means of replacing services on a timely basis or at all if
they are inadequate or if there is a service interruption or failure. We may
face liability for the failure of our system to function for any reason.
IF WE ARE HELD LIABLE FOR USE OF DATA WE PROVIDE, WE COULD BE REQUIRED TO PAY
MATERIAL DAMAGES TO INJURED THIRD PARTIES.
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. Claims regarding injuries related to the use of this
data may be made in the future, and we may not be able to insure adequately
against these claims. A claim brought against us that is uninsured or
under-insured could lead to material damages against us.
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
12
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.
OUR INABILITY TO PREVENT SECURITY BREACHES COULD DETER PEOPLE FROM USING OUR
PRODUCTS AND SERVICES AND COULD EXPOSE US TO CLAIMS FOR DAMAGES.
Any well-publicized compromise of Internet security could deter people from
using our products and services to conduct transactions that involve
transmitting confidential healthcare information over the Internet.
A security breach could occur if a third party were able to penetrate our
network security and misappropriate our patient and other information. If this
happened, we could also be subject to liability and litigation. 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 may have to devote significant financial and other resources
to protect against security breaches or to alleviate problems caused by
breaches.
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.
RISKS RELATED TO THE HEALTHCARE INDUSTRY AND THE INTERNET
FEDERAL AND STATE LEGISLATION AND REGULATION AFFECTING THE HEALTHCARE INDUSTRY
COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS.
We are subject to federal and state legislation and regulation affecting the
healthcare industry. Existing and new laws and regulations applicable to the
healthcare industry could have a material adverse effect on our ability to
operate our business. The federal and state governments extensively regulate the
confidentiality and release of patient records. Additional legislation governing
the distribution of medical records 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.
Other legislation currently being considered at the federal level could also
negatively affect our business. For example, the Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions and
identifiers, prescribed security measures and other provisions within two years
after the adoption of final regulations by the Department of Health and Human
Services. In addition, our success depends on other healthcare participants
complying with these regulations.
If United States Food and Drug Administration, or FDA, regulations were
applicable to any of our products and services, we believe that complying with
those regulations would be time consuming, burdensome and expensive and could
delay our introduction of new products or services. Some computer applications
and software are considered medical devices and are subject to regulation by the
FDA. We do not believe that our current products or services are subject to FDA
regulation. We may, however, expand our product and service offerings into areas
that subject us to FDA regulation. We have no experience in complying with FDA
regulations.
13
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 SEVERELY RESTRICT OUR ABILITY TO
OPERATE OUR BUSINESS.
Our business is subject to evolving government regulation of the Internet.
Existing as well as new laws and regulations could severely restrict our ability
to operate our business. Laws and regulations may be adopted to govern the
Internet or other online services covering issues such as:
- User privacy;
- Pricing;
- Content;
- Copyrights;
- Distribution; and
- 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.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD RESULT IN MORE INTENSE
COMPETITION.
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. 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 revenues and results of
operations could suffer. In addition, the acquisition by third parties of any of
our customers could have an adverse effect on our relationship with that
customer.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
THE DEMAND FOR AND PRICE OF OUR COMMON STOCK COULD FLUCTUATE SIGNIFICANTLY.
Before 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:
- Actual or anticipated variations in our quarterly results of operations;
- Announcements of technological innovations or new services or products by
us or our competitors;
- Timeliness of our introductions of new products; and
14
- Changes in financial estimates by securities analysts.
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, 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.
SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THE OFFERING COULD RESULT IN A LOWER
MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that these 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 September 30, 1999, the holders of approximately
16,327,967 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 181(st) day after the date of
this prospectus, approximately 22,752,297 shares of our common stock, including
11,139,545 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 September 30, 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 7,997,192 shares of
common stock reserved for issuance under our stock incentive plans.
OUR RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS WE EXPRESS IN OUR
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
This prospectus contains forward-looking statements that involve risks and
uncertainties, including those discussed above and in other sections of 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.
15
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 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. We currently intend to retain
earnings, if any, to fund the development and growth of our business.
16
CAPITALIZATION
The table below presents the following information:
- our actual capitalization as of September 30, 1999; and
- our pro forma capitalization 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 100 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 in this prospectus. The shares
issued and outstanding do not include 2,829,826 shares issuable on the exercise
of outstanding options as of October 15, 1999.
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
Cash, cash equivalents and short-term investments........... $ 45,140 $
======== ========
Capital leases and notes payable, less current portion...... $ 1,659 $
-------- --------
Convertible redeemable preferred stock; 50,000,000 shares
authorized, $99,418 aggregate liquidation preference,
46,091,527 shares designated, 31,901,388 issued and
outstanding at September 30, 1999, actual; no shares
issued or outstanding, as adjusted........................ 97,825
Shareholders' equity (deficit):
Common stock, 100,000,000 shares authorized, 8,926,281
issued and outstanding at September 30, 1999, actual;
100,000,000 shares authorized, shares issued and
outstanding, as adjusted................................ 15,793
Common stock notes receivable............................. (6,449)
Deferred compensation..................................... (988)
Accumulated deficit....................................... (48,920)
-------- --------
Total shareholders' equity (deficit)........................ (40,564)
-------- --------
Total capitalization........................................ $ 57,261 $
======== ========
17
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $52,491,000 or $2.11 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, as illustrated in
the following table:
Assumed initial public offering price per share............. $
-----------------------
Pro forma net tangible book value per share as of September
30, 1999.................................................. $ 2.11
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 September 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....... 24,876,975 % $114,153 % $ 4.58
----------------------- -----------------------
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.
18
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 in this prospectus. The consolidated
statements of operations data for the three-year period ended December 31, 1998
and the nine-month period ended September 30, 1999 and the consolidated balance
sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included 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 nine-month period ended September 30, 1998 are
derived from unaudited financial statements included 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 this period. Historical results
of operations are not necessarily indicative of future results, and the results
for interim periods are not necessarily indicative of the results that may be
expected for the entire year.
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Licenses........................................ $ 2,084 $ 6,765 $ 6,845 $ 7,617 $10,410 $ 6,534 $ 9,620
Service and support............................. 366 772 2,819 5,190 5,750 4,225 5,372
------- ------- -------- -------- ------- ------- --------
Total revenues.................................... 2,450 7,537 9,664 12,807 16,160 10,759 14,992
Operating expenses:
Cost of licenses................................ 263 1,036 2,089 1,702 939 608 813
Cost of service and support..................... 724 2,105 4,031 6,054 5,815 4,354 4,911
Marketing and sales............................. 2,755 5,061 6,667 7,681 7,882 5,647 12,300
Research and development........................ 1,024 2,980 6,583 7,047 8,071 5,981 8,495
General and administrative...................... 376 582 718 1,315 1,151 735 2,511
------- ------- -------- -------- ------- ------- --------
Total operating expenses.......................... 5,142 11,764 20,088 23,799 23,858 17,325 29,030
------- ------- -------- -------- ------- ------- --------
Operating loss.................................... (2,692) (4,227) (10,424) (10,992) (7,698) (6,566) (14,038)
------- ------- -------- -------- ------- ------- --------
Other income (expense):
Interest expense................................ (88) (176) (251) (240) (187) (145) (180)
Interest income................................. 70 172 456 617 707 504 1,113
Other, net...................................... (22) (30) (96) (55) 143 (40) 9
------- ------- -------- -------- ------- ------- --------
Total other income (expense)...................... (40) (34) 109 322 663 319 942
------- ------- -------- -------- ------- ------- --------
Loss before income taxes.......................... (2,732) (4,261) (10,315) (10,670) (7,035) (6,247) (13,096)
Provision for income taxes........................ -- -- -- -- -- --
Accretion of preferred stock redemption
preference.................................... -- -- (49) (149) (197) (147) (285)
------- ------- -------- -------- ------- ------- --------
Net loss attributed to common shareholders...... $(2,732) $(4,261) $(10,364) $(10,819) $(7,232) $(6,394) $(13,381)
======= ======= ======== ======== ======= ======= ========
Net loss per share:
Basic and diluted............................... $ (0.58) $ (0.68) $ (1.58) $ (1.63) $ (1.05) $ (0.93) $ (1.61)
======= ======= ======== ======== ======= ======= ========
Weighted average shares--basic and diluted...... 4,687 6,302 6,576 6,635 6,883 6,882 8,331
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $3,545 $10,614 $ 18,651 $ 4,924 $ 4,718 $ 7,081
Working capital........................................ 4,159 10,245 19,096 14,870 16,091 43,151
Total assets........................................... 6,242 14,787 26,074 22,072 24,308 67,727
Long-term obligations, net of current portion.......... 406 1,454 977 278 679 1,659
Convertible redeemable preferred stock................. 5,698 15,795 35,867 42,791 49,782 97,825
Total shareholders' deficit............................ (869) (4,995) (15,317) (26,093) (32,439) (40,564)
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 nine months of 1999, we released our current version of
LOGICIAN, for which we shipped an upgrade in September 1999. Our revenues
totaled approximately $16.2 million and $15.0 million for the year ended
December 31, 1998 and the nine months ended September 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 nine months of 1999, Baylor College of Medicine
accounted for approximately 31% of our total revenues and Carilion Health
Systems accounted for approximately 10% of our total revenues.
Costs of license revenues consist of licensing fees paid to third-party
software vendors, product media, product duplication, and manuals. Costs of
service revenues consist of implementation and support personnel and third-party
service provider costs related to customer support. Our third-party licensing
fees represent charges for use of Oracle databases and industry specific content
we include in our software. The majority of these licensing fees are based on
the number of licenses we distribute to our customers. Marketing and sales
expenses consist primarily of salaries, commissions and bonuses earned by sales
and marketing personnel, travel and promotional expenses and facility and
communication costs. Research and development expenses consist primarily of
salaries and benefits paid to software developers, quality assurance personnel
and technical writers, equipment for software developers and payments to outside
contractors. General and administrative expenses consist primarily of salaries,
benefits and related costs for our finance and administrative personnel and
professional services fees.
We recognize software license revenues consistent 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 October 1999. Our consumer Web site, 98POINT6 is being tested
in a pilot program and
20
will not be introduced until early 2000. 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. 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:
- Subscription fees for use of LOGICIAN, rather than the one-time license
fees we have historically charged;
- 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;
- Transaction fees for drug prescriptions transmitted through the Internet
Health Services Center;
- Transaction fees to process payment claims through our Internet Health
Services Center; and
- Fees charged to advertisers for posting banner and other forms of
advertising on our physician-and consumer-oriented Web sites.
The subscription revenue associated with LOGICIAN and LOGICIAN INTERNET will
be recognized on a monthly basis over the life of the agreement or as services
are rendered. Transaction and advertising fee revenues will be recorded as they
are received.
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 through
September 30, 1999, we hired 78 employees, or approximately 34% of our current
workforce, and invested approximately $9.0 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.
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
$13.1 million for the nine months ended September 30, 1999 and, as of
September 30, 1999, had an accumulated deficit of $48.9 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. Of this amount, $3.3 million was
allocated to a customer list, which will be amortized on a straight line basis
over a two-year period. 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.
At about the time of the PrimaCis acquisition, we entered into an agreement
with the Baylor College of Medicine. This agreement provides that for each
purchase of licenses of LOGICIAN by December 31, 2002 by Baylor College of
Medicine or any other institution or health care provider in
21
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
$12.0 million of our common stock. We account for sales of LOGICIAN in the
Houston, Texas area in one of two ways: 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; and 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.
For the nine months ended September 30, 1999, we recorded aggregate deferred
compensation of $1.1 million for the grant of stock options and restricted stock
at prices less than the estimated fair value on the grant date. We expect to
record additional deferred compensation of $538,000 in the fourth quarter of
1999. The deferred compensation is being amortized over the vesting period of
the securities, which is generally three years. Of the total deferred
compensation, $70,000 was amortized through the nine-month period ended
September 30, 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
(UNAUDITED)
Revenues:
Licenses....................................... 70.8% 59.5% 64.4% 60.7% 64.2%
Service and support............................ 29.2 40.5 35.6 39.3 35.8
------ ----- ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of licenses............................... 21.6 13.3 5.8 5.7 5.4
Cost of service and support.................... 41.7 47.3 36.0 40.5 32.8
Marketing and sales............................ 69.0 60.0 48.8 52.5 82.0
Research and development....................... 68.1 55.0 49.9 55.6 56.7
General and administrative..................... 7.4 10.3 7.1 6.8 16.7
------ ----- ----- ----- -----
Total operating expenses..................... 207.8 185.9 147.6 161.1 193.6
Operating loss................................. (107.8) (85.9) (47.6) (61.1) (93.6)
Other income (expense):
Interest expense............................... (2.6) (1.9) (1.2) (1.3) (1.2)
Interest income................................ 4.7 4.8 4.4 4.7 7.4
Other, net..................................... (1.0) (0.4) 0.9 (0.4) 0.1
------ ----- ----- ----- -----
Total other income (expense):................ 1.1 2.5 4.1 3.0 6.3
Loss before income taxes..................... (106.7) (83.4) (43.5) (58.1) (87.3)
Provision for income taxes....................... -- -- -- -- --
------ ----- ----- ----- -----
Net loss..................................... (106.7)% (83.4)% (43.5)% (58.1)% (87.3)%
====== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues, which consisted of software licenses and service revenues,
increased to $15.0 million for the first nine months of 1999 from $10.8 million
for the first nine months of 1998. This increase primarily resulted from an
increase of $3.1 million in software revenue, which in turn was
22
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 $5.4 million for the first nine months of
1999 from $4.2 million for the first nine months of 1998, due primarily to an
increase in our LOGICIAN installed base to 7,468 users on September 30, 1999
from 5,486 users on September 30, 1998. Service revenue represented 36% of our
total revenues for the first nine months of 1999 and 39% 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.
OPERATING EXPENSES
COSTS OF REVENUES
Costs of licenses increased 34%, to $813,000 for the first nine months of
1999 from $608,000 for the first nine months of 1998. Costs of licenses as a
percentage of related license revenues was 8% for the first nine months of 1999
and 9% for the first nine months of 1998. We anticipate some increased costs for
third party licensing fees as we add additional third party content.
