<PAGE>
As Filed With the Securities and Exchange Commission on July 7, 1999.
Registration No. 333-78431
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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Allscripts, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 5122 36-3444974
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2401 Commerce Drive
Libertyville, Illinois 60048
(847) 680-3515
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
---------------
Glen E. Tullman
Chairman and Chief Executive Officer
2401 Commerce Drive
Libertyville, Illinois 60048
(847) 680-3515
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Joseph H. Greenberg Mitchell L. Hollins
Gardner, Carton & Douglas Sonnenschein Nath & Rosenthal
321 North Clark Street, Suite 2900 8000 Sears Tower
Chicago, Illinois 60610 Chicago, Illinois 60606
(312) 644-3000 (312) 876-8000
----------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
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,
please 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 thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a United States offering of the registrant's common
stock (the "U.S. Prospectus") and one to be used in connection with a
concurrent international offering of the common stock (the "International
Prospectus"). The International Prospectus will be identical to the U.S.
Prospectus except that it will have a different page 3. The U.S. Prospectus is
included herein and is followed by the alternative page to be used in the
International Prospectus, which has been labeled "Alternate Page for
International Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated July 7, 1999.
7,000,000 Shares
[LOGO] Allscripts, Inc.
Common Stock
-----------
This is an initial public offering of shares of common stock of Allscripts,
Inc. All of the 7,000,000 shares of common stock are being sold by Allscripts.
Prior to this offering, there has been no public market for Allscripts'
common stock. It is currently estimated that the initial public offering price
per share will be between $10.00 and $12.00. The common stock has been approved
for quotation on the Nasdaq National Market under the symbol "MDRX".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Initial public offering price............................ $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to Allscripts................. $ $
</TABLE>
The underwriters may, subject to the terms of the underwriting agreement,
purchase up to an additional 1,050,000 shares from Allscripts at the initial
public offering price less the underwriting discount.
-----------
The underwriters expect to deliver the shares in New York, New York on
, 1999.
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
CIBC World Markets
Wit Capital Corporation
-----------
Prospectus dated , 1999.
<PAGE>
ALLSCRIPTS(TM)
MANAGEMENT SOLUTIONS
Connectivity @ The Point of Care
Pharmacy Managed Care
[Photo of patient [Photo of patient
consulting with consulting with
pharmacist] physician]
Pharmacy Benefits Managed Care Benefits
> Valuable Electronic > Control Medication Costs
Information . Increase Formulary
. e-Refill Compliance
. e-Messaging . Drug Utilization Review
> Decreased Costs > Managing Care
. Reduced Prescription Errors . Treatment Protocols
. Increased Patient
Compliance
Physician
[Photo of physician using TouchScript]
Using Allscripts
Physician Benefits
> 3Touch(TM) Speed & Simplicity
> Increased Revenue
> Increased Patient Satisfaction
> Time Savings from e-Scripts
> Internet Gateway
> Better Management of Financial Risk
> Fewer Phone Calls & Disruptions
Patient Benefits Pharmaceutical
Manufacturer Benefits
> Convenience > Internet Gateway
> Confidentiality to Physicians
> Compliance Programs > Improved Marketing
> Decreased . Physician Profiling
Medication Errors . e-Detailing
> Link Clinical and
Rx Information
Patient Pharmaceutical
[Photo of patient [Photo of machine
receiving prepackaged repackaging medications]
medication]
Manufacturer
<PAGE>
PROSPECTUS SUMMARY
This is a summary and does not contain all the information that may be
important to you. You should read the more detailed information included in
this prospectus. All information in this prospectus gives effect to a one-for-
six reverse split of our common stock effected on June 28, 1999. Except as
otherwise noted, the information contained in this prospectus assumes:
. the underwriters will not exercise the over-allotment option, and no
other person will exercise any other outstanding option or warrant;
. we will reincorporate in the state of Delaware upon the closing of this
offering, which will result in, among other things, our adoption of a
new Certificate of Incorporation and By-laws; and
. all outstanding shares of our Series A, B, C, D, F and G preferred stock
will convert into a total of 2,977,483 shares of common stock upon the
closing of this offering.
Allscripts, Inc.
We provide physicians with Internet and client/server medication management
solutions designed to improve the quality and cost effectiveness of
pharmaceutical healthcare. Our technology-based approach focuses on the point
of care, where the prescription originates, and creates an electronic dialogue
between physicians and other participants in the healthcare delivery process,
including patients, pharmacies, managed care organizations and pharmaceutical
manufacturers. We believe physicians find our solutions attractive because
incorporating these solutions into their office work flow can increase
efficiency and profitability and improve the quality of patient care.
The current process for prescribing and delivering medications is
inefficient, unnecessarily costly and error-prone. Our in-office and Internet-
based comprehensive solutions are designed to improve and streamline every step
of the pharmaceutical healthcare process in a way that can benefit each
participant. Our medication management solutions enable physicians to improve
their prescribing at the point of care by providing them with information about
potential adverse drug interactions, patient drug history and managed care
guidelines. This ready access to information during the prescribing process
reduces the time physicians spend clarifying and changing prescriptions and
enables them to better manage financial risk. Our products also enable
physicians to increase practice revenue by dispensing medications. In addition,
our solutions make it possible for patients to have their prescriptions
electronically routed to the pharmacy of their choice or to benefit from the
convenience, immediacy and confidentiality of receiving their medications in
the physician's office. Our solutions also benefit managed care organizations
by promoting higher physician compliance with their pharmacy guidelines, while
pharmacies benefit from improved communication with physicians, which enhances
efficiency and reduces the likelihood of errors.
We currently offer products in four categories: point-of-care medication
management, Internet products and services, information products and
prepackaged medications. Our TouchScript software enables electronic
prescribing, routing of prescription information and capturing of prescription
data at the point of care. Our other e-commerce products and services offer
physicians and their patients medication-related education and information
services. We also sell prepackaged medications to physicians so they can offer
their patients the convenience of receiving prescription medications in the
physician's office.
We believe that our experience in the pharmaceutical healthcare delivery
process gives us a competitive advantage. Through our business relationships
with thousands of physicians, we have developed an understanding of their
office work flow and business practices. Versions of TouchScript are currently
installed and used in over 150 physician practice sites, and we have
facilitated relationships
3
<PAGE>
between many of the country's largest managed care payers and our physician
customers under which our customers can obtain reimbursement for prescription
medications dispensed in their offices. In addition, our experience in
providing medication management solutions has given us a thorough understanding
of the complex and dynamic healthcare regulatory environment. Finally, we
believe that our management team, which is experienced in managing rapidly
growing public companies that use technology to change business processes,
further enhances our competitive advantage.
Corporate Information
Allscripts was incorporated in Illinois in 1986 and will be reincorporated
in Delaware upon the closing of this offering. Our executive offices are at
2401 Commerce Drive, Libertyville, Illinois 60048. Our telephone number is
(847) 680-3515; our Internet e-mail address is [email protected]; and our Web
site is www.Allscripts.com. Information contained on our Web site is not part
of this prospectus.
TouchScript(R) and MedSmart(R) are registered trademarks of Allscripts, Inc.
Allscripts(TM), 3Touch Prescribing(TM), Physician's Interactive(TM),
ScriptGuard(TM) and Intelligent Reminder(TM) are trademarks of Allscripts, Inc.
All other trademarks, brand marks, trade names and registered marks used in
this prospectus are trademarks, brand marks, trade names or registered marks of
their respective owners.
The Offering
<TABLE>
<S> <C>
Shares offered by
Allscripts............. 7,000,000
Shares to be outstanding
after the offering
(1).................... 18,929,799
Nasdaq National Market
symbol................. MDRX
Use of proceeds......... To redeem all outstanding shares of our Series H, I and J
redeemable preferred stock, to repay the promissory note
to be issued in connection with our acquisition of
Shopping@Home and for general corporate purposes. See
"Use of Proceeds" and "Certain Relationships and Related
Party Transactions--Shopping@Home Acquisition" and "--
Redeemable Preferred Stock Redemptions."
</TABLE>
- -------
(1) The number of shares to be outstanding after the offering is based on:
. 8,932,299 shares outstanding as of May 31, 1999;
. 2,977,483 shares issuable upon conversion of all outstanding convertible
preferred stock; and
. 20,017 shares to be issued upon the closing of this offering under a
contingent payment obligation in connection with an acquisition we made
in 1995.
The number of shares to be outstanding after the offering does not include
an aggregate of up to 8,743,508 shares comprised of:
. 4,903,763 shares issuable upon the exercise of outstanding warrants,
4,895,430 of which are currently exercisable, at a weighted average
exercise price of $0.54 per share;
. 2,380,539 shares issuable upon the exercise of stock options that were
outstanding on May 31, 1999 with a weighted average exercise price of
$1.06 per share;
. 1,341,706 shares available for future grant as of May 31, 1999 under our
Amended and Restated 1993 Stock Incentive Plan; and
. up to 117,500 shares that may be issued under a contingent payment
obligation relating to the MedSmart acquisition.
See "Shares Eligible for Future Sale."
4
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
The following table summarizes our financial data and should be read
together with our consolidated financial statements, including the related
notes, and the other financial information in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
------------------------------------------------ ----------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ 32,635 $ 33,310 $ 33,462 $ 30,593 $ 23,682 $ 6,351 $ 6,028
Gross profit............ 11,029 9,168 10,132 9,571 6,536 1,848 1,528
Loss from continuing
operations............. (3,019) (5,752) (4,430) (8,991) (7,694) (2,137) (2,289)
Gain from sale of
discontinued
operations............. -- -- -- -- -- -- 3,547
Net (loss) income....... (2,662) (4,363) (2,941) (10,799) (7,514) (1,750) 1,284
Net (loss) income to
common shareholders.... (2,988) (5,286) (3,864) (11,722) (9,929) (1,981) 585
Basic and diluted net
loss from continuing
operations per share... $ (8.34) $ (3.84) $ (1.87) $ (3.35) $ (1.66) $ (0.69) $ (0.35)
Weighted average shares
used in computing per
share calculation...... 401 1,737 2,854 2,956 6,076 3,410 8,490
Pro forma basic and
diluted net loss from
continuing operations
per share(1)........... $ (1.14) $ (0.28)
Shares used in computing
pro forma basic and
diluted net loss from
continuing operations
per share(1)........... 9,073 11,487
Other Operating Data:
Traditional revenue
(2).................... $ 32,635 $ 33,310 $ 33,462 $ 30,593 $ 22,338 $ 6,101 $ 5,235
E-commerce revenue (3).. -- -- -- -- 1,344 250 793
-------- -------- -------- -------- -------- ------- -------
Revenue................. $ 32,635 $ 33,310 $ 33,462 $ 30,593 $ 23,682 $ 6,351 $ 6,028
======== ======== ======== ======== ======== ======= =======
</TABLE>
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(1) Pro forma basic and diluted net loss from continuing operations per share
information is presented as if all outstanding shares of convertible
preferred stock were converted into common stock and also reflects the
contingent issuance of 20,017 shares of common stock upon the closing of
this offering.
(2) Traditional revenue is derived from the sale of prescription medications to
physicians through channels other than the Internet.
(3) E-commerce revenue is derived primarily from the sale of prescription
medications over the Internet to physicians and also includes revenue from
software license fees, computer hardware sales and leases, and related
services.
The "pro forma" column below shows our balance sheet data as if we had
completed our acquisitions of MedSmart and Shopping@Home on March 31, 1999. The
"pro forma as adjusted" column below shows our pro forma balance sheet data as
if on March 31, 1999 we had sold 7,000,000 shares of common stock at an assumed
initial public offering price of $11.00 per share and the application of the
net proceeds as described in "Use of Proceeds." The "pro forma as adjusted"
column also reflects the issuance of 20,017 shares of common stock upon the
closing of this offering under a contingent payment obligation. See Note 9 of
Notes to Unaudited Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------
Pro Forma
As
Actual Pro Forma Adjusted
-------- --------- ---------
<S> <C> <C> <C>
Balance Sheet Data:
Cash............................................. $ 8,023 $ 8,068 $44,180
Working capital.................................. 4,717 3,460 39,572
Total assets..................................... 22,528 25,278 62,040
Long-term debt, net of current portion........... 59 59 59
Redeemable preferred shares...................... 33,246 33,246 --
Total stockholders' equity (deficit)............. (26,038) (24,745) 45,263
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and other information in this prospectus before deciding to invest in our
common stock. These are not the only risks and uncertainties that we face.
Additional risks and uncertainties that we do not currently know about or that
we currently believe are immaterial may also harm our business operations. If
any of these risks or uncertainties occurs, it could have a material adverse
effect on our business, the trading price of our common stock could decline and
you could lose all or part of your investment.
Risks Related to Our Company
If physicians do not accept our products and services, our growth will be
impaired.
Our business model depends on our ability to sell our TouchScript system to
physicians and other healthcare providers and to generate usage by a large
number of physicians. We have not achieved this goal with previous versions of
our software. Physician acceptance of our products and services will require
physicians to adopt different behavior patterns and new methods of conducting
business and exchanging information. We cannot assure you that physicians will
integrate our products and services into their office work flow or that
participants in the pharmaceutical healthcare market will accept our products
and services as a replacement for traditional methods of conducting
pharmaceutical healthcare transactions. 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 participants in the pharmaceutical healthcare industry. If we
fail to achieve broad acceptance of our products and services by physicians and
other healthcare participants or to position our services as a preferred method
for pharmaceutical healthcare delivery, our prospects for growth will be
diminished.
Because our business model is new and unproven, our operating history is not
indicative of our future performance and our business is difficult to evaluate.
Because we have not yet successfully implemented our business model, we do
not have an operating history upon which you can evaluate our prospects, and
you should not rely upon our past performance to predict our future
performance. We sold our pharmacy benefit management business in March 1999.
Revenue from this discontinued operation was $42,225,000 in 1996, $44,719,000
in 1997 and $52,866,000 in 1998, which exceeded revenue from continuing
operations in each of those years. For the year ended December 31, 1998, we
generated 93.4% of our revenue from the sale of prepackaged medications to
doctors for dispensing at the point of care, without the use of our TouchScript
system. Accordingly, our operating history is not indicative of our future
performance under our new business model. In attempting to implement our
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.
We have a substantial accumulated deficit because of our operating losses and
may never be profitable.
At March 31, 1999, we had an accumulated deficit of $49,480,000, and we
expect to continue to incur significant operating losses. We cannot be certain
that we will ever become profitable. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis in the future.
If we are unable to maintain existing relationships and create new
relationships with managed care payers, our prospects for growth will suffer.
We rely on managed care organizations to reimburse our physician customers
for prescription medications dispensed in their offices. While many of the
leading managed care payers and pharmacy benefit managers currently reimburse
our physicians for in-office dispensing, none of these payers is under
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a long-term obligation to do so. If we are unable to increase the number of
managed care payers that reimburse for in-office dispensing, or if some or all
of the payers who currently reimburse physicians decline to do so in the
future, utilization of our products and, therefore, our growth will be
impaired.
If we are unable to successfully introduce new products, our business prospects
will be impaired.
The successful implementation of our business model depends on our ability
to introduce certain new products, such as TouchScript Version 7 and Version
7.i, and to introduce these new products on schedule. See "Business--Products
and Services" and "--Product Development and Technology." We currently intend
to introduce these two products in the third quarter of 1999. We cannot assure
you that we will be able to introduce these products or our other products
under development on schedule, or at all. In addition, early releases of
software often contain errors or defects. We cannot assure you that, despite
our extensive testing, errors will not 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. A failure by
us to introduce planned products or to introduce such products on schedule
could have a material adverse effect on our business prospects.
Our business will not be successful unless we establish and maintain strategic
relationships.
To be successful, we must establish and maintain strategic relationships
with leaders in a number of healthcare and Internet industry segments. This is
critical to our success because we believe that these relationships will enable
us to:
. extend the reach of our products and services to a larger number of
physicians and to other participants in the healthcare industry;
. develop and deploy new products;
. further enhance the Allscripts brand; and
. generate additional revenue.
Entering into strategic relationships is complicated because some of our
current and future strategic partners may decide to compete with us in some or
all of our markets. In addition, we may not be able to establish relationships
with key participants in the healthcare industry if we have relationships with
their competitors. Moreover, many potential strategic partners have resisted,
and may continue to resist, working with us until our products and services
have achieved widespread market acceptance.
Once we have established strategic relationships, we will depend on our
partners' ability to generate increased acceptance and use of our products and
services. 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. If we lose
any of these 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, and our business
will suffer.
If potential customers take a long time to evaluate the purchase of our
products and services, we could incur additional selling expenses and require
additional working capital.
The length of the selling cycle for our current TouchScript product depends
on a number of factors, including the nature and size of the potential customer
and the extent of the commitment being made by the potential customer, and is
difficult to predict. Because we are focusing our marketing efforts on large
healthcare organizations, the sale and implementation process has generally
been lengthy due to these organizations' complex decision-making processes. If
potential customers take longer than we expect to decide whether to purchase
our solutions, our selling expenses could increase, and we may need to raise
additional capital sooner than we would otherwise need to.
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<PAGE>
If we cannot keep pace with advances in technology, our business could be
harmed.
If we cannot adapt to changing technologies, our products and services may
become obsolete, and our business could suffer. Because the Internet and
healthcare information markets are characterized by rapid technological change,
we may be unable to anticipate changes in our current and potential customers'
requirements that could make our existing technology obsolete. Our success will
depend, in part, on our ability to continue to enhance our existing 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. The development
of our proprietary technology entails significant technical and business risks.
We may not be successful in using new technologies effectively or adapting our
proprietary technology to evolving customer requirements or emerging industry
standards.
Our future success depends upon our ability to grow, and if we are unable to
manage our growth effectively, we may incur unexpected expenses and be unable
to meet our customers' requirements.
We will need to expand our operations if we successfully achieve market
acceptance for our products and services. We cannot be certain that our
systems, procedures, controls and existing space will be adequate to support
expansion of our operations. Our future operating results 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. An unexpectedly large increase in the
volume or pace of traffic on our Web site or the number of orders placed by
customers may require us to expand and further upgrade our technology. We may
not be able to project the rate or timing of increases in the use of our Web
site accurately or to expand and upgrade our systems and infrastructure to
accommodate such increases. Difficulties in managing any future growth could
have a significant negative impact on our business because we may incur
unexpected expenses and be unable to meet our customers' requirements.
If we lose the services of our key personnel, we may be unable to replace them,
and our business could be negatively affected.
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
Glen E. Tullman, our Chairman and Chief Executive Officer, and David B. Mullen,
our President and Chief Financial Officer, are integral to the execution of our
business strategy. If one or more of our key employees leaves Allscripts, we
will have to find a replacement with the combination of skills and attributes
necessary to execute our strategy. Because competition for skilled employees is
intense, and the process of finding qualified individuals can be lengthy and
expensive, we believe that the loss of the services of key personnel could
negatively affect our business, financial condition and results of operations.
If we are unable to implement our acquisition strategy successfully, our
ability to expand our product and service offerings and our customer base may
be limited.
We recently completed the acquisitions of TeleMed Corp. and Shopping@Home,
Inc. In addition, we regularly evaluate acquisition opportunities. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations, services, products and personnel of the acquired company, the
diversion of management's attention from other business concerns, entry into
markets in which we have little or no direct prior experience, the potential
loss of key employees of the acquired company and our inability to maintain the
goodwill of the acquired businesses. In order to expand our product and service
offerings and grow our business by reaching new customers, we may continue to
acquire businesses that we believe are complementary. The successful
implementation of this strategy depends on our ability to identify
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<PAGE>
suitable acquisition candidates, acquire companies on acceptable terms,
integrate their operations and technology successfully with our own and
maintain the goodwill of the acquired business. We are unable to predict
whether or when any prospective acquisition candidate will become available or
the likelihood that any acquisition will be completed. Moreover, in pursuing
acquisition opportunities, we may compete for acquisition targets with other
companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than we have. Competition
for these acquisition targets could also result in increased prices of
acquisition targets.
Future acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the assumption of known and
unknown liabilities, the writeoff of software development costs and the
amortization of expenses related to goodwill and other intangible assets, all
of which could have a material adverse effect on our business, financial
condition, operating results and prospects. We have taken, and in the future
may take, charges against earnings in connection with acquisitions. The costs
and expenses incurred may exceed the estimates upon which we based these
charges.
Our business depends on our intellectual property rights, and if we are unable
to protect them, our competitive position will suffer.
Our business plan is predicated on our proprietary systems and technology,
including TouchScript. We protect our proprietary rights through a combination
of trademark, trade secret and copyright law, confidentiality agreements and
technical measures. We generally enter into non-disclosure agreements with our
employees and consultants and limit access to our trade secrets and technology.
We cannot assure you that the steps we have taken will prevent misappropriation
of technology. Misappropriation of our intellectual property would have a
material adverse effect on our competitive position. In addition, we may have
to engage in litigation in the future to enforce or protect our intellectual
property rights or to defend against claims of invalidity, and we may incur
substantial costs as a result.
If we are deemed to infringe on the proprietary rights of third parties, we
could incur unanticipated expense and be prevented from providing our products
and services.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the functionality of our applications
overlaps with competitive products. One of our potential competitors recently
filed a patent infringement lawsuit, which has since been settled on
undisclosed terms, against another of our potential competitors asserting broad
proprietary rights in processes similar to our medication management solutions.
While we do not believe that we have infringed or are infringing on any valid
proprietary rights of third parties, we cannot assure you that similar
infringement claims will not be asserted against us or that those claims will
be unsuccessful. We could incur substantial costs and diversion of management
resources defending any infringement claims. Furthermore, 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. In addition, we cannot assure you that
licenses for any intellectual property of third parties that might be required
for our products or services will be available on commercially reasonable
terms, or at all.
Factors beyond our control could cause interruptions in our operations, which
would adversely affect our reputation in the marketplace and our results of
operations.
To succeed, we must be able to operate our systems without interruption.
Certain of our communications and information services are provided through our
service providers. Our operations are vulnerable to interruption by damage 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;
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. computer viruses and similar disruptive problems; and
. fire, flood and other natural disasters.
We have no comprehensive plans for these contingencies. Any significant
interruptions in our services would damage our reputation in the marketplace
and have a negative impact on our results of operations.
We may be liable for use of data we provide.
We provide data for use by healthcare providers in treating patients.
Third-party contractors provide us with most of this data. Although no claims
have been brought against us alleging injuries related to the use of our data,
claims may be made in the future. While we maintain product liability insurance
coverage in an amount that we believe is sufficient for our business, we cannot
assure you that this coverage will prove to be adequate or will continue to be
available on acceptable terms, if at all. A claim brought against us that is
uninsured or under-insured could materially harm our financial condition.
If our security is breached, we could be subject to liability, and people could
be deterred from using our services.
The difficulty of securely transmitting confidential information over the
Internet has been a significant barrier to conducting e-commerce and engaging
in sensitive communications over the Internet. Our strategy relies on the use
of the Internet to transmit confidential information. We believe that any well-
publicized compromise of Internet security may deter people from using the
Internet for these purposes, and from using our system to conduct transactions
that involve transmitting confidential healthcare information.
It is also possible that third parties could penetrate our network security
or otherwise misappropriate patient information and other data. If this
happens, our operations could be interrupted, and we could be subject to
liability. We may have to devote significant financial and other resources to
protect against security breaches or to alleviate problems caused by breaches.
We could face financial loss, litigation and other liabilities to the extent
that our activities or the activities of third-party contractors involve the
storage and transmission of confidential information like patient records or
credit information. In addition, we could incur additional expenses if new
regulations regarding the use of personal information are introduced.
We are uncertain of our ability to obtain additional financing for our future
needs.
We expect the net proceeds of this offering, together with our existing
cash and borrowings under our line of credit, to be sufficient to meet our
anticipated needs for working capital and other cash requirements for at least
the next twelve months. We may need to raise additional funds sooner, however,
in order to fund more rapid expansion, to develop new or enhance existing
services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. We cannot be certain that
additional financing will be available on favorable terms, or at all. If
adequate financing is not available or is not available on acceptable terms,
our ability to fund our expansion, take advantage of potential acquisition
opportunities, develop or enhance services or products, or respond to
competitive pressures would be significantly limited.
If our content and service providers fail to perform adequately, our reputation
in the marketplace and results of operations could be adversely affected.
We depend on independent content and service providers for many of the
benefits we provide through our TouchScript system, including the maintenance
of managed care pharmacy guidelines, drug interaction reviews and the routing
of transaction data to third-party payers. Any problems with our
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providers that result in interruptions of our services or a failure of our
services to function as desired could damage our reputation in the marketplace
and have a material adverse effect on our results of operations. We may have no
means of replacing content or services on a timely basis or at all if they are
inadequate or in the event of a service interruption or failure.
We also expect to rely on independent content providers for the majority of
the clinical, educational and other healthcare information that we plan to
provide on our Web site. In addition, we will depend on our content providers
to deliver high quality content from reliable sources and to continually
upgrade their content in response to demand and evolving healthcare industry
trends. Any failure by these parties to develop and maintain high quality,
attractive content could impair the value of the Allscripts brand and our
results of operations.
If third-party payers force us to reduce our prices, our results of operations
could suffer.
We expect to derive a majority of our revenue from the sale, including over
the Internet, of prepackaged medications to physicians. We may be subject to
pricing pressures with respect to our future sales of prepackaged medications
arising from various sources, including practices of managed care organizations
and any governmental action requiring or allowing pharmaceutical reimbursement
under Medicare. If our pricing of prepackaged medications experiences
significant downward pressure, our business will be less profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We are subject to risks from litigation.
We are a defendant in numerous multi-defendant lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine and phentermine. The
plaintiffs in these cases claim injury as a result of ingesting a combination
of these weight-loss drugs. While we do not believe we have any significant
liability in these lawsuits, in the event we were found liable in these
lawsuits or in any other lawsuits filed against us in the future in connection
with these weight-loss drugs or otherwise, and if our insurance coverage were
inadequate to satisfy these liabilities, it could have a material adverse
effect on our financial condition. See "Business--Legal Proceedings."
If our principal supplier fails or is unable to perform its contract with us,
we may be unable to meet our commitments to our customers.
We currently purchase a majority of the medications that we repackage from
McKesson HBOC, Inc. We have an agreement with this supplier that expires in
September 2001. If we do not meet certain minimum purchasing requirements,
McKesson may increase the prices that we pay under this agreement, in which
case we would have the option to terminate the agreement. Although we believe
that there are a number of other sources of supply of medications, if McKesson
fails or is unable to perform under our agreement, particularly at certain
critical times during the year, we may be unable to meet our commitments to our
customers, and our relationships with our customers could suffer.
Year 2000 problems may adversely affect us.
Based upon our assessment to date, we believe that all the medication
management products that we currently sell are Year 2000 compliant. We may,
however, discover Year 2000 compliance problems that will require substantial
revisions to our systems, products or services. In addition, third-party
software, hardware or services that we rely on may need to be revised or
replaced, all of which could be time consuming and expensive. Any failure to
address any problems that may arise on a timely basis could result in lost
revenue, increased operating costs, the loss of customers and other business
interruptions. As of May 31, 1999, we had incurred costs that we believe are
allocable to the Year 2000 problem of approximately $125,000.
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In addition, we cannot assure you that physicians, payers, Internet access
companies, business partners and others outside our control will be Year 2000
compliant. In a worst-case scenario, these entities would fail to be Year 2000
compliant, resulting in a systemic failure beyond our control, such as a
prolonged Internet or communications failure or power loss, which could also
prevent us from operating our Web site effectively, taking product orders,
making product deliveries, transmitting data or conducting other fundamental
parts of our business. We have not developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve Year 2000
compliance. If circumstances require, we will develop a contingency plan. The
cost of developing and implementing such a plan, if necessary, could be
material. As the Year 2000 issue has many elements and potential consequences,
some of which are not reasonably foreseeable, the ultimate impact of the Year
2000 on our operations could differ materially from our expectations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
Because of anti-takeover provisions under Delaware law and in our Certificate
of Incorporation and By-laws, takeovers may be more difficult, possibly
preventing you from obtaining optimal share price.
Following the offering, certain provisions of Delaware law and our
Certificate of Incorporation and By-Laws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of Allscripts. For example, our Certificate
of Incorporation and By-Laws will provide for a classified Board of Directors
and will allow us to issue preferred stock with rights senior to those of the
common stock without any further vote or action by the stockholders. In
addition, we will be subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which could have the effect of delaying
or preventing a change in control of Allscripts. See "Description of Capital
Stock--Preferred Stock" and "--Certain Limited Liability, Indemnification and
Anti-takeover Provisions."
Risks Related to Our Industry
If the healthcare environment becomes more restrictive, or we do not comply
with healthcare regulations, our existing and future operations may be
curtailed, and we could be subject to liability.
As a participant in the healthcare industry, our operations and
relationships are regulated by a number of federal, state and local
governmental entities. Because our business relationships with physicians are
unique, and the healthcare electronic commerce industry as a whole is
relatively young, the application of many state and federal regulations to our
business operations is uncertain. It is possible that a review of our business
practices or those of our customers by courts or regulatory authorities could
result in a determination that could adversely affect us. In addition, the
healthcare regulatory environment may change in a way that restricts our
existing operations or our growth. See "Business--Governmental Regulation."
. Electronic Prescribing. The use of our TouchScript software by physicians
to perform electronic prescribing, electronic routing of prescriptions to
pharmacies and dispensing is governed by state and federal law. The
application of these laws to our business is uncertain because many
existing laws and regulations, when enacted, did not anticipate methods
of e-commerce now being developed. The laws of many jurisdictions neither
specifically permit nor specifically prohibit electronic transmission of
prescription orders. Future regulation of these areas may adversely
affect us.
. Licensure. As a repackager and distributor of drugs to dispensing
physicians, we are subject to regulation by and licensure with the United
States Food and Drug Administration, the United States Drug Enforcement
Administration and various state agencies that regulate wholesalers or
distributors. Among the regulations applicable to our repackaging
operation are the FDA's "good manufacturing practices." The FDA has the
right, at any time, to inspect our facilities and operations to determine
if we are operating in compliance with the requirements for licensure and
all applicable laws and regulations. We believe that we currently possess
all licenses required to operate our business and that we are in
compliance with all of the requirements to maintain those
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licenses in full force and effect. If, however, we do not maintain all
necessary licenses, or the FDA finds any violations during one of its
periodic inspections, we could be subject to liability, and our operations
could be shut down.
. Physician Dispensing. Physician dispensing of medications for profit is
allowed in all states except Massachusetts, Montana, Texas and Utah. New
Jersey and New York allow physician dispensing of medications for profit,
but limit the number of days' supply that a physician may dispense. Other
states may enact legislation prohibiting or restricting physician
dispensing.
. Stark II. Congress enacted significant prohibitions against physician
self-referrals in the Omnibus Budget Reconciliation Act of 1993. This
law, commonly referred to as "Stark II," applies to physician dispensing
of outpatient prescription drugs that are reimbursable by Medicare or
Medicaid. We believe that the physicians who use our TouchScript system
or dispense drugs distributed by us are doing so in material compliance
with Stark II, either pursuant to an in-office ancillary services
exception or another applicable exception. If, however, it were
determined that the physicians who use our system or dispense
pharmaceuticals purchased from us were not in compliance with Stark II,
it could have a material adverse effect on our business, results of
operations and prospects.
. Drug Distribution. As a distributor of prescription drugs to physicians,
we and our customers are also subject to the federal anti-kickback
statute, which applies to Medicare, Medicaid and other state and federal
programs. The statute prohibits the solicitation, offer, payment or
receipt of remuneration in return for referrals or the purchase of goods,
including drugs, covered by the programs. The anti-kickback law provides
a number of exceptions or "safe harbors" for particular types of
transactions. We believe that our arrangements with our customers are in
material compliance with the anti-kickback statute and relevant safe
harbors. Many states have similar fraud and abuse laws, and we believe
that we are in material compliance with those laws. If, however, it were
determined that we were not in compliance with those laws, we could be
subject to liability, and our operations could be curtailed.
. Claims Transmission. As part of our services provided to physicians, our
system will electronically transmit claims for prescription medications
dispensed by a physician to many patients' managed care organizations
and payers for immediate approval and reimbursement. Federal law
provides that it is both a civil and a criminal violation for any person
to submit a claim to any payer, including, for example, Medicare,
Medicaid and all private health plans or managed care plans seeking
payment for any services or products that have not been provided to the
patient or overbilling for services or products provided. We have in
place policies and procedures that we believe assure that all claims
that are transmitted by our system are accurate and complete, provided
that the information given to us by our customer is also accurate and
complete. If, however, we do not follow those procedures and policies,
or they are not sufficient to prevent inaccurate claims from being
submitted, we could be subject to liability.
. Patient Information. Both federal and state laws regulate the disclosure
of confidential medical information, including information regarding
conditions like AIDS, substance abuse and mental illness. As part of the
operation of our business, our customers may provide to us patient-
specific information related to the prescription drugs that our customers
prescribe to their patients. We have policies and procedures that we
believe assure compliance with all federal and state confidentiality
requirements for handling of confidential medical information we receive.
If, however, we do not follow those procedures and policies, or they are
not sufficient to prevent the unauthorized disclosure of confidential
medical information, we could be subject to liability, fines and
lawsuits, or our operations could be shut down.
In June 1999, President Clinton announced that he intended to propose broad
Medicare reform legislation that would make available to Medicare recipients a
subsidized prescription drug benefit. While no federal price controls are
included in the current version of the proposed legislation, any legislation
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that reduces physician incentives to dispense medications in their offices
could adversely affect physician acceptance of our products. We cannot predict
whether or when future health care reform initiatives at the federal or state
level or other initiatives affecting our business will be proposed, enacted or
implemented or what impact such initiatives may have on our business, financial
condition or results of operations.
If the new and rapidly evolving Internet and electronic healthcare information
markets fail to develop as quickly as expected, our business prospects will be
impaired.
The Internet and electronic healthcare information markets are in the early
stages of development and are rapidly evolving. A number of market entrants
have introduced or developed products and services that are competitive with
one or more components of the solutions we offer. We expect that additional
companies will continue to enter these markets. In new and rapidly evolving
industries, there is significant uncertainty and risk as to the demand for, and
market acceptance of, recently introduced products and services. Because the
markets for our products and services are new and evolving, we are not able to
predict the size and growth rate of the markets with any certainty. We cannot
assure you that markets for our products and services will develop or that, if
they do, they will be strong and continue to grow at a sufficient pace. If
markets fail to develop, develop more slowly than expected or become saturated
with competitors, our business prospects will be impaired.
Consolidation in the healthcare industry could adversely affect our business.
Many healthcare industry participants are consolidating to create
integrated healthcare delivery systems with greater market power. As provider
networks and managed care organizations consolidate, competition to provide
products and services like ours will become more intense, and the importance of
establishing relationships with key industry participants will become greater.
These industry participants may try to use their market power to negotiate
price reductions for our products and services. If we were forced to reduce our
prices, our business would become less profitable unless we were able to
achieve corresponding reductions in our expenses.
If the Internet infrastructure does not continue to improve, our ability to use
the Internet on a large scale could be compromised.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it. The Internet may not prove to be
a viable commercial medium because of inadequate development of the necessary
infrastructure, lack of timely development of complementary products like high
speed modems, delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or increased
government regulation. Because our business plan relies heavily on the
viability of the Internet, our business will suffer if growth of the Internet
does not meet our expectations.
Risks Related to This Offering and Our Stock
The public market for our common stock may be volatile.
Prior to this offering, there has been no public market for our common
stock. We cannot guarantee that an active trading market will develop or be
sustained or that the market price of our common stock will not decline. Even
if an active trading market develops, the market price of our common stock is
likely to be highly volatile and could fluctuate significantly in response to
various factors, including:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new services or products by
us or our competitors;
. timeliness of our introductions of new products;
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. changes in financial estimates by securities analysts;
. conditions and trends in the electronic healthcare information, Internet,
e-commerce and pharmaceutical markets; and
. general market conditions and other factors.
In addition, the stock markets, especially the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many technology companies, and Internet-related
companies in particular. These fluctuations have often been unrelated or
disproportionate to operating performance. The trading prices of many
technology companies' stocks are at or near historical highs. We cannot assure
you that these high trading prices will 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, stockholders 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.
Our quarterly operating results may vary.
Our quarterly operating results have varied in the past, and we expect that
they will continue to vary in future periods depending on a number of factors,
including seasonal variances in demand for our products and services, the
sales, installation and implementation cycles for our TouchScript system and
other factors described in this "Risk Factors" section of the prospectus. For
example, all other factors aside, our sales of prepackaged medications have
historically been highest in the fall and winter months. We expect to increase
activities and spending in substantially all of our operational areas. We base
our expense levels in part upon our expectations concerning future revenue, and
these expense levels are relatively fixed in the short term. If we have lower
revenue, we may not be able to reduce our spending in the short term in
response. Any shortfall in revenue would have a direct impact on our results of
operations. For these and other reasons, we may not meet the earnings estimates
of securities analysts or investors, and our stock price could suffer.
We may have substantial sales of our common stock after the offering.
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such sales will occur, could adversely
affect the market price of our common stock and make it more difficult for us
to raise funds through equity offerings in the future. A substantial number of
outstanding shares of common stock and shares issuable upon exercise of
outstanding options and warrants will become available for resale in the public
market at prescribed times. Of the 18,929,799 shares to be outstanding after
the offering, the 7,000,000 shares offered by this prospectus will be eligible
for immediate sale in the public market without restriction by persons other
than our affiliates. Approximately 1,290,370 additional shares, including
approximately 51,460 shares issuable upon the cashless exercise of outstanding
warrants, will be eligible for immediate sale in the public market under Rule
144(k) of the Securities Act of 1933. Approximately 469,230 shares, including
approximately 137,390 shares issuable upon the cashless exercise of outstanding
warrants and approximately 291,930 shares previously issued upon the exercise
of options or issuable upon exercise of outstanding options, will be eligible
for sale 90 days after the date of this prospectus under Rules 144 and 701 of
the Securities Act. Approximately 9,915,210 additional shares and shares
issuable upon exercise of outstanding options and warrants will be eligible for
sale in the public market subject to the provisions of Rules 144 and 701 under
the Securities Act and any contractual restrictions on their transfer upon the
expiration of 180-day lock-up agreements with the underwriters. Goldman, Sachs
& Co. may, in its sole discretion and at any time without notice, release all
or any portion of the shares subject to lock-up agreements. After the offering,
the holders of approximately 9,945,547 of our shares of common stock and shares
issuable upon exercise
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of outstanding options and warrants will be entitled to registration rights
with respect to these shares until the holders may sell the shares under Rule
144(k) of the Securities Act. In addition, after the offering, we intend to
register 3,722,245 shares of common stock reserved for issuance under our
Amended and Restated 1993 Stock Incentive Plan. For more information, see
"Shares Eligible for Future Sale."
Because our executive officers and directors have substantial control of our
voting stock, takeovers not supported by them will be more difficult, possibly
preventing you from obtaining optimal share price.
The control of a significant amount of our stock by insiders could
adversely affect the market price of our common stock. After this offering, our
executive officers and directors will beneficially own or control 11,468,039
shares or 54.8% of the outstanding common stock. Our executive officers and
directors, acting collectively, will be able to control all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This control may delay or prevent a change
in control. For more information, see "Management," "Principal Stockholders"
and "Description of Capital Stock."
Investors will suffer immediate and substantial dilution.
The initial public offering price will be substantially higher than the net
tangible book value per share of common stock. If we sell 7,000,000 shares in
the offering at an assumed initial public offering price of $11.00 per share,
our net tangible book value per share will be $2.21, which is $8.79 below the
assumed per share initial public offering price. If we issue additional common
stock in the future, or outstanding options or warrants to purchase our common
stock are exercised, there will be further dilution. For more information, see
"Dilution."
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, including those discussed above and elsewhere in this
prospectus. We develop forward-looking statements by combining currently
available information with our beliefs and assumptions. 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. Recognize these statements for what they are and
do not rely on them as facts.
USE OF PROCEEDS
The net proceeds to us from the sale of the 7,000,000 shares in this
offering at an assumed initial public offering price of $11.00 per share are
estimated to be $70,710,000, after deducting the underwriting discount and
estimated offering expenses payable by us, or $81,451,500 if the underwriters
exercise the over-allotment option in full.
We will use a portion of the net proceeds to redeem all of our outstanding
Series H, I and J redeemable preferred stock, a majority of which is held by
our affiliates, for a total of $29,110,563, plus accrued dividends, which at
May 31, 1999 were $5,242,960. We will also use net proceeds to repay the
$650,000 note issued as consideration for our acquisition of Shopping@Home,
which bears interest at 6.0% per year and is payable upon the closing of this
offering. Glen E. Tullman, our Chairman and Chief Executive Officer, and Joseph
E. Carey, our Chief Operating Officer, are principal shareholders of
Shopping@Home. We will use the remainder of the net proceeds for general
corporate purposes and working capital. We may use a portion of the net
proceeds to acquire complementary technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any acquisitions. Pending use of the net proceeds
of this offering, we intend to invest the net proceeds in interest-bearing,
investment-grade securities. See "Certain Relationships and Related Party
Transactions--Shopping@Home Acquisition" and "--Redeemable Preferred Stock
Redemptions."
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. In addition, under the terms of our
current bank line of credit, we are prohibited from paying dividends, other
than dividends payable in capital stock, on any of our shares.
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CAPITALIZATION
The following table shows our capitalization as of March 31, 1999 on an
actual, pro forma and pro forma as adjusted basis. The "actual" column reflects
our capitalization as of March 31, 1999 on an historical basis, without any
adjustments to reflect subsequent or anticipated events.
The "pro forma" column reflects our capitalization as of March 31, 1999
with adjustments for the following:
. our reincorporation in Delaware upon the closing of this offering, which
will result in, among other things, the adoption of a new Certificate of
Incorporation that provides for authorized capital stock of 75,000,000
shares of common stock and 1,000,000 shares of undesignated preferred
stock; and
. the issuance of 117,500 shares of common stock in connection with the
MedSmart acquisition.
The "pro forma as adjusted" column reflects our capitalization as of March
31, 1999 with the preceding "pro forma" adjustments and adjustments for the
following:
. the receipt of the estimated net proceeds from our sale of the 7,000,000
shares of our common stock in this offering at an assumed initial public
offering price of $11.00 per share and the application of a portion of
the net proceeds to redeem 1,361,775 shares of outstanding Series H
redeemable preferred stock, 1,339,241 shares of outstanding Series I
redeemable preferred stock and 1,803,838 shares of outstanding Series J
redeemable preferred stock. See "Use of Proceeds;"
. the issuance of 20,017 shares of common stock upon the closing of this
offering under a contingent payment obligation in connection with an
acquisition we made in 1995. See Note 8 of Notes to Unaudited Condensed
Consolidated Financial Statements; and
. the automatic conversion of all shares of outstanding Series A, B, C, D,
F and G preferred stock into 2,977,483 shares of common stock upon the
closing of this offering.
None of the columns shown below reflects the following:
. the 4,903,763 shares of common stock issuable upon exercise of
outstanding warrants as of March 31, 1999, 4,895,430 of which were
exercisable as of that date at a weighted average exercise price of $0.54
per share. See "Description of Capital Stock--Warrants" and "Shares
Eligible for Future Sale;"
. the 3,744,281 shares reserved for issuance under our stock option plan,
of which 2,440,757 shares were subject to outstanding options as of March
31, 1999. Of those 2,440,757 shares, 953,745 were exercisable as of that
date. See "Management--Employee Benefit Plans--Amended and Restated 1993
Stock Incentive Plan;" and
. up to 117,500 shares that may be issued under a contingent payment
obligation relating to the MedSmart acquisition.
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The table below should be read in conjunction with our balance sheet as of
March 31, 1999 and the related notes, which are included elsewhere in this
prospectus:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Long-term debt, net of current portion......... $ 59 $ 59 $ 59
Redeemable preferred shares:
Series I, cumulative, $1.00 par value,
1,339,241 shares authorized, issued and
outstanding, including $704,955 of
cumulative dividends; liquidation value of
$8,654,175, actual and pro forma; no shares
authorized, issued or outstanding, pro forma
as adjusted................................. 8,766 8,766 --
Series J, cumulative, $1.00 par value,
1,812,903 shares authorized, 1,803,838
issued and outstanding, including $949,510
of cumulative dividends; liquidation value
of $11,656,388, actual and pro forma; no
shares authorized, issued or outstanding,
pro forma as adjusted....................... 12,606 12,606 --
Series H, cumulative, $1.00 par value,
1,361,775 shares authorized, issued and
outstanding, including $3,183,430 of
cumulative dividends; liquidation value of
$8,800,000, actual and pro forma; no shares
authorized, issued or outstanding, pro forma
as adjusted................................. 11,874 11,874 --
Stockholders' equity (deficit):
Preferred shares, $1.00 par value; 25,000,000
shares authorized, 8,718,768 shares issued
and outstanding, actual and pro forma;
1,000,000 shares authorized, no shares
issued and outstanding, pro forma as
adjusted.................................... 8,719 8,719 --
Common shares: $0.01 par value, 125,000,000
shares authorized, 8,815,599 shares issued,
actual; 75,000,000 shares authorized,
8,933,099 shares issued, pro forma;
75,000,000 shares authorized, 18,930,599
shares issued, pro forma as adjusted........ 88 89 189
Treasury stock at cost; 34,465 common shares,
actual, pro forma and pro forma as
adjusted.................................... (68) (68) (68)
Unearned compensation........................ (2,055) (2,055) (2,055)
Additional paid-in capital................... 16,758 18,050 96,897
Accumulated deficit.......................... (49,480) (49,480) (49,700)
-------- -------- --------
Total stockholders' equity (deficit)....... (26,038) (24,745) 45,263
-------- -------- --------
Total capitalization..................... $ 7,267 $ 8,560 $ 45,322
======== ======== ========
</TABLE>
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DILUTION
Our pro forma net tangible book value (deficit) as of March 31, 1999 was
approximately $(28.2) million or $(2.37) per share of common stock. Pro forma
net tangible book value per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities, after giving effect to
the MedSmart and Shopping@Home acquisitions, and the liquidation value of our
Series H, I and J redeemable preferred stock and accrued dividends, and divided
by the total number of shares of common stock outstanding after giving effect
to the automatic conversion upon the closing of this offering of our Series A,
B, C, D, F and G preferred stock, the issuance of 117,500 shares of common
stock in connection with the MedSmart acquisition and the issuance of 20,017
shares of common stock upon the closing of this offering under a contingent
payment obligation. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering and the net tangible book value per share of
common stock immediately after the closing of this offering. After giving
effect to the sale of the 7,000,000 shares of common stock offered by us at an
assumed initial public offering price of $11.00 per share, and after deducting
the underwriting discount and estimated offering expenses payable by us, our
pro forma net tangible book value at March 31, 1999 would have been
approximately $41.8 million or $2.21 per share of common stock. This represents
an immediate increase in net tangible book value of $4.58 per share to existing
shareholders and an immediate dilution of $8.79 per share to new investors in
the common stock. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $11.00
Pro forma net tangible book value per share before this
offering..................................................... $(2.37)
Increase per share attributable to new investors.............. 4.58
------
Pro forma net tangible book value per share after this offering
(as adjusted).................................................. 2.21
------
Dilution per share to new investors............................. $ 8.79
======
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
this offering, as of March 31, 1999, the difference between the number of
shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid by existing stockholders and by new public
investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 11,896,134 63.0% $ 25,196,883 24.7% $ 2.12
New public investors...... 7,000,000 37.0 77,000,000 75.3 11.00
---------- ----- ------------ -----
Totals.................... 18,896,134 100.0% $102,196,883 100.0%
========== ===== ============ =====
</TABLE>
The above information assumes no exercise of outstanding options and no
exercise of any options that we may grant in the future under our Amended and
Restated 1993 Stock Incentive Plan. As of March 31, 1999, there were
outstanding options to purchase 2,440,757 shares of common stock at a weighted
average exercise price of $1.05 per share. On that date, options to purchase
953,745 shares were exercisable. The above information also assumes no exercise
of outstanding warrants. As of March 31, 1999, there were outstanding warrants
to purchase 4,903,763 shares of common stock at a weighted average exercise
price of $0.54 per share, 4,895,430 of which were exercisable. Based on the pro
forma net tangible book value of $1.79 per share after this offering and the
assumed initial public offering price of $11.00 per share, dilution to new
investors would be $9.21 per share if all of the outstanding stock options and
warrants were exercised. See "Management--Employee Benefit Plans--Amended and
Restated 1993 Stock Incentive Plan," "Description of Capital Stock" and Note 12
of Notes to Consolidated Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data shown below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes
included elsewhere in this prospectus. The consolidated statements of
operations data for the years ended December 31, 1996, 1997 and 1998 and the
consolidated balance sheet data at December 31, 1997 and 1998 are derived from
the consolidated financial statements audited by PricewaterhouseCoopers LLP
that are included in this prospectus. The consolidated statements of operations
data for the years ended December 31, 1994 and 1995 and the balance sheet data
at December 31, 1994, 1995 and 1996 are derived from audited financial
statements that are not included in this prospectus. The balance sheet data as
of March 31, 1999 and the statements of operations data for the three-month
periods ended March 31, 1998 and 1999 were derived from our unaudited
consolidated financial statements that are included in this prospectus. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which we consider necessary for a fair presentation of the
consolidated financial position and results of operations for these periods.
The historical results are not necessarily indicative of results to be expected
for any future period. The statements of operations data below reflect the
pharmacy benefit management business that we sold March 1999 as a discontinued
operation. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $32,635 $33,310 $33,462 $ 30,593 $ 23,682 $ 6,351 $ 6,028
Cost of revenue......... 21,606 24,142 23,330 21,022 17,146 4,503 4,500
------- ------- ------- -------- -------- --------- ---------
Gross profit............ 11,029 9,168 10,132 9,571 6,536 1,848 1,528
Operating expenses:
Selling, general and
administrative
expenses.............. 10,024 12,427 11,659 13,964 12,832 3,384 3,615
Amortization of
intangibles........... 506 495 529 409 372 93 93
Other operating
expenses.............. 1,210 1,318 1,034 2,568 430 112 --
------- ------- ------- -------- -------- --------- ---------
Loss from operations.... (711) (5,072) (3,090) (7,370) (7,098) (1,741) (2,180)
Interest expense........ (1,534) (1,005) (1,301) (1,621) (596) (396) (109)
Other expense........... (774) 325 (39) -- -- -- --
------- ------- ------- -------- -------- --------- ---------
Loss from continuing
operations............. (3,019) (5,752) (4,430) (8,991) (7,694) (2,137) (2,289)
Income (loss) from
discontinued
operations............. 357 1,389 1,489 (1,808) 970 387 26
Gain on sale of
discontinued
operations............. 3,547
------- ------- ------- -------- -------- --------- ---------
(Loss) income before
extraordinary items.... (2,662) (4,363) (2,941) (10,799) (6,724) (1,750) 1,284
Extraordinary loss from
early extinguishment of
debt................... -- -- -- -- (790) -- --
------- ------- ------- -------- -------- --------- ---------
Net (loss) income ...... (2,662) (4,363) (2,941) (10,799) (7,514) (1,750) 1,284
Accretion on mandatory
redeemable preferred
shares and accrued
dividends on preferred
shares................. (326) (923) (923) (923) (2,415) (231) (699)
------- ------- ------- -------- -------- --------- ---------
Net (loss) income to
common stockholders.... $(2,988) $(5,286) $(3,864) $(11,722) $ (9,929) $ (1,981) $ 585
======= ======= ======= ======== ======== ========= =========
Basic and diluted net
loss from continuing
operations per share... $ (8.34) $ (3.84) $ (1.87) $ (3.35) $ (1.66) $ (0.69) $ (0.35)
======= ======= ======= ======== ======== ========= =========
Weighted average shares
used in computing per
share calculation...... 401 1,737 2,854 2,956 6,076 3,410 8,490
======= ======= ======= ======== ======== ========= =========
Pro forma basic and
diluted net loss from
continuing operations
per share(1)........... $ (1.14) $ (0.28)
======== =========
Shares used in computing
pro forma basic and
diluted net loss from
continuing operations
per share(1)........... 9,073 11,487
======== =========
Other Operating Data:
Traditional revenue(2).. $32,635 $33,310 $33,462 $ 30,593 $ 22,338 $ 6,101 $ 5,235
E-commerce revenue(3)... -- -- -- -- 1,344 250 793
------- ------- ------- -------- -------- --------- ---------
Revenue................. $32,635 $33,310 $33,462 $ 30,593 $ 23,682 $ 6,351 $ 6,028
======= ======= ======= ======== ======== ========= =========
Balance Sheet Data (at
period end):
Cash.................... $ 1,118 $ 673 $ 665 $ 205 $ 718 $ 136 $ 8,023
Working capital......... 504 (2,730) 5,443 (3,023) 271 176 4,717
Total assets............ 25,275 23,701 26,713 19,387 18,920 17,895 22,528
Long-term debt, net of
current portion........ 5,033 4,814 15,093 11,276 59 11,276 59
Redeemable preferred
shares................. 7,949 8,873 9,796 10,719 32,547 10,950 33,246
Total stockholders'
equity (deficit)....... 1,649 (2,859) (6,700) (18,356) (26,792) (20,856) (26,038)
</TABLE>
- --------
(1) Pro forma basic and diluted net loss from continuing operations per share
information is presented as if all outstanding shares of convertible
preferred stock were converted into common stock and also reflects the
contingent issuance of 20,017 shares of common stock upon the closing of
this offering.