Costs of service and support increased 13%, to $4.9 million for the first
nine months of 1999 from $4.4 million for the first nine months of 1998. The
increase in dollar amount resulted primarily from an increase in support and
implementation personnel. Costs of service and support as a percentage of
related service revenues was 91% for the first nine months of 1999 and 103% for
the first nine months of 1998. The decreases in marginal costs of service and
support as a percentage of the related service revenues resulted from allocating
these costs over a larger revenue base. 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 $12.3 million for the first nine
months of 1999 from $5.6 million for the first nine months of 1998. Marketing
and sales expenses represented 82% of our total revenues for the nine months
ended September 30, 1999 and 53% of our total revenues for the nine months ended
September 30, 1998. The increase in dollar amount and percentage of our
marketing and sales expenses resulted primarily from costs of $500,000 related
to our LOGICIAN INTERNET Beta Program, amortization of costs of $1.2 million
related to acquiring PrimaCis' customer list, incremental expenses of
$3.6 million related to our new Internet business, including the cost of
independent contractors and the hiring of 27 new employees, and an increase of
$900,000 in other marketing activities, including trade shows and public
relations. We believe that we will need to continue to increase our sales and
marketing efforts to expand our market penetration and increase acceptance of
our Internet products and services.
23
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $8.5 million for the first
nine months of 1999 from $6.0 million for the first nine months of 1998. Of the
increase, $1.4 million was used to fund an increase in the number of software
developers and quality assurance personnel to 81 as of September 30, 1999 from
55 as of September 30, 1998 and $560,000 to fund the use of outside contractors
to support our product development and testing activities. Research and
development costs represented 57% of total revenue for the nine months ended
September 30, 1999 and 56% of total revenues for the nine months ended
September 30, 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $2.5 million for the first
nine months of 1999 from $735,000 for the first nine months of 1998. The
increase resulted from amortization of $539,000 of goodwill related to the
PrimaCis acquisition, $70,000 in compensation expense related to issuing
securities below the estimated fair value, and an increase in finance and
administrative personnel to 23 as of September 30, 1999 from 9 as of
September 30, 1998, to support the growth of our business. These increases were
partially offset by a net decrease of $175,000 related to the settlement of
litigation related to two customer contracts. General and administrative cost
represented 17% of our total revenues for the nine months ended September 30,
1999 and 7% of our total revenues for the nine months ended September 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, 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 $942,000 for the
first nine months of 1999 compared to $319,000 for the first nine months of
1998. The increase in other income is primarily the result of an increase of
$609,000 in interest earned on cash and cash equivalents and short term
investments.
PROVISION FOR INCOME TAXES
As a result of our net operating losses, no provision for income taxes
during the nine-month periods ended September 30, 1999 and 1998 was recorded. As
of September 30, 1999 we had net operating loss carryforwards for tax reporting
purposes of approximately $48.0 million and research and experimentation credits
of approximately $1.6 million which expire through 2019. Approximately
$7.1 million of the net operating loss is subject to an annual utilization
limitation due to ownership changes in prior years.
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. License revenues increased from $6.8 million in
1996 to $7.6 million in 1997, and to $10.4 million in 1998. The increase in
license 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 license revenues from 1997 to 1998
continued the trend of realizing higher average selling prices through our
direct sales channel.
24
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.
OPERATING EXPENSES
COSTS OF REVENUES
Costs of licenses decreased from $2.1 million in 1996 to $1.7 million in
1997, and to $939,000 in 1998. Costs of license revenues as a percentage of
license revenues was 31% in 1996, 22% in 1997 and 9% in 1998. The decrease in
dollar amounts and percentage of revenue amounts from 1997 to 1998 is primarily
due to the more favorable license fee terms negotiated with Oracle.
Costs of service and support increased from $4.0 million in 1996 to
$6.1 million in 1997, and decreased to $5.8 million in 1998. Costs of service
revenues as a percentage of service revenues was 143% in 1996, 117% in 1997 and
101% in 1998. The decrease in dollar amount from 1997 to 1998 reflects 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 $6.7 million in 1996 to
$7.7 million in 1997, and to $7.9 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 69% of our total revenues in 1996, 60% in 1997 and 49% 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 $8.1 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
$1.3 million in 1997, and decreased to $1.2 million in 1998. The increase 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 and, in 1997, reflects an accrual of $450,000 for litigation
expenses. General and administrative expenses represented approximately 7% of
total revenues in 1996, 10% in 1997 and 7% in 1998.
25
OTHER INCOME (EXPENSE)
Other income increased from $109,000 in 1996 to $322,000 in 1997, and to
$663,000 in 1998. The increase from 1996 to 1998 in other income is mainly
attributable to an increase in interest earned on cash and cash equivalents and
short term investments.
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.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
for 1998 and the first nine 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, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
---------- --------- -------------- ------------- ---------- --------- --------------
(DOLLARS IN THOUSANDS)
Revenues:
License.................. $ 1,417 $ 2,572 $ 2,545 $ 3,876 $ 2,137 $ 3,650 $ 3,833
Service and support...... 1,394 1,276 1,555 1,525 1,490 1,698 2,184
------- ------- ------- ------- ------- ------- -------
Total revenues......... 2,811 3,848 4,100 5,401 3,627 5,348 6,017
Operating expenses:
Cost of
revenue--license....... 234 215 158 332 188 279 346
Costs of revenue--service
and support............ 1,420 1,414 1,521 1,460 1,414 1,537 1,960
Sales and marketing...... 1,742 1,943 1,962 2,235 2,749 3,510 6,041
Research and
development............ 1,886 2,027 2,068 2,090 2,292 2,800 3,403
General and
administrative......... 203 248 284 416 136 793 1,582
------- ------- ------- ------- ------- ------- -------
Total operating
expense.............. 5,485 5,847 5,993 6,533 6,779 8,919 13,332
Operating loss............. (2,674) (1,999) (1,893) (1,132) (3,152) (3,571) (7,315)
Other income (expense),
net...................... 36 139 144 344 211 206 525
------- ------- ------- ------- ------- ------- -------
Loss before income tax..... (2,638) (1,860) (1,749) (788) (2,941) (3,365) (6,790)
Provision for income
taxes.................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income................. $(2,638) $(1,860) $(1,749) $ (788) $(2,941) $(3,365) $(6,790)
======= ======= ======= ======= ======= ======= =======
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 September 30, 1999, net proceeds from these private placements
totaled $97.0 million.
26
As of September 30, we had cash and cash equivalents of $7.1 million and
short term investments of $38.1 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 $2.1 million
under this facility, and $1.2 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 $423,000 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 outflows of $4.3 million for
the first nine months of 1999 and $5.0 million for the first nine months of
1998. The reduction in cash outflows during the first nine 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,
1998 and 1999 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 $42.4 million in the first nine months of
1999. Of that amount, $9.0 million was used to purchase fixed assets,
$2.1 million was used for the acquisition of PrimaCis and $43.0 million was
invested in short term investment instruments. Financing activities provided
cash of $49.1 million in the nine months ended September 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 as we:
- Enter new markets for our products and services;
- Increase marketing activities;
- Increase research and development spending;
- Develop new distribution channels;
- Expand our infrastructure; and
- 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 these
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
21(st) century dates from 20(th) 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
27
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 readiness of our software products and
our information technology and non-information technology systems and 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 21(st) century dates from 20(th) 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 periodically review our internal management information technology and
other systems to identify any products, services or systems that are not
Year 2000 compliant and to take corrective action. Significant information
technology systems include our production system, composed of the servers,
networks and software that comprise the underlying technical infrastructure that
runs our business, and various internal office systems. Our significant
non-information technology systems include the telephone systems, air
conditioning and security system. To date, we have not encountered any material
Year 2000 problems with our computer systems or any other equipment that might
be subject to these problems.
In addition to assessing the readiness of our systems, we have gathered
information from, and have directly communicated through written correspondence,
telephone calls and in face-to-face meetings with, our third-party systems and
software vendors, as well as other suppliers, to identify and, to the extent
possible, resolve issues involving the Year 2000 problem. Based on
representations made to us by applicable suppliers, we believe that the
third-party software and systems that are material to our business are Year 2000
compliant. However, we have limited or no control over the actions of our
third-party suppliers. Thus, while we expect that we will be able to resolve any
significant Year 2000 problems with our systems, we cannot guarantee that our
third-party suppliers will resolve all Year 2000 problems with their systems
before the occurrence of a material disruption to our business. Any failure of
material third-party suppliers to resolve Year 2000 problems with their systems
in a timely manner would have a negative effect on our ability to conduct
business.
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.
In addition, we cannot be certain that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by these
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
that could prevent us from delivering our services to our customers, decrease
the use of the Internet or prevent users from accessing our Web site, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
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
28
compliance efforts may involve significant time and expense and unremediated
problems could materially adversely affect our business, financial condition and
results of operations.
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.
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. 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 some costs related to internal use software once specified
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.
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 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.
29
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 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 a leading provider
of electronic medical record software in the healthcare industry.
The Internet, with its open architecture and broadening availability at
home, in the workplace and at the point of care, makes it possible for 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
accurate and timely access to their physician-created medical information. By
connecting physicians and consumers around this shared database of Internet
health records, we believe we can enhance the physician-patient relationship and
make common communications processes, such as prescription refills or
appointment requests, much more convenient. Finally, we expect 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.
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:
- PATIENTS: the individual consumers of healthcare services;
- PROVIDERS: physicians and organizations such as hospitals, rehabilitation
centers and nursing homes;
30
- SUPPLIERS: manufacturers and distributors of goods such as
pharmaceuticals, medical devices and healthcare supplies, and providers of
ancillary services such as laboratories and others; and
- 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
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 the Internet has changed the electronic medical records software
environment and made computerized tools more useful and acceptable to
physicians. In the past, two principal 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
31
information technology within the physician office sector. 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.
THE MEDICALOGIC SOLUTION
Our solution is the Internet Health Services Center, which will integrate
the following:
- ELECTRONIC MEDICAL RECORDS--for physicians, Internet-hosted applications,
which have been commercially available since October 1999, and
Internet-enabled client-server applications, which will become
commercially available in early 2000, used at the point of care to
document physician-patient encounters and manage clinical information.
- PERSONAL HEALTH PORTFOLIO--for consumers, a compelling Internet
application, which will become commercially available in early 2000, and
let consumers maintain a personal health portfolio, combining portions of
their physician-created electronic medical record with personally entered
information.
- CONTEXT-SPECIFIC CONTENT AND E-COMMERCE--for both consumers and
physicians, health information content and e-commerce opportunities, which
will become commercially available beginning in mid 2000, 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.
- INTERNET HEALTH RECORD--a highly secure, clinically rich and deeply
structured core database for use by physicians, patients and our strategic
partners, which, beginning in early 2000, 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.
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The shaded center of the following diagram shows graphically that the
Internet Health Record will consist of data in personal health portfolios
entered by patients, data in electronic medical records entered by physicians
and services and content provided by our strategic eHealthcare partners.
THE MEDICALOGIC INTERNET HEALTH SERVICES CENTER
eHEALTHCARE PARTNERS
[GRAPHIC]
HEALTHCARE CONSUMERS PHYSICIANS
[graphic containing three overlapping circles. In the top circle is caption
"Context-specific Content and e-Commerce," in the left circle is caption
"Personal Health Portfolio" and in the right circle is caption "Electronic
Medical Record." The overlapping section of the three circles contains the
caption "Internet Health Record."]
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 we believe
will ultimately result in more accurate diagnoses and more timely and
appropriate treatments. Online access to accurate, 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 are just a few of the benefits provided by our solution that 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, we believe the
electronic access to healthcare records that will be provided to patients and
others
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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 systems. In addition, through greater efficiency
and better access to patient medical records, health maintenance should be
improved and the costs of treatment reduced.
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 RECORD
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 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 is
available today at our MEDICALOGIC.COM Web site and 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
September 30, 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, 98POINT6, will be highly valued by consumers. This
Web site is currently being tested in a pilot program and will be released
commercially in early 2000. When released, 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.
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BECOME A CATALYST 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, we believe 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 catalyst of
clinical e-commerce transactions, which will be completed through strategic
partnerships with the appropriate healthcare stakeholders, such as pharmacies,
laboratories and electronic claims clearinghouses. We expect these e-commerce
services to start becoming available in mid 2000.
UTILIZATION 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. We expect to begin providing data to these third parties in late 2000
or early 2001.
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 October 1999. LOGICIAN
INTERNET provides the following benefits:
- The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- The ability to verify automatically compliance with Health Care Financing
Administration documentation guidelines for the level of service billed;
- The ability to obtain secure and rapid access to key patient clinical
information from any Web browser by accessing the MEDICALOGIC.COM Web
site;
- The ability to be used at the point of care in the exam room, without
requiring a continuous Internet connection;
- The ability to securely store electronic records at our data center; and
- Additional planned benefits in future releases including integration of
laboratory results, electronic prescription transmission, claims
submission and eligibility checking as well as the ability of physicians
to communicate with patients using 98POINT6 by sharing records data and
exchanging messages on the patients' personal health portfolios. We expect
these features to start becoming available in mid 2000.
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To minimize the challenges for nontechnical users in installing software and
obtaining Internet access, LOGICIAN INTERNET is available as a complete,
ready-to-run solution. For a monthly fee, a physician receives a complete
package that includes an ultramobile laptop computer from Dell Computer
Corporation, pre-installed speech recognition software from Lernout & Hauspie,
Internet access service and the LOGICIAN INTERNET hosted application with
storage for an unlimited number of charts. For users who already have a suitable
computer and Internet access, the hosted application and storage service is 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 that has been commercially available
for several years, and LOGICIAN INTERNET, depending on the needs of the
institution. Clients will be able to migrate between LOGICIAN and LOGICIAN
INTERNET in future releases. After delivering first-generation electronic
medical record products for the PC-DOS environment from 1990 to 1995, 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:
- Extensive clinical decision support to improve outcomes, including
preventive care reminders, drug interaction and allergy checking and
formulary management;
- Enhanced ability to measure and manage patient populations using query,
reporting and intervention tools;
- The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- The ability to 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
- The ability to be used at the point of care, in the exam room.