(2) Traditional revenue is derived from the sale of prescription medications to
physicians through channels other than the Internet.
(3) E-commerce revenue is derived primarily from the sale of prescription
medications over the Internet to physicians and also includes revenue from
software license fees, computer hardware sales and leases, and related
services.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis together with
"Selected Consolidated Financial Data" and our consolidated financial
statements and related notes included in this prospectus. This discussion
contains certain forward-looking statements that involve risks, uncertainties
and assumptions. You should read the cautionary statements made in this
prospectus as applying to related forward-looking statements wherever they
appear in this prospectus. Our actual results may be materially different from
the results we discuss in the forward-looking statements due to certain
factors, including those discussed in "Risk Factors" and other sections of this
prospectus.
Overview
We provide physicians with Internet and client/server medication management
solutions designed to improve the quality and cost effectiveness of
pharmaceutical healthcare.
From our inception in 1986 through 1996, we focused almost exclusively on
the sale of prepackaged medications to physicians, in particular those with a
high percentage of fee-for-service patients. The advent of managed prescription
benefit programs required providers to obtain reimbursement for medications
dispensed from managed care organizations rather than directly from their
patients. This new reimbursement methodology made it more difficult for our
physician customers to dispense medications to their patient base.
In 1997, under the direction of our new senior management team, we
intensified the focus of our efforts on the information aspects of medication
management, including the development of technology tools necessary for
electronic prescribing, routing of prescription information and submission of
medication claims for managed care reimbursement. In January 1998, we
introduced the first version of TouchScript that fully incorporated these
features. At the same time, we redirected our sales and marketing efforts away
from our traditional fee-for-service customer base to physicians who have a
large percentage of managed care patients. To implement our strategy fully, we
expect to increase the number of our sales, sales support, product development
and customer service personnel significantly.
As our strategic focus has shifted to medication management products and
solutions, the human resources needed to manage, implement and support our
strategy have been changing as well. Consequently, we have continually assessed
the skills and experience of our workforce to ensure an appropriate match with
our business objectives. This led to a significant turnover in staff since 1996
through reductions in force, employee terminations and employee attrition. The
costs associated with this reorganization consist primarily of severance costs
related to the reductions in force and employee terminations and have been
recorded as other operating expenses. We expect this reorganization to help
align our staffing with our strategic focus and to reduce administrative
expenses.
We currently derive our revenue from the sale of prepackaged medications,
software licenses, computer hardware and related services. For the twelve
months ended December 31, 1998 and the three months ended March 31, 1999, sales
of prepackaged medications represented 97.8% and 96.5%, respectively, of total
revenue.
Our shift in focus away from physicians with a high percentage of fee-for-
service patients to those who require technology-based services to operate
successfully in a managed care environment is reflected in the composition of
our revenue, as depicted in the following table:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
1998 1999
------------------------------- --------
June Dec.
March 31 30 Sept. 30 31 March 31
-------- ------ -------- ------ --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Traditional revenue.................... $6,101 $5,807 $5,394 $5,036 $5,235
E-commerce revenue..................... 250 249 366 479 793
------ ------ ------ ------ ------
Total revenue........................ $6,351 $6,056 $5,760 $5,515 $6,028
====== ====== ====== ====== ======
</TABLE>
22
<PAGE>
Traditional revenue is derived from the sale of prescription medications to
physicians through non-Internet channels. We expect traditional revenue to
represent a decreasing percentage of total revenue in the future. E-commerce
revenue includes the sale of prescription medications over the Internet as well
as technology-related revenue for software license fees, computer hardware
sales and leases and related services. For the twelve months ended December 31,
1998 and the three months ended March 31, 1999, sales of prepackaged
medications represented 98.7% and 88.0%, respectively, of e-commerce revenue.
While some of our historical e-commerce revenue has represented a shifting of
traditional customers to TouchScript, and we expect a portion of future e-
commerce revenue to represent a shifting of traditional revenue, we anticipate
that most of the future growth in e-commerce revenue will be generated by new
customers.
As of March 31, 1999, we operated in one segment--the sale of medication
management products, which currently consist principally of TouchScript and
prepackaged medications. Our two other product categories, Internet products
and services and information products, did not exist at March 31, 1999 and
currently generate an immaterial amount of revenue. Nevertheless, these product
categories are central to our operating strategy. We anticipate that if these
product categories grow, the way our business is organized will change to
reflect the increasing importance of each of these products. If this occurs, we
may determine that we operate in multiple segments.
We believe that managed care prescription programs will continue to cover
an increasing percentage of patients for the foreseeable future. This trend
will have the effect of reducing the dispensing opportunities for our
traditional dispensing customers, thereby reducing the revenue that we have
historically recognized from these customers. Additionally, managed care
programs impose reduced reimbursement rates for the medications dispensed to
their plan participants, thus providing us with a dollar margin per
prescription dispensed that is lower than we have historically experienced.
Because a large portion of the medications dispensed by our TouchScript
customers are to managed care patients, we expect that the fastest growing
portion of our business will provide margins with respect to the sale of
prepackaged medications that are lower than we have historically experienced.
The length of the selling cycle for our current TouchScript product has
generally ranged from three to nine months and depends on a number of factors,
including the nature and size of the potential customer and the extent of the
commitment being made by the potential customer. Our customers currently
consist of physician practices that range in size from a single physician in
one location to as many as 40 physicians practicing in multiple locations.
Because we are now focusing our marketing efforts on large healthcare
organizations, the sale and implementation process has generally taken longer
due to these organizations' more complex decision-making processes. Typical
license agreements have a term of three years and provide for up-front fees for
hardware and installation services and monthly software license fees. Some
contracts include a 90-day evaluation period.
Medications sold to physicians are billed upon shipment with 30-day payment
terms. We collect, on behalf of TouchScript customers, amounts due from managed
care organizations for medications provided to patients in the office.
We recognize revenue from the sale of computer hardware when the hardware
is delivered and from the provision of installation services when the services
are performed. We recognize software fees ratably over the term of the license
agreement and medication revenue upon shipment of the product.
We do not believe that inflation has had a material effect on our results
of operations.
In the twelve months ended December 31, 1998, we recorded total unearned
stock compensation of approximately $407,000 in connection with stock options
granted during the period. Such amount is amortized to expense over the vesting
periods of the applicable options, resulting in approximately $176,000 of
expense for the twelve months ended December 31, 1998, which is included in
selling, general and
23
<PAGE>
administrative expenses. These amounts represent the difference between the
exercise price of stock option grants and the deemed fair market value of our
common stock at the time of the grants.
In addition, during the three months ended March 31, 1999, we recognized
approximately $1,850,000 of additional unearned compensation. Amortization of
unearned compensation expense for each of the next five fiscal years is
expected to be as follows:
<TABLE>
<CAPTION>
Amount (in
Year Ended thousands)
--------------------------------------------------------------- ----------
<S> <C>
December 31, 1999.............................................. $449
December 31, 2000.............................................. 538
December 31, 2001.............................................. 493
December 31, 2002.............................................. 485
December 31, 2003.............................................. 116
</TABLE>
Recent Developments
In March 1999, in order to focus all of management's attention and
resources on the physician medication management business and due to the
significant resources necessary to remain competitive and sustain profitability
in the pharmacy benefit management business, we sold substantially all of the
assets, excluding cash and accounts receivable, of the pharmacy benefit
management business. The total consideration was approximately $7,500,000 in
cash at closing and a contingent payment of up to $8,400,000 based upon
achieving certain milestones for the one-year period following the closing. We
expect to receive less than the maximum contingent payment. This business had
net sales of $52,866,000 and $44,719,000 for the twelve months ended December
31, 1998 and 1997, respectively, while recording an operating profit of
$970,000 for fiscal 1998 versus an operating loss of $1,808,000 for fiscal
1997. The operating loss of $1,808,000 for fiscal 1997 included a writedown of
acquisition intangibles in the amount of $3,300,000. The writedown was the
result of the loss of customers acquired in the acquisition of our mail order
pharmacy business, reduced margin contributions from other acquired customers
and higher projected levels of customer attrition. Our financial statements and
the discussion in Management's Discussion and Analysis of Financial Condition
and Results of Operations reflect the pharmacy benefit management business as a
discontinued operation. In the quarter ended March 31, 1999, we recognized a
gain on the sale of this business of $3,547,000, based upon the consideration
received at closing. If we receive any additional contingent payments, the
gain, net of tax effects, will be increased accordingly. See Note 17 of Notes
to Consolidated Financial Statements.
In May 1999, we acquired all of the outstanding stock of TeleMed Corp.,
which operates as MedSmart, in exchange for 117,500 shares of our common stock
and up to an additional 117,500 shares under specific circumstances. MedSmart
sells Internet-based physician drug education programs and medical books online
and by telephone. These products are intended to complement our existing line
of medication management products. MedSmart generated revenue of approximately
$1,600,000 with a net loss of approximately $330,000 for the fiscal year ended
December 31, 1998. The MedSmart acquisition will have the near-term effect of
increasing cash used in operating activities.
In June 1999, we acquired substantially all of the assets of Shopping@Home,
Inc., a development-stage Internet retailer, in exchange for a promissory note
in the principal amount of $650,000, bearing interest at 6.0% per year and
payable upon the consummation of this offering. We expect the Internet software
capabilities of Shopping@Home to enhance the development of our Internet-based
products. Shopping@Home generated no revenue and had operating losses of
approximately $325,000 for the fiscal year ended December 31, 1998. The
Shopping@Home acquisition will have the near-term effect of increasing cash
used in operating activities. See "Certain Relationships and Related Party
Transactions--Shopping@Home Acquisition."
24
<PAGE>
Results of Operations
The following table shows, for the periods indicated, our results of
operations expressed as a percentage of our revenue:
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
--------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................ 69.7 68.7 72.4 70.9 74.6
------- ------- ------- ------ ------
Gross profit................... 30.3 31.3 27.6 29.1 25.4
Operating expenses:
Selling, general and
administrative expenses..... 34.8 45.6 54.2 53.3 60.0
Amortization of intangibles.. 1.6 1.3 1.6 1.5 1.5
Other operating expenses..... 3.1 8.4 1.8 1.8 0.0
------- ------- ------- ------ ------
Loss from operations........... (9.2) (24.0) (30.0) (27.5) (36.1)
Interest expense............... (3.9) (5.3) (2.5) (6.2) (1.8)
Other expense.................. (0.1) 0.0 0.0 0.0 0.0
------- ------- ------- ------ ------
Loss from continuing
operations.................... (13.2) (29.3) (32.5) (33.7) (37.9)
Income (loss) from discontinued
operations.................... 4.4 (5.9) 4.1 6.1 0.4
Gain from sale of discontinued
operations ................... -- -- -- -- 58.8
------- ------- ------- ------ ------
Income (loss) before
extraordinary items........... (8.8) (35.2) (28.4) (27.6) 21.3
Extraordinary loss from early
extinguishment of debt........ 0.0 0.0 (3.3) 0.0 0.0
------- ------- ------- ------ ------
Net (loss) income ............. (8.8)% (35.2)% (31.7)% (27.6)% 21.3%
======= ======= ======= ====== ======
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Total revenue for the three months ended March 31, 1999 decreased by 5.1%
or $323,000 from $6,351,000 in 1998 to $6,028,000 in 1999. Traditional revenue
for the three months ended March 31, 1999 decreased by 14.2% or $866,000 from
$6,101,000 in 1998 to $5,235,000 in 1999. E-commerce revenue increased by
217.2% or $543,000 from $250,000 in the first quarter of 1998, when we first
introduced our e-commerce products, to $793,000 in the first quarter of 1999.
The decrease in traditional revenue reflects lower utilization, attrition of
customers, price reductions in response to competitive pressures and a product
mix shift to lower-priced generic products. The increase in e-commerce revenue
reflects additional installations and increased use of TouchScript.
Cost of revenue for the three months ended March 31, 1999 decreased by 0.1%
or $3,000 from $4,503,000 in 1998 to $4,500,000 in 1999 due to the overall
decrease in revenue. As a percentage of total revenue, cost of revenue for the
three months ended March 31, 1999 increased to 74.6% from 70.9% in the prior
year period principally due to the price reductions noted above.
Selling, general and administrative expenses for the three months ended
March 31, 1999 increased by 6.8% or $231,000 over the prior year period due
primarily to additional spending of $534,000 for sales support personnel
needed to sell, implement and support TouchScript installations, and
TouchScript product development personnel. These increases were partially
offset by reduced spending of $271,000 on sales personnel with the redirection
of the sales and marketing efforts toward targeted, large managed care-
oriented organizations, staff reductions in middle management personnel and
other smaller reductions in corporate and general administrative expenses. As
a result, selling, general and administrative expenses as a percentage of
total revenue increased to 60.0% for the three months ended March 31, 1999
from 53.3% of total revenue in the prior year period.
Amortization of intangibles for the three months ended March 31, 1999 did
not differ materially from the prior year period.
25
<PAGE>
Other operating expenses for the three months ended March 31, 1999
decreased by 100% or $112,000 from the prior year period. The expense in 1998
consisted entirely of severance costs of nine sales personnel who were
terminated as part of the refocusing of our sales and marketing efforts toward
targeted, large managed care-oriented organizations. This was part of an
ongoing process of matching the skills and experience of our workforce with our
strategic objectives. The severance plan was announced during the quarter ended
March 31, 1998, and all payments were made in accordance with the original plan
by September 15, 1998.
Interest expense for the three months ended March 31, 1999 decreased by
72.5% or $287,000 over the prior year period due to the exchange of
subordinated convertible debentures for redeemable preferred stock and the
repayment of the term loan we had with our commercial bank in April 1998. These
amounts were partially offset by increased borrowings on our revolving credit
facility with our commercial bank. In addition, accretion on mandatorily
redeemable preferred shares and accrued dividends on preferred shares increased
by $468,000 in the 1999 period due to the issuance of mandatorily redeemable
preferred shares in April 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenue for 1998 decreased by 22.6% or $6,911,000 from $30,593,000 in
1997 to $23,682,000 in 1998. Traditional revenue decreased by 27.0% or
$8,255,000 from $30,593,000 in 1997 to $22,338,000 in 1998. The overall
decrease consists primarily of approximately $6,600,000 due to lower
utilization, attrition of customers, approximately $3,300,000 due to the
manufacturer withdrawal of two weight-loss products in October 1997 and
approximately $700,000 as a result of price reductions in response to
competitive pressures. This decrease was partially offset by increases in the
average selling price of brand products sold, which increased traditional
revenues by approximately $2,500,000 in 1998 over the prior year. In the first
quarter of 1998, we began to generate e-commerce revenue. We recognized
$1,344,000 of e-commerce revenue in 1998.
Cost of revenue in 1998 decreased by 18.4% or $3,876,000 from $21,022,000
in 1997 to $17,146,000 due to the decrease in traditional revenue outlined
above. As a percentage of total revenue, cost of revenue for 1998 increased to
72.4% from 68.7% in the prior year. This percentage increase was principally
due to price reductions in response to competitive pressures, which increased
the cost of revenue as a percentage of revenue by approximately 5.0%, and
increased costs of production, warehousing and distribution, which increased
cost of revenue as a percentage of revenue by approximately 0.6%. These
increases were partially offset by a shift in product mix to higher percentage
margin products, which reduced cost of revenue as a percentage of revenue by
approximately 1.9%.
Selling, general and administrative expenses decreased by 8.1% or
$1,132,000 in 1998 compared to 1997, but increased as a percentage of total
revenue from 45.6% in 1997 to 54.2% in 1998. The decrease consists primarily of
$1,614,000 attributable to a reduction in sales personnel and related expenses
as a result of the reorganization of the sales and marketing efforts, and
$446,000 related to decreased expenses associated with general and
administrative functions. These decreases were partially offset by increased
spending of $492,000 for personnel needed to develop, sell, implement and
support the TouchScript product, an increase in bad debt expense of $263,000
and unearned compensation expense of $176,000.
Amortization of intangibles decreased by 9.0% or $37,000 in 1998 from the
prior year. The decrease in the amortization is the result of a writedown in
1997 of acquisition intangibles to net realizable value.
Other operating expenses decreased in 1998 by 83.2% or $2,138,000 over the
prior year period. The 1997 expense relates to a writedown of acquisition
intangibles in the amount of $2,328,000 and a severance charge of $240,000 for
a reduction in force of three sales and seven general and administrative staff
personnel. The expense in 1998 related to a reduction in force of nine sales
and ten general and administrative staff personnel.
26
<PAGE>
Interest expense decreased in 1998 by 63.2% or $1,025,000 over the prior
year period due to the exchange of subordinated convertible debentures for
redeemable preferred stock and the repayment of the term loan in April 1998. In
addition, in 1998 we recognized an extraordinary loss of $790,000 from the
early extinguishment of debt relating to the exchange of the debentures for
redeemable preferred stock.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue in 1997 decreased by 8.6% or $2,869,000 from $33,462,000 in 1996 to
$30,593,000 in 1997. The overall net decrease reflects lower utilization by,
and attrition of, customers, price reductions in response to competitive
pressures and a shift in product mix to lower-priced generic products.
Cost of revenue in 1997 decreased by 9.9% or $2,308,000 from $23,330,000 in
1996 to $21,022,000 due to the decrease in revenue outlined above. As a
percentage of total revenue, cost of revenue for 1997 decreased to 68.7% from
69.7% in the prior year period principally due to lower acquisition costs of
generic products and increased rebates from pharmaceutical manufacturers. These
amounts were partially offset by increased costs of production, warehousing and
distribution associated with our new production facility, which we moved to in
1997.
Selling, general and administrative expenses increased by 19.8% or
$2,305,000 in 1997 compared to 1996 and increased as a percentage of total
revenue from 34.8% in 1996 to 45.6% in 1997. The increase consists primarily of
$1,247,000 spent on the development of a sales support infrastructure needed to
sell, implement and support TouchScript installations, $470,000 for the
addition of new senior management personnel, $232,000 for moving costs and
increased lease costs associated with our new office and production facility,
$160,000 for increased information services staff, $408,000 for receivable
realization reserves primarily related to three weight-loss products that were
withdrawn from the market and $339,000 for general increases in general and
administrative expenses. These increases were partially offset by $715,000 in
sales personnel reductions as part of our reorganization of the sales process.
Amortization of intangibles decreased by 22.7% or $120,000 in 1997 from the
prior year period. The decrease is the result of certain intangibles becoming
fully amortized in 1996 and 1997.
Other operating expenses increased in 1997 by 148.4% or $1,534,000 over the
prior year period. The 1997 expense relates to a writedown of acquisition
intangibles and a reduction in force as part of the reorganization of our sales
process. The expense in 1996 related to the writeoff of software intangibles
related to a product rendered obsolete by TouchScript, in the amount of
$166,000, the recognition of a charge for severance costs related to four
individuals in the amount of $574,000 and $294,000 in costs related to the
shutdown of our Pennsylvania sales office.
Interest expense increased in 1997 by 24.6% or $320,000 over the prior year
period due to the annualized cost of our subordinated convertible debentures
issued in April 1996.
Other expense in 1996 relates to the loss recognized on the exchange of a
note receivable from a shareholder for common shares.
Selected Quarterly Operating Results
Our quarterly results of operations have generally been seasonal, with a
greater proportion of our revenue typically occurring in the first and fourth
quarters. This seasonality is primarily attributable to the fact that more
prescriptions are written in the winter months.
The following table shows our quarterly unaudited consolidated financial
information for the five quarters ended March 31, 1999 and each item as a
percentage of total revenue. We have prepared this information on the same
basis as the annual information presented in other sections of this prospectus.
In
27
<PAGE>
management's opinion, this information reflects all adjustments, all of which
are of a normal recurring nature, that are necessary for a fair presentation of
the results for these periods. You should not rely on the operating results for
any quarter to predict the results for any subsequent period or for the entire
fiscal year. You should be aware of possible variances in our future quarterly
results. See "Risk Factors--Risks Related to This Offering and Our Stock--Our
quarterly operating results may vary."
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
1998 1999
--------------------------------------- --------
March 31 June 30 Sept. 30 Dec. 31 March 31
-------- ------- -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue...................... $ 6,351 $ 6,056 $ 5,760 $ 5,515 $ 6,028
Cost of revenue.............. 4,503 4,372 4,236 4,035 4,500
------- ------- ------- ------- -------
Gross profit................. 1,848 1,684 1,524 1,480 1,528
Operating expenses:
Selling, general and
administrative expenses.... 3,384 3,283 3,160 3,005 3,615
Amortization of
intangibles................ 93 93 93 93 93
Other operating expenses.... 112 -- -- 318 --
------- ------- ------- ------- -------
Loss from operations......... (1,741) (1,692) (1,729) (1,936) (2,180)
Interest expense............. (396) (81) (45) (74) (109)
Other expense................ -- -- -- -- --
------- ------- ------- ------- -------
Loss from continuing
operations.................. (2,137) (1,773) (1,774) (2,010) (2,289)
Income (loss) from
discontinued operations..... 387 294 201 88 26
Gain from sale of
discontinued operations..... -- -- -- -- 3,547
------- ------- ------- ------- -------
Income (loss) before
extraordinary items......... (1,750) (1,479) (1,573) (1,922) 1,284
Extraordinary loss from early
extinguishment of debt...... -- (790) -- -- --
------- ------- ------- ------- -------
Net (loss) income ........... $(1,750) $(2,269) $(1,573) $(1,922) $ 1,284
======= ======= ======= ======= =======
<CAPTION>
Quarter Ended
--------------------------------------------------
1998 1999
--------------------------------------- --------
March 31 June 30 Sept. 30 Dec. 31 March 31
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
As a Percentage of Revenue:
Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.............. 70.9 72.2 73.5 73.2 74.6
------- ------- ------- ------- -------
Gross profit................. 29.1 27.8 26.5 26.8 25.4
Operating expenses:
Selling, general and
administrative expenses.... 53.3 54.2 54.9 54.5 60.0
Amortization of
intangibles................ 1.5 1.5 1.6 1.7 1.5
Other operating expenses.... 1.8 -- -- 5.8 --
------- ------- ------- ------- -------
Loss from operations......... (27.5) (27.9) (30.0) (35.2) (36.1)
Interest expense............. (6.2) (1.3) (0.8) (1.3) (1.8)
Other expense................ -- -- -- -- --
------- ------- ------- ------- -------
Loss from continuing
operations.................. (33.7) (29.2) (30.8) (36.5) (37.9)
Income (loss) from
discontinued operations..... 6.1 4.8 3.5 1.6 0.4
Gain from sale of
discontinued operations..... -- -- -- -- 58.8
------- ------- ------- ------- -------
Income (loss) before
extraordinary items......... (27.6) (24.4) (27.3) (34.9) 21.3
Extraordinary loss from early
extinguishment of debt...... -- (13.1) -- -- --
------- ------- ------- ------- -------
Net (loss) income............ (27.6)% (37.5)% (27.3)% (34.9)% 21.3%
======= ======= ======= ======= =======
</TABLE>
Discontinued Operations
The operating results of the pharmacy benefit management segment have been
segregated from continuing operations and reported as a separate line item on
the Consolidated Statements of Operations under the caption "Income (loss) from
discontinued operations." Additionally, we have restated our prior financial
statements to present the operating results of the pharmacy benefit management
business as a discontinued operation.
28
<PAGE>
Operating results from discontinued operations were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue............................ $42,225,000 $44,719,000 $52,866,000
Cost of revenue.................... 39,001,000 41,413,000 49,313,000
----------- ----------- -----------
Gross profit................... 3,224,000 3,306,000 3,553,000
Selling, general and administrative
expenses.......................... 1,735,000 5,114,000 2,583,000
----------- ----------- -----------
Operating income (loss)............ 1,489,000 (1,808,000) 970,000
----------- ----------- -----------
Income (loss) from discontinued
operations........................ $ 1,489,000 $(1,808,000) $ 970,000
=========== =========== ===========
</TABLE>
Revenue from discontinued operations increased by 5.9% or $2,494,000 from
$42,225,000 in 1996 to $44,719,000 in 1997 while increasing 18.2% or $8,147,000
to $52,866,000 in 1998. The increase in revenue reflects our focus on and
success within the specialty medication market business, primarily HIV
medications. These increases were partially offset by the loss of customers and
the repricing of certain accounts as part of the competitive renewal bid
process.
While these specialty medication customers generated significant revenue,
their gross profit margin percentage was lower than our historical customer
base. As a result, cost of revenue in 1997 increased by 6.2% or $2,412,000 from
1996 and increased as a percentage of revenue from 92.4% to 92.6%. Cost of
revenue in 1998 increased by 19.1% or $7,900,000 from 1997 and increased as a
percentage of revenue from 92.6% to 93.3%.
Selling, general and administrative expenses of discontinued operations
remained relatively constant from 1996 to 1997, after consideration of a
$3,294,000 writedown of acquisition intangibles in 1997. Selling, general and
administrative expenses increased by $763,000 or 41.9% from $1,820,000 in 1997,
excluding the writedown of intangibles noted above, to $2,583,000 in 1998. This
increase relates to a $800,000 charge for uncollectible receivables, costs
associated with a major computer system conversion and increased administrative
and support costs to support higher revenue levels.
Liquidity and Capital Resources
Historically, our principal sources of funds were bank borrowings, the sale
of subordinated debt, redeemable preferred stock and equity securities, and
operating cash flow generated by our pharmacy benefit management business,
which we sold in March 1999. We issued securities totaling approximately
$10,000,000 in 1996 and $8,930,000 in 1998. We have used these capital
resources to fund operating losses, working capital, capital expenditures,
acquisitions and retirement of debt. At March 31, 1999, we had an accumulated
deficit of $49,480,000.
We have spent $771,000, $518,000 and $296,000 on software development costs
in fiscal 1998, 1997 and 1996, respectively. We project that we will spend
approximately $1,500,000 in fiscal 1999 on software development. No software
development costs have been capitalized to date; software development costs
will be capitalized in the future, after market acceptance has been
established.
Net cash used in operating activities in 1998 increased by approximately
$2,494,000 compared to 1997. Of this amount, changes in working capital
accounted for approximately $1,059,000 of the increase, principally as a result
of higher levels of receivables and inventory in the pharmacy benefit
management business of $1,504,000. In March 1999, we sold substantially all the
assets of this business, excluding cash and accounts receivable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments."
We maintain allowances for uncollectible accounts to reflect our accounts
receivable balances at net realized value. The adequacy of the allowance is
determined by periodic reviews of individual customer accounts. The allowances
for uncollectible accounts at March 31, 1999 and December 31, 1998, $4,532,000
and $4,523,000, respectively, include approximately $2,600,000 for several
receivable balances with respect to which we have initiated legal action.
29
<PAGE>
We have a line of credit with a bank for up to $10,000,000, subject to
levels of eligible accounts receivable and inventory. The line of credit
agreement expires on April 16, 2000. Borrowings under the line of credit are
collateralized by all of our assets. Covenants restrict the payment of
dividends, purchase or redemption of securities and the issuance of additional
debt without the bank's consent. As of March 31, 1999, we were able to borrow
up to $7,661,000 and had borrowed approximately $5,400,000 under this
agreement, at an interest rate of prime plus 0.5%, which was 8.5% at March 31,
1999. As we collect outstanding receivables from our pharmacy benefit
management business, our borrowing capacity will decrease.
At March 31, 1999, we had outstanding long-term debt and redeemable
preferred stock, at redemption value, including accrued dividends, totaling
approximately $34,007,000. Approximately $9,359,000 of the redeemable preferred
shares are mandatorily redeemable upon the closing of this offering. We intend
to redeem all of the outstanding redeemable preferred stock, approximately
$33,948,000 at March 31, 1999, with a portion of the net proceeds from this
offering. See "Use of Proceeds."
Capital expenditures were $1,242,000 in 1997 and $884,000 in 1998. The
increased level of expenditures in 1997 resulted from moving our office and
production operations to a new facility in that year.
At December 31, 1998, we had operating loss carryforwards available for
federal income tax reporting purposes of approximately $30,534,000. The
operating loss carryforwards expire in 2002 through 2013. Our ability to use
these operating loss carryforwards to offset future taxable income depends on a
variety of factors, including possible limitations on usage under Internal
Revenue Code Section 382. Section 382 imposes an annual limitation on the
future utilization of operating loss carryforwards due to changes in ownership
resulting from the issuance of common shares, stock options, warrants and
preferred shares.
We expect the net proceeds from this offering, together with our existing
cash and borrowings under our line of credit, to be sufficient to meet our
anticipated needs for working capital and other cash requirements for at least
the next twelve months. See "Risk Factors--Risks Related to Our Company--We are
uncertain of our ability to obtain additional financing for our future needs."
Year 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the Year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the Year
2000 phenomenon. For example, we are dependent on third-party vendors to host
our Internet servers, perform certain information processing functions and
provide other services critical to our business.
We have reviewed the Year 2000 compliance of our medication management
products and have tested these products to determine how they will function at
and beyond the Year 2000. Based upon our assessment to date, we believe that
all of the medication management products that we currently sell are Year 2000
compliant. We have contacted the small number of customers using certain older
versions of our products that are not Year 2000 compliant. We have offered
these customers upgrades to Year 2000 compliant versions of these products at
no cost.
We have assessed the Year 2000 readiness of all mission-critical hardware,
operating systems and third-party and proprietary software, which include
software for use in our accounting, order entry, database, security and other
operating systems. The failure of our software or systems to be Year 2000
30
<PAGE>
compliant could have a material adverse effect on our corporate accounting
functions, our ability to fulfill orders and the operation of TouchScript and
our Web site. As part of the assessment of the Year 2000 compliance of these
systems, we have received assurances from our vendors that their software,
computer technology and other services are Year 2000 compliant. We have
expensed amounts incurred in connection with Year 2000 assessment through
December 31, 1998. Such amounts have not been material. As of April 1, 1999 we
have completed our assessment process, replaced all mission critical, non-
compliant hardware with hardware that is Year 2000 compliant, upgraded all
mission-critical third-party software, including operating systems, to Year
2000 compliant versions, upgraded proprietary software so that it is Year 2000
compliant, and audited the interfaces among our internal systems and between
those systems and external systems. We expect to complete the upgrading of
interfaces by August 1, 1999 and then immediately begin system-wide testing,
which we expect to be completed by October 1, 1999. At this time, we cannot
determine the expenses associated with this testing and any potential
remediation plan that may be incurred in the future. The failure of our
software and computer systems and of our third-party suppliers to be Year 2000
compliant could have a material adverse effect on us. As of May 31, 1999, we
had incurred costs that we believe are allocable to the Year 2000 problem of
approximately $125,000.
The Year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. The infrastructure
necessary to support our operations consists of a network of computers and
telecommunications systems located throughout the world and operated by
numerous unrelated entities and individuals, none of which has the ability to
control or manage the potential Year 2000 issues that may impact the entire
infrastructure. Our ability to assess the reliability of this infrastructure is
limited and relies solely on generally available news reports, surveys and
comparable industry data. Based on these sources, we believe most entities and
individuals who rely significantly on the Internet are carefully reviewing and
attempting to remediate issues relating to Year 2000 compliance, but it is not
possible to predict whether these efforts will be successful in reducing or
eliminating the potential negative impact of Year 2000 issues. A significant
disruption in the ability to reliably access the Internet or portions of it
would have an adverse effect on demand for our products and services and would
have a material adverse effect on us.
We have not developed a contingency plan to address situations that may
result if we or our vendors are unable to achieve Year 2000 compliance. If
circumstances require, we will develop a contingency plan. The cost of
developing and implementing such a plan, if necessary, could be material. Any
failure of our material systems, our vendors' material systems or the Internet
to be Year 2000 compliant could have material adverse consequences for us.
These consequences could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries, transmitting
data or conducting other fundamental parts of our business.
31
<PAGE>
BUSINESS
General
We provide physicians with Internet and client/server medication management
solutions designed to improve the quality and cost effectiveness of
pharmaceutical healthcare. Our technology-based approach focuses on the point
of care, where the prescription originates, and creates an electronic dialogue
between physicians and other participants in the healthcare delivery process,
including patients, pharmacies, managed care organizations and pharmaceutical
manufacturers. We believe physicians find our solutions attractive because
incorporating these solutions into their office work flow can increase
efficiency and profitability and improve the quality of patient care.
Our products are designed to improve every step of the pharmaceutical
healthcare process. We currently offer products in four categories: point-of-
care medication management, Internet products and services, information
products and prepackaged medications. Our TouchScript software enables
electronic prescribing, routing of prescription information and capturing of
prescription data at the point of care. Our other e-commerce products and
services offer physicians and their patients medication-related education and
information services. We also sell our prepackaged medications to physicians so
they can offer their patients the convenience of receiving prescription
medications in the physician's office.
Background
According to the Health Care Financing Administration, healthcare
expenditures in the United States totaled approximately $1.0 trillion in 1996,
or 14% of the country's gross domestic product, making it the largest single
sector of the economy. One of the fastest growing components of healthcare
expenditures is pharmaceutical costs, which last year totaled approximately
$100 billion, according to IMS HEALTH, a leading provider of pharmaceutical
information. According to the Health Care Financing Administration,
pharmaceutical costs are expected to increase at an annual rate of
approximately 10% through 2007, driven by an aging population, the accelerating
introduction of new drugs, direct-to-consumer advertising by pharmaceutical
manufacturers and cost advantages over alternate forms of care, most notably
inpatient hospital care. This in turn has created pressure on managed care
organizations to control pharmacy costs and improve the process of managing
medication treatments.
Physicians have also been affected as healthcare has shifted from a fee-
for-service model to managed care forms of reimbursement, which increasingly
transfer financial risk for pharmaceutical costs from traditional third-party
payers to physicians. This transfer of risk has often had an adverse financial
impact on physicians. Moreover, as healthcare becomes increasingly consumer
driven, patients are seeking more information, control and convenience, placing
additional time and financial pressures on physicians. These changes have led
many physicians in the United States to search for tools and solutions to
improve practice efficiency, increase revenue, comply with managed care
guidelines and address patient needs.
Rapid Growth of the Internet and E-commerce
The Internet is becoming an increasingly important medium in healthcare,
providing the opportunity for unprecedented communication and access to
information for all participants in the healthcare delivery process. We believe
that an increasing number of physicians regularly access the Internet,
indicating their willingness to adopt technology. Consumer usage of the
Internet continues to grow rapidly, and health and medical information was the
second most popular subject of Web-based information retrieval searches in 1997
according to Media Metrix, an independent Internet research firm. In addition,
Simba Information, Inc., a media and information industry market research firm,
estimates that e-commerce will grow from $28 billion in 1998 to over $100
billion by 2002.
32
<PAGE>
The Opportunity
The current process for prescribing and delivering medications is
inefficient, unnecessarily costly and error-prone. Physicians write virtually
all of the 2.8 billion annual prescriptions by hand, resulting in errors and
necessitating millions of telephone inquiries from pharmacies for clarification
and correction. When physicians write prescriptions, they often do not have
ready access to information that would help ensure that the prescription is
clinically sound, cost effective and compliant with managed care organizations'
pharmacy guidelines. The pharmacist or managed care organization checks this
information only after the physician writes the prescription. The inability of
managed care organizations to communicate with physicians at the time of
prescribing has made it difficult to manage pharmaceutical costs. The existing
process further inconveniences the patient, who must travel from the
physician's office to a pharmacy and must often wait for the prescription to be
filled. In addition, despite the fact that pharmaceutical manufacturers spend
billions of dollars promoting the use of their drugs, physicians have a
difficult time staying current on the rapidly expanding body of pharmaceutical
products and knowledge.
The Allscripts Solution
We have developed comprehensive in-office and Internet-based electronic
solutions that significantly streamline the process of prescribing and
delivering medications. Our TouchScript software enables physicians to improve
their prescribing at the point of care by providing ready access to information
about potential adverse drug interactions, patient drug history and managed
care preferences, including pharmacy guidelines and generic substitutes. Both
before and as the prescription is written, TouchScript reduces the possibility
of errors and the need for expensive and time-consuming intervention by
pharmacists and pharmacy benefit managers.
We offer or intend to offer other e-commerce products that address various
aspects of the medication management process. We currently have products that
enable physicians to purchase medications and supplies via the Internet and
make it possible for patients to have their prescriptions electronically routed
to the pharmacies of their choice or to receive their medications in their
physicians' offices. To physicians, we intend to offer Internet-based
information services to permit them to better care for their patients. To
patients, we intend to offer ancillary information and electronic services
focused on improving care, including patient education and compliance.
Our solution redesigns the pharmaceutical healthcare delivery process to
benefit each participant. By providing ready access to information during the
prescribing process, our system benefits physicians by reducing the amount of
time spent clarifying and changing prescriptions. In addition, our system
enables physicians to better manage financial risk and to increase practice
revenue through dispensing medications. Patients benefit from the convenience,
immediacy and confidentiality of receiving prescription medications in the
physician's office. Patients also gain access to valuable information that
enables them to play a more active role in managing their healthcare. Managed
care organizations benefit from higher physician compliance with their pharmacy
guidelines, resulting in lower overall costs. Pharmacies benefit from improved
communication with physicians, which enhances efficiency and reduces the
likelihood of errors.
We believe that the best way to improve the medication management process
is by focusing where the prescription originates--with the physician--and
motivating physicians to write prescriptions electronically. By combining
electronic prescribing and dispensing, innovative product design, state-of-the-
art software and hardware, and the Internet, we believe we offer an attractive
opportunity for physicians. Key advantages of our solution include:
. Ease of Use. TouchScript is easy to use, enabling a physician to complete
a prescription in as little as 20 seconds.
. Accessibility. TouchScript enables physicians to prescribe electronically
from a variety of locations on several different platforms, including
touch screen-enabled personal computers, and, in the near future, the
Internet and hand-held Microsoft CE devices.
33
<PAGE>
. Information. TouchScript provides valuable, objective information prior
to and during the prescribing process, enabling physicians to improve the
quality of their prescriptions.
. Financial Opportunity. TouchScript offers physicians a significant
financial opportunity through better management of pharmacy risk and
additional practice revenue from dispensing medications.
Competitive Advantage
We believe that we have several advantages over our current and potential
competitors:
. Physician Relationships. Our experience with thousands of physicians at
more than 2,500 sites across the United States enables us to understand
their office workflow and the way they conduct their business.
. Managed Care Experience. Over 60 managed care payers and pharmacy benefit
managers, including many of the country's largest, currently reimburse
our physician customers for prescription medications dispensed in their
offices.
. Regulatory Experience. We have a thorough understanding of, and operating
experience in, the dynamic and complex federal and state healthcare
regulatory environment.
. Installed Base. Versions of TouchScript are currently installed and used
in over 150 physician practice sites.
. Management. Our management team has substantial experience in managing
rapidly growing public companies that use technology to change business
processes.
The Allscripts Strategy
Our objective is to become the leading provider of medication management
solutions. Our strategy to achieve this objective includes the following:
. Accelerating sales of our medication management solutions through
expansion of marketing efforts, conversion of traditional dispensing-only
customers to TouchScript and development of strategic alliances with
physician practice management system vendors, physician-oriented Internet
portals and managed care organizations.
. Increasing customer utilization of our medication management products to
enhance the financial opportunity for physicians through a combination of
quality customer service and expansion of the number of managed care
organizations that reimburse physicians for prescription medications
dispensed in their offices.
. Enhancing our product line by developing additional Internet-based
products for physicians and their patients.
. Developing and marketing information products that use the data collected
during the electronic prescribing process.
Products and Services
Our product strategy is built around the physician prescribing
electronically at the point of care, where virtually all prescriptions are
initiated. Our e-commerce business is comprised of three major product
categories:
. point-of-care medication management,
. Internet products and services and
. information products.
Our traditional business consists of sales of prepackaged medications through
channels other than the Internet.
34
<PAGE>
Current and Future E-Commerce Products and Services
<TABLE>
<CAPTION>
Product or Service Key Features Availability
<S> <C> <C>
Point-of-Care Medication Management
TouchScript Version 6 Drug Utilization Review Currently Available
Formulary checking (800 plans)
Generic substitution
Automated Internet ordering
SCRIPT standard transmission
Online submission of pharmacy claims
Inventory management
ScriptGuard barcode scanning
Touch screen-enabled
TouchScript Outsourcing On-site pharmacy or dispensary Currently Available
management
TouchScript Version 7 All Version 6 features, plus: Expected Third Quarter
3Touch Prescribing 1999
Hand held enabled
- -----------------------------------------------------------------------------------------------------------
Internet Products and Services
Online Ordering (www.Allscripts.com) Medications for in-office dispensing Currently Available
Medical education materials
Physician's Interactive Internet and Interactive Voice Response drug Currently Available
education and detailing
TouchScript Version 7.i Internet-enabled electronic prescribing Expected Third Quarter
1999
Intelligent Reminder Patient compliance tracking *
Patient Education Health state information *
Managed care information
Drug information
- -----------------------------------------------------------------------------------------------------------
Information Products
Data Mining Products Prescribing data linked to diagnosis Currently Available
</TABLE>
* Release date to be determined.
35
<PAGE>
Point-of-Care Medication Management
TouchScript is a client/server and Internet-based software application that
physicians use to electronically prescribe, route prescriptions and dispense
medications. TouchScript provides the physician with ready access to
information during the prescribing process to facilitate writing a high-
quality prescription. This information includes patient drug history,
potential adverse drug interactions, generic drug alternatives and the
relative costs of medications and drug preferences of over 800 managed care
plans. The resulting prescription is legible, accurate and more likely to be
clinically safe and follow managed care guidelines, reducing the need for
subsequent communication between the physician and a pharmacist to correct or
clarify the prescription.
Once the prescribing process is completed, TouchScript offers a variety of
fulfillment options for the patient: electronic routing to a retail or mail
order pharmacy, printing a legible hard copy or receiving the medication in
the physician's office. If the patient chooses to receive the medication in
the physician's office and is carrying a pharmacy benefit card, the system can
submit the pharmacy claim electronically for immediate approval and
reimbursement by the managed care organization.
Drug inventory management is fully automated, and all medication orders and
receipts are handled via the Internet using a proprietary program. TouchScript
employs an industry standard electronic data interchange format for sending
and receiving prescription information called SCRIPT standard, which was
developed by the National Council for Prescription Drug Programs. This enables
two-way communication between physicians and pharmacists in a more efficient
way than can be accomplished over the telephone. In addition, TouchScript's
underlying relational database enables users to generate a variety of
clinical, financial and operational reports.
We designed TouchScript to be faster and easier for a physician to use than
a prescription pad. We currently offer TouchScript with a touch-screen
interface option, and we are developing and expect to offer 3Touch Prescribing
in the third quarter of 1999. We also plan to offer TouchScript on Internet
and hand-held Microsoft CE platforms in the near future. TouchScript learns
the physician's preferences dynamically, tailoring information on patients,
diagnoses, medications and instructions more precisely as usage increases.
We offer a number of outsourcing options. These range from Allscripts
providing employees to assist in the operation of the TouchScript system to
more comprehensive arrangements where we establish and manage the customer's
pharmacy operations.
Internet Products and Services
As an extension of our TouchScript medication management solutions, we
offer transaction-based
e-commerce services that enhance our business relationships with physicians.
We are also developing a number of informational and educational services for
physicians and patients to be offered through our Web site. We expect to
introduce additional services during the current fiscal year and plan to
expend significant resources for continued development.
Online Ordering. Through our Web site, www.Allscripts.com, we currently
sell pharmaceuticals to physicians, enabling them to provide patients with
medications in the office, and we plan to facilitate the delivery of
pharmaceutical products directly to patients in the future. We also enable
healthcare professionals to purchase medical-related texts, journals and
products online.
Physician's Interactive. This product enables pharmaceutical manufacturers
and managed care organizations to deliver drug education and detailing to
physicians more efficiently and cost-effectively via the Internet, without the
face-to-face interaction currently required. The product is also available
through Interactive Voice Response.
Intelligent Reminder. We intend to offer a service to track patient
compliance with prescribed treatment and to send reminders to patients,
physicians and managed care organizations. By increasing
36
<PAGE>
compliance, we expect to improve patient care and reduce unnecessary office
visits, benefiting patients, physicians and managed care organizations.
Patient Education. We intend to create a Web site that will provide
information to patients, enabling them to take a more active role in managing
and improving the quality and cost of their healthcare. Specific information
regarding health state, managed care and medications will be made available on
the Web site and via e-mail.
Information Products
Data Mining Products. As a by-product of electronic prescribing, we
accumulate data that correlates the medications prescribed with the related
diagnosis. This type of correlated data is not readily available on a broad
scale, and we believe that we can market it to pharmaceutical manufacturers and
managed care organizations.
Prepackaged Medications
We fulfill orders for prepackaged medications for our traditional and e-
commerce customers from our FDA-licensed repackaging facility in Libertyville,
Illinois. Enabling physicians to sell repackaged pharmaceuticals is an
important component of the financial opportunity we provide to physicians.
Sales and Marketing
We sell our products through an internal direct sales force and intend to
pursue strategic relationships with key suppliers of physician practice
management systems, physician-focused Internet portals and managed care
organizations to complement our internal efforts.
As of May 31, 1999, we employed 35 sales professionals who market directly
to large physician practices, clinics, integrated healthcare networks and
physician practice management organizations. We target sites with a large
number of high-volume prescribing physicians in states where in-office
dispensing is well-established or where many physicians bear financial risk for
pharmaceutical costs.
We use a variety of tools to attract prospective customers, including
editorials, articles and advertisements in trade journals, as well as executive
seminars, exhibits at selected trade shows and other direct marketing
techniques.
Merck-Medco Strategic Relationship
Merck-Medco Managed Care is the country's largest pharmacy benefits
manager, covering over 60 million people. We have a pilot agreement with Merck-
Medco to evaluate the effectiveness of our TouchScript medication management
solutions in affecting prescribing behavior and accelerating patient
participation in Merck-Medco's mail order prescription services. Merck-Medco
works closely with us to target high-volume prescribers and encourage them to
adopt the TouchScript system.
Customer Service and Support
Our customer service strategies are important to our ability to maximize
physician utilization of our medication management solutions. We provide our
customers with a range of services that begins before product implementation
and continues throughout our relationship. As of May 31, 1999, our TouchScript
customer service and support team consisted of 65 Account Executives, Regional
Managers and Customer Support Representatives. We expect our team to grow
substantially by the end of 1999.
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Implementation Services
Implementation involves site evaluation, work flow preparation, hardware
and software installation and training of physicians and their staff. Site
evaluation helps us understand how best to implement our solution within the
physician's office work flow. Physician training on the system can typically be
completed in 30 minutes or less. The physician's office staff is usually
trained in administrative and fulfillment functions in two to three hours. The
objective of the implementation process is to maximize the value added to the
physician's practice through electronic prescribing, routing to the appropriate
dispensing location and utilizing information.
Account Management and Customer Support
Once TouchScript is operational, our staff works to help the customer
realize the benefits of the system. Account Managers contact customers on a
regular basis, either in person, by telephone or online, monitor weekly
activity and help increase customer satisfaction. We provide toll-free
telephone and online support to our TouchScript customers 24 hours a day, seven
days a week. In addition, a separate group of Account Managers services more
than 2,500 physician practice locations across the country that purchase our
prepackaged medications.
Managed Care
Our Managed Care team is responsible for facilitating access to managed
care networks, acquiring and maintaining pharmacy guideline information for
over 800 payers and supporting ongoing relationships with payers and pharmacy
benefit managers.
Competition
Our industry is intensely competitive, rapidly evolving and subject to
rapid technological change. Many companies that offer products or services that
compete with one or more of our products or services have greater financial,
technical, product development, marketing and other resources than we have.
These organizations may be better known and may have more customers than we
have. We may be unable to compete successfully against these organizations. We
believe that we must gain significant market share with our products and
services before our competitors introduce alternative products and services
with features similar to ours.
We believe that there are no competitors in medication management that
offer a comprehensive solution with ease of use, accessibility, information
content and financial opportunity for physicians comparable to ours. However,
several organizations offer components that overlap with certain components of
our solutions and may become increasingly competitive with us in the future.
We face competition from several types of organizations, including the
following:
. physician practice management systems suppliers;
. electronic medical records providers;
. healthcare electronic data interchange providers;
. point-of-care dispensing providers;
. Internet pharmacies; and
. Internet information providers.
While many of these types of organizations are potential competitors, we
believe that there are opportunities to establish strategic relationships,
alliances or distribution agreements with some of them. Although we do not have
any existing agreements with these types of organizations, we intend to pursue
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these opportunities selectively. In addition, we expect that major software
information systems companies and others specializing in the healthcare
industry may offer products or services that are competitive with components of
our solutions.
Product Development and Technology
As of May 31, 1999, our software development department consisted of 19
technology professionals. These individuals, with expertise in application
development, documentation and quality assurance, are divided into cross-
functional teams responsible for our point-of-care and Internet solutions.
The key initiatives under development for 1999 include TouchScript Version
7, which features 3Touch Prescribing. In addition, we are developing software
to support a variety of Windows CE and Palm Pilot hand-held devices. We also
continue to develop our Internet products, including our Web-enabled
TouchScript Version 7.i, which will permit physicians to access the features of
TouchScript through the Internet, either directly or via healthcare portals.
TouchScript operates on Microsoft's NT and Windows operating systems. All
software products are developed using com-objects, Active Server Pages and C++
programming language. Our Internet applications are browser-independent and are
protected by a state-of-the-art firewall, which is a network interconnection
element that polices traffic flowing between the Allscripts internal network
and the Internet, and proxy servers that provide layered security defenses
against unauthorized access. We employ industry standard 128-bit encryption,
known as secure socket layers, to provide secure transfer of information over
the Internet.
Governmental Regulation
As a participant in the healthcare industry, our operations and
relationships are regulated by a number of federal, state and local
governmental entities. We believe we are in material compliance with all
applicable laws and that we have obtained all licenses necessary for the
operation of our business.