In future releases, we expect that LOGICIAN will also provide the following
benefits:
- The ability to store electronic records at our data center securely;
- The ability of physicians to communicate with patients using 98POINT6 by
sharing records data and exchanging messages via their personal health
portfolio; and
- Additional planned benefits in future releases including integration of
laboratory results, electronic prescription transmission 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 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
36
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 98POINT6, which is currently in a pilot program and
which we expect to be commercially available in early 2000. 98POINT6 will
provide the following benefits for healthcare consumers:
- The ability to securely view summary data from the physician, including
medications, diagnoses, allergies, health directives and laboratory
results;
- The ability to enter information about medical and family history,
wellness goals and behaviors into a personal health portfolio;
- The ability to integrate these two sources of data into the Internet
Health Record, providing useful information that can be shared selectively
with other individuals and health professionals;
- The ability to conveniently communicate with their personal physician, to
request appointments, obtain medication refills, ask questions or clarify
their records;
- The ability to access health information content that is tailored to their
personal needs through data in the Internet Health Record; and
- 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 catalyst 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. With the consent of individual patients
and physicians, and in compliance with applicable legal requirements, these
opportunities include:
- Pharmacy--delivery of new and refill prescription orders from physicians
and patients to pharmacies and pharmacy benefit managers;
- Laboratory--delivery of orders and return of results to physicians and
patients;
- Payers--direct submission of claims to clearinghouses from physicians
using electronic data interchange and electronic bill presentment/payment
to clearinghouses by physicians on behalf of patients using their personal
health portfolio;
- Clinical research organizations--enhanced recruitment of patients for
studies through automated screening and notification;
- Healthcare organizations, both government and private--aggregated and
anonymous data about the health of designated populations for
epidemiologic research, planning and management;
- Pharmaceutical marketing research--more accessible data on the use and
outcomes of drugs; and
37
- Advertising/sponsorship--highly personalized and targeted marketing to
consumers and physicians for healthcare-related products or services.
We expect to begin providing this data beginning mid 2000 through 2001.
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 benefits of electronic medical records to the
enterprise and the physician's practice.
SIGNIFICANT CUSTOMERS
We market our products and services to physicians and large integrated
healthcare delivery networks. 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 1996, we derived approximately
$1.5 million, or 16%, of our revenue from North Memorial Medical Center,
$1.0 million, or 11%, of our revenue from Eli Lilly & Company, $990,000, or 11%,
of our revenue from Arkansas Blue Cross Blue Shield and $920,000, or 10%, of our
revenue from Riverside Physicians Services. In 1997, we derived approximately
$2.7 million, or 20%, of our revenue from VHA, Inc., one of our distribution
partners, and approximately $1.6 million, or 12%, from Wake Forest Baptist
Medical Center. In 1998, we derived approximately $3.4 million, or 21%, of our
revenue from VHA. In the first nine months of 1999, we derived approximately
$4.5 million, or 31% of our revenue from Baylor College of Medicine and
approximately $1.5 million, or 10% from Carilion Health Systems.
Our products and services are currently being used by 40 integrated
healthcare delivery networks, including:
- Allina Health System;
- Baylor College of Medicine;
- Carilion Health Systems;
- Christiana Care Health System;
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- Eastern Maine Healthcare;
- MeritCare Health System;
- Promina Health System;
- Providence Health System;
- Riverside Physician Services; and
- 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:
- 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;
- Promotion of free trial periods and low cost bundled hardware packages;
- A physician incentive program that offers every physician subscribing to
LOGICIAN INTERNET a points-based redeemable reward for referring fellow
physicians;
- An affiliate program for e-commerce partners and professional
associations;
- A media relations campaign targeted at physician publications and local
media; and
- 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. We believe 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:
- Participation at national health information technology trade conferences;
- A speakers program placing current customers and executives before key
decision makers of prospective customers;
- An editorial and news presence in the healthcare information technology
press supported by targeted advertising of our brand;
- Publication of industry-reference briefs and texts addressing critical
adoption issues; and
39
- Internet access to online product and service information, demonstrations
and promotional trials and offline publications.
HEALTHCARE CONSUMERS. We believe 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 98POINT6, which
is currently being tested in a pilot program and which we expect to release
commercially in early 2000, that is co-branded with local integrated healthcare
delivery networks. In addition, promotion of 98POINT6 will include a national
brand building campaign designed to create interest by healthcare consumers
through physicians. Consumers will register for membership at no charge at the
98POINT6 site or through a co-branded provider partner site. Marketing programs
will include:
- Co-branded direct mail and point of service promotional campaigns
developed and sponsored by us and executed with provider partners;
- Consumer brand building in communities with a high concentration of
physician users of electronic medical record products that can be
interfaced to 98POINT6;
- Online advertising with consumer e-commerce and content partners; and
- 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.
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 September 30, 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 believe
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 MedicaLogic. We have entered into a nonexclusive agreement with
Dell Marketing L.P. providing for a mutual marketing relationship to promote
each other's products and services, including hyperlinks between each of our Web
sites and cooperative marketing efforts which may include trade shows, direct
mail campaigns and sales training.
40
The agreement designates Dell as our 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 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. The
agreement provides that 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.
L&H. L&H Applications USA, Inc. is a subsidiary of Lernout & Hauspie Speech
Products N.V., a leading provider of dictation software programs for use in
professional services. We have entered into an agreement with L&H that provides
us with a nonexclusive and nontransferable license to L&H's medical-specific
speech recognition software programs for distribution with LOGICIAN INTERNET. We
will make royalty payments to L&H for each copy of the software licensed,
including a maintenance and support fee. Royalties will be prepaid quarterly,
contingent upon development milestones to be met by L&H. This service is
currently available to our LOGICIAN INTERNET subscribers.
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:
- Automating financial, administrative and clinical transactions, such as
Healtheon Corporation and CareInsite, Inc.;
- Attracting physicians with journalistic content, such as Medscape, Inc.
and Physicians Online, Inc.; and
- Targeting the health consumer area, including drkoop.com, Inc. and
iVillage Inc. for content, as well as online pharmacies, such as
drugstore.com, Inc.
Each of these companies can be expected to compete with us within segments
of the evolving Internet healthcare market, but it is also likely that some of
them will serve in the role of our partner
41
or vendor. Major Internet companies, including those not currently specializing
in the healthcare industry, may also enter our markets. Many of these companies
have longer operating histories, larger customer bases, substantially greater
financial, technical, sales and marketing resources and greater name recognition
than we do and 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.
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. 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. 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 September 30, 1999, we employed 101 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.
We must maintain a high standard and desire for the most effective and
innovative technologies. The success of new product and service introductions is
dependent on several factors, including:
- Proper definition of new applications or services;
- Appropriate staffing of expertise on the particular assignment;
- Timely completion and introduction of new products and services; and
42
- 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 change the operating environment for our potential customers. Healthcare
organizations may react to these proposals and the uncertainty surrounding these
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, these 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 rules about individuals'
rights to access their own or someone else's medical information within
legislation known as a Patient Bill of Rights. This legislation, if enacted,
would likely define what is to be considered protected health information and
outline steps to ensure the confidentiality of this 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 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 and rapidly evolving regulation governing both the disclosure and
the use of confidential patient medical record information. Legislation
governing the dissemination of medical record information has been proposed at
both the state and federal levels. This legislation may require holders of
medical records to implement security measures that may require substantial
expenditures by us or 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 that address issues such as online content, user privacy, pricing and
characteristics and quality of applications and services. For example, although
two key provisions of the act were 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
43
may adopt legislation to attempt to protect this privacy. Any legislation
addressing these issues 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
some 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 specific 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.
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,
98point6, Quickstep and ScheduLogic. We are currently preparing 12 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
and, as a result, third parties may infringe upon or misappropriate our
copyrights, trademarks, service marks and similar proprietary rights. In
addition, the global nature of the Internet makes it impossible to control the
ultimate destination of our services and effective copyright and trademark
protection may be unenforceable or limited in foreign countries.
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 Internet domain names derive value from
the individual's ability to remember these 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.
44
EMPLOYEES
As of September 30, 1999, we employed 230 persons on a full-time basis, of
whom there were 101 in technical development and support, 60 in sales and
marketing, 29 in professional services, 17 in operations and networks and 23 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. on June 14, 1999 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 these
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 do not believe, however, that the ultimate
disposition of this litigation will have a material adverse effect on our
financial condition, liquidity and results of operations.
We are not currently subject to any other material legal proceedings.
45
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 September 30, 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
Frank J. Spina....................... 45 Senior Vice President and Chief Financial 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 e-Commerce
Strategies
Blackford Middleton.................. 41 Vice President, Clinical Informatics
C. Sue Reber......................... 53 Vice President, Marketing and Corporate Communications
Richard L. Samco..................... 49 Vice President and Chief Technology Officer
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.
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
46
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.
FRANK J. SPINA was hired by MedicaLogic to serve as its senior vice
president and chief financial officer starting in November 1999. From 1997 to
1999, Mr. Spina served as the chief financial officer for 3D Systems
Corporation, a provider of solid imaging systems. From 1994 to 1997, Mr. Spina
served as vice president and corporate controller of Qualcomm, Inc., a developer
and manufacturer of wireless communication equipment. From 1985 to 1994,
Mr. Spina served in a variety of positions with Motorola, Inc., including
division controller and group operations controller. Mr. Spina received his B.A.
from Baldwin Wallace College and is a certified public accountant.
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 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
e-commerce 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
47
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.
BLACKFORD F. MIDDLETON has served as vice president, clinical informatics
since 1994. 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, or
CPRI, 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.
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. Before 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.
RICHARD L. SAMCO has served as 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. Before 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.
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
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 boards of directors of
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.
48
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. Mr. Stevens joined Sequoia
Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on
the boards of directors of MP3.com, Inc., an online music Internet company,
NVidia Corp., a supplier of graphics processors and software and Terayon
Communication Systems, Inc., a cable modem system supplier, and several
privately held Internet and semiconductor companies. Mr. Stevens received a
B.S.E.E., a B.A. and an M.S. in computer engineering from the University of
Southern California and an M.B.A. from Harvard University.
RONALD R. TAYLOR has been a director since 1995. Since 1998, Mr. Taylor has
been a general partner of Enterprise Partners, a venture capital firm. In 1987,
Mr. Taylor founded Pyxis Corporation, a medical information systems company, and
served as its chairman and chief executive officer until it merged with Cardinal
Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson
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 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 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 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 the accountants. The current members of
the audit committee are Bruce M. Fried, Neal Moszkowski and Ronald R. Taylor.
The compensation committee reviews and makes recommendations to the board of
directors concerning the policies, practices and procedures relating to the
compensation and benefits of our officers and managerial employees. The
compensation committee exercises all authority under our stock
49
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
Before establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No member
of the board of directors or the compensation committee serves as a member of
the board of directors or compensation committee of any entity that has one or
more directors serving as an executive officer of MedicaLogic.
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 30,000 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 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.
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.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)(2)
- --------------------------- -------- -------- -------- ------------------
Mark K. Leavitt, Chairman of the Board and Chief
Executive Officer............................... 1998 $210,000 -- --
David C. Moffenbeier, Chief Operating Officer..... 1998 $190,000 -- $50,000
Blackford Middleton, Senior Vice President,
Clinical Informatics............................ 1998 $160,000 $20,000 $48,621
Richard L. Samco, Senior Vice President and Chief
Technology Officer.............................. 1998 $185,000 -- --
Thomas M. Watson, Senior Vice President, Worldwide
Sales and Professional Services................. 1998 $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
may be terminated with 60-days notice.
50
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
PERFORMANCE OR
NUMBER OF OTHER PERIOD UNTIL
NAME SHARES(#) MATURATION OR PAYOUT(3)
- ---- --------- -----------------------
Mark K. Leavitt........................................ 15,000 Before July 1, 2000
David C. Moffenbeier................................... 15,000 Before July 1, 2000
Blackford Middleton.................................... 7,500(1) Before July 1, 2000
Richard L. Samco....................................... 15,000 Before July 1, 2000
Thomas M. Watson....................................... 15,000(2) Before July 1, 2000
- ------------------------
(1) Does not include 12,500 shares of restricted stock issued to Mr. Middleton
on July 1, 1998 upon his surrender of 12,500 outstanding options to purchase
common stock. Of these 12,500 shares of restricted stock, 5,556 were not
subject to a right of repurchase, and 6,945 shares were subject to a right
of repurchase by MedicaLogic and have been released from the repurchase
option ratably over a period of 20 months beginning July 1, 1998.
(2) Does not include 75,000 shares of restricted stock issued to Mr. Watson on
July 1, 1998 upon his surrender of 75,000 outstanding options to purchase
common stock. Of these 75,000 shares of restricted stock, 33,334 shares were
not subject to a right of repurchase, and 41,667 were subject to a right of
repurchase by MedicaLogic and have been released from the repurchase option
ratably over a period of 20 months beginning July 1, 1998.
(3) Unless the repurchase option is terminated earlier upon satisfaction of
performance criteria.
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 if the holder
voluntarily terminates his 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
before 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 234,500
shares of restricted stock with an aggregate value of $779,000.
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.
STOCK INCENTIVE PLANS
An aggregate of 6,997,192 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 2,247,192 shares. Under the 1996 STOCK INCENTIVE PLAN,
adopted December 27, 1996, 500,000 shares were originally reserved for issuance.
The 1996 plan was amended in 1998 to reserve an additional 350,000 shares for
issuance and in 1999 to reserve an additional 1,900,000 shares for issuance,
bringing the total number of shares reserved under the 1993 plan and the 1996
plan to 4,997,192. 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
51
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.
The 1999 STOCK INCENTIVE PLAN authorizes the issuance of 2,000,000 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.
As of October 15, 1999, options to purchase 2,829,826 shares of common stock
at a weighted average exercise price of $6.10 per share were outstanding and
1,170,000 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 granted under the stock incentive plans are generally
nontransferable and, unless otherwise determined by the board of directors, must
be exercised during the period of the option holder's employment or service with
MedicaLogic or within 90 days of termination of employment or service.
The stock incentive plans provide that if 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.
EMPLOYEE STOCK PURCHASE PLAN
The board of directors has adopted and the shareholders have approved an
employee stock purchase plan, or ESPP, for the benefit of MedicaLogic's
employees. A total of 1,000,000 shares are reserved for issuance under the ESPP.
Except as described below, all full-time employees of MedicaLogic and
designated subsidiaries of MedicaLogic are eligible to participate in the ESPP.
Any employee who would, after a purchase of shares under an offering, own or be
deemed to own five percent or more of the voting power or value of all classes
of stock of MedicaLogic, or any parent or subsidiary of MedicaLogic, is
ineligible to participate in an offering.
Except for the first offering period, offering periods are six months long
and commence on January 1 and July 1 of each year and end on the last day of the
following June and December. The first offering period will commence on the date
of this prospectus and end on June 30, 2000. On the first trading day of each
offering period, known as the offering date, each eligible employee is
automatically granted an option to purchase shares of MedicaLogic's common stock
to be automatically exercised on the last trading day of the six-month purchase
period comprising an offering period. The last trading day of a purchase period
is known as a purchase date. No option will permit an employee
52
to purchase more than 10,000 shares or permit an employee's right to purchase
shares under the ESPP to accrue at a rate that exceeds $25,000 of fair market
value, as determined on the offering date, for each calendar year that the
option is outstanding. Each eligible employee may elect to participate in the
ESPP by filing a subscription and payroll deduction authorization. Shares may be
purchased under the ESPP only through payroll deductions of not more than 15
percent of an employee's total compensation. On the purchase date, the amounts
withheld will be applied to purchase shares for the employee from MedicaLogic.
The purchase price will be the lesser of 85 percent of the closing market price
of MedicaLogic's common stock on the offering date or on the purchase date.
The ESPP is administered by the board of directors. The board of directors
may promulgate rules and regulations for the operation of the ESPP, adopt forms
for use in connection with the ESPP, decide any question of interpretation of
the ESPP or rights arising under the ESPP and generally supervise the
administration of the ESPP. MedicaLogic pays all expenses of the ESPP other than
commissions on sales of shares for employees' accounts by the custodian.
An independent custodian maintains the records under the ESPP. Shares
purchased by employees under the ESPP are delivered to and held by the custodian
on behalf of the employees. By appropriate instructions from an employee, all or
part of the shares may be sold or transferred into the employee's own name and
delivered to the employee.
The board of directors may amend the ESPP, except that increases in the
number of reserved shares, other than adjustments authorized by the ESPP, or
decreases in the purchase price of shares offered under the ESPP require
shareholder approval. The board of directors may terminate the ESPP at any time.
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 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.
To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of MedicaLogic under the above provisions MedicaLogic has been advised
that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the act and is,
therefore, unenforceable.
53
RELATED-PARTY TRANSACTIONS
We have accepted promissory notes from the following persons in the amounts
listed below as consideration for restricted stock issued to them:
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
Frank J. Spina............................... 1,187,500 October 20, 1999
Thomas M. Watson............................. 300,000 July 1, 1998
Thomas M. Watson............................. 60,000 July 1, 1998
Thomas M. Watson............................. 66,000 March 1, 1999
All of the above non-negotiable promissory notes accrue interest at an
annual rate of 6% on the unpaid principal balance from the date of the note
until the principal balance is paid in full. Interest is payable quarterly in
arrears. The notes are payable in full 10 years from the date of the loan and
each note can be prepaid without penalty.
We loaned Harvey J. Anderson $103,800 to pay for relocation expenses in the
form of an unsecured promissory note. The promissory note accrues interest at an
annual rate of 6% on the unpaid principal balance from the date of the note
until the principal is paid in full. The note is payable in full on the earlier
to occur of the sale of his residence located in Portland, Oregon, the
termination of his employment by us, or 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. We agreed
to reimburse Mr. Anderson $7,930 for improvements to his Portland, Oregon
residence and any shortfall between the sales price on his Portland, Oregon
residence and the original purchase price of $520,000 paid by Mr. Anderson and
any transaction costs not covered by the sales price of this residence, unless
the sales price is greater than the purchase price. We also agreed to forgive
the interest accrued on the unsecured promissory note referred to above, which
will be repaid from the proceeds of the sale of the Portland, Oregon residence
and to pay the mortgage payment on 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
54
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.
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 175,000 shares of our common stock at a price of $4.00 per
share. We also granted an option to purchase 8,000 shares of our common stock at
a price of $4.00 per share to Enterprise Partners IV Associates, L.P. and
granted an option to purchase 92,000 shares of common stock to Enterprise
Partners IV, L.P. The options were exercised on April 14, 1999. Directors Ronald
R. Taylor and Ronald H. Kase are affiliated with the Enterprise funds.
In connection with 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 MedicaLogic.
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 regulatory and
intellectual property issues.
55
PRINCIPAL SHAREHOLDERS
The following table presents the beneficial ownership of our common stock as
of September 30, 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 that the person or entity has the right to acquire
within 60 days after September 30, 1999 are considered to be outstanding in
calculating the percentage ownership of the person or entity but are not
considered to be outstanding for any other person or entity.
SHARES BENEFICIALLY OWNED
-----------------------------------------------------
PERCENTAGE PERCENTAGE
NAME NUMBER BEFORE OFFERING AFTER OFFERING
- ---- ---------- --------------- --------------
ENTITIES ASSOCIATED WITH SEQUOIA FUNDS ........ 2,803,840(1) 11.3%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
NEW ENTERPRISE ASSOCIATES ..................... 2,353,595 9.5%
2490 Sand Hill Road
Menlo Park, CA 94025
CONTINENTAL CASUALTY COMPANY .................. 2,000,000(2) 8.0%
CNA Insurance
CNA Plaza
Chicago, IL 60685
QUANTUM INDUSTRIAL PARTNERS LDC ............... 1,568,421 6.3%
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
SFM DOMESTIC INVESTMENT LLC ................... 1,568,421 6.3%
c/o Soros Fund Management LLC
888 Seventh Avenue
New York, NY 10016
MARK A. STEVENS ............................... 2,831,340(3) 11.4%
3000 Sand Hill Rd.,
Bldg. 4, Ste. 280
Menlo Park, CA 94025
RONALD H. KASE ................................ 2,381,095(4) 9.6%
2490 Sand Hill Road
Menlo Park, CA 94025
DAVID W. WROE ................................. 2,000,000(2) 8.0%
CNA Insurance
CNA Plaza
Chicago, IL 60685
MARK K. LEAVITT ............................... 1,520,000(5) 6.1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
56
SHARES BENEFICIALLY OWNED
-----------------------------------------------------
PERCENTAGE PERCENTAGE
NAME NUMBER BEFORE OFFERING AFTER OFFERING
- ---- ---------- --------------- --------------
RICHARD L. SAMCO .............................. 970,303(6) 3.9%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
DAVID C. MOFFENBEIER .......................... 658,952(7) 2.6%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
RONALD R. TAYLOR .............................. 529,167(8) 2.1%
Enterprise Partners
7979 Ivanhoe Ave., Ste. 550
La Jolla, CA 92037
BLACKFORD F. MIDDLETON ........................ 108,250(9) Less than 1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
THOMAS M. WATSON .............................. 105,000 Less than 1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
BRUCE M. FRIED ................................ 11,250(10) Less than 1%
2300 N. Street, NW
Washington, DC 20037
CHARLES D. BURWELL ............................ 27,500(11) Less than 1%
220 East Las Colinas Blvd.
Irving, TX 75039
NEAL MOSZKOWSKI ............................... 0(12) Less than 1%
888 Seventh Avenue
Suite 3300
New York, NY 10106
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(15 PERSONS)................................. 11,343,931(13) 45.4%
- ------------------------
(1) Includes 1,775,008 shares of common stock held of record by Sequoia Capital
Growth Fund; 358,271 shares of common stock held of record by Sequoia
Capital VI; 15,749 shares of common stock held of record by Sequoia 1995;
19,685 shares of common stock held of record by Sequoia Technology Partners
VI; 108,812 shares of common stock held of record by Sequoia Technology
Partners III; 447,369 shares of common stock held of record by Sequoia
Capital Franchise Fund; and 78,948 shares of common stock held of record by
Sequoia Capital Franchise Partner.
(2) Includes 2,000,000 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.
(3) Includes 2,803,840 shares of common stock held of record by entities
associated with Sequoia funds, of which Mr. Stevens disclaims beneficial
ownership, except to the extent of his pecuniary interest. See note (1).
Mr. Stevens 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, Sequoia 1995 and Sequoia Technology
57
Partners III. The share amount also includes 3,334 shares subject to an
option held of record by Mr. Stevens that is exerciseable within 60 days of
September 30, 1999.
(4) Includes 2,353,595 shares of common stock held of record by New Enterprises
Associates VI, LP, of which Mr. Kase disclaims beneficial ownership.
Includes 27,500 shares subject to an option held of record by Mr. Kase that
is exerciseable within 60 days of September 30, 1999.
(5) Includes 252,500 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, 5,000 shares of common stock held of record by Amy Elizabeth
Leavitt and 85,000 shares of common stock held in trust for Amy Elizabeth
Leavitt.
(6) Includes 5,000 shares of common stock held of record by Courtaney E. Samco
and 5,000 shares of common stock held of record by Mark R. Samco.
(7) Includes 250,000 shares of common stock held of record by Elizabeth
Moffenbeier.
(8) Includes 475,000 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. Of
those shares for which beneficial ownership is disclaimed, Mr. Taylor has
the right to acquire beneficial ownership of 27,778 shares at any time.
Also includes 29,167 shares subject to an option held of record by
Mr. Taylor that is exerciseable within 60 days of September 30, 1999 and an
aggregate of 12,000 shares of common stock of which 4,000 shares each are
held of record by his children, Luke Rand Williams, Leah Williams Barbieri
and Tiffany Marie Taylor.
(9) Includes 2,500 shares of common stock held of record by Allie Middleton.
(10) Includes 7,500 shares subject to an option held of record by Mr. Fried
that is exerciseable within 60 days of September 30, 1999.
(11) Consists of 27,500 shares subject to an option held of record by
Mr. Burwell that is exerciseable within 60 days of September 30, 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 793,651 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 these shares.
(12) 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.
(13) Includes 99,514 shares subject to options that are exercisable within
60 days of September 30, 1999.
58
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, and 50,000,000 shares of undesignated
preferred stock. The following summary describes all material provisions of our
capital stock. However, we encourage you to read the provisions of our articles
of incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and which, together with
applicable Oregon law, contain the legal terms that govern our capital stock.
COMMON STOCK
As of September 30, 1999, there were 24,876,975 shares of our common stock
outstanding, which were held of record by approximately 262 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 the dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. If 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.
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:
- Restricting dividends on our common stock;
- Diluting the voting power of our common stock;
- Impairing the liquidation rights of our common stock; and
- Delaying or preventing a change in control of MedicaLogic without further
action by the shareholders.
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 16,327,967 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
59
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;
- include their shares of common stock in the registration; and
- 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, broadly defined to include companies
or persons acting as a group to acquire the shares, 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 given to the
control shares by:
- A majority of each voting group entitled to vote; and
- 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 acquiror may, but is not required to, submit to the target company a
statement including specific 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 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 the 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 business combination transactions for three years following
the date the person acquired the shares. Business combination transactions for
this purpose include:
60
- A merger or plan of share exchange;
- Any sale, lease, mortgage or other disposition of 10% or more of the
assets of the corporation; and
- Transactions that result in the issuance or transfer of capital stock of
the corporation to the acquiring shareholder.
These restrictions do not apply if:
- The acquiring shareholder, as a result of the transaction in which the
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 some employee benefits plans;
- 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
- 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:
- 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
- Provide that directors may be removed by shareholders only for cause and
only upon the vote of 75% of the votes then entitled to be cast for the
election of directors.
The classified board provisions may have the effect of lengthening the time
required for a third party to acquire control of MedicaLogic through a proxy
contest or the election of a majority of the board of directors and may deter
any potential unfriendly offers or other efforts to obtain control of
MedicaLogic. These provisions could deprive you of opportunities to realize a
premium for your shares and could make removal of incumbent directors more
difficult. At the same time, these provisions may have the effect of inducing
any third parties seeking control of MedicaLogic to negotiate terms acceptable
to the board of directors. In addition, the provisions regarding removal of
directors will make the removal of any director more difficult, even if you
believe removal is in your best interests. Since these provisions make the
removal of directors more difficult, they increase the likelihood that incumbent
directors will retain their position and, since the board has the power to
retain and discharge management, could perpetuate incumbent management.
61
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 consider 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 September 30, 1999, we had approximately 262 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 our affiliates, or persons who directly or indirectly
control, are controlled by or are under common control with us. Shares held by
affiliates may generally only be sold in compliance with the limitations of Rule
144 of the Securities Act described below. This leaves 24,876,975 shares
eligible for sale in the public market as follows:
NUMBER OF SHARES DATE
- ---------------- ----
22,752,297................. After 180 days from the date of this prospectus, subject, in
some cases, to volume limitations.
2,124,679.................. 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:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this offering;
or
- 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.
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
62
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 16,327,967 shares of our common stock
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.
63
UNDERWRITING
Subject to the terms and conditions in the 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 each agreed to purchase from MedicaLogic the number of shares of common
stock indicated opposite each of their names below.
NUMBER OF
UNDERWRITERS 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 each of the
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of legal
matters and to other specified 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 indicated on
the cover page of this prospectus and in part to dealers, including the
underwriters, at that price less a concession not in excess of $ per share.
The underwriters may allow, and the dealers may re-allow, to 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
specified conditions, to purchase its pro rata portion of the additional shares
based on the 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.
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
the Internet site relating to our offering is not a part of this prospectus, has
64
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 specified liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in connection with these
liabilities.