The use of our TouchScript software by physicians to perform electronic
prescribing, electronic routing of prescriptions to pharmacies and dispensing
is governed by state and federal law. States have differing prescription format
requirements, which we have programmed into TouchScript. Many existing laws and
regulations, when enacted, did not anticipate methods of e-commerce now being
developed. Federal law and the laws of several states neither specifically
permit nor specifically prohibit electronic transmission of prescription
orders. Given the rapid growth of e-commerce in healthcare, and particularly
the growth of the Internet, we expect many states, as well as the federal
government, to directly address these areas with regulation in the near future.
Physician dispensing of medications for profit is allowed in all states
except Massachusetts, Montana, Texas and Utah. Two states, New York and New
Jersey, allow physician dispensing of medications for profit, but limit the
number of days' supply that a physician can dispense. Many of the states
allowing physician dispensing for profit have regulations relating to
licensure, storage, labeling, record keeping and the degree of supervision
required by the physician over support personnel who assist in the non-
judgmental tasks associated with physician dispensing, like retrieving
medication bottles and affixing labels. We regularly monitor these laws and
regulations, in consultation with the governing agencies, to assist our
customers in understanding them so that they can materially comply.
Congress enacted significant prohibitions against physician self-referrals
in the Omnibus Budget Reconciliation Act of 1993. This law, commonly referred
to as "Stark II," applies to physician dispensing of outpatient prescription
drugs that are reimbursable by Medicare or Medicaid. Stark II, however,
includes an exception for the provision of in-office ancillary services,
including a physician's dispensing of outpatient prescription drugs, provided
that the physician meets the requirements of the exception. We believe that
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the physicians who use our TouchScript system or dispense drugs distributed by
us are doing so in material compliance with Stark II, either pursuant to the
in-office ancillary services exception or another applicable exception.
As a repackager and distributor of drugs to dispensing physicians, we are
subject to regulation by and licensure with the FDA, the DEA and various state
agencies that regulate wholesalers or distributors. Among the regulations
applicable to our repackaging operation are the FDA's "good manufacturing
practices." We are subject to periodic inspections by regulatory authorities of
our facilities, policies and procedures for compliance with applicable legal
requirements. We believe we are in material compliance with applicable federal
and state laws and regulations, including the FDA's "good manufacturing
practices," relating to our activities as a repackager and distributor of drugs
to dispensing doctors.
As a distributor of prescription drugs to physicians, we and our customers
are also subject to the federal anti-kickback statute, which applies to
Medicare, Medicaid and other state and federal programs. The statute prohibits
the solicitation, offer, payment or receipt of remuneration in return for
referrals or the purchase of goods, including drugs, covered by the programs.
The anti-kickback law provides a number of exceptions or "safe harbors" for
particular types of transactions. We believe that our arrangements with our
customers are in material compliance with the anti-kickback statute and
relevant safe harbors. Many states have similar fraud and abuse laws, and we
believe that we are in material compliance with those laws.
As part of our services provided to physicians, our system will
electronically transmit claims for prescription medications dispensed by a
physician to many patients' payers for immediate approval and reimbursement.
Federal law provides that it is both a civil and a criminal violation for any
person to submit a claim to any payer, including, for example, Medicare,
Medicaid and all private health plans and managed care plans, seeking payment
for any services or products that overbills or bills for items that have not
been provided to the patient. We believe that we have in place policies and
procedures to assure that all claims that are transmitted by our system are
accurate and complete, provided that the information given to us by our
customers is also accurate and complete.
Both federal and state laws regulate the disclosure of confidential medical
information, including information regarding conditions like AIDS, substance
abuse and mental illness. As part of the operation of our business, our
customers may provide to us patient-specific information related to the
prescription drugs that our customers prescribe to their patients. We believe
that we have policies and procedures to assure that any confidential medical
information we receive is handled in a manner that complies with all federal
and state confidentiality requirements.
History
Allscripts was initially organized to repackage and sell pharmaceuticals to
physicians for dispensing to their patients. When the current management team
arrived at Allscripts in late 1997, it recognized the need for a new set of
medication management solutions. The communication capabilities offered by the
Internet, paired with our existing relationships with managed care
organizations and with physicians, enabled us to create a new set of tools for
the physician with a first-to-market advantage. Management immediately
refocused Allscripts on information technology products rather than solely
dispensing repackaged pharmaceuticals. In recent years, we have invested
heavily in Internet and client/server software development to capture and
leverage the value of electronic information to all parties in the healthcare
equation: patients, physicians, managed care organizations, pharmacies and
pharmaceutical manufacturers.
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Employees
As of May 31, 1999, we employed 195 persons on a full-time basis, including
65 in customer service and support, 51 in general and administrative, 35 in
sales and marketing, 25 in production and warehousing and 19 in product
development. None of our employees is a member of a labor union or is covered
by a collective bargaining agreement. We believe we have excellent relations
with our employees.
Facilities
Our executive offices and state-of-the-art repackaging facilities are
located in Libertyville, Illinois in approximately 61,000 square feet of leased
space under a lease that expires in June 2004. We also lease space for a
separate, smaller repackaging facility in Grayslake, Illinois under a lease
that expires in June 2002. We believe that our facilities are adequate for our
current operations.
Insurance
Since June 1998, we have maintained occurrence-based product liability
insurance in the amount of $32,000,000 per occurrence and $32,000,000 per year
in the aggregate. Prior to that, we were covered by occurrence-based product
liability insurance in the amount of $15,000,000 per occurrence and $15,000,000
per year in the aggregate. While we believe our insurance is adequate for our
needs, we cannot assure you that we will be able to maintain this insurance in
the future or that this insurance will be sufficient to cover all possible
liabilities.
Legal Proceedings
We are involved in litigation incidental to our business from time to time.
We are not currently involved in any litigation in which we believe an adverse
outcome would have a material adverse effect on our business, financial
condition, results of operations or prospects. However, we have been involved
in litigation and are subject to certain claims as described below.
We are a defendant in approximately 115 multi-defendant lawsuits filed
between February 1998 and April 1999 and involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine. The plaintiffs in these cases
claim cardiac and other injuries as a result of ingesting a combination of
these weight-loss drugs. Approximately 110 of these suits were filed in state
court in California; the remainder were filed in federal courts in Georgia and
Pennsylvania and in state courts in Texas, Nevada and West Virginia. In each of
these suits we are one of many defendants, including manufacturers and other
distributors of these drugs. We do not believe we have any significant
liability incident to the distribution or repackaging of these drugs, and we
have tendered defense of these lawsuits to our insurance carrier for handling.
The lawsuits are in various stages of litigation, and it is too early to
determine what, if any, liability we will have with respect to the claims made
in these lawsuits. If our insurance coverage in the amount of $15,000,000 per
occurrence and $15,000,000 per year in the aggregate is inadequate to satisfy
any resulting liability, we will have to defend these lawsuits and be
responsible for the damages, if any, that we suffer as a result of these
lawsuits. We do not believe that the outcome of these lawsuits will have a
material adverse effect on our business, financial condition, results of
operations or prospects.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth the directors, executive officers and
certain key employees of Allscripts, their ages and the positions they held
with Allscripts as of June 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Directors and Executive Officers:
Glen E. Tullman................................ 39 Chairman of the Board and Chief Executive Officer
David B. Mullen................................ 48 President, Chief Financial Officer and Director
Joseph E. Carey................................ 41 Chief Operating Officer
James A. Rosenblum............................. 32 Chief Technology Officer
Steven M. Katz................................. 49 Executive Vice President, Sales and Marketing
John G. Cull................................... 37 Senior Vice President, Finance, Treasurer and Secretary
Philip D. Green(1)............................. 49 Director
M. Fazle Husain(2)............................. 35 Director
Michael J. Kluger(2)........................... 42 Director
L. Ben Lytle(1)(2)............................. 52 Director
Gary M. Stein(1)............................... 32 Director
Edward M. Philip............................... 34 Director (upon the closing of this offering)
Other Key Employees:
Donald J. Abramo............................... 47 Vice President, Managed Care
Clifford E. Berman............................. 40 General Counsel and Senior Vice President,
Regulatory and Legislative Affairs
Stanley A. Crane............................... 49 Vice President, Internet Services
Karl L. Greiter 38 General Manager, Point-of-Care Dispensing
II ................................
Philip J. Langley.............................. 32 Senior Vice President, Implementation Services
Steven Lefar................................... 32 Senior Vice President, Corporate Development
Gary 48 Senior Vice President, Outsourcing Options
Reiss ........................................
Brian D. 44 Vice President, Pharmacy Services
Ward ...................................
</TABLE>
- --------
(1)Member of Audit Committee.
(2)Member of Compensation Committee.
Glen E. Tullman has been the Chairman of the Board since May 1999 and our
Chief Executive Officer since August 1997. From October 1994 to July 1997, Mr.
Tullman was Chief Executive Officer of Enterprise Systems, Inc., a publicly
traded healthcare information services company providing resource management
solutions to large integrated healthcare networks. From 1983 to 1994, Mr.
Tullman was employed by CCC Information Services Group, Inc., a computer
software company servicing the insurance industry, most recently as President
and Chief Operating Officer. Mr. Tullman serves on the Board of Directors of
Insurance Auto Auctions, Inc.
David B. Mullen has been our President and Chief Financial Officer and a
director since August 1997. From January 1995 to June 1997, Mr. Mullen served
as Chief Financial Officer of Enterprise Systems, Inc. From 1983 to 1995, Mr.
Mullen was employed in various positions by CCC Information Services Group,
Inc., including Vice Chairman, President and Chief Financial Officer. Prior to
that, he was employed by Ernst & Young LLP.
Joseph E. Carey has been our Chief Operating Officer since April 1999. From
September 1998 to April 1999, he served as President and Chief Operating
Officer of Shopping@Home, Inc. Prior to that time, he was Senior Vice President
and General Manager of the Resource Management Group of HBO & Company, a
healthcare software firm. Mr. Carey joined HBO in 1997 with HBO's acquisition
of Enterprise Systems, Inc., where he held the role of President from 1993
until the acquisition.
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James A. Rosenblum has been our Chief Technology Officer since December
1998. Mr. Rosenblum joined Allscripts in December 1995. He served as our
Director of Product Development from January 1996 to August 1996 and our Vice
President, Technology from August 1996 to December 1998. From May 1994 to
December 1995, he was employed by Physician Dispensing Systems, Inc. (PDS), a
technology and medication dispensing firm that we acquired in December 1995.
Steven M. Katz has been our Executive Vice President, Sales and Marketing
since September 1997. From December 1994 to July 1997, Mr. Katz served as Chief
Operating Officer of Enterprise Systems, Inc. From December 1993 to November
1994, Mr. Katz was employed by CCC Information Services Group, Inc. as
President of the Insurance Division.
John G. Cull has been our Senior Vice President, Finance, Secretary and
Treasurer since 1995. From 1991 to 1993, Mr. Cull was our assistant controller,
and from 1993 to 1995 he was our controller. From 1986 to 1991, Mr. Cull was
controller of Federated Foods, Inc., a food brokerage company. Prior to joining
Federated Foods, Mr. Cull was employed by Arthur Andersen & Co.
Philip D. Green has been one of our directors since 1992. Mr. Green is a
founding partner of the Washington, D.C. based law firm of Green, Stewart,
Farber & Anderson, P.C., which was formed in 1989. From 1978 through 1989, Mr.
Green was a partner in the Washington, D.C. based law firm of Schwalb,
Donnenfeld, Bray & Silbert, P.C. Mr. Green practices healthcare law and
represents several major teaching hospitals.
M. Fazle Husain has been one of our directors since April 1998. Mr. Husain
is a Principal of Morgan Stanley Dean Witter & Co., an investment banking firm,
where he has been employed since 1991, and is a Managing Member of Morgan
Stanley Venture Partners III, L.L.C., the General Partner of Morgan Stanley
Venture Partners III, L.P., Morgan Stanley Venture Investors III, L.P. and The
Morgan Stanley Venture Partners Entrepreneur Fund, L.P. Mr. Husain was also
employed at Morgan Stanley Dean Witter from 1987 until 1989. Mr. Husain focuses
primarily on investments in the healthcare industry, including heathcare
services, medical devices and healthcare information technology. He serves on
the Board of Directors of IntegraMed America, Inc.
Michael J. Kluger has been one of our directors since 1994. He is a founding
partner of Liberty Partners, L.P., whose general partner is Liberty Capital
Partners, Inc., a New York investment management firm, where he has served as a
Managing Director since 1992. For five years prior thereto, Mr. Kluger was a
Director and Senior Vice President of Merrill Lynch Interfunding Inc., a
subsidiary of Merrill Lynch & Co., an investment banking and brokerage firm.
Mr. Kluger is also a managing director of Liberty Capital Partners, Inc. Mr.
Kluger serves on the Board of Directors of Monaco Coach Corporation.
L. Ben Lytle has been one of our directors since March 1999. He is Chairman
of the Board, President and CEO of Anthem, Inc., one of the largest healthcare
management companies in the United States. Before joining Anthem's predecessor
company in 1976, he held positions with LTV Aerospace, Associates Corp. of
North America and American Fletcher National Bank. Mr. Lytle serves on the
boards of IPALCO Enterprises, Inc., an energy company; Central Newspapers,
Inc., a media company; CID Equity Partners, a venture capital firm; and Duke
Realty Investments, Inc., a real estate investment firm.
Gary M. Stein has been one of our directors since April 1998. Mr. Stein is a
Vice President of Morgan Stanley Dean Witter & Co., an investment banking firm,
where he has been employed since 1997 and a Vice President of Morgan Stanley
Venture Partners III, L.L.C. Prior to joining Morgan Stanley Dean Witter in
1997, Mr. Stein was an Associate at Patricof & Co. Ventures, Inc., where he
focused on private equity investments in the healthcare industry from 1992 to
1997. Prior to that time, Mr. Stein was a Financial Analyst at Morgan Stanley &
Co., Inc. and Morgan Stanley Australia, Ltd.
Edward M. Philip is expected to join our Board of Directors upon the closing
of this offering. Mr. Philip has served as Chief Financial Officer and
Secretary of Lycos, Inc. since December 1995 and Chief Operating
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Officer of Lycos, Inc. since December 1996. From July 1991 to December 1995,
Mr. Philip was employed by The Walt Disney Company, where he served in various
finance positions, most recently as Vice President and Assistant Treasurer.
Prior to joining The Walt Disney Company, Mr. Philip was an investment banker
at Salomon Brothers Inc.
Donald J. Abramo has been our Vice President, Managed Care since February
1999. From January 1998 to January 1999, Mr. Abramo served as Regional Vice
President of Managed Care for Caremark International Inc., which has been a
wholly owned subsidiary of MedPartners Inc. since September 1996. From January
1997 to December 1997, Mr. Abramo served as Area Vice President for Caremark
International Inc., and from January 1994 to December 1996, he served as
Caremark's Director of Managed Care Sales. Prior to 1994, he was employed with
Baxter International and Blue Cross/Blue Shield.
Clifford E. Berman has been our General Counsel and Senior Vice President,
Regulatory and Legislative Affairs since July 1998. From September 1996 to July
1998, he served as Vice President of Legal Services for MedPartners, Inc. Prior
to that time, he held various positions at Caremark, Inc. Mr. Berman serves on
the Illinois State Board of Pharmacy and is Chairman of its Legislative and
Regulatory Committee. Mr. Berman is the past president of the Pharmaceutical
Care Management Association and currently serves on its Board of Directors.
Stanley A. Crane has been our Vice President, Internet Services since April
1999. From September 1998 to April 1999, he was Chief Technology Officer for
Shopping@Home, Inc. From January 1998 to September 1998, he was Chief
Technology Officer for MaxMiles, Inc., an Internet travel services company.
From August 1995 to January 1998, Mr. Crane was Chief Technology Officer for
Enterprise Systems, Inc., where he led a development team through its
successful migration from DOS-based applications to a system of Windows,
object-oriented, client/server applications. Prior to this, Mr. Crane held a
variety of roles with Lotus, Ashton-Tate and WordStar.
Karl L. Greiter has been our General Manager, Point-of-Care Dispensing since
September 1998. From November 1995 to August 1998, Mr. Greiter was our
controller. Before joining Allscripts, Mr. Greiter was employed by William G.
Ceas & Co., an investment banking firm.
Phillip J. Langley has been our Senior Vice President, Implementation
Services since August 1998. From 1989 to 1998, Mr. Langley served in a variety
of positions for CCC Information Services Group, Inc., most recently as Group
Vice President--North America Sales and Service.
Steven Lefar has been our Senior Vice President, Corporate Development since
April 1999. From 1996 to 1999, Mr. Lefar served as a Senior Manager in the
healthcare practice of Andersen Consulting, where he helped develop and
implement Covation, a joint venture that delivers outsourcing and e-commerce
services to healthcare providers. Prior to that, he was employed with Caremark
and APM, a healthcare consulting firm.
Gary Reiss has been our Senior Vice President, Outsourcing Operations since
March 1999. From July 1995 until that time, he was our Senior Vice President,
Customer and Field Services. Mr. Reiss co-founded Physician Dispensing Systems,
Inc., a technology and medication dispensing firm, which we acquired in
December 1995.
Brian D. Ward has been our Vice President, Pharmacy Services, since 1994.
Mr. Ward joined Allscripts in 1991. From 1989 to 1991, he was President of CAP
Services, a consulting firm specializing in pharmacy implementation and
hospital cost containment. Prior to 1989, Mr. Ward was employed by HPI
Healthcare, Inc., a hospital pharmacy management company.
Election of Directors
All of our directors were elected to the Board pursuant to the terms of our
Shareholders' Agreement among the holders of our preferred stock, certain of
the holders of our common stock and us. The Shareholders' Agreement will
terminate upon the closing of this offering.
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Following the offering, the Board of Directors will be composed of three
classes, with each class as nearly equal in number as possible. Upon the
expiration of the term of each class of directors, directors comprising that
class will be elected for a three-year term at the annual meeting of
stockholders in the year in which their term expires. Messrs. Green, Lytle and
Philip will serve in the class with a term that expires on the date of the
annual meeting of stockholders to be held in 2000. Messrs. Kluger, Mullen and
Stein will serve in the class with a term that expires on the date of the
annual meeting of stockholders to be held in 2001. Messrs. Husain and Tullman
will serve in the class with a term that expires on the date of the annual
meeting of stockholders to be held in 2002. All officers serve at the pleasure
of the Board of Directors. There are no family relationships among any of our
directors or executive officers.
Committees of the Board of Directors
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee. The Audit Committee recommends the
appointment of auditors and oversees our accounting and audit functions. The
Compensation Committee determines executive officers' salaries, bonuses and
other compensation and administers the Amended and Restated 1993 Stock
Incentive Plan.
Director Compensation
Our independent directors receive a fee of $1,000 for each meeting of the
Board of Directors that they attend. We also reimburse them for their travel
expenses. Under our Amended and Restated 1993 Stock Incentive Plan, these
directors are eligible to receive stock option grants at the discretion of the
Board of Directors or the Compensation Committee. In 1998, Mr. Green received
options to purchase 29,166 shares of our common stock at a per share exercise
price of $0.06. Also in 1998, Mr. Lytle received options to purchase 25,000
shares at a per share exercise price of $0.06. The options vest 25% per year
and become fully vested in 2002.
Pharmacy Advisory Board
Because of the important role pharmacy plays in medication management, we
have assembled a Pharmacy Advisory Board to consult on a variety of topics. The
Advisory Board will provide guidance to Allscripts in a number of key areas,
including the design and development of products and services, trends in
pharmacy and pharmaceutical care, and the planning and conducting of
pharmacoeconomic and medical research on issues such as electronic prescribing,
compliance programs and drug education.
J. Lyle Bootman, Ph.D., is Dean and Professor of the University of Arizona
College of Pharmacy and is Founding and Executive Director of the University of
Arizona Center for Health Outcomes and PharmacoEconomic (HOPE) Research. Dr.
Bootman has authored over 200 research articles and has been an invited speaker
at more than 300 healthcare meetings. He has published several books, including
"Principles of Pharmacoeconomics." Dr. Bootman was recently named to the
Institute of Medicine and serves as the current President of the American
Pharmaceutical Association.
James T. Doluisio, Ph.D., is the Hoeschst Roussel Professor of Pharmacy at
the University of Texas at Austin, where he also served as the Dean of the
College of Pharmacy from 1973 through 1998. Dr. Doluisio has written more than
90 papers on bioequivalency, biopharmaceutics, pharmacokinetics and on various
other pharmacy topics for national and international journals and textbooks.
Dr. Doluisio also served as President of the American Pharmaceutical
Association in 1982 and President of the American Association of Pharmaceutical
Scientists in 1988. From 1990 to 1995, he chaired the Board of the United
States Pharmacopeial Convention and recently served as the Inaugural Chairman
of Pharmaceutical Care Management Association's Deans Advisory Council. He has
served as a consultant to the FDA, as a member of the U.S. Office of Technology
Assessment Drug Bioequivalence Study Panel and as a consultant in Pharmacy to
the Surgeon General of the U.S. Air Force.
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Robert C. Johnson, Ph.D., is President of R.C. Johnson Associates, a
healthcare and association management consulting firm in Arizona, and he is
Professor of Pharmacy Administration and Executive Director of the Center for
the Advancement of Pharmacy Practice at Midwestern University's College of
Pharmacy. Mr. Johnson is a past Chairman and Chief Executive Officer of PCS
Health Systems, the nation's largest pharmacy benefit managers, and also served
as Corporate Vice President for Government Affairs for the McKesson Foundation.
He served as Chief Executive Officer of the California Pharmacists Association
for 20 years, and he is a past president of the American Pharmaceutical
Association.
Ronald P. Jordan, R.Ph., is a registered pharmacist, President of HCaliber
Consulting of East Greenwich, Rhode Island, an international healthcare
informatics firm, and Senior Vice President of Informatics at Hospice Pharmacia
L.L.C. of Philadelphia, Pennsylvania. Mr. Jordan is immediate past president of
the American Pharmaceutical Association and served as a member of its board of
trustees from 1994 through 1997. He served as a Trustee of the National Council
for Prescription Drug Programs, where he co-chaired the Standardization
Committee for over five years. Most recently, Mr. Jordan was appointed as one
of eleven members of the Health Care Financing Administration Medicare Coverage
Advisory Commission, and he was appointed to serve on the Rhode Island
Governor's Advisory Council on Health.
Delbert D. Konnor, PharmMS, is President and Chief Executive Officer of the
Pharmaceutical Care Management Association, a trade association representing
the major companies in the managed care pharmacy industry. In addition, he is
Adjunct Professor of Pharmaceutical Administration at Duquesne University and
Ohio Northern University. Mr. Konnor previously served as Vice President of
Professional Services for AARP Pharmacy Service. His key government pharmacy
positions have included Manager of the Voluntary Compliance Program for the
Drug Enforcement Administration and the Director of the first White House
Conference on Prescription Drug Misuse, Abuse and Diversion.
Debi Reissman, Pharm.D. is President of Rxperts Managed Care Consulting, a
consulting firm in Santa Ana, California that specializes in pharmacy benefit
consulting to physicians and the managed care industry. She is also an
Assistant Clinical Professor at the University of Southern California School of
Pharmacy. Dr. Reissman consults in the area of pharmacy benefit design and
prescription utilization management and has more than 19 years of experience in
the managed healthcare industry. She has held a variety of pharmacy management
positions, including Chief Executive Officer of Prescription Solutions, the
pharmacy benefit subsidiary of PacifiCare Health Systems. In addition to her
work experience, Dr. Reissman has been actively involved in national pharmacy
organizations, including the Academy of Managed Care Pharmacy where she chaired
the finance committee and served as treasurer for four years.
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Executive Compensation
This table summarizes the before-tax compensation for our named executive
officers for the fiscal year ended December 31, 1998. Named executive officers
include the Chief Executive Officer and the other four executive officers of
Allscripts whose salary and bonus earned during 1998 exceeded $100,000. Amounts
disclosed as "all other compensation" consist of our matching contributions
under our 401(k) plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------ ------------
Securities
Name and Underlying All Other
Principal Position Salary($) Options(#) Compensation($)
------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Glen E. Tullman
Chairman of the Board and Chief
Executive Officer................... $225,000 548,083 $ 498
David B. Mullen
President and Chief Financial
Officer............................. 225,000 548,083 1,000
Steven M. Katz
Executive Vice President, Sales and
Marketing........................... 215,000 382,841 --
John G. Cull
Senior Vice President, Finance,
Treasurer and Secretary............. 140,000 19,164 1,000
James A. Rosenblum
Chief Technology Officer............ 105,000 32,498 1,000
</TABLE>
Option Grants in Last Fiscal Year
This table gives information relating to option grants to the named
executive officers during the year ended December 31, 1998. The options were
granted under our Amended and Restated 1993 Stock Incentive Plan. The potential
realizable value is calculated based on the term of the option at its time of
grant, 10 years. The calculation assumes that the fair market value on the date
of grant appreciates at the indicated rate compounded annually for the entire
term of the option and that the option is exercised at the exercise price and
sold on the last day of its term at the appreciated price. Stock price
appreciation of 0%, 5% and 10% is assumed pursuant to the rules of the
Securities and Exchange Commission. Based on the assumed initial public
offering price of $11.00 per share, the actual price appreciation may be
substantially greater than that assumed under these rules. We cannot assure you
that the actual stock price will appreciate over the 10-year option term at the
assumed levels or at any other defined level.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Percent Potential Realizable
of Total Fair Value at Assumed Annual
Number of Options Market Rates of Stock Price
Securities Granted Value at Appreciation for Option
Underlying in Exercise Grant Term
Options Fiscal Price Date Expiration -------------------------
Name Granted (#) 1998 (%) ($/Share) ($/Share) Date 0% 5% 10%
---- ----------- -------- --------- --------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Glen E. Tullman......... 548,083(1) 27.6% $0.06 $0.24 5/29/08 $98,655 $181,380 $308,296
David B. Mullen......... 548,083(1) 27.6 0.06 0.24 5/29/08 98,655 181,380 308,296
Steven M. Katz.......... 382,841(2) 19.3 0.06 0.24 5/29/08 68,911 126,695 215,347
John G. Cull............ 6,666(3) 0.3 0.06 0.24 5/29/08 1,200 2,206 3,750
12,498(3) 0.6 0.06 0.50 12/10/08 5,499 9,429 15,458
James A. Rosenblum...... 7,499(3) 0.4 0.06 0.24 5/29/08 1,350 2,482 4,218
24,999(3) 1.2 0.06 0.50 12/10/08 11,000 18,860 30,921
</TABLE>
- --------
(1) The options vested 25% on the grant date and 25% on August 1, 1998 and will
vest 25% on each of August 1, 1999 and 2000.