Each of MedicaLogic, its executive officers and directors and most of our
shareholders has agreed, subject to 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 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 by any other method, 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 this period, we have also agreed not
to file any registration statement for, and each of our executive officers,
directors and most of our shareholders has agreed not to make any demand for, or
exercise any right for, 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.
Before 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.
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
of the 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 the 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 an offer or a solicitation is unlawful.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or affect the price of our common stock.
Specifically, the underwriters may over-allot this offering, meaning syndicate
sales may be in excess of the offering size which creates a syndicate short
position. The underwriters may bid for and purchase shares of common stock in
the open market to cover the 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 in other transactions. Any of these activities may stabilize or
maintain the market price
65
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.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 8% of the shares of common stock to be sold in this
offering for sale to our employees, directors and other persons we designate.
The number of shares available for sale to the general public will be reduced to
the extent that any reserved shares are purchased. Any reserved shares not
purchased will be offered by the underwriters on the same basis as the other
shares offered by this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 for the common stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information included 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 will file
periodic reports, proxy statements and other information with the Commission.
These 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. Stoel Rives LLP holds a
warrant to purchase 10,000 shares of MedicaLogic's common stock at an exercise
price of $6.50 a share. 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
25,000 shares of our common stock.
EXPERTS
The financial statements of MedicaLogic, Inc. as of December 31, 1997 and
1998 and September 30, 1999 and for each of the years in the three-year period
ended December 31, 1998 and for the nine-month period ended September 30, 1999
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing herein
and upon the authority of such firm as experts in auditing and accounting.
The financial statements of PrimaCis Health Information Technology, Inc. as
of December 31, 1998 and for the year then ended have been included herein in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of such firm as experts in
auditing and accounting.
66
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-27
Balance Sheet............................................. F-28
Statement of Operations................................... F-29
Statement of Shareholders' Deficit........................ F-30
Statement of Cash Flows................................... F-31
Notes to Financial Statements............................. F-32
Pro Forma Financial Information:
Summary................................................... F-40
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Nine-Month Period Ended
September 30, 1998...................................... F-41
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended December 31, 1998......... F-42
Notes to the Unaudited Pro Forma Condensed Combined
Financial Information................................... F-43
F-1
When the reverse stock split referred to in note 13(d) to the consolidated
financial statements has been consummated, we will render the following opinion.
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, 1998, and
September 30, 1999 and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998 and the nine-month period ended
September 30, 1999. These consolidated financial statements are the
responsibility of MedicaLogic's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MedicaLogic, Inc.
and subsidiaries as of December 31, 1997, 1998, and September 30, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 and the nine-month period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Portland, Oregon
October 22, 1999, except as to note 13(d)
which is as of November , 1999
F-2
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------
1997 1998 SEPTEMBER 30, 1999
-------- -------- -------------------------
(PRO FORMA)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,924 $ 4,718 $ 7,081
Short-term investments.................................... 7,116 7,030 38,059
Accounts receivable, net.................................. 7,663 10,084 4,537
Prepaid expenses and other current assets................. 263 545 2,031
-------- -------- --------
Total current assets.................................... 19,966 22,377 51,708
Property and equipment, net................................. 1,969 1,804 10,853
Other assets, net........................................... 137 127 5,166
-------- -------- --------
Total assets............................................ $ 22,072 $ 24,308 $ 67,727
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... 667 557 2,993
Accrued and other liabilities............................. 2,187 2,286 1,347
Deferred revenue.......................................... 1,396 2,701 2,554
Current portion of capital leases......................... 846 215 557
Current portion of notes payable.......................... -- 527 1,106
-------- -------- --------
Total current liabilities............................... 5,096 6,286 8,557
Non-current portion of capital leases....................... 278 92 868
Non-current portion of notes payable........................ -- 587 791
Deferred rent............................................... -- -- 250
-------- -------- --------
Total liabilities....................................... 5,374 6,965 10,466
-------- -------- --------
Convertible redeemable preferred stock; 50,000,000 shares
authorized; aggregate liquidation preference $99,418 at
September 30, 1999; issued and outstanding 19,525,545,
21,524,545, and 31,901,388 at December 31, 1997 and 1998,
and September 30, 1999, respectively; pro forma no shares
issued and outstanding.................................... 42,791 49,782 97,825 $ --
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 6,654,280, 7,127,556 and
8,926,281 shares at December 31, 1997 and 1998 and
September 30, 1999, respectively; pro forma 24,876,975
shares issued and outstanding........................... 3,202 5,139 15,793 113,618
Common stock notes receivable............................. (988) (2,039) (6,449) (6,449)
Deferred stock compensation............................... -- -- (988) (988)
Accumulated deficit....................................... (28,307) (35,539) (48,920) (48,920)
-------- -------- -------- --------
Total shareholders' equity (deficit).................... (26,093) (32,439) (40,564) $ 57,261
-------- -------- -------- ========
Total liabilities, redeemable preferred stock and
shareholders' equity (deficit)........................ $ 22,072 $ 24,308 $ 67,727
======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE-MONTH PERIOD
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Revenues:
Licenses.................... $ 6,845 $ 7,617 $ 10,410 $ 6,534 $ 9,620
Service and support......... 2,819 5,190 5,750 4,225 5,372
----------- ----------- ----------- ----------- -----------
Total revenues.......... 9,664 12,807 16,160 10,759 14,992
Operating expenses:
Cost of licenses............ 2,089 1,702 939 608 813
Cost of service and
support................... 4,031 6,054 5,815 4,354 4,911
Marketing and sales......... 6,667 7,681 7,882 5,647 12,300
Research and development.... 6,583 7,047 8,071 5,981 8,495
General and
administrative............ 718 1,315 1,151 735 2,511
----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 20,088 23,799 23,858 17,325 29,030
----------- ----------- ----------- ----------- -----------
Operating loss.......... (10,424) (10,992) (7,698) (6,566) (14,038)
Other income (expense):
Interest expense............ (251) (240) (187) (145) (180)
Interest income............. 456 617 707 504 1,113
Other, net.................. (96) (55) 143 (40) 9
----------- ----------- ----------- ----------- -----------
Total other income...... 109 322 663 319 942
----------- ----------- ----------- ----------- -----------
Loss before income
taxes................. (10,315) (10,670) (7,035) (6,247) (13,096)
Provision for income taxes.... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................ $ (10,315) $ (10,670) $ (7,035) $ (6,247) $ (13,096)
=========== =========== =========== =========== ===========
Accretion of preferred stock
redemption preference....... (49) (149) (197) (147) (285)
----------- ----------- ----------- ----------- -----------
Net loss attributed to
common shareholders... $ (10,364) $ (10,819) $ (7,232) $ (6,394) $ (13,381)
=========== =========== =========== =========== ===========
Historical net loss per share:
Basic and diluted........... $ (1.58) $ (1.63) $ (1.05) $ (0.93) $ (1.61)
=========== =========== =========== =========== ===========
Weighted average shares--
basic and diluted......... 6,576,278 6,634,541 6,883,036 6,881,578 8,331,102
Pro forma net loss per share:
Basic and diluted........... $ (0.41) $ (0.63)
=========== ===========
Weighted average shares--
basic and diluted......... 17,478,642 21,083,550
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.................. 6,528,112 $ 2,812 $ (683) $ -- $ (7,124) $ (4,995)
Issuance of common stock in exchange for a
promissory note............................. 52,500 210 (210) -- -- --
Issuance of common stock in exchange for
services.................................... 12,500 50 -- -- -- 50
Issuance of common stock for cash............. 2,500 10 -- -- -- 10
Options exercised............................. 18,250 26 -- -- -- 26
Interest accrued on common stock notes
receivable.................................. -- -- (44) -- -- (44)
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (49) (49)
Net loss...................................... -- -- -- -- (10,315) (10,315)
---------- ------- ------- ------- -------- --------
Balance at December 31, 1996.................. 6,613,862 3,108 (937) -- (17,488) (15,317)
Issuance of common stock in exchange for
services.................................... 14,350 51 -- -- -- 51
Options exercised............................. 26,068 43 -- -- -- 43
Interest accrued on common stock notes
receivable.................................. -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (149) (149)
Net loss...................................... -- -- -- -- (10,670) (10,670)
---------- ------- ------- ------- -------- --------
Balance at December 31, 1997.................. 6,654,280 3,202 (988) -- (28,307) (26,093)
Issuance of common stock for acquisition...... 13,750 55 -- -- -- 55
Issuance of common stock for cash............. 175,000 700 -- -- -- 700
Issuance of restricted common stock in
exchange for promissory notes............... 250,000 1,000 (1,000) -- -- --
Non-cash stock compensation................... -- 110 -- -- -- 110
Options exercised............................. 34,526 72 -- -- -- 72
Interest accrued on common stock notes
receivable.................................. -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (197) (197)
Net loss...................................... -- -- -- -- (7,035) (7,035)
---------- ------- ------- ------- -------- --------
Balance at December 31, 1998.................. 7,127,556 5,139 (2,039) -- (35,539) (32,439)
Issuance of common stock for acquisition...... 750,000 3,300 -- -- -- 3,300
Issuance of restricted common stock in
exchange for promissory notes............... 742,500 4,196 (4,196) -- -- --
Issuance of common stock in exchange for
services.................................... 58,750 398 -- -- -- 398
Issuance of common stock for commission....... 14,868 141 -- -- -- 141
Warrants exercised............................ 22,500 13 -- -- -- 13
Options exercised............................. 210,107 758 -- -- -- 758
Stock compensation expense.................... -- 790 -- 70 -- 860
Interest accrued on common stock notes
receivable.................................. -- -- (214) -- -- (214)
Deferred compensation related to stock
options..................................... -- 1,058 -- (1,058) -- --
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (285) (285)
Net loss...................................... -- -- -- -- (13,096) (13,096)
---------- ------- ------- ------- -------- --------
Balance at September 30, 1999................. 8,926,281 $15,793 $(6,449) $ (988) $(48,920) $(40,564)
========== ======= ======= ======= ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE-MONTH PERIOD
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $(10,315) $(10,670) $ (7,035) $ (6,247) $(13,096)
Adjustments to reconcile net loss to net cash (used by)
provided by operating activities:
Depreciation and amortization......................... 912 1,464 1,537 1,152 3,085
Non-cash expenses..................................... 50 51 110 110 1,001
Provisions for doubtful accounts...................... 304 829 756 50 405
Loss (gain) on disposition of assets.................. -- 14 (2) (2) (11)
Other non-cash expenses............................... (44) (51) (51) (38) 249
Changes in assets and liabilities:
Accounts receivable................................. (3,027) (3,630) (3,177) 194 5,142
Prepaid expenses and other current assets........... (25) (133) (239) (235) (1,486)
Other assets........................................ 300 (35) -- (48) (177)
Accounts payable.................................... 1,131 (906) (110) (130) 1,383
Accrued and other liabilities....................... 80 1,314 99 (259) (939)
Deferred rent....................................... -- -- -- -- 250
Deferred revenue.................................... (250) 113 1,305 481 (147)
-------- -------- -------- -------- --------
Net cash (used by) provided by operating
activities...................................... (10,884) (11,640) (6,807) (4,972) (4,341)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets.................................. (263) (525) (1,280) (990) (9,027)
Purchase of business...................................... -- -- (12) (12) (2,117)
Proceeds from sale of fixed assets........................ -- -- 6 6 18
Purchase of short-term investments........................ -- (15,261) (28,248) (23,868) (42,990)
Purchase from maturities of short-term investments........ -- 8,145 28,334 18,911 11,961
Issuance of long-term note receivable..................... -- -- -- -- (200)
-------- -------- -------- -------- --------
Net cash used by investing activities............. (263) (7,641) (1,200) (5,953) (42,355)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............. 20,023 6,775 6,794 6,794 47,758
Net proceeds from issuance of common stock................ 36 43 772 745 771
Proceeds from issuance of notes payable................... -- -- 1,264 967 1,311
Principal payments under capital lease.................... (875) (1,264) (879) (697) (253)
Principal payments under note obligations................. -- -- (150) (33) (528)
-------- -------- -------- -------- --------
Net cash provided by financing activities......... 19,184 5,554 7,801 7,776 49,059
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 8,037 (13,727) (206) (3,149) 2,363
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 $ 1,775 $ 7,081
======== ======== ======== ======== ========
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable.............................................. $ 210 $ -- $ 1,000 $ 1,000 $ 4,196
Issuance of common stock for purchase of a business....... -- -- 55 55 3,300
Assets acquired or exchanged under capital leases......... 1,451 593 62 62 1,371
Accretion of preferred stock redemption preference........ 49 149 197 147 285
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. (MedicaLogic) 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
MedicaLogic and subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
(b) UNAUDITED QUARTERLY INFORMATION
The financial information included herein for the nine-month period ended
September 30, 1998 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
period. The unaudited interim consolidated financial statements should be
read together with the consolidated financial statements and the notes
included in the consolidated financial statements. The results of operations
for the interim periods presented are not necessarily indicative of the
results to be expected for the full year.
(c) CASH EQUIVALENTS
For purposes of these statements, MedicaLogic considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
(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 September 30, 1999, contractual maturities of
short-term investments ranged from ninety to two hundred ninety-six days.
(e) ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$852, $1,360 and $1,235 at December 31, 1997 and 1998 and September 30,
1999, respectively. The following table presents a rollforward of the
allowance for doubtful accounts for the respective periods:
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- --------------
Balance--beginning of period..... $ 30 $ 165 $ 852 $1,360
Provision........................ 304 829 756 405
Charge offs...................... (169) (142) (248) (530)
----- ----- ------ ------
Balance--end of period........... $ 165 $ 852 $1,360 $1,235
===== ===== ====== ======
F-7
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
(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 nine-month period
ended September 30, 1999 was $-0-, $-0-, $34 and $566, respectively.
Accumulated amortization at December 31, 1997 and 1998 and at September 30,
1999 was $-0-, $34 and $600, respectively. Recoverability of goodwill is
periodically reviewed for impairment.
(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, MedicaLogic has not capitalized any software
development costs and charged all costs to research and development expense.
F-8
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 MedicaLogic
beginning January 1, 1998. Prior to 1997, MedicaLogic'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. MedicaLogic
establishes VSOE based on the average selling prices of our product and
support during the respective period.
MedicaLogic recognizes revenue from license fees generally when a signed
agreement has been obtained, the delivery of the product has occurred, there
are no uncertainties surrounding product acceptance, the fee is fixed and
determinable and collectibility of the license fee is probable. Term based
licenses from internet products will be recognized on a subscription basis.
Support revenue consists of annual subscriptions for maintenance and
post-customer support services. Subscriptions, conveying the right to obtain
upgrades, when and if available, are generally paid in advance and revenue
is recognized ratably over the term of subscription.
Services revenue generally consists of consulting, training and integration
fees. Such services are typically billed separately from the license fees
and are recognized as the related services are 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.
(j) INCOME TAXES
MedicaLogic accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the
future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end.
F-9
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
MedicaLogic has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for
employee stock options and similar equity instruments. As is permitted under
SFAS No. 123, MedicaLogic has elected to continue to account for its stock-
based compensation plans under APB Opinion No. 25 and provide the pro forma
disclosures as prescribed by SFAS No. 123.
(l) ADVERTISING
MedicaLogic expenses costs of advertising when the costs are incurred.
Advertising expense was approximately $700, $836, $896 and $1,471 for the
years ended December 31, 1996, 1997 and 1998 and for the nine-month period
ended September 30, 1999, respectively.
(m) NET LOSS PER SHARE
MedicaLogic 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 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:
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ --------------------------------------
1996 1997 1998 1998 1998 1999 1999
--------- --------- --------- ------------ ----------- --------- ------------
(PRO FORMA) (UNAUDITED) (PRO FORMA)
(UNAUDITED) (UNAUDITED)
Basic weighted average
shares of common
stock............... 6,576,278 6,634,541 6,883,036 17,478,642 6,881,578 8,331,102 21,083,550
Effect of dilutive
securities:
Stock options and
warrants.......... -- -- -- -- -- -- --
--------- --------- --------- ---------- --------- --------- ----------
Diluted weighted
average shares of
common stock........ 6,576,278 6,634,541 6,883,036 17,478,642 6,881,578 8,331,102 21,083,550
========= ========= ========= ========== ========= ========= ==========
Common stock equivalents related to stock options and warrants of 419,927,
915,284, 1,129,724, 1,088,518 (unaudited) and 2,161,773 are anti-dilutive in
a net loss year and, therefore, are not
F-10
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included during the years ended December 1996, 1997 and 1998, and the
nine-month periods ended September 30, 1998 and 1999 for calculation of net
loss per share.
The pro forma net loss per share information assumes the conversion, on a
weighted average basis, of 10,595,606 and 12,752,488 shares of preferred
stock into common stock for the year ended December 31, 1998 and the
nine-month period ended September 30, 1999.
(n) COMPREHENSIVE LOSS
MedicaLogic has no material components of other comprehensive loss and
accordingly the comprehensive loss is the same as net loss for all periods
presented.
(o) 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.
(p) 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.
(q) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Internal use software development costs are accounted for in accordance with
SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary project stage
are expensed as incurred and costs incurred in the application and
development stage, which meet the capitalization criteria, are capitalized
and amortized on a straight-line basis over five years, the estimated useful
life of the asset.
(r) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of MedicaLogic's revenues each year are generated from
the development and release to market of computer software products. In the
extremely competitive industry environment in which MedicaLogic 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
F-11
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
introduction could have a severe near term impact on MedicaLogic's growth
and results of operations.
(s) 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 MedicaLogic's initial public
offering (using the as-if-converted method). If MedicaLogic'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
15,950,964 shares of common stock based on the shares of convertible
preferred stock outstanding at September 30, 1999. Unaudited pro forma
shareholders' equity at September 30, 1999, as adjusted for the conversion
of the convertible preferred stock, is disclosed on the balance sheet.
(2) ACQUISITIONS
On January 5, 1998, MedicaLogic paid $12 in cash and issued 13,750 shares of
common stock valued at $4.00 per share to acquire 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,
MedicaLogic 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 MedicaLogic's overall results of operations
and as such, pro forma financial information has been omitted.
In January 1999, MedicaLogic acquired PrimaCis Health Information Technology,
Inc. (PrimaCis), a Delaware corporation. The total purchase price, including
acquisition costs, was $6,453 and consisted of $2,100 in cash, the assumption of
$1,053 in liabilities and the issuance of 750,000 shares of common stock at an
estimated fair value of $4.40 per share.
The purchase accounting allocations resulted in goodwill of approximately $3,200
and other intangible assets of approximately $3,300, which consists primarily of
a customer list. Goodwill is amortized on a straight-line basis over a four year
period. Other intangible assets are amortized on a straight-line basis over a
two year period.
The pro forma results shown below assume the PrimaCis acquisition occurred as of
the beginning of 1998.
Revenues.................................................... $ 16,408
Net loss.................................................... (11,278)
Diluted net loss per share.................................. (1.48)
The pro forma results are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the 1998 period. The pro forma
statement of operations data for the nine-months ended September 30, 1999 have
not been presented as the results of operations presented for MedicaLogic during
this period include PrimaCis' operating results. In addition, they are not
intended to be a projection of the future results that may be achieved from the
combined operations.
F-12
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) ACQUISITIONS (CONTINUED)
In connection with the acquisition of PrimaCis, MedicaLogic entered into a
separate agreement with a customer of PrimaCis under which MedicaLogic received
a purchase order for 1,500 licenses. MedicaLogic delivered 500 licenses to this
customer on March 31, 1999 and delivered 1,000 licenses to this customer on
June 17, 1999 under a standard license agreement. In addition, Medicalogic is
performing training and implementation services on a time and materials basis.
(3) BALANCE SHEET COMPONENTS
(a) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of
the following:
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
Furniture and equipment............... $ 3,850 $ 4,565 $12,086
Leasehold improvements................ 876 1,267 3,551
------- ------- -------
4,726 5,832 15,637
Less accumulated depreciation and
amortization........................ (2,757) (4,028) (4,784)
------- ------- -------
$ 1,969 $ 1,804 $10,853
======= ======= =======
(b) ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
Royalties............................... $ 947 $ 843 $ 599
Payroll and related liabilities......... 674 627 412
Litigation accruals..................... 301 488 175
Other................................... 265 328 161
------ ------ ------
$2,187 $2,286 $1,347
====== ====== ======
(4) LEASES
MedicaLogic leases certain office furniture and equipment under long-term
capital leases, which expire over the next two years. At December 31, 1997 and
1998 and September 30, 1999, the net book value of leased furniture and
equipment included in property and equipment was $1,122, $307 and $1,425
respectively.
MedicaLogic also leases its office facilities under non-cancelable operating
lease agreements.
F-13
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) LEASES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases and the
capital leases are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
Year ending December 31:
1999 (for the three months ended December 31)........... $ 199 $ 590
2000.................................................... 730 2,838
2001.................................................... 838 2,884
2002.................................................... -- 2,884
2003.................................................... -- 3,003
Thereafter.............................................. -- 16,353
------ -------
Total minimum lease payments........................ 1,767 $28,552
=======
Less amount representing interest......................... (342)
------
Present value of net minimum capital lease
payments.......................................... 1,425
Less current portion of capital leases.................... (557)
------
Non-current portion of capital leases............... $ 868
======
Rent expense for the years ended December 31, 1996, 1997 and 1998 and for the
nine-month period ended September 30, 1999 totaled approximately $600, $611,
$1,073 and $981, respectively.
On May 12, 1999 MedicaLogic entered into a ten year operating lease agreement
for office space. The lease requires a letter of credit in lieu of a cash
security deposit in the amount of $1,750. Also in connection with this lease,
MedicaLogic granted options to the lessor to purchase up to 25,000 shares of
common stock, at a price of $6.50 per share. The lessor is required to exercise
the option at any time within three years of MedicaLogic's initial public
offering. In addition, at the time of MedicaLogic's initial public offering the
lessor will have the right to purchase the greater of 50,000 shares of common
stock or 1% of the number of shares offered at the initial offering price.
The fair value of the options to issued to the lessor was determined by applying
the Black-Scholes methodology using the commitment date of the lease for
performance of the lessor as the measurement date. The per share weighted
average fair market value was $1.30 on the date of grant, with the following
weighted average assumptions: Risk-free interest rate of 5.75%, expected
dividend yield -0-%, a three year term, an expected volatility of 100%. The fair
value of $65 will be amortized over the lease period.
F-14
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) NOTES PAYABLE
Notes payable consists of the following:
DECEMBER 31, SEPTEMBER 30,
------------------- --------------
1997 1998 1999
-------- -------- --------------
Note payable, monthly principal and interest
payments of $1; interest at 11% per annum;
final payment due December 31, 2008;
unsecured...................................... $ -- $ 70 $ 67
Note payable, monthly principal and interest
payments of $3; interest at 11% per annum;
final payment due November 30, 1999;
unsecured...................................... -- 37 7
Notes payable, under term facility, 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 September 30,
1999); maturing between September 2000 and
September 2001; secured by equipment purchased
thereunder..................................... -- 1,007 650
Notes payable under term facility, monthly
principal and interest payments of $25;
interest at a two-year treasury constant
maturities plus 5% per annum (9.45% at
September 30, 1999); maturing between March
2001 and September 2001; secured by equipment
purchased thereunder........................... -- -- 834
Note payable under term facility, quarterly
principal and interest payments of $38;
interest at 7.96% per annum; final payment due
April 2001; secured by equipment purchased
thereunder..................................... -- -- 339
----- ------ ------
-- 1,114 1,897
Less current portion of notes payable............ -- 527 1,106
----- ------ ------
$ -- $ 587 $ 791
===== ====== ======
MedicaLogic has a $3,300 term loan facility to finance the purchase of new
capital equipment. $1,823 is outstanding, as described above, under this
facility at September 30, 1999.
Future maturities are as follows:
Year ending December 31:
1999 (for the three months ended December 31)............. $ 274
2000...................................................... 1,049
2001...................................................... 483
2002...................................................... 44
2003...................................................... 8
Thereafter................................................ 39
------
Total................................................... $1,897
======
F-15
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) CONVERTIBLE REDEEMABLE PREFERRED STOCK
MedicaLogic 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, SEPTEMBER 30,
------------------- --------------
1997 1998 1999
-------- -------- --------------
Series A, $1.00 liquidation preference; issued
and outstanding 5,750,001 at December 31,
1997 and 1998 and September 30, 1999........ 5,734 5,745 5,750
Series A-1, $10.00 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series C, $2.25 liquidation preference; issued
and outstanding 7,012,637 shares at
December 31, 1997 and 1998 and
September 30, 1999.......................... 15,744 15,767 15,779
Series C-1, $22.50 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series E, $3.15 liquidation preference;
4,761,907 shares issued and outstanding at
December 31, 1997 and 1998 and
September 30, 1999.......................... 14,538 14,694 14,811
Series E-1, $31.50 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
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 September 30, 1999............. 6,775 13,576 13,582
Series F-1, $34.00 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series I, $3.80 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series I-1, $38.00 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series J, $4.75 liquidation preference;
10,376,843 shares issued and outstanding at
September 30, 1999.......................... -- -- 47,930
Series J-1, $47.50 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
------- ------- -------
Total convertible redeemable preferred
stock................................... 42,791 49,782 97,825
======= ======= =======
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, and $0.475 and $4.75 for Series J and J-1, respectively. The
right to receive
F-16
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
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
September 30, 1999, no dividends had been declared or paid.
LIQUIDATION PREFERENCES
Upon dissolution, liquidation or winding up of the affairs of MedicaLogic,
either voluntarily or involuntarily, the preferred shareholders receive
preference in liquidation over the common shareholders of MedicaLogic. The
liquidation value for each outstanding share is $1 and $10 for Series A and A-1,
$2.25 and $22.50 for Series C and C-1. $3.15 and $31.50 for Series E and E-1,
$3.40 and $34.00 for Series F and F-1. $3.80 and $38.00 for Series I and I-1,
and $4.75 and $47.50 for Series J and J-1, respectively, adjusted for any stock
dividends. The holders of Series E and E-1, Series F and F-1, Series I and I-1
and Series J and J-1, on a parity basis among these Series, are entitled to
receive their liquidation value 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, MedicaLogic is required to redeem all of the
then outstanding preferred stock or an amount determined by MedicaLogic for
which funds are available for redemption. The per share redemption price for
each series of preferred stock is equal to its per share liquidation value for
each respective series discussed above.
In the event of a redemption of only a portion of the total outstanding
preferred stock, MedicaLogic is required to redeem Series E and E-1, Series F
and F-1, Series I and I-1 and Series J and J-1 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.
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
Two shares of preferred stock is voluntarily convertible into one share of
common stock at any time after the date of issuance at a rate that equals the
original issue price divided by the conversion price at the time in effect,
subject to 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,
F-17
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
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 of common stock equals
or exceeds $10 per share. The public offering price of MedicaLogic's common
stock that will trigger automatic conversion of the Series F and F-1, the
Series I and I-1 and Series J and J-1 preferred stock is $10.80, $11.58 and
$10.80 per share, respectively.
(7) SHAREHOLDERS' EQUITY
(a) SHAREHOLDERS' AGREEMENT
MedicaLogic and certain of its shareholders have an agreement that includes
restrictions on the purchase and sale of MedicaLogic'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 entitles MedicaLogic to purchase a shareholder's stock under
certain conditions. The acquisition price is equal to the fair value of the
shares to be purchased.
(b) STOCK INCENTIVE PLAN
On February 9, 1993, MedicaLogic adopted a Stock Incentive Plan which
allowed for the issuance of 2,249,692 shares of common stock. Under the 1996
Stock Incentive Plan, adopted December 31, 1996, together with the 1993
Stock Incentive Plan (the Plans), 500,000 shares of common stock were
reserved for issuance. The 1996 Plan was amended in 1998 to reserve an
additional 350,000 shares of common stock for issuance, bringing the total
under the Plans to 3,097,192. 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 MedicaLogic. 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 MedicaLogic and, unless otherwise specified,
expire ten years from the date of grant.