(2) The options vested 25% on the grant date and 25% on September 30, 1998 and
will vest 25% on each of September 1, 1999 and 2000.
(3) The options vest 25% on each of the first through fourth anniversaries of
the grant date.
47
<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
This table provides information regarding the exercise of options during
fiscal 1998 by the named executive officers. The value of unexercised in-the-
money options at fiscal year end is calculated using the difference between the
option exercise price and the fair market value at December 31, 1998, which has
been deemed to be $0.50 per share, multiplied by the number of shares
underlying the option. An option is in-the-money if the fair market value of
the common stock subject to the option is greater than the exercise price.
Based on the assumed initial public offering price of $11.00 per share, the
value of unexercised in-the-money options following the completion of this
offering is expected to significantly exceed the value of these options at
fiscal year end.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Shares Unexercised In-the-Money Options
Acquired on Options at Fiscal Year End (#) at Fiscal Year End ($)
Exercise Value ------------------------------- -------------------------
Name (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Tullman......... 261,958 $115,262 -- 286,125 -- $125,895
David B. Mullen......... -- -- 262,467 285,616 $115,485 125,671
Steven M. Katz.......... -- -- 184,902 197,939 81,357 87,093
John G. Cull............ -- -- 75,287 39,707 18,057 11,941
James A. Rosenblum...... -- -- 37,702 44,186 9,105 18,701
</TABLE>
Employment and Other Agreements
Employment Agreements
We have entered into employment agreements with each of David B. Mullen and
Glen E. Tullman effective August 1, 1997, and with Steven M. Katz effective
September 2, 1997. Each agreement has an initial term ending December 31, 2000
and renews for consecutive one-year terms unless either party gives 30 days'
notice prior to the expiration of any term. Messrs. Mullen and Tullman are each
paid an annual salary of $225,000 and are each entitled to an annual bonus as
determined by the Board of Directors or the Compensation Committee. Mr. Katz is
paid an annual salary of $215,000 and is entitled to an annual bonus,
contingent upon the attainment of certain objectives, as determined by the
Chief Executive Officer in consultation with the Board of Directors or the
Compensation Committee. The agreements also provide that each of Messrs.
Mullen, Tullman and Katz will not compete with us during the term of his
employment and for one year thereafter. If we terminate any of Messrs. Mullen,
Tullman or Katz without Cause or if any of them terminates his employment For
Good Reason, as each of those terms is defined in the agreements, he will be
entitled to 12 months' salary as severance, as well as any salary that was
accrued but not yet paid as of the termination date, the unpaid performance
bonus, if any, for the calendar year preceding the termination date and any
performance bonus for the calendar year in which the termination date occurs
that would have been payable had there been no termination. The amount of these
performance bonuses is to be determined in the manner in which it would have
been determined had there been no termination.
Termination of Employment and Change in Control Arrangements
We have entered into stock option agreements with each of Messrs. Tullman,
Mullen and Katz pursuant to their employment agreements granting them options
to purchase shares of our common stock as follows: Mr. Tullman, 548,083 shares;
Mr. Mullen, 548,083 shares; and Mr. Katz, 382,841 shares. Under the option
agreements, in the event of a Change of Control, as defined in the stock option
agreements, vesting of the options will accelerate so that the unvested portion
of the options will vest immediately. The option agreements also provide for
accelerated vesting of a portion of the options in the event of termination of
employment without Cause, For Good Reason or because of death or disability, as
each of those terms is defined in the employment agreements.
48
<PAGE>
Under an agreement entered into between us and John G. Cull, if Mr. Cull is
discharged for any reason other than for Cause, as defined in the agreement,
Mr. Cull will be entitled to monthly payments equal to his then in-effect
monthly salary together with a pro rata bonus amount and a continuation of
health insurance benefits, for a period of 12 months. If, within six months of
a Change in Control of Allscripts, as defined in the agreement, Mr. Cull is
discharged by Allscripts other than for Cause or voluntarily terminates his
employment following a change in his position that materially reduces his level
of responsibilities or a material reduction in his overall level of
compensation, Mr. Cull will be entitled to monthly payments equal to his then
in-effect monthly salary for a period of 12 months together with a pro rata
bonus amount and a continuation of health insurance benefits. In addition, the
agreement provides that all existing stock options owned by Mr. Cull will
immediately vest upon the occurrence of the same events that require us to make
severance payments to him following a Change in Control. In addition, Mr. Cull
has agreed not to compete with us for a period of 12 months following the
termination of his employment.
Employee Benefit Plans
Amended and Restated 1993 Stock Incentive Plan
In May and June 1999, our Board of Directors and shareholders adopted and
approved our Amended and Restated 1993 Stock Incentive Plan, which, among other
things, increased the shares authorized for issuance under the plan by
1,300,000. The plan authorizes the grant of options to purchase up to an
aggregate of 4,393,489 shares. The plan provides that the number of shares of
common stock underlying stock incentives granted under the plan to any
individual in any twelve-month period may not exceed 3,000,000. The plan is
designed to grant stock incentives, including qualified and nonqualified
options to purchase common stock and stock appreciation rights, to key
individuals who perform services for us or on our behalf, such as employees,
officers, eligible directors, as defined in the plan, consultants and agents of
Allscripts. The purpose of the plan is to enable us to attract, retain and
motivate key individuals by providing them the opportunity to obtain an equity
interest in Allscripts. The Compensation Committee of our Board of Directors
administers the plan and determines the per share exercise price at the time
each stock incentive is granted; provided that in the case of qualified
incentive stock options, the exercise price is not less than fair market value
on the date of grant. The plan provides that if there is a change in our common
stock through a merger, consolidation, reorganization, recapitalization or
otherwise, or if there is a dividend on the common stock, payable in common
stock, or if there is a stock split, combination or other change in our issued
common stock, the common stock available under the plan and the common stock
subject to then-existing stock incentives shall be increased or decreased
proportionately. In 1998, we recognized unearned compensation of approximately
$407,000 in connection with grants under the plan and during the three months
ended March 31, 1999, we recognized approximately $1,850,000 of additional
unearned compensation.
As of May 31, 1999, there were options outstanding under the plan to
purchase an aggregate of 2,380,539 shares of common stock, 932,900 of which
were currently exercisable. The weighted average per share exercise price for
all of these options is $1.06.
401(k) Plan
We have adopted a 401(k) retirement savings plan. This plan is available to
all employees who are at least 21 years old and who have been employed by us
for at least one year. An employee may contribute, on a pretax basis, up to the
maximum percent of the employee's total annual income from us permitted under
the Internal Revenue Code. Under the terms of the 401(k) plan, we match
employee contributions at 25% of the first 10% of eligible compensation
contributed by the employee to the plan. For "highly compensated employees" as
defined under the Internal Revenue Code, our matching percentage is 10% of the
first 10% of eligible compensation contributed by the employee. Contributions
are allocated to each employee's individual account and are, at the employee's
election, invested in one, all, or some combination of four investment funds.
Employee contributions are fully vested and non-forfeitable. Employees become
100% vested in our contributions after a period of three years.
49
<PAGE>
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of our Board of Directors are
Messrs. Husain, Kluger and Lytle. At various times during 1998, Mr. Green and
John M. Goense, Managing Director of Allstate Private Equity, a division of the
Investment Department of Allstate Insurance Company, and a former director of
Allscripts, were members of the Compensation Committee. None of these persons
has ever been an officer or employee of Allscripts or any of its subsidiaries.
Mr. Goense resigned from our Board of Directors in connection with the sale by
Allstate of its interest in Allscripts in May 1999. The sale was a part of
Allstate's disposition of its investments in certain private companies made
because of a change in Allstate's investment strategy. See "Certain
Relationships and Related Party Transactions--Series I and J Redeemable
Preferred Stock Private Placement," "--Redeemable Preferred Stock Redemptions,"
"--Certain Business Relationships" and "Description of Capital Stock--
Registration Rights."
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our policy is that all transactions between us and our executive officers,
directors and principal stockholders be on terms no less favorable to us than
we could obtain from unaffiliated third parties or else be approved by our
disinterested directors.
Shopping@Home Acquisition
In June 1999, we acquired substantially all of the assets of Shopping@Home,
Inc. in exchange for a promissory note in the principal amount of $650,000,
which equals the aggregate amount of cash invested by the shareholders since
the company's formation in October 1998. The note bears interest at a rate of
6.0% per year and is payable upon the consummation of this offering. Messrs.
Tullman and Carey are principal shareholders of Shopping@Home.
Series I and J Redeemable Preferred Stock Private Placement
In April 1998, we sold 1,199,770 shares of Series I redeemable preferred
stock and 4,118,324 shares of common stock for an aggregate purchase price of
$8,000,000 to Morgan Stanley Venture Partners III, L.P., Morgan Stanley Venture
Investors III, L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund,
L.P. Messrs. Husain and Stein, two of our directors, are affiliates of each of
these Morgan Stanley funds. We also sold 37,493 shares of Series I preferred
stock and 128,697 shares of common stock to Mr. Tullman for a purchase price of
$250,000, 14,997 shares of Series I preferred stock and 51,479 shares of common
stock to Mr. Mullen for a purchase price of $100,000, 3,749 shares of Series I
preferred stock and 12,869 shares of common stock to Mr. Carey for a purchase
price of $25,000, 4,499 shares of Series I preferred stock and 15,443 shares of
common stock to Mr. Rosenblum for a purchase price of $30,000, and 13,497
shares of Series I preferred stock and 46,331 shares of common stock to Michael
E. Cahr, a former director of Allscripts, for a purchase price of $90,000.
In connection with our sale of Series I preferred stock, we also issued
543,870 shares of Series J redeemable preferred stock and warrants to acquire
an aggregate of 696,833 shares of common stock at a per share exercise price of
$0.06 to Allstate Insurance Company. Mr. Goense, a former member of our
Compensation Committee, is Managing Director of Allstate Private Equity, a
division of the Investment Department of Allstate Insurance Company. We issued
the shares and warrants in exchange for debentures of Allscripts held by
Allstate in the principal amount of $3,382,704 plus accrued interest of
$131,785, which Allstate purchased from us in April 1996 for $3,000,000, and
Allstate's agreement to modify the redemption and dividend provisions of the
440,968 shares of Series H preferred stock held by Allstate. In the same
transaction, we issued 273,748 shares of Series J preferred stock and warrants
to purchase an aggregate of 659,669 shares of common stock at a per share
exercise price of $0.06 to Liberty Partners Holdings 6, L.L.C. and Liberty
Investment Partnership #6, of each of which Mr. Kluger, one
50
<PAGE>
of our directors, is a managing director, and to the State Board of
Administration of Florida, which has entered into an investment management
contract with Liberty Capital Partners Inc., of which Mr. Kluger is a managing
director. We issued the shares and warrants in exchange for debentures of
Allscripts held by the State Board of Administration of Florida in the
principal amount of $1,691,352 plus accrued interest of $65,892, which the
State Board of Administration of Florida purchased from us in April 1996 for
$1,500,000, and debentures held by Liberty Investment Partnership #6 in the
principal amount of $11,276 plus accrued interest of $439, as well as Liberty
Partners Holdings 6, L.L.C.'s agreement to modify the redemption and dividend
provisions of the 680,892 shares of Series H preferred stock held by it. In
connection with this financing, we also entered into a Right of First Offer and
Co-Sale Agreement with Allstate, the Liberty funds, the Morgan Stanley funds
and Messrs. Tullman, Mullen and Cahr.
Redeemable Preferred Stock Redemptions
We will use a portion of the net proceeds of this offering to redeem shares
of preferred stock held by some of our affiliates according to their redemption
terms as follows, including accrued dividends as of May 31, 1999:
. $10,360,378 to redeem 815,594 shares of Series H preferred stock and
439,883 shares of Series J preferred stock held by Liberty Partners
Holdings 6, L.L.C.;
. $12,324,738 to redeem 217,459 shares of Series H preferred stock,
1,199,770 shares of Series I preferred stock and 268,204 shares of Series
J preferred stock held collectively by the Morgan Stanley Venture
Partners III, L.P., Morgan Stanley Venture Investors III, L.P. and The
Morgan Stanley Venture Partners Entrepreneur Fund, L.P.;
. $598,867 to redeem 18,929 shares of Series H preferred stock, 37,493
shares of Series I preferred stock and 23,345 shares of Series J
preferred stock held by Mr. Tullman;
. $242,934 to redeem 7,764 shares of Series H preferred stock, 14,997
shares of Series I preferred stock and 9,575 shares of Series J preferred
stock held by Mr. Mullen;
. $14,024 to redeem 796 shares of Series H preferred stock and 982 shares
of Series J preferred stock held by Mr. Cull;
. $187,865 to redeem 9,159 shares of Series H preferred stock, 3,749 shares
of Series I preferred stock and 11,295 shares of Series J preferred stock
held by Mr. Carey;
. $45,877 to redeem 796 shares of Series H preferred stock, 4,499 shares of
Series I preferred stock and 982 shares of Series J preferred stock held
by Mr. Rosenblum; and
. $49,097 to redeem 2,787 shares of Series H preferred stock and 3,438
shares of Series J preferred stock held by Mr. Green.
Certain Business Relationships
In each of the last three fiscal years, we retained the law firm of Green,
Stewart, Farber & Anderson, P.C., of which Mr. Green, one of our directors, is
a partner. We paid fees to Mr. Green's law firm of approximately $76,000 in
1996, $55,000 in 1997 and $36,000 in 1998.
From June 1997 through March 1999, we provided pharmacy benefit management
services for Anthem, Inc. Mr. Lytle, one of our directors, is Chairman of the
Board, President and Chief Executive Officer of Anthem. Anthem paid us
approximately $1,580,000 in 1997, approximately $2,982,000 in 1998 and
approximately $375,000 in 1999 for these services.
Registration Rights Agreement
See "Description of Capital Stock--Registration Rights."
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information known to us with respect to the
beneficial ownership of our common stock as of June 15, 1999 and immediately
following this offering by:
. each stockholder known by us to own beneficially more than 5% of the
common stock;
. each director;
. our Chief Executive Officer and our other named executive officers; and
. all directors and executive officers as a group.
Beneficial ownership is a technical term broadly defined by the SEC to mean
more than ownership in the usual sense. In general, beneficial ownership
includes any shares that the holder can vote or transfer and stock options and
warrants that are exercisable currently or become exercisable within 60 days.
These shares are considered to be outstanding for the purpose of calculating
the percentage of outstanding Allscripts common stock owned by a particular
stockholder, but are not considered to be outstanding for the purpose of
calculating the percentage ownership of any other person. Except as otherwise
noted, to our knowledge, the stockholders named in this table have sole voting
and investment power for all shares shown as beneficially owned by them. Mr.
Philip, who is expected to join our Board of Directors upon the closing of this
offering, does not beneficially own any shares of our common stock.
<TABLE>
<CAPTION>
Percentage of
Total
-----------------
Shares Before After
Beneficially the the
Owned Offering Offering
------------ -------- --------
<S> <C> <C> <C>
Glen E. Tullman (1)............................ 581,832 6.4% 3.3%
David B. Mullen (2)............................ 389,722 4.3 2.2
Steven M. Katz................................. 185,053 2.1 1.1
John G. Cull (3)............................... 94,667 1.0 *
James A. Rosenblum (4)......................... 75,769 * *
Philip D. Green (5)............................ 97,387 1.1 *
M. Fazle Husain (6)............................ 6,141,366 57.5 33.7
Michael J. Kluger (7).......................... 3,804,181 32.3 19.4
L. Ben Lytle................................... 0 0.0 0.0
Gary M. Stein (6).............................. 6,141,366 57.5 33.7
Entities affiliated with Morgan Stanley Dean
Witter Venture Partners (6)................... 6,141,366 57.5 33.7
Liberty Partners Holdings 6, L.L.C. (7)........ 3,804,181 32.3 19.4
All directors and executive officers as a group
(11 persons) (8).............................. 11,468,039 81.2 54.8
</TABLE>
- --------
*Less than 1%.
(1) Includes 74,762 shares issuable upon the closing of this offering upon
conversion of convertible preferred stock and 80,158 shares issuable upon
exercise of warrants that are currently exercisable.
(2) Includes 30,665 shares issuable upon the closing of this offering upon
conversion of convertible preferred stock and 32,877 shares issuable upon
exercise of warrants that are currently exercisable.
(3) Includes 87,262 shares issuable upon exercise of options that will be
exercisable within 60 days, 3,144 shares issuable upon the closing of this
offering upon conversion of convertible preferred stock and 3,371 shares
issuable upon exercise of warrants that are currently exercisable.
(4) Includes 37,931 shares issuable upon exercise of options that will be
exercisable within 60 days, 3,144 shares issuable upon the closing of this
offering upon conversion of convertible preferred stock and 3,371 shares
issuable upon exercise of warrants that are currently exercisable.
(5) Includes 54,798 shares issuable upon exercise of options that will be
exercisable within 60 days, 11,005 shares issuable upon the closing of this
offering upon conversion of convertible preferred stock and 11,801 shares
issuable upon exercise of warrants that are currently exercisable.
52
<PAGE>
(6) Consists of: (a) 3,828,167 shares, 753,862 shares issuable upon the closing
of this offering upon conversion of convertible preferred stock and 808,258
shares issuable upon exercise of warrants that are currently exercisable,
in each case owned by Morgan Stanley Venture Partners III, L.P.;
(b) 367,680 shares, 72,404 shares issuable upon the closing of this
offering upon conversion of convertible preferred stock and 77,629 shares
issuable upon exercise of warrants that are currently exercisable, in each
case owned by Morgan Stanley Venture Investors III, L.P.; and (c) 165,739
shares, 32,636 shares issuable upon the closing of this offering upon
conversion of convertible preferred stock and 34,991 shares issuable upon
exercise of warrants that are currently exercisable, in each case owned by
The Morgan Stanley Venture Partners Entrepreneur Fund, L.P. Mr. Husain is a
Managing Member of Morgan Stanley Venture Partners III, L.L.C., which is
the General Partner of each of these three entities. Mr. Stein is a Vice
President of Morgan Stanley Venture Partners III, L.L.C. Each of Messrs.
Husain and Stein disclaim beneficial ownership of the shares held by these
entities, except to the extent of his proportionate interest therein. The
address for Messrs. Husain and Stein and these entities is c/o Morgan
Stanley Dean Witter Venture Partners, 1221 Avenue of the Americas, New
York, New York 10020.
(7) Consists of 907,235 shares, 532,031 shares issuable upon the closing of
this offering upon conversion of convertible preferred stock and 2,364,917
shares issuable upon exercise of warrants that are currently exercisable.
Mr. Kluger disclaims beneficial ownership of the shares held by these
entities, except to the extent of his proportionate interest therein. The
address for Mr. Kluger and these entities is c/o Liberty Partners, L.P.,
1177 Avenue of the Americas, New York, New York 10036.
(8) Includes the shares described in Notes 1 through 7.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our Certificate of Incorporation will
provide that our authorized capital stock consists of 75,000,000 shares of
common stock, $0.01 par value, and 1,000,000 shares of preferred stock, $0.01
par value. As of the date of this prospectus, there were 11,909,782 shares of
common stock outstanding and no shares of preferred stock outstanding. As of
the date of this prospectus, there were 354 holders of record of common stock.
All shares of common stock are, and the common stock being sold in this
offering will be, when issued, fully paid and non-assessable.
Common Stock
Holders of common stock will be entitled to one vote for each share held on
all matters subject to a vote of stockholders and will not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock will be entitled to receive
ratably any dividends that the Board of Directors may declare out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
Allscripts, the holders of common stock will be entitled to receive ratably the
net assets of Allscripts available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
preferred stock. Holders of common stock will have no preemptive, subscription,
redemption or conversion rights.
Preferred Stock
Under our Certificate of Incorporation, we will be authorized to issue
1,000,000 shares of preferred stock, which may be issued from time to time in
one or more series upon authorization by the Board of Directors. The Board of
Directors, without further approval of the stockholders, will be authorized to
fix the number of shares constituting any series, as well as the dividend
rights and terms, conversion rights and terms, voting rights and terms,
redemption rights and terms, liquidation preferences and any other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could also
adversely affect the voting power of the holders of common stock. The issuance
of preferred stock could also, under some circumstances, have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, a majority of our outstanding voting stock or otherwise
adversely affect the market price of our common stock. We are not aware of any
plans by a third party to seek control of Allscripts and we have no current
plans to issue any preferred stock.
Warrants
As of May 31, 1999, we had warrants outstanding to purchase an aggregate of
4,903,763 shares of common stock at an average weighted exercise price of $0.54
per share, 4,895,430 of which are vested and presently exercisable. All of the
warrants allow cashless exercises. If they were all exercised in this way at
the closing of this offering, we would receive no cash payment, and an
additional 4,655,109 shares would be outstanding, assuming an initial public
offering price of $11.00 per share.
Registration Rights
Upon the closing of this offering, Liberty Partners Holdings 6, L.L.C.,
Morgan Stanley Venture Investors III, L.P., Morgan Stanley Venture Partners
III, L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund, L.P.,
which collectively hold 6,659,752 shares of common stock and warrants
exercisable for an aggregate of 3,285,795 shares of common stock, will be
entitled to registration rights. Under our Registration Agreement, Liberty
Partners Holdings 6, L.L.C. and Morgan Stanley Venture Partners III, L.P.,
Morgan Stanley Venture Investors III, L.P. and The Morgan Stanley Venture
Partners
54
<PAGE>
Entrepreneur Fund, L.P., collectively, are each entitled to require us to
register their shares of common stock three times, but not more than once in
any six-month period. In addition, if we propose or are required to register
any of our common stock, either for our own account or for the account of other
of our stockholders, we are required to notify the holders described above, and
subject to certain limitations, to include in such registration all of the
common stock requested to be included by those holders. We are obligated to
bear the expenses, other than underwriting commissions, of the first
registration required by Liberty or the Morgan Stanley parties, and of all
incidental registrations. Any exercise of these registration rights may hinder
our efforts to arrange future financings and have an adverse effect on the
market price of our common stock.
Certain Limited Liability, Indemnification and Anti-takeover Provisions
Indemnification and Limitation of Liability
After the closing of this offering, our Certificate of Incorporation and
By-laws will provide that we shall, with some limitations, indemnify our
directors and officers against expenses, including attorneys' fees, judgments,
fines and certain settlements, actually and reasonably incurred by them in
connection with any suit or proceeding to which they are a party so long as
they acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of Allscripts. This indemnification also applies
to a criminal action or proceeding, so long as the director or officer had no
reasonable cause to believe their conduct to have been unlawful.
Section 102 of the Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. Delaware
General Corporation Law Section 102 provides, however, that liability for
breaches of the duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct, or knowing violation of the law, and the
unlawful purchase or redemption of stock or payment of unlawful dividends or
the receipt of improper personal benefits cannot be eliminated or limited in
this manner. Our Certificate of Incorporation will include a provision that
eliminates, to the fullest extent permitted, director liability for monetary
damages for breaches of fiduciary duty.
Section 203 of Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates or associates,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations between an interested stockholder and a corporation for a
period of three years after the date the interested stockholder becomes an
interested stockholder, unless:
. the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder becomes an
interested stockholder;
. the interested stockholder acquired at least 85% of the voting stock of
the corporation (other than stock held by directors who are also officers
or by certain employee stock plans) in the transaction in which it
becomes an interested stockholder; or
. the business combination is approved by a majority of the board of
directors and by the affirmative vote of 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
For this purpose, business combinations include mergers, consolidations,
sales or other dispositions of assets having an aggregate value in excess of
10% of the consolidated assets of the corporation, and certain transactions
that would increase the interested stockholder's proportionate share ownership
in the corporation.
55
<PAGE>
Special Meetings of Stockholders; No Stockholder Action By Written Consent
Our Certificate of Incorporation will provide that special meetings of our
stockholders may be called only by a majority of the Board of Directors, the
Chairman or the President. In addition, the Certificate of Incorporation will
provide that, following the closing of this offering, our stockholders may only
take actions at a duly called annual or special meeting of stockholders and may
not take action by written consent.
Advance Notice Requirements for Stockholder Proposals and Nomination of
Directors
Our By-laws will provide that stockholders seeking to bring business
before, or nominate directors at, any annual meeting of stockholders, must
provide timely notice in writing. To be timely, a stockholder's notice must be
given in writing to the Secretary of Allscripts not less than 120 days prior to
the meeting. The By-laws will also specify requirements for a stockholder's
notice to be in proper written form.
Classified Board of Directors
The Certificate of Incorporation and By-Laws will provide that the Board of
Directors is divided into three classes of directors serving staggered three-
year terms. As a result, one-third of our Board of Directors will be elected
each year. See "Management--Election of Directors."