In March 1998, MedicaLogic extended the term of all outstanding options from
five years to ten years, which constituted a new measurement date. The fair
value of the stock as determined by the Board of Directors on the date the
change was effective was $4.00 per share. 121,025 of these options had
exercise prices of less than $4.00 per share and were fully vested.
MedicaLogic recorded a compensation charge of $110 in connection with this
change in option terms. The compensation expense was calculated by taking
the difference between the original grant price and the fair value on the
new measurement date.
F-18
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
On April 30, 1999, MedicaLogic's 1996 Plan was amended to reserve an
additional 1,900,000 shares of common stock. In September 1999 MedicaLogic
adopted the 1999 Stock Incentive Plan, which authorizes the issuance of
2,000,000 shares, bringing the total to 6,997,192.
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, 1998 and the nine-month period ended September 30,
1999 was $2.88, $2.90, $3.44 and $5.02, respectively, on the date of grant,
with the following weighted average assumptions:
YEARS ENDED NINE-MONTH
DECEMBER 31, PERIOD ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -------------
Risk-free interest rate................ 6.3% 6.5% 6.0% 5.75%
Expected dividend yield................ 0% 0% 0% 0%
Expected life (in years)............... 4 4 7 7
Expected volatility.................... 100% 100% 100% 100%
MedicaLogic continues to apply APB Opinion No. 25 in accounting for the
Plans and, accordingly, compensation cost is generally not recognized for
its stock options in the financial statements. The effect on MedicaLogic's
net loss, had MedicaLogic determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123 is as
follows:
NINE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -------------
Net loss................... $(10,364) $(10,819) $(7,232) $(13,381)
Pro forma net loss......... (10,908) (11,921) (8,342) (16,289)
Net loss per share......... (1.58) (1.63) (1.05) (1.61)
Pro forma net loss per
share.................... (1.65) (1.77) (1.20) (1.92)
F-19
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
Transactions involving the Plans are summarized as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
Options outstanding, December 31, 1995..... 295,520 $2.40
Granted.................................... 248,150 4.00
Exercised.................................. (18,250) 1.50
Forfeited.................................. (21,350) 2.50
--------- -----
Options outstanding, December 31, 1996..... 504,070 3.08
Granted.................................... 536,475 4.00
Exercised.................................. (26,068) 1.64
Forfeited.................................. (40,462) 3.90
--------- -----
Options outstanding, December 31, 1997..... 974,015 3.68
Granted.................................... 480,493 4.10
Exercised.................................. (34,526) 2.10
Forfeited.................................. (206,576) 3.98
--------- -----
Options outstanding, December 31, 1998..... 1,213,406 3.80
Granted.................................... 1,193,750 5.92
Exercised.................................. (210,107) 3.60
Forfeited.................................. (35,276) 5.04
--------- -----
Options outstanding, September 30, 1999.... 2,161,773 $4.98
========= =====
F-20
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- -------------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
--------------------- -------------- ----------- -------- -------------- --------
1.60--2.00 73,225 3.62 1.78 73,225 1.78
4.00--4.40 1,243,798 8.30 4.12 728,712 4.04
6.50 844,750 9.54 6.50 36,842 6.50
----------- --------- ---- ---- ------- ----
1.60--6.50 2,161,773 8.5 4.98 838,779 3.95
At September 30, 1999, 2,036,784 shares were available for grant.
MedicaLogic has recorded deferred stock compensation expense of $1,058 at
September 30, 1999. This deferred stock compensation expense is based on the
difference between the deemed fair market value of common stock and the
exercise price of the option or stock on the grant date. Deferred
compensation is being amortized over the vesting period of the options,
which is generally three years. MedicaLogic recognized expense of $70 in the
nine-month period ended September 30, 1999 related to these grants.
(c) STOCK WARRANTS
In 1994, MedicaLogic entered into a Stock Purchase Warrant Agreement (the
Agreement) with Indius, Inc. (II). Pursuant to the Agreement, MedicaLogic
issued II warrants to purchase up to 22,500 shares of common stock at $.62
per share, conditioned on II meeting certain software development and
licensing requirements. These warrants were exercised in March 1999.
(d) RESTRICTED STOCK PURCHASE AGREEMENTS
As of September 30, 1999, MedicaLogic had sold 1,045,000 shares of common
stock at prices ranging from $4.00 to $6.50 to senior management of
MedicaLogic. These shares were sold under agreements which allow
MedicaLogic, at its option, to repurchase these shares at the original sale
price. In accordance with the repurchase agreements associated with 827,500
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 August 20, 2000. At December 31, 1997 and 1998 and
September 30, 1999 there were 22,951, 141,530 and 809,376 shares outstanding
that were eligible for repurchase.
217,500 of these shares of common stock are released from MedicaLogic's
repurchase rights if certain key business performance criteria are met. In
connection with these stock issuances, MedicaLogic recorded compensation
expense of $790 for nine months ended September 30, 1999. 82,500 and 217,500
of these shares were eligible for repurchase at December 31, 1998 and
September 30, 1999, respectively.
(e) SHARES ISSUED FOR SERVICES
During 1996, MedicaLogic issued 12,500 shares of common stock valued at $50
in exchange for consulting services performed by an independent third party.
F-21
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
During 1997, MedicaLogic issued 14,350 shares of common stock valued at $57,
in exchange for contracted engineering services by an independent
third-party.
During 1999, MedicaLogic issued 58,750 shares of common stock valued at $398
for public relations consulting, headhunter services, and contracted
engineering services by independent third-parties. 208,422 shares of
preferred stock were issued to the three principals of an investment group
as a commission in conjunction with the Series J preferred stock issuance.
The preferred shares were valued at $990. A warrant for 10,000 shares of
common shares at a price of $6.50 and a two year term was issued for legal
services. The value of the warrant was $35.
(f) EMPLOYEE STOCK PURCHASE PLAN
In September 1999, MedicaLogic adopted the MedicaLogic Employee Stock
Purchase Plan. 1,000,000 shares were authorized for issuance under this
Plan.
(8) INCOME TAXES
MedicaLogic incurred a loss for both financial reporting and tax return purposes
for the years ended December 31, 1996, 1997 and 1998 and the nine-month period
ended September 30, 1999. As such, there was no current or deferred tax
provision for these periods.
The actual income tax expense differs from the expected tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to net loss before
income taxes) as follows:
YEARS ENDED DECEMBER 31, NINE-MONTH
------------------------------------ PERIOD ENDED
1996 1997 1998 1999
-------- -------- -------- ------------
Computed expected income tax (benefit)
expense............................... (34.0)% (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) (4.3)
Increase in valuation allowance..... 39.0 43.8 44.7 38.7
Research and development credits.... (0.7) (3.1) (8.3) (2.0)
Other............................... -- (2.4) 1.9 1.6
----- ----- ----- -----
Income tax expense................ --% --% --% --%
===== ===== ===== =====
F-22
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
NINE-MONTH
DECEMBER 31, PERIOD ENDED
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
Deferred tax assets:
Furniture and equipment due to differences
in depreciation......................... $ 165 $ 229 $ 107
Net operating loss and research and
experimentation credit carryforwards.... 11,221 14,169 19,220
Allowance for doubtful accounts........... 326 234 474
Other accruals............................ 173 215 425
-------- -------- --------
Gross deferred tax assets............... 11,885 14,847 20,226
Less valuation allowance.................. (11,406) (14,559) (20,046)
-------- -------- --------
Net deferred tax assets................. 479 288 180
-------- -------- --------
Deferred tax liabilities:
Change in method of accounting............ (467) (280) (175)
Other..................................... (12) (8) (5)
-------- -------- --------
Net deferred tax liabilities............ (479) (288) (180)
-------- -------- --------
Net deferred tax assets and
liabilities........................... $ -- $ -- $ --
======== ======== ========
The valuation allowance for deferred tax assets as of September 30, 1999 was
approximately $20,046. The net change in the total valuation allowance for the
years ending December 31, 1996, 1997 and 1998 and the nine-month period ended
September 30, 1999 was an increase of approximately $4,067, $4,668, $3,153 and
$5,487 respectively.
At September 30, 1999, MedicaLogic has available federal and state net operating
loss carryforwards for tax purposes of approximately $47,963 and research and
experimentation credits of approximately $1,597, which expire through 2019.
Approximately $7,100 of the net operating losses are subject to annual
utilization limitation due to ownership changes in prior years.
(9) COMMITMENTS AND CONTINGENCIES
In September 1999, MedicaLogic entered into a license agreement with L&H
Applications USA, Inc. (L&H). L&H has granted to MedicaLogic a non-exclusive,
non-transferable license to incorporate L&H's product into MedicaLogic's
Logician family of products. MedicaLogic has committed to a non-refundable
pre-payment of royalty fees of $1,100 due on December 20, 1999. MedicaLogic is
required to make additional minimum payments of $230 and $795 for the years
ended December 31, 2000 and 2001, respectively.
MedicaLogic has agreed to issue common stock to a customer at fair market
value up to $12,000, contingent upon sales of additional licenses to third
parties in the customer's geographic area.
F-23
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
MedicaLogic has issued 14,868 shares of common stock with an estimated fair
value of $9.50 per share, to this customer as of September 30, 1999. The stock
agreement expires December 31, 2002.
MedicaLogic is involved in various claims and legal actions in the normal
course of business. The most significant of these are described below.
MedicaLogic was the defendant in a suit at December 31, 1998 arising out of
an alleged breach of contract with a channel partner. This suit was settled in
April 1999. MedicaLogic was also the defendant at December 31, 1998 in a suit
filed by a customer. This suit was a counter-claim to a breach of contract
MedicaLogic had filed. The suit sought a refund of amounts paid to MedicaLogic
for the product. This suit was settled in July 1999. MedicaLogic accrued for its
estimated exposure related to these suits based on a review of the current facts
and circumstances at both December 31, 1997 and 1998.
MedicaLogic is currently a defendant in an action relating to a patent
infringement claim. The plaintiff is seeking unspecified damages. MedicaLogic
believes this suit is without merit and intends to vigorously defend against the
claims.
In the opinion of management, the ultimate disposition of outstanding claims
and legal actions will not have a material effect on MedicaLogic's consolidated
financial position, results of operations or liquidity.
(10) SEGMENT INFORMATION
MedicaLogic derives its revenue from a single operating segment, electronic
medical records, and the service and support related to these products.
GEOGRAPHIC INFORMATION
MedicaLogic operates solely within the United States and to date has derived
all of its revenue from within the United States.
MAJOR CUSTOMERS
In 1996, MedicaLogic derived greater than 10% of its revenue from the
following customers: North Memorial Medical Center ($1,500), Eli Lilly & Company
($1,000), Arkansas Blue Cross Blue Shield ($990).
In 1997, MedicaLogic derived greater than 10% of its revenue from VHA, Inc.,
one of our distribution partners ($2,700), and from Wake Forest Baptist Medical
Center ($1,600). MedicaLogic had accounts receivable from these customers
representing approximately 36% of trade accounts receivable at December 31,
1997.
In 1998, MedicaLogic derived greater than 10% of its revenue from VHA, Inc.,
($3,400). MedicaLogic had accounts receivable from this customer representing
approximately 20% of trade accounts receivable at December 31, 1998.
F-24
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(10) SEGMENT INFORMATION (CONTINUED)
During the nine-month period ended September 30, 1999, MedicaLogic derived
10% or greater of its revenue from Baylor College of Medicine ($4,500) and
Carilion Health Systems ($1,500).
(11) 401(K) PLAN
MedicaLogic sponsors a 401(k) deferred savings plan for all employees.
Employees become eligible to participate in the plan upon employment. Employees
may contribute up to 15% of their pay to the plan, subject to the limitation of
$10 by the Internal Revenue Code. All employee contributions vest immediately.
MedicaLogic has not made any matching contributions but does pay administrative
costs for the Plan. These costs were not significant for any period presented.
(12) RELATED PARTY TRANSACTIONS
MedicaLogic has accepted promissory notes aggregating $1,965 of principal
amount at September 30, 1999 from Company officers in consideration for
restricted stock issued. These notes accrue interest at 6% per annum and are
payable in full 10 years from the date of the loan. MedicaLogic also has loaned
an officer approximately $104 to help pay for relocation expenses, pursuant to
an unsecured promissory note, which bears interest at 6% per annum. The note is
payable in full on the earlier to occur of the sale of his residence located in
Portland, Oregon, the termination of his employment by the Company, or July 1,
2001. The note is prepayable in full without penalty.
In September 1999, MedicaLogic entered into an agreement with a Company
officer in consideration of relocating to San Francisco, California. MedicaLogic
agreed to reimburse this officer $8 for improvements to his Portland, Oregon
residence and any shortfall between the sales price on his Portland, Oregon
residence and the original purchase price of $520 paid by this officer and any
transaction costs not covered by the sales price of this residence, unless the
sales price is greater than the purchase price. MedicaLogic also agreed to
forgive the interest accrued on the unsecured promissory note referred to above,
which will be repaid from the proceeds of the sale of the Portland, Oregon
residence and to pay the mortgage payment on the officer's residence in
Portland, Oregon until it is sold.
In May 1996, MedicaLogic sold a total of 514,445 shares of Series C
preferred stock for $1,158 to beneficial owners of greater than 5% of
MedicaLogic's common stock on a converted basis.
In August 1998, MedicaLogic entered into stock purchase agreements with two
entities that are affiliated with two directors of MedicaLogic. These agreements
were for the issuance of 175,000 shares of common stock at a price of $4.00 per
share. Options for 100,000 shares of common stock were also granted to these
entities with a fair value using the Black-Scholes of $113. These stock options
were exercised by these entities for an additional 100,000 shares of common
stock in April 1999.
In May 1999, MedicaLogic sold an aggregate of 526,316 shares of Series J
preferred stock to two entities that are affiliated with a director of
MedicaLogic.
A member of MedicaLogic's Board of Directors is a partner in a law firm
retained by MedicaLogic to provide legal counsel.