Number of Directors; Removal; Vacancies
The By-Laws will provide that we have at least three directors, with the
exact number fixed by the Board of Directors. Vacancies on the Board of
Directors may be filled only by the affirmative vote of the remaining directors
then in office. The Certificate of Incorporation will provide that directors
may be removed only for cause and only by the holders of at least 80% of the
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be LaSalle Bank
N.A.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We will have 18,929,799 shares of common stock outstanding after this
offering, 19,979,799 shares if the underwriters' over-allotment option is
exercised in full. The 7,000,000 shares we will sell in this offering will be
freely tradable without restriction under the Securities Act by persons other
than our "affiliates" as that term is defined in Rule 144 under the Securities
Act. Approximately 1,290,370 additional shares, including approximately 51,460
shares issuable upon the cashless exercise of outstanding warrants, will be
eligible for immediate sale in the public market as of the date of this
prospectus under Rule 144(k) and approximately 469,230 additional shares,
including approximately 137,390 shares issuable upon the cashless exercise of
outstanding warrants, will be eligible for sale in the public market 90 days
after the date of this prospectus under Rule 144. Shares acquired in
transactions exempt from registration under the Securities Act are "restricted
securities" as that term is defined in Rule 144. Restricted shares may only be
resold if they are registered under the Securities Act or are sold under an
exemption from registration, like the exemption contained in Rule 144. The
following table summarizes the shares of our common stock eligible for future
sale over various time periods:
<TABLE>
<CAPTION>
Days after the Approximate shares becoming
date of this prospectus eligible for future sale(1) Comment
----------------------- --------------------------- -------
<C> <C> <S>
Upon effectiveness............. 8,290,370 Freely tradeable shares sold in this
offering and shares salable under Rule
144(k) that are not subject to 180-day
lockup.
90 days........................ 761,160 Shares salable under Rule 144 or 701
that are not subject to 180-day
lockup.
180 days....................... 9,915,210 Lockup released.
Between 181 days and 365 days.. 4,228,380 Restricted securities held for at
least 180 days but less than one year
as of the date falling 180 days after
the date of this prospectus.
</TABLE>
- --------
(1) All share numbers in this table assume the cashless exercise of all
outstanding warrants at the closing of this offering for an aggregate of
approximately 4,655,109 shares, assuming an initial public offering price
of $11.00 per share.
Our executive officers, directors, key employees and some of our
stockholders have agreed to a "lock up" at the request of the underwriters.
Under the lock up, they cannot sell or otherwise dispose of any of our common
stock in the public market for a period of 180 days after the date of this
prospectus without the written consent of Goldman, Sachs & Co. When the 180-day
lock-up period expires, approximately 8,003,480 additional shares, including
approximately 2,839,280 shares issuable upon the cashless exercise of
outstanding warrants, that are restricted securities will be eligible for sale
under Rule 144.
Currently under Rule 144, a person who has beneficially owned restricted
securities for at least one year may, subject to certain conditions, sell his
restricted securities. Generally, these persons may sell within any three-month
period a number of restricted shares that does not exceed the greater of (1) 1%
of our then outstanding common stock (189,298 shares immediately after the
offering) or (2) the average weekly trading volume of our common stock during
the four calendar weeks preceding the sale, subject to the filing of a Form 144
with respect to the sale. Sales under Rule 144 are also subject to requirements
concerning manner of sale, notice and availability of public information about
us. A person who is not deemed to have been our affiliate at any time during
the three months preceding the sale and who has beneficially owned his shares
for at least two years may sell restricted shares in the public market under
Rule 144(k) without regard to the requirements mentioned above, other than the
manner-of-sale requirement. Persons deemed to be affiliates must always sell
pursuant to Rule 144, even after expiration of the applicable holding periods.
57
<PAGE>
Shares that we have issued or that we may issue upon the exercise of
options that we have granted to consultants and employees prior to the date of
this prospectus also may be eligible for sale in the public market. Beginning
90 days after we become subject to the reporting requirements of the Securities
Exchange Act of 1934, Rule 701 under the Securities Act permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts in
reliance upon certain provisions of Rule 144. Non-affiliates may sell without
complying with the public information, holding period, volume limitations or
notice provisions of Rule 144. Affiliates may sell without complying with the
holding period provisions of Rule 144. If all of the requirements of Rule 701
are met, approximately 291,930 shares of our common stock previously issued
upon the exercise of options or issuable upon the exercise of currently
outstanding options that will then be vested will be eligible for sale
beginning 90 days after the date of this prospectus. In addition, approximately
1,911,730 shares previously issued upon the exercise of options or issuable
upon the exercise of currently outstanding options that will then be vested
will be eligible for sale upon expiration of the 180-day lock-up period.
We intend to file a registration statement on Form S-8 under the Securities
Act to register for offer and sale the common stock subject to outstanding
stock options or reserved for issuance under our Amended and Restated 1993
Stock Incentive Plan and other outstanding options. See "Management--Employee
Benefit Plans." Shares issued after the effective date of this registration
statement upon the exercise of stock options registered on the registration
statement generally will be eligible for sale in the public market, subject to
the lock-up agreements discussed above and volume and other restrictions.
In addition, certain stockholders have registration rights with respect to
9,945,547 shares of our common stock. Registration of these securities subject
to registration rights under the Securities Act would result in the shares
becoming freely tradable without restriction under the Securities Act. See
"Description of Capital Stock--Registration Rights" and "Risk Factors--Risks
Related to This Offering and Our Stock--We may have substantial sales of our
common stock after the offering."
LEGAL MATTERS
Gardner, Carton & Douglas, Chicago, Illinois, will pass upon the validity
of the common shares offered by this prospectus. Sonnenschein Nath & Rosenthal,
Chicago, Illinois, has acted as counsel to the underwriters in connection with
certain legal matters relating to the common shares offered by this prospectus.
EXPERTS
The financial statements of Allscripts as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE TO FIND MORE INFORMATION
We have filed with the SEC a registration statement under the Securities
Act with respect to the common stock offered by this prospectus. This
prospectus does not contain all of the information that is in the registration
statement. For further information with respect to us and the common stock, you
should refer to the registration statement, including the related exhibits and
schedules. The statements contained in this prospectus as to the contents of
any document filed as an exhibit are of necessity brief descriptions and are
not necessarily complete; each of these statements is qualified in its entirety
by reference to the document.
58
<PAGE>
You may read and copy this registration statement, including the exhibits,
without charge and obtain copies at prescribed rates at the Public Reference
Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at Seven World Trade Center, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, you can
obtain electronically filed documents, including registration statements,
reports and proxy statements and other information, from the SEC's Web site at:
http://www.sec.gov.
59
<PAGE>
ALLSCRIPTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1998................ F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998..................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998.................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998..................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Unaudited Interim Financial Statements
Condensed Consolidated Balance Sheet at March 31, 1999................... F-25
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1998 and March 31, 1999................................. F-27
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1999........................................... F-28
Notes to Unaudited Condensed Consolidated Financial Statements........... F-29
Unaudited Condensed Consolidated Pro Forma Financial Information......... F-31
Unaudited Condensed Consolidated Pro Forma Balance Sheet at March 31,
1999.................................................................... F-32
Unaudited Condensed Consolidated Pro Forma Statement of Operations for
the year ended December 31, 1998........................................ F-33
Unaudited Condensed Consolidated Pro Forma Statement of Operations for
the three months ended March 31, 1999................................... F-34
Notes to Unaudited Condensed Consolidated Pro Forma Financial
Information............................................................. F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Allscripts, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Allscripts, Inc. (an Illinois corporation) and Subsidiaries at December 31,
1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Allscripts' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
May 12, 1999, except for the
information in Note 22, for which
the date is June 18, 1999
F-2
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
December 31, as of
----------------------- December 31,
1997 1998 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 204,981 $ 718,008 $ 718,008
Accounts receivable, net of allowances
of $3,431,947 in 1997 and $4,522,507 in
1998 and pro forma..................... 9,580,418 9,525,084 9,525,084
Inventories, net........................ 2,556,926 2,905,484 2,905,484
Prepaid and other assets................ 382,370 229,283 229,283
----------- ----------- -----------
Total current assets.................. 12,724,695 13,377,859 13,377,859
Fixed assets, net......................... 1,532,822 1,783,996 1,783,996
Intangible assets, net.................... 4,577,740 3,701,835 3,701,835
Debt issuance costs....................... 551,631 56,594 56,594
----------- ----------- -----------
Total assets.......................... $19,386,888 $18,920,284 $18,920,284
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
Pro forma
December 31, as of
-------------------------- December 31,
1997 1998 1998
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
LIABILITIES
Current liabilities:
Note payable........................ $ 2,500,000 $ 4,000,000 $ 4,000,000
Current portion of long-term debt... 4,692,932 -- --
Accounts payable.................... 6,698,770 7,830,158 7,830,158
Accrued expenses.................... 1,856,019 1,276,849 1,276,849
------------ ------------ ------------
Total current liabilities......... 15,747,721 13,107,007 13,107,007
Long-term debt, net of current
portion............................. 11,275,680 58,774 58,774
------------ ------------ ------------
Total liabilities................. 27,023,401 13,165,781 13,165,781
------------ ------------ ------------
Redeemable preferred shares:
Series I, cumulative, $1.00 par
value, 1,339,241 shares
authorized, issued and
outstanding, including $521,053 of
cumulative dividends; liquidation
value of $8,654,175................ -- 8,545,842 8,545,842
Series J, cumulative, $1.00 par
value, 1,812,903 shares
authorized, 1,803,838 issued and
outstanding, including $701,812 of
cumulative dividends; liquidation
value of $11,656,388............... -- 12,358,200 12,358,200
Series H, cumulative, $1.00 par
value, 1,361,775 shares
authorized, issued and
outstanding, including $2,303,430
and $3,007,430 of cumulative
dividends in 1997 and 1998,
respectively; liquidation value of
$8,800,000......................... 10,719,480 11,642,880 11,642,880
------------ ------------ ------------
10,719,480 32,546,922 32,546,922
------------ ------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred shares:
Series A, $1.00 par value, 1,050,000
shares authorized, issued and
outstanding, liquidation value of
$1,050,000, convertible to common
shares; no shares issued and
outstanding, pro forma.............. 1,050,000 1,050,000 --
Series B, $1.00 par value, 533,333
shares authorized, issued and
outstanding, liquidation value of
$2,000,000, convertible to common
shares; no shares issued and
outstanding, pro forma.............. 533,333 533,333 --
Series C, $1.00 par value, 2,187,501
shares authorized, issued and
outstanding, liquidation value of
$7,000,003, convertible to common
shares; no shares issued and
outstanding, pro forma.............. 2,187,501 2,187,501 --
Series D, $1.00 par value, 1,833,334
shares authorized, issued and
outstanding, liquidation value of
$8,250,003, convertible to common
shares; no shares issued and
outstanding, pro forma.............. 1,833,334 1,833,334 --
Series F, $1.00 par value, 2,492,781
shares authorized, issued and
outstanding, liquidation value
$3,115,976, convertible to common
shares; no shares issued and
outstanding, pro forma.............. 2,492,781 2,492,781 --
Series G, $1.00 par value, 621,819
shares authorized, issued and
outstanding, liquidation value
$2,798,186, convertible to common
shares; no shares issued and
outstanding, pro forma.............. 621,819 621,819 --
------------ ------------ ------------
8,718,768 8,718,768 --
Common shares:
$0.01 par value, 125,000,000 shares
authorized, 3,425,052 and
8,358,654 shares issued and
outstanding in 1997 and 1998,
respectively; 75,000,000
authorized, 11,356,154 shares
issued and outstanding, pro
forma.............................. 34,252 83,587 113,562
Treasury stock at cost; 34,465 common
shares, actual and pro forma........ (67,817) (67,817) (67,817)
Unearned compensation................ -- (230,417) (230,417)
Additional paid-in capital........... 16,208,465 15,467,430 24,376,410
Accumulated deficit.................. (43,249,661) (50,763,970) (50,984,157)
------------ ------------ ------------
Total shareholders' equity
(deficit)........................ (18,355,993) (26,792,419) (26,792,419)
------------ ------------ ------------
Total liabilities, redeemable
preferred shares and
shareholders' equity (deficit)... $ 19,386,888 $ 18,920,284 $ 18,920,284
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Revenue............................... $33,461,863 $ 30,593,032 $23,681,610
Cost of revenue....................... 23,330,282 21,021,946 17,146,182
----------- ------------ -----------
Gross profit...................... 10,131,581 9,571,086 6,535,428
Selling, general and administrative
expenses............................. 11,657,993 13,964,555 12,831,357
Amortization of intangibles........... 529,360 408,736 371,905
Other operating expenses.............. 1,034,169 2,567,652 430,345
----------- ------------ -----------
Loss from operations.............. (3,089,941) (7,369,857) (7,098,179)
Interest expense...................... (1,301,131) (1,621,214) (595,699)
Other expense......................... (38,956) -- --
----------- ------------ -----------
Loss from continuing operations....... (4,430,028) (8,991,071) (7,693,878)
Income (loss) from discontinued
operations........................... 1,489,000 (1,808,000) 970,000
----------- ------------ -----------
Loss before extraordinary item........ (2,941,028) (10,799,071) (6,723,878)
Extraordinary loss from early
extinguishment of debt............... -- -- (790,431)
----------- ------------ -----------
Net loss.............................. (2,941,028) (10,799,071) (7,514,309)
Accretion of mandatory redemption
value of preferred shares and accrued
dividends on preferred shares........ (923,400) (923,399) (2,415,143)
----------- ------------ -----------
Net loss attributable to common
shareholders......................... $(3,864,428) $(11,722,470) $(9,929,452)
=========== ============ ===========
Per share data--basic and diluted:
Loss from continuing operations...... $ (1.87) $ (3.35) $ (1.66)
Discontinued operations.............. 0.52 (0.61) 0.16
Extraordinary loss................... -- -- (0.13)
----------- ------------ -----------
Net loss............................. $ (1.35) $ (3.96) $ (1.63)
=========== ============ ===========
Per share data--pro forma basic and
diluted (unaudited):
Loss from continuing operations...... $ (1.14)
Discontinued operations.............. 0.11
Extraordinary loss................... (0.09)
-----------
Net loss............................. $ (1.12)
-----------
Weighted average shares of common
stock outstanding used in computing
basic and diluted loss per share..... 2,853,960 2,955,982 6,075,803
=========== ============ ===========
Weighted average shares of common
stock outstanding used in computing
pro forma basic and diluted loss per
share (unaudited).................... 9,073,303
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Notes
Additional Receivable
Preferred Common Paid-In Unearned from Sale Treasury Accumulated
Shares Shares Capital Compensation of Shares Stock Deficit
-------------------- ----------------- ----------- ------------ ---------- ----------------- ------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995............. 8,718,768 $8,718,768 2,866,299 $28,663 $17,970,544 -- $(35,000) (13,342) $(32,020) $(29,509,562)
Issuance of
1,616 common
shares under
option
agreements...... 1,616 16 2,409
Exchange of note
receivable from
shareholder for
6,837 common
shares.......... 35,000 (6,837) (14,367)
Cumulative
dividends in
arrears on
Series H
redeemable
preferred
shares.......... (704,000)
Accretion of
mandatory
redemption value
of preferred
shares.......... (219,400)
Net loss for the
year ended
December 31,
1996............ (2,941,028)
--------- ---------- --------- ------- ----------- --------- -------- ------- -------- ------------
Balance at
December 31,
1996............. 8,718,768 8,718,768 2,867,915 28,679 17,049,553 -- (20,179) (46,387) (32,450,590)
Issuance of
37,807 common
shares under
option
agreements...... 37,807 378 56,333 (14,286) (21,430)
Issuance of
519,530 common
shares to HBO &
Co. for
TouchScript
software........ 519,330 5,195 25,978
Cumulative
dividends in
arrears on
Series H
redeemable
preferred
shares.......... (704,000)
Accretion of
mandatory
redemption value
of preferred
shares.......... (219,399)
Net loss for the
year ended
December 31,
1997............ (10,799,071)
--------- ---------- --------- ------- ----------- --------- -------- ------- -------- ------------
Balance at
December 31,
1997............. 8,718,768 8,718,768 3,425,052 34,252 16,208,465 -- (34,465) (67,817) (43,249,661)
Issuance of
4,597,070 common
shares in Series
I Unit
Offering........ 4,597,070 45,970 963,120
Issuance of
336,532 common
shares under
option
agreements...... 336,532 3,365 53,956
Issuance of
1,326,661
warrants in
connection with
exchange of
subordinated
convertible
debentures for
Series J
redeemable
preferred
shares.......... 238,800
Unearned
compensation in
connection with
issuance of
1,985,165
options......... 406,671 $(406,671)
Compensation
expense......... 176,254
Cumulative
dividends in
arrears on
Series H
redeemable
preferred
shares.......... (704,000)
Cumulative
dividends in
arrears on
Series I
redeemable
preferred
shares.......... (521,053)
Cumulative
dividends in
arrears on
Series J
redeemable
preferred
shares.......... (701,812)
Accretion of
mandatory
redemption value
of preferred
shares.......... (323,278)
Issuance costs
of Series I Unit
Offering........ (153,439)
Net loss for the
year ended
December 31,
1998............ (7,514,309)
--------- ---------- --------- ------- ----------- --------- -------- ------- -------- ------------
Balance at
December 31,
1998............. 8,718,768 $8,718,768 8,358,654 $83,587 $15,467,430 $(230,417) $ -- (34,465) $(67,817) $(50,763,970)
========= ========== ========= ======= =========== ========= ======== ======= ======== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(2,941,028) $(10,799,071) $(7,514,309)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 1,784,149 1,694,950 1,530,965
Provision for losses on accounts
receivable........................ 30,524 666,829 1,202,949
Exchange of note receivable for
common shares..................... 20,633 -- --
Write-off of intangible assets..... 196,865 5,621,994 --
Extraordinary loss................. -- -- 790,431
Compensation expense............... -- -- 176,254
Exchange of debentures in
satisfaction of accrued interest.. 400,000 875,680 439,281
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable...................... (3,614,163) (108,088) (1,147,615)
(Increase) decrease in
inventories..................... (193,807) 246,965 (348,558)
(Increase) decrease in other
assets.......................... (56,413) (22,940) 154,347
Increase in accounts payable..... 759,879 265,609 1,131,388
(Decrease) increase in accrued
expenses........................ 296,238 (113,451) (580,230)
----------- ------------ -----------
Net cash used in operating
activities.................... (3,317,123) (1,671,523) (4,165,097)
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures................. (287,581) (1,191,941) (884,207)
Disposal of property, plant, and
equipment........................... -- 39,598 --
Acquisition of TouchScript software.. -- (49,971) --
----------- ------------ -----------
Net cash used in investing
activities.................... (287,581) (1,202,314) (884,207)
----------- ------------ -----------
Cash flows from financing activities:
Borrowings under bank agreements..... 370,000 2,500,000 4,000,000
Payments under bank agreements....... (5,070,000) -- (2,500,000)
Proceeds from issuance of
subordinated convertible
debentures.......................... 10,000,000 -- --
Proceeds from Series I Unit
Offering............................ -- -- 8,930,000
Payments under long-term
obligations......................... (825,931) (101,146) --
Repayment of term loan............... -- -- (4,692,932)
Payments on capital lease............ -- (20,107) --
Proceeds from exercise of common
share options....................... 2,425 56,712 57,321
Treasury stock purchases............. -- (21,430) --
Share and debt issue costs........... (880,414) -- (232,058)
----------- ------------ -----------
Net cash provided by financing
activities.................... 3,596,080 2,414,029 5,562,331
----------- ------------ -----------
Net increase (decrease) in cash........ (8,624) (459,808) 513,027
Cash, beginning of year................ 673,413 664,789 204,981
----------- ------------ -----------
Cash, end of year...................... $ 664,789 $ 204,981 $ 718,008
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Allscripts, Inc. (an Illinois corporation) and its wholly owned
subsidiaries, Allscripts Pharmacy Centers, Inc., Prescription Management
Company, Inc., and Physician Dispensing Systems, Inc. (altogether referred to
as "Allscripts"), provide physicians with Internet and client/server medication
management solutions designed to improve the quality and cost effectiveness of
pharmaceutical healthcare. Allscripts grants uncollateralized credit to its
customers. Allscripts operates in one industry segment. As its product
offerings evolve, the manners in which its activities are internally reported
and its decisions are made could change. Allscripts will continually evaluate
its determination of operating segments. The company changed its name to
Allscripts, Inc. on October 20, 1997.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Allscripts,
Inc. and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
Revenue Recognition
Through December 1998, Allscripts generated substantially all of its
revenue from the sale of medications for dispensing at the point of care.
Revenue is recognized upon shipment of the products. Revenue for services is
recognized when the related service is performed. Revenue for software license
fees is recognized after the software has been installed, training has been
completed and the customer begins utilizing the software. No revenue is
recognized where it is refundable or subject to the performance of future
obligations.
Manufacturer Rebates
Rebates from suppliers are recorded as a reduction of cost of revenue and
are recognized on an estimated basis upon shipment of the product to customers.
The difference between the amount estimated and the amount actually received is
reflected prospectively as a change of estimate. These revisions have not been
material.
Inventories
Inventories, which consist primarily of finished goods, are carried at the
lower of cost (specific identification) or market.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed on the straight-
line method over the estimated useful lives of the related assets, which range
from 2 to 7 years. Upon asset retirement or other disposition, cost and the
related allowance for depreciation are removed from the accounts, and gain or
loss is included in the consolidated statements of operations. Amounts expended
for repairs and maintenance are charged to operations as incurred.
Intangible Assets
Intangible assets, which are stated at cost, consist of software rights,
non-compete agreements, customer lists and goodwill. Allscripts' policy is to
amortize intangible assets using the straight-line method
F-8
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
over the remaining estimated economic life of those assets including the period
being reported on. Allscripts analyzes the value of its recorded intangible
assets on an ongoing basis to determine that the recorded amounts are
reasonable and are not impaired. The analysis includes a review of undiscounted
future cash flows for each group of acquired customers based on environmental
factors, customer retention, cash flow projections and other factors Allscripts
believes are relevant to determine if any impairment of the asset has occurred.
If impairment is noted, then future cash flows are discounted and the amount of
impairment is then measured and a writedown is recorded. If necessary, the
remaining amortization period is adjusted accordingly.
The average amortization periods for intangible assets for the years ended
December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Capitalized software........................... 3 years 3 years 3 years
Non-compete agreements......................... 5 years 5 years 5 years
Customer lists................................. 5 years 2 years 2 years
Goodwill....................................... 15 years 5 years 5 years
</TABLE>
Debt Issuance Costs
Costs attributable to the issuance of significant debt are deferred and
amortized on a straight-line basis over the term of the related debt.
Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year end
and the reported amounts of revenues and expenses during the year. Actual
results could differ from these estimates.
Concentration of Credit Risk
Financial instruments that potentially subject Allscripts to a
concentration of credit risk consist of cash and trade receivables.
Allscripts sells its products and services to healthcare providers and
employer funded benefit plans. Credit risk with respect to trade receivables is
generally diversified due to the large number of customers and their dispersion
across the entire United States. Trade receivables with employer funded benefit
plans are further diversified across many different industries. To reduce
credit risk, Allscripts performs ongoing credit evaluations of its customers
and their payment histories. In general, Allscripts does not require collateral
from its customers, but it does enter into advance deposit, security or
guarantee agreements if appropriate.
Allscripts maintains its cash balances with one major commercial bank.
Income Taxes
Deferred tax assets or liabilities are established for temporary
differences between financial and tax reporting bases and are subsequently
adjusted to reflect changes in tax rates expected to be in effect
F-9
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
when the temporary differences reverse. A valuation allowance is established
for any deferred tax asset for which realization is not likely.
Stock Based Compensation
Effective December 31, 1996, Allscripts adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation." As
provided by SFAS 123, Allscripts has elected to continue to account for its
stock based compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense has been recognized to the extent of employee
or director services rendered based on the intrinsic value of compensatory
options or shares granted under the plans. Allscripts has adopted the
disclosure provisions required by SFAS 123.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts
receivable and accounts payable approximate their fair values due to the short
term nature of these financial instruments. The fair values of the note payable
to bank and the long term debt are estimated based on current interest rates
available to Allscripts for debt instruments with similar terms, degrees of
risk and remaining maturities. The carrying values of the note payable to bank
and the long term debt approximates their fair values.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements and is
effective for fiscal years beginning after December 15, 1997. To date,
Allscripts has not had any transactions that are required to be reported as
comprehensive income.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FAS 128), for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted average number of shares of common stock
outstanding during the period. Allscripts has excluded all outstanding
convertible preferred stock, which is convertible into 2,977,483 shares of
common stock, all outstanding warrants to purchase 4,892,136 shares of common
stock and all outstanding options to purchase 2,697,123 shares of common stock
from the calculation of diluted loss per share because all such securities are
antidilutive for all periods presented.
Software and Development Costs
Allscripts capitalizes purchased software that is ready for service and
software development costs incurred from the time technological feasibility of
the software is established until the software is ready for use. Research and
development costs and other computer software maintenance costs related to
software development are expensed as incurred. No software development costs
related to the TouchScript product have been capitalized to date; such costs
will be capitalized in the future after market acceptance has been established.
The costs of purchased software are amortized using the straight-line method
over three years.
F-10
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The carrying value of a software and development asset is regularly
reviewed by Allscripts, and a loss is recognized when the net realizable value
falls below the unamortized cost.
Pro Forma Consolidated Balance Sheet and Net Loss per Share (unaudited)
If the offering contemplated by this prospectus is consummated, all of the
outstanding shares of Allscripts' convertible preferred stock will
automatically be converted into 2,977,483 shares of common stock.
Additionally, 20,017 shares of common stock are issuable upon the closing of
the offering pursuant to a contingent share payment obligation. Allscripts has
presented a pro forma balance sheet as if this conversion and contingent share
issuance happened on December 31, 1998 and the pro forma net loss per share
information for the year ended December 31, 1998 as if these transactions
occurred at the beginning of 1998.
The pro forma consolidated balance sheet also reflects Allscripts'
reincorporation in Delaware upon the closing of the offering.
3. Other Operating Expenses
Other operating expenses consist of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- --------
<S> <C> <C> <C>
Management reorganization and shutdown costs.... $ 867,502 $ 239,652 $430,345
Writeoff of software intangible................. 166,667 -- --
Writedown of acquisition intangibles............ -- 2,328,000 --
---------- ---------- --------
$1,034,169 $2,567,652 $430,345
========== ========== ========
</TABLE>
The management reorganization and shutdown costs relate to severance costs
associated with reductions in force and other severance arrangements and, in
1996, include the costs associated with the shutdown of Allscripts'
Pennsylvania sales office. The portion of the charges outlined above that
relates to management reorganization equals $573,727 in fiscal 1996, $239,652
in fiscal 1997 and $430,345 in fiscal 1998. The number and nature of employees
affected in each year is as follows: 1996, three administrative and one sales,
1997, seven administrative and three sales and 1998, ten administrative and
nine sales. As of March 31, 1999, all payments provided for had been made.
A summary of management reorganization and shutdown costs and related
payments is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Beginning balance.............................. $ 336,500 $ 285,515 $ 180,688
Expense........................................ 867,502 239,652 430,345
Adjustment to prior period..................... -- -- --
Payments....................................... (918,487) (344,479) (337,967)
--------- --------- ---------
Ending balance............................... $ 285,515 $ 180,688 $ 273,066
========= ========= =========
</TABLE>
Allscripts determined that an impairment of customer lists and goodwill
acquired in certain point-of-care-dispensing acquisitions occurred in 1997.
The impairment was triggered by the loss of customers and the reduced level of
operating profit being generated by the acquired customers. The impairment
analysis included a review of undiscounted future cash flows for each group of
acquired customers to determine if any impairment of the asset had occurred.
As a result, Allscripts has made a provision in 1997 of $2,328,000,
representing the estimated excess of the carrying value of the intangible
assets over the
F-11
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
discounted future cash flows. In addition, Allscripts reduced the remaining
amortization period to six and three years for goodwill and customer lists,
respectively, related to its mail order pharmacy business and five and two
years for goodwill and customer lists, respectively, related to its point-of-
care site dispensing business. The previous amortization periods had been 20
and 10 years for intangibles arising from those acquisitions. In testing for
impairment, Allscripts used the held-for-use model under SFAS 121.
4. Other Expense
Other expense consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Loss on note receivable from shareholder
exchanged for common shares................... $38,956 $ -- $ --
======= ======= =======
</TABLE>
5. Fixed Assets
Fixed assets as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Office furniture and equipment..................... $3,214,670 $3,845,120
Production and warehouse equipment................. 2,039,390 2,170,198
Leasehold improvements............................. 473,086 584,139
Construction in progress........................... 27,317 39,213
---------- ----------
5,754,463 6,638,670
Less accumulated depreciation...................... 4,221,641 4,854,674
---------- ----------
$1,532,822 $1,783,996
========== ==========
</TABLE>
Included in fixed assets are $2,540,856 and $3,273,553 as of December 31,
1997 and 1998, respectively, related to revenue producing assets that are fully
depreciated.
Depreciation expense from continuing operations was approximately $558,000
in 1996, $522,000 in 1997 and $563,000 in 1998.
6. Intangible Assets
Intangible assets as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Capitalized software............................. $ 81,145 $ 81,145
Non-compete agreements........................... 515,000 515,000
Customer lists................................... 4,263,282 4,263,282
Goodwill......................................... 15,984,192 15,984,192
----------- -----------
20,843,619 20,843,619
Less accumulated amortization.................... 16,265,879 17,141,784
----------- -----------
$ 4,577,740 $ 3,701,835
=========== ===========
</TABLE>
Accumulated amortization includes writedowns in excess of normal
amortization.
F-12
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Accrued Expenses
Accrued expenses as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Accrued employee compensation benefits and
payroll taxes................................... $ 580,839 $ 201,060
Accrued vacation pay............................. 422,011 549,686
Accrued severance................................ 180,688 273,066
Accrued commissions.............................. 346,591 41,629
Accrued interest................................. 159,739 3,526
Accrued--other................................... 166,151 207,882
---------- ----------
$1,856,019 $1,276,849
========== ==========
</TABLE>
8. Lease Commitments
Allscripts conducts its operations from leased premises and with equipment
under several operating leases. Total rent expense from continuing operations
was approximately $494,000, $491,000 and $599,000 for the years ended December
31, 1996, 1997 and 1998, respectively.
Future minimum rental payments for the next five years are as follows:
<TABLE>
<CAPTION>
Year Ending
December
31,
-----------
<S> <C>
1999.......................................................... $ 569,275
2000.......................................................... 546,104
2001.......................................................... 551,250
2002.......................................................... 540,491
2003 and thereafter........................................... 804,714
----------
Total minimum lease payments.................................. $3,011,834
==========
</TABLE>
9. Notes Payable
Notes payable as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Borrowings under revolving credit facility with
commercial bank................................. $2,500,000 $4,000,000
========== ==========
</TABLE>
During 1997 and up to April 16, 1998, Allscripts maintained a credit
arrangement with a commercial bank consisting of two components, a revolving
credit facility and a term loan. The revolving credit facility permitted
borrowings up to $10,000,000, limited by certain eligible working capital
requirements. At December 31, 1997, approximately $3,400,000 of borrowing
capacity was available. Interest was at prime plus 0.5% (9.00% at December 31,
1997). Borrowings under the revolving credit facility were collateralized by
accounts receivable, inventory, equipment and other assets. Allscripts was
required to maintain a compensating balance of $350,000 under the revolving
credit facility.
On April 16, 1998, Allscripts signed a new revolving credit agreement with
its commercial bank. As amended, the revolving credit facility permits
borrowings up to $10,000,000, limited by certain eligible working capital
requirements. At December 31, 1998, approximately $4,000,000 of borrowing
capacity was
F-13
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
available. Interest is at prime plus 0.5% (8.5% at December 31, 1998).
Borrowings under the revolving credit facility are collateralized by accounts
receivable, inventory, equipment and other assets. The revolving credit
facility expires on April 16, 2000.
The term loan, which was guaranteed by a certain preferred shareholder and
which was part of the credit arrangement with a commercial bank that expired on
April 30, 1998, was paid off in April 1998 from the proceeds of the Series I
Unit Offering.
Under the revolving credit agreement, Allscripts is required to maintain
certain financial ratios, including minimum net working capital, minimum EBITDA
and minimum capital funds. The agreement also prohibits the payment of
dividends. At December 31, 1998, Allscripts was in violation of certain
financial covenants for which it received a waiver from the bank.
10. Long-Term Obligations
On April 30, 1996, Allscripts completed a $10,000,000 financing in the form
of 8.0% convertible subordinated debentures due April 30, 2001. Interest on the
debentures is payable semiannually. The debentures can be converted into
2,683,152 common shares of Allscripts at a conversion price equal to $4.2024.
The debentures are convertible at the option of the holder. Under the terms of
the debenture agreements, Allscripts' ability to pay dividends is restricted
under certain circumstances.
In conjunction with the issuance of the Series I Preferred and common stock
(see Note 12), the majority of the outstanding subordinated convertible
debentures were exchanged for 1,803,838 shares of Series J Preferred (see Note
13). In connection with this exchange, Allscripts also issued to the Series J
Preferred shareholders 1,326,661 detachable warrants to purchase shares of
common stock of Allscripts for $0.06 per share. The warrants will expire five
years from the date of closing of the sale of Series I Preferred (see Note 12).
An extraordinary loss of $790,431 was recorded in the consolidated
statement of operations for the year ended December 31, 1998, consisting of the
writeoff of deferred financing costs related to Allscripts' convertible
subordinated debentures and the value of the warrants issued to the Series J
Preferred shareholders.
Long-term obligations as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -------
<S> <C> <C>
Term loan, payable to a commercial bank, principal due
April 30, 1998; interest at prime; interest payable
monthly, collateralized by certificates of deposit or
letters of credit of a certain related party preferred
shareholder (Allstate Insurance Company).................. $ 4,692,932 $ --
Convertible subordinated debentures issued April 30, 1996
at par in the amount of $10,000,000; due April 30, 2001;
interest at 8.0% payable semiannually on April 30 and
October 31, potentially increasing 0.5% on each such
interest record date to a maximum of 1.5%; convertible
into 2,683,152 common shares at December 31, 1997 and
13,985 common shares at December 31, 1998 at $4.2024...... 11,275,680 58,774
----------- -------
15,968,612 58,774
Less current portion....................................... 4,692,932 --
----------- -------
$11,275,680 $58,774
=========== =======
</TABLE>
F-14
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. Income Taxes
Under the provisions of SFAS No. 109, "Accounting for Income Taxes,"
Allscripts recognizes a current tax asset or liability for current taxes
payable or refundable and a deferred tax asset or liability for the estimated
future tax effects of temporary differences between the carrying value of
assets and liabilities for financial reporting and their tax basis, excluding
goodwill, and carryforwards to the extent that these items are realizable. The
consolidated balance sheet includes the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
--------------------------------------- ---------------------------------------
Current Noncurrent Total Current Noncurrent Total
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Deferred income tax..... $ 2,117,000 $ 11,471,000 $ 13,588,000 $ 2,555,000 $ 12,729,000 $ 15,284,000
Valuation allowance..... (2,117,000) (11,471,000) (13,588,000) (2,555,000) (12,729,000) (15,284,000)
----------- ------------ ------------ ----------- ------------ ------------
$ -- $ -- $ -- $ -- $ -- $ --
=========== ============ ============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------------- --------------------------
Temporary Temporary
Difference Tax Effect Difference Tax Effect
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Provision for doubtful
accounts............... $ 3,432,000 $ 1,425,000 $ 4,522,507 $ 1,877,000
Acquisition costs....... 873,000 366,000 873,000 362,000
Vacation accrual........ 422,000 175,000 523,000 217,000
Bonus accrual........... 30,000 12,000 30,000 12,000
Severance reserve....... 77,000 32,000 -- --
Inventory reserve....... 235,000 98,000 154,000 64,000
Inventory
capitalization......... 24,000 10,000 56,000 23,000
Property, plant and
equipment.............. 675,000 280,000 138,000 57,000
Net operating loss...... 26,965,000 11,190,000 30,534,000 12,672,000
------------ ------------ ------------ ------------
Subtotal............ 32,733,000 13,588,000 36,830,507 15,284,000
Less: valuation
allowance.............. (32,733,000) (13,588,000) (36,830,507) (15,284,000)
------------ ------------ ------------ ------------
Total............... $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
At December 31, 1997 and 1998, Allscripts has operating loss carryforwards
available for federal income tax reporting purposes of approximately
$26,965,000 and $30,534,000, respectively. The operating loss carryforwards
expire in 2002 through 2013. Allscripts' ability to utilize these operating
loss carryforwards to offset future taxable income is dependent on a variety of
factors, including possible limitations on usage pursuant to Internal Revenue
Code Section (IRC) 382. IRC 382 imposes an annual limitation on the future
utilization of operating loss carryforwards due to changes in ownership
resulting from the issuance of common shares, stock options, warrants and
convertible preferred shares.
No provision for income taxes has been made due to Allscripts' operating
losses.
12. Redeemable Preferred Shares and Shareholders' Equity
Redeemable Preferred Shares
The Series H Preferred shares are voting, nonparticipating and have a
liquidation preference upon dissolution of Allscripts of $6.462 per share plus
an amount equal to all unpaid dividends accrued thereon.
F-15
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Series H Preferred shares are senior to Series A, Series B, Series C,
Series D, Series F and Series G Preferred shares with respect to the
liquidation preference.
The shares are entitled to cumulative, quarterly dividends of 8.0% accruing
from the date of issuance and payable beginning September 15, 1998 and then
payable quarterly thereafter. Mandatory redemption of shares (at $6.462 per
share) in the proportion of 10%, 10%, 10%, and 70% of the total number of
shares originally issued was initially scheduled to begin on September 15, 1998
and occur annually thereafter through 2001, respectively.
In connection with the convertible subordinated debenture offering
described in Note 10, the terms of the Series H Preferred were amended.
Pursuant to such amendment, on September 15, 1998, Allscripts was required to
begin paying dividends quarterly. Allscripts was required to redeem shares of
Series H Preferred with a redemption value of $6.16 million and all accrued
dividends thereon on September 15, 2001.
In conjunction with the issuance of $8,930,000 of Series I Preferred on
April 16, 1998, the terms of the Series H Preferred were amended to extend the
maturity date five years from the closing of the sale of the Series I
Preferred. Allscripts will be required to redeem shares of Series H Preferred
equal to $8,800,000 plus all accrued dividends ($3,007,430 at December 31, 1998
or $2.21 per share) five years from the closing of the sale of Series I
Preferred. In consideration of the change in terms therein, Allscripts issued
916,657 warrants to purchase shares of common stock of Allscripts for $0.06 per
share to the holders of Series H Preferred. The warrants will expire five years
from the date of the closing of the sale of Series I Preferred.
On April 16, 1998, Allscripts effected the private placement of Series I
Preferred and common stock of Allscripts for $8,930,000. The common stock
component, 4,597,070 shares, represented 24.4% of Allscripts' common stock at
April 16, 1998, assuming exercise of all options and warrants and the
conversion of all convertible preferred stock into common stock. Based upon an
independent appraisal, $1,009,000 was allocated to the value of the common
stock issued in the Series I Unit Offering. The difference, $733,265, between
the amount initially recorded for the redeemable preferred stock and its
redemption value will be accreted over the life of the Series I Preferred
shares such that the Series I Preferred shares will be reflected at redemption
value at the date of redemption. The Series I Preferred shares are voting and
have a liquidation preference upon dissolution of Allscripts of $6.462 per
share plus an amount equal to all unpaid dividends accrued thereon. The Series
I Preferred shares are in parity with the Series J Preferred shares and senior
to Series A, Series B, Series C, Series D, Series F, Series G and Series H
Preferred shares with respect to liquidation preference.
A cumulative dividend on the Series I Preferred accrues at a rate of 8.5%
per annum. The Series I Preferred are to be redeemed at $8,654,175 plus any
accrued but unpaid dividends ($521,053 at December 31, 1998 or $0.39 per
share), upon a qualified initial public offering, but no later than five years
from the issuance date of the Series I Preferred. A qualified initial public
offering is defined as a firm commitment public offering with a per share price
of at least $4.80 and in which Allscripts receives at least $20,000,000 in net
proceeds.
Accrued dividends are payable only: (a) when declared by the Board, (b)
upon the liquidation, dissolution or winding up of Allscripts, (c) upon a
qualified initial public offering, or (d) upon a redemption event as defined
above.
As outlined above and in Note 10, the issuance of the Series I Preferred
securities required amendments to the terms of the Series H and an exchange of
the Subordinated Convertible debentures, among other things.
F-16
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In conjunction with the issuance of the Series I Preferred and common
stock, all of the outstanding subordinated convertible debentures other than
debentures in the aggregate principal amount of $56,378 were exchanged for
1,803,838 shares of Series J Preferred. The Series J Preferred shares are
voting and have a liquidation preference upon dissolution of Allscripts of
$6.462 per share plus an amount equal to all unpaid dividends accrued thereon.
A cumulative dividend on the Series J Preferred accrues at a rate of 8.5%
per annum. The Series J Preferred Shares are to be redeemed at $11,656,388 plus
accrued dividends ($701,812 at December 31, 1998 or $0.39 per share) no later
than April 16, 2003. The terms for payment of accrued dividends are similar to
those for the Series I Preferred shares described above.
Preferred Shares
The Series A, Series B, Series C, Series D, Series F and Series G Preferred
shares are voting, nonparticipating, convertible, and have a liquidation
preference upon dissolution of Allscripts equal to $1.00, $3.75, $3.20, $4.50,
$1.25 and $4.50 per share, respectively. The Series G Preferred shares are
senior to the Series A, Series B, Series C, Series D and Series F Preferred
shares in respect to the liquidation preference. The Series C, Series D and
Series F Preferred shares are senior to the Series A and Series B Preferred
shares in respect to the liquidation preference. These preferred shareholders
have the option to convert their shares into common shares at prescribed rates.
Automatic conversion occurs upon the closing of a qualified initial public
offering, as defined. At December 31, 1998, Allscripts had reserved 2,977,483
common shares for issuance upon conversion of all outstanding convertible
preferred shares.
Warrants
Simultaneous with the Series H Unit Offering, Allscripts issued warrants to
purchase 156,428 shares of Allscripts' common shares for $7.50 per share to a
shareholder in exchange for the continuing guaranty of a term loan with
Allscripts' principal bank. The warrants expire in September 1999. Because the
exercise price of the warrants exceeded the per share value implied by the
Series H Unit Offering, no value was ascribed to the warrants.
In conjunction with the 1996 convertible subordinated debenture offering,
the term loan guaranteed by a shareholder was amended to extend the maturity
date to April 30, 1998. In exchange for extending its guaranty of such term
debt, Allscripts issued warrants to purchase an aggregate of 279,181 common
shares with a strike price of $4.2024. The warrants expire April 30, 2001.
Because the exercise price of the warrants exceeded the per share value implied
by the convertible subordinated debenture offering, no value was ascribed to
the warrants.
As a condition to the Series I Unit Offering, Allscripts amended the
maturity date of the Series H Preferred shares and exchanged the subordinated
convertible debentures for shares of Series J Preferred. In exchange for these
concessions, Allscripts issued detachable warrants to the holders of Series H
Preferred shares and holders of Series J Preferred shares in the aggregate
amounts of 916,657 and 1,326,661 shares of common stock, respectively. Based
upon an independent appraisal, $165,000 was allocated to the warrants issued to
the Series H Preferred shareholders, and the net loss attributable to the
common shareholders in 1998 was increased by this amount. Based upon an
independent appraisal, $238,800 was assigned to the value of the warrants
issued to the Series J Preferred shareholders. The warrants carry a strike
price of $0.06 and expire in April 2003.
As part of the Series H Unit Offering, Allscripts issued warrants to
purchase 2,269,633 shares of the common stock of Allscripts for $0.06 per
share. These warrants are on substantially the same terms as the above warrant
issuances. The warrants expire in September 1999. Based upon an independent
F-17
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
outside appraisal, Allscripts has allocated value from the Series H Unit
Offering of $1,097,000 to these warrants. This amount has been recorded as
additional paid-in capital and as a reduction in the initial carrying value of
the Series H Preferred shares. The carrying amount of the Series H preferred
shares is being periodically adjusted to their mandatory redemption value.
All of the above warrants may be exercised with payment of cash or the
surrender of additional warrants, such warrants to be valued by the excess of
fair market value of a common share on the day of exercise over the warrant
purchase price. In addition, the warrants may be adjusted in certain
circumstances in the event of dilutive financings, as defined.
At December 31, 1998, all outstanding warrants were fully vested and
exercisable, and Allscripts has reserved 4,892,136 common shares for issuance
upon the exercise of warrants.
Stock Option Plans
Allscripts has established several stock option plans under which officers,
employees, directors, consultants or agents are eligible to receive incentive
stock or nonqualified options to purchase shares of Allscripts' common shares.
In November 1993, Allscripts adopted the 1993 Stock Incentive Plan and
established the number of shares initially issuable under the plan at 150,000
shares. In addition, the several existing plans were amended to terminate
future grants under those plans and to provide for the transfer of shares
authorized for grant but not granted to the 1993 Stock Incentive Plan. The
exercise price for shares under these plans is determined by Allscripts' Board
of Directors at the date of grant. All options must be exercised within ten
years of the date of grant. The plans provide for exercise of options by
payment of cash, surrender of common shares or surrender of options. Options
vest on various schedules, primarily over three and four year periods from the
date of grant, and in certain circumstances upon a change in control. In
September 1994, the 1993 Stock Incentive Plan was amended to provide for
1,077,217 additional common shares to be issuable pursuant thereto. In December
1995, the 1993 Stock Incentive Plan was amended to provide for 578,331
additional common shares to be issued pursuant thereto. In July and September
1997, the 1993 Stock Incentive Plan was amended to provide for 684,151 and
500,000 additional common shares to be issued pursuant thereto. At December 31,
1998, options to purchase 2,905,258 common shares were authorized under those
plans, and options with respect to 1,434,122 shares were exercisable under
these plans.
In addition, in November 1993, Allscripts adopted the 1993 Amended and
Restated Eligible Directors Stock Option Plan and established the number of
shares issuable under the plan at 33,333 shares. The plan provides for
nonqualified option grants to eligible directors, as defined, of Allscripts
upon election to the Board of Directors or adoption of the plan and upon the
first and second anniversary of their directorship. The exercise price for
shares under these plans is determined by Allscripts' Board of Directors, at
the date of grant. The plans provide for exercise of options by payment of
cash, surrender of common shares or surrender of options. Options vest upon
grant. In February 1997, Allscripts adopted an amendment and restatement of the
1993 Stock Incentive Plan and terminated the Eligible Directors Stock Option
Plan. The amendment and restatement of the 1993 Stock Incentive Plan made
eligible directors (as defined in the Eligible Directors Stock Option Plan)
eligible for grants of stock incentives under the 1993 Stock Incentive Plan and
provided for the transfer to the 1993 Stock Incentive Plan of shares authorized
for grant but not granted under the Eligible Directors Stock Option Plan and of
shares underlying outstanding options under the Eligible Directors Stock Option
Plan that are terminated or canceled or that expire.
In addition, in 1990, Allscripts has issued options to purchase 7,760
shares of Allscripts' common stock outside of the plans under separate
agreement. These options were fully vested and exercisable at December 31,
1997.
F-18
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In May 1998, in conjunction with the closing of the Series I Unit Offering,
the Board of Directors approved the cancellation and reissuance of options to
purchase 1,481,916 shares of Allscripts' common stock. The options covered by
the grant all have an exercise price of $0.06 per share. At December 31, 1998,
Allscripts has reserved 2,913,018 shares for issuance upon exercise of all
options.
Had Allscripts elected to apply the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123) regarding recognition of compensation expense to the extent of the
calculated fair value of stock options granted in 1996, 1997 and 1998, reported
net income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
Net loss, as reported................. $2,941,028 $10,799,071 $7,514,309
Pro forma net loss.................... 3,031,347 10,895,180 7,606,193
Pro forma net loss per share--basic
and diluted.......................... $ 1.06 $ 3.69 $ 1.25
</TABLE>
Under SFAS 123, compensation expense representing fair value of the option
grant is recognized over the vesting period. The initial impact on pro forma
net loss may not be representative of compensation expense in future years,
when the effect of amortization of multiple awards would be reflected in pro
forma earnings.
For purposes of the SFAS 123 pro forma net income and earnings per share
calculation, the fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option pricing model. The weighted average
assumptions used in determining fair value as disclosed for SFAS 123 are shown
in the following table:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate................................. 6.29% 5.99% 5.15%
Option life (years)..................................... 4 4 4
</TABLE>
Option activity for the years ended December 31, 1996, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
Options Weighted Average Options
Outstanding Exercise Price Exercisable
----------- ---------------- -----------
<S> <C> <C> <C>
Balance at January 1, 1996............ 1,523,201 $2.10 745,255
Options granted..................... 195,850 1.50
Options exercised................... (1,616) 1.50
Options forfeited................... (339,423) 3.96
---------- ----- ---------
Balance at December 31, 1996.......... 1,378,012 1.50 802,049
Options granted..................... 1,655,218 2.34
Options exercised................... (37,807) 1.50
Options forfeited................... (265,066) 1.56
---------- ----- ---------
Balance at December 31, 1997.......... 2,730,357 2.04 1,100,948
Options granted..................... 1,985,165 0.06
Options exercised................... (336,522) 0.18
Options forfeited................... (198,301) 1.62
Options canceled.................... (1,483,576) 1.34
---------- ----- ---------
Balance at December 31, 1998.......... 2,697,123 $0.68 1,434,122
========== ===== =========
</TABLE>
F-19
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the years ended December 31, 1996, 1997 and 1998, the weighted average
fair value of options granted with an exercise price equal to market price was
$1.50, $2.34 and $0.06, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Number of Average
Exercise Options Life Exercise Options Exercise
Prices Outstanding (in years) Price Exercisable Price
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.06 1,660,897 9.43 $0.06 497,538 $ 0.06
1.50 899,453 6.26 1.50 856,214 1.50
2.16 10,350 7.63 2.16 5,820 2.16
2.34 110,330 8.00 2.34 58,457 2.34
3.00 8,333 6.04 3.00 8,333 3.00
10.24 7,760 1.13 10.24 7,760 10.24
--------- ---------
2,697,123 1,434,122
</TABLE>
13. Contingencies
The pharmaceutical repackaging industry is subject to stringent federal and
state regulations. Allscripts' repackaging operations are regulated by the Food
and Drug Administration as if Allscripts were a manufacturer. Allscripts is
also subject to regulation by the Drug Enforcement Administration in connection
with the packaging and distribution of controlled substances.
Allscripts is a defendant in numerous multi-defendant lawsuits involving
the manufacture and sale of dexfenfluramine, fenfluramine and phentermine. The
plaintiffs in these cases claim injury as a result of ingesting a combination
of these weight-loss drugs. These suits have been filed in various
jurisdictions throughout the United States, and in each of these suits,
Allscripts is one of many defendants, including manufacturers and other
distributors of these drugs. Allscripts does not believe it has any significant
liability incident to the distribution or repackaging of these drugs and it has
tendered defense of these lawsuits to its insurance carrier for handling. The
lawsuits are in various stages of litigation and it is too early to determine
what, if any, liability Allscripts will have with respect to the claims made in
these lawsuits. If Allscripts' insurance coverage in the amount of $15,000,000
per occurrence and $15,000,000 per year in the aggregate is inadequate to
satisfy any resulting liability, Allscripts will have to defend these lawsuits
and be responsible for the damages, if any, that Allscripts suffers as a result
of these lawsuits. Allscripts does not believe that the outcome of these
lawsuits will have a material adverse effect on its financial condition,
results of operations or cash flows.
14. Employment Matters and Agreements
In June 1996, October 1997, December 1997, March 1998 and December 1998,
certain executives and employees terminated their responsibilities