F-25
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(13) SUBSEQUENT EVENTS
(a) STOCK INCENTIVE PLAN
In October 1999, MedicaLogic granted 719,250 options under the 1999
stock incentive plan. The options were granted at $9.50, the fair market
value at the grant date. The fair value was determined by MedicaLogic's
Board of Directors.
(b) SHARES ISSUED
In October 1999, MedicaLogic issued 157,895 shares to Baylor College of
Medicine associated with sales to a third party. The estimated fair market
value of the common stock on the date of issuance was $9.50 per share
resulting in commission expense of $1,501.
(c) BORROWINGS
In October 1999, MedicaLogic used $581 of its term loan referenced in
note 5 to acquire additional capital equipment. These borrowings are secured
by the equipment purchased and bear interest at the rate of 10% per annum.
(d) STOCK SPLIT
On November , 1999, the Board of Directors approved a one-for-two
reverse stock split of outstanding common shares. Common share data for all
periods presented in the accompanying financial statements have been
adjusted to give effect to the stock split.
F-26
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
PrimaCis' 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.
/s/ KPMG LLP
Portland, Oregon
July 23, 1999
F-27
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
1998
------------
ASSETS
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-28
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
DECEMBER 31,
1998
------------
Revenues:
Licenses.................................................. $ 70
Service and support....................................... 178
-----------
Total revenues........................................ 248
Operating expenses:
Cost of licenses.......................................... 16
Cost of service and support............................... 105
Marketing and sales....................................... 282
Research and development.................................. 454
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-29
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-30
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-31
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. (PrimaCis), located in
Houston, Texas, was formed in April 1996. PrimaCis 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, PrimaCis 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, PrimaCis has not capitalized any software
development costs and charged all such costs to research and development
expense.
(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
F-32
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
PrimaCis' 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. PrimaCis
establishes VSOE based on the average selling price of our products, support
and services during the period.
PrimaCis recognizes revenue from license fees generally when a signed
agreement has been obtained, the delivery of the product has occurred, there
are no uncertainties surrounding product acceptance, the fee is fixed and
determinable and collectibility of the license fee is probable.
Support revenue consists of annual subscriptions for maintenance and
post-customer support services. Subscriptions, containing the right to
obtain upgrades, when and if available, are generally paid in advance and
revenue is recognized ratably over the term of the subscription.
Services revenue generally consists of consulting, training and
integration fees. Such services are typically billed separately from the
license fees and are recognized as the related services are 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) INCOME TAXES
PrimaCis 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.
F-33
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) STOCK-BASED EMPLOYEE COMPENSATION
PrimaCis 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, PrimaCis 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
PrimaCis 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.
(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.
F-34
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 PrimaCis' revenues each year are generated from
the development and release to market of computer software products. In the
extremely competitive industry environment in which PrimaCis 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.
(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
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) LEASES (CONTINUED)
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, PrimaCis received an unsecured loan of $381 from an officer and
shareholder of PrimaCis. The loan was evidenced by a promissory note payable and
other supporting documentation, and was paid in full during 1999. In conjunction
with this loan, PrimaCis granted the shareholder the option to purchase 300,000
shares of common stock of PrimaCis 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 PrimaCis' stock. Except as
expressly provided, no stockholder is allowed to transfer ownership of stock
without the prior written consent of all stockholders.
F-36
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(b) STOCK INCENTIVE PLAN
In 1997, PrimaCis 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 PrimaCis and, unless otherwise specified, expire ten years from the
date of grant. PrimaCis 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%
PrimaCis 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, PrimaCis recognized $282 in compensation costs with respect to stock
based compensation awards as valued under APB No. 25. The effect on
PrimaCis' net loss, had PrimaCis 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
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
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 $.06 to $.60 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, PrimaCis 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
PrimaCis 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.
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...................................... --%
=====
F-38
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) INCOME TAXES (CONTINUED)
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.
PrimaCis 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
PrimaCis had two customers that accounted for approximately 98% of the total
revenue for the year ended December 31, 1998.
(8) SUBSEQUENT EVENTS
On January 29, 1999, PrimaCis entered into a reorganization and merger
agreement with MedicaLogic, Inc. The purchase price consisted of $2,100 in cash,
the assumption of $1,053 in liabilities and 750,000 shares of MedicaLogic common
stock issued at $4.40 per share.
F-39
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of operations
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 for the
nine month period ended September 30, 1998 and the year ended December 31, 1998.
The unaudited pro forma condensed combined statement of operations for the
period from December 31, 1998 through September 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 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 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-40
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
--------------------------------------------------------
PRO FORMA PRO FORMA
MEDICALOGIC PRIMACIS ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
Revenues:
Licenses................................ $ 6,534 $ 36 $ 6,570
Service and support..................... 4,225 133 4,358
----------- ----------- -----------
Total revenues...................... 10,759 169 10,928
----------- ----------- -----------
Operating expenses:
Cost of licenses........................ 608 8 616
Cost of service and support............. 4,354 86 4,440
Marketing and sales..................... 5,647 109 $1,238 6,994
Research and development................ 5,981 211 6,192
General and administrative.............. 735 905 600 2,240
----------- ----------- -----------
Total operating expenses............ 17,325 1,319 20,482
----------- ----------- -----------
Operating loss...................... (6,566) (1,150) (9,554)
Other income (expense):
Interest expense........................ (145) (72) (217)
Interest income......................... 504 1 505
Other, net.............................. (40) (5) (45)
----------- ----------- -----------
Loss before income taxes............ (6,247) (1,226) (9,311)
Provision for income taxes................ -- -- --
----------- ----------- -----------
Net loss............................ $ (6,247) $ (1,226) $ (9,311)
=========== =========== ===========
Net loss per share:
Basic and diluted....................... $ (0.90) $ (0.11) $ (1.22)
=========== =========== ===========
Shares used in computing net loss per
share:
Basic and diluted....................... 6,881,578 11,111,426 7,631,578
=========== =========== ===========
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.
F-41
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:
Licenses................................ $ 10,410 $ 70 $ 10,480
Service and support..................... 5,750 178 5,928
----------- ----------- -----------
Total revenues...................... 16,160 248 16,408
----------- ----------- -----------
Operating expenses:
Cost of licenses........................ 939 16 955
Cost of service and support............. 5,815 105 5,920
Marketing and sales..................... 7,882 282 $1,650 9,814
Research and development................ 8,071 454 8,525
General and administrative.............. 1,151 1,063 800 3,014
----------- ----------- -----------
Total operating expenses............ 23,858 1,920 28,228
----------- ----------- -----------
Operating loss...................... (7,698) (1,672) (11,820)
Other income (expense):
Interest expense........................ (187) (116) (303)
Interest income......................... 707 2 709
Other, net.............................. 143 (7) 136
----------- ----------- -----------
Loss before income taxes............ (7,035) (1,793) (11,278)
Provision for income taxes................ -- -- --
----------- ----------- -----------
Net loss............................ $ (7,035) $ (1,793) $ (11,278)
=========== =========== ===========
Net loss per share:
Basic and diluted....................... $ (1.02) $ (0.16) $ (1.48)
=========== =========== ===========
Shares used in computing net loss per
share:
Basic and diluted....................... 6,883,036 11,481,704 7,633,036
=========== =========== ===========
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.
F-42
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 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 750,000
shares of MedicaLogic common stock, valued at $4.40 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 the unaudited pro forma condensed combined
statements of operations are to record the amortization of goodwill of
approximately $3,200 and other intangible assets of approximately $3,300
recorded as a result of the acquisition over four and two years, respectively,
and to reduce depreciation expense to reflect new asset fair values.
F-43
- ---------------------------------------------------------
- ---------------------------------------------------------
1999
[MEDICALOGIC LOGO]
________ SHARES
----------------------
PROSPECTUS
----------------------
DONALDSON, LUFKIN & JENRETTE
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 about
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. The information contained in this prospectus is
accurate only on the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of the common stock.
- --------------------------------------------------------------------------------
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 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).
II-1
(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 $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 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 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 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
II-2
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.
In September and October 1999, the Registrant issued 345,525 shares of
Common Stock to Baylor College of Medicine pursuant to an agreement described in
the prospectus that provides for the issuance of shares of Common Stock to
Baylor upon certain purchases of LOGICIAN licenses from the Company. The shares
were issued to Baylor as a result of purchases of LOGICIAN licenses by
institutions in Houston, Texas for approximately $1,641,244, and the deemed
value of the shares at the time of issuance was $4.75 a share. 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.
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.
NUMBER OF SHARES EXERCISE
SUBJECT TO 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 to September 17, 1999.................. 1,719,500 $3.25
September 18, 1999 and thereafter................... 1,300,000 $4.75
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 from May 26, 1999 to
September 17, 1999 to purchase 1,719,500 shares of Common Stock, all were
outstanding as of October 15, 1999. Of the options granted after September 17,
1999 to purchase 1,300,000 shares of Common Stock, all were outstanding as of
October 15, 1999.
II-3
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 SALE
RESTRICTED 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 to September 17, 1999.................. 885,000 $3.25
September 18, 1999 and thereafter................... 250,000 $4.75
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 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 SHARE
NUMBER OF SHARES 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 to September 17, 1999........... 70,000 $3.25
September 18, 1999 and thereafter............ 10,000 $4.75
The foregoing share amounts do not give effect to a one-for-two reverse
stock split to be effected by the Company prior to the offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
1.1 Form of Underwriting Agreement
3.1(3) 1994 Restated Articles of Incorporation, as amended
3.2(3) Restated Bylaws
4.1(3) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
4.2 Specimen Stock Certificate
5.1(2) Opinion of Stoel Rives LLP
10.1(3) 1999 Amended and Restated Investor Rights Agreement
10.2(3) 1993 Stock Incentive Plan
10.3(3) 1996 Stock Incentive Plan, as amended
10.4(3) 1999 Stock Incentive Plan
10.5(3) Form of Incentive Stock Option Agreement
10.6 Form of Restricted Stock Purchase Agreement (Performance)
10.7 Form of Restricted Stock Purchase Agreement
10.8 Equipment Financing Agreement between MedicaLogic and GE
Capital Financing dated June 5, 1998
10.8.1 Industrial Business Park Lease between MedicaLogic and
Evergreen Corporate Center LLC dated January 15, 1997, as
amended July 15, 1999
10.8.2(3) Office Lease between 945 Battery LLC, and MedicaLogic, dated
May 9, 1999
II-4
10.9(3) Agreement to Issue Shares of Common Stock between
MedicaLogic 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)(3) Oracle Alliance Agreement between MedicaLogic and Oracle
Corporation dated April 1, 1998, as amended
10.12(3) Employment Agreement between MedicaLogic and Mark Leavitt,
dated August 1, 1985
10.13(2) Employee Stock Purchase Plan
21.1(3) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1)
24.1(3) Power of Attorney
24.2 Power of Attorney of Neal Moszkowski
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.
(3) Previously filed.
(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.
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.
II-5
(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-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to 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 October 27, 1999.
MEDICALOGIC, INC.
By /s/ MARK K. LEAVITT, M.D.
------------------------------------------
Mark K. Leavitt, M.D.
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement on Form S-1 has been signed below on
October 27, 1999 by the following persons in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ MARK K. LEAVITT, M.D.
-------------------------------------- Chairman of the Board and Chief Executive Officer
Mark K. Leavitt, M.D. PRINCIPAL EXECUTIVE OFFICER
/s/ DAVID C. MOFFENBEIER*
-------------------------------------- Chief Operating Officer and Director
David C. Moffenbeier PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
/s/ CHARLES D. BURWELL*
-------------------------------------- Director
Charles D. Burwell
/s/ BRUCE M. FRIED*
-------------------------------------- Director
Bruce M. Fried
/s/ RONALD H. KASE*
-------------------------------------- Director
Ronald H. Kase
/s/ NEAL MOSZKOWSKI*
-------------------------------------- Director
Neal Moszkowski
/s/ MARK A. STEVENS*
-------------------------------------- Director
Mark A. Stevens
/s/ RONALD R. TAYLOR*
-------------------------------------- Director
Ronald R. Taylor
II-7
SIGNATURE TITLE
--------- -----
/s/ DAVID W. WROE*
-------------------------------------- Director
David W. Wroe
/s/ MARK K. LEAVITT, M.D.
-----------------------------------------
Mark K. Leavitt, M.D.
*By ATTORNEY-IN-FACT
II-8
EXHIBIT INDEX
1.1 Form of Underwriting Agreement
3.1(3) 1994 Restated Articles of Incorporation, as amended
3.2(3) Restated Bylaws
4.1(3) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
4.2 Specimen Stock Certificate
5.1(2) Opinion of Stoel Rives LLP
10.1(3) 1999 Amended and Restated Investor Rights Agreement
10.2(3) 1993 Stock Incentive Plan
10.3(3) 1996 Stock Incentive Plan, as amended
10.4(3) 1999 Stock Incentive Plan
10.5(3) Form of Incentive Stock Option Agreement
10.6 Form of Restricted Stock Purchase Agreement (Performance)
10.7 Form of Restricted Stock Purchase Agreement
10.8 Equipment Financing Agreement between MedicaLogic and GE
Capital Financing dated June 5, 1998
10.8.1 Industrial Business Park Lease between MedicaLogic and
Evergreen Corporate Center LLC dated January 15, 1997, as
amended July 15, 1999
10.8.2(3) Office Lease between 945 Battery LLC, and MedicaLogic, dated
May 9, 1999
10.9(3) Agreement to Issue Shares of Common Stock between
MedicaLogic 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)(3) Oracle Alliance Agreement between MedicaLogic and Oracle
Corporation dated April 1, 1998, as amended
10.12(3) Employment Agreement between MedicaLogic and Mark Leavitt,
dated August 1, 1985
10.13(2) Employee Stock Purchase Plan
21.1(3) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3(2) Consent of Stoel Rives LLP (included in Exhibit 5.1)
24.1(3) Power of Attorney
24.2 Power of Attorney of Neal Moszkowski
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.
(3) Previously filed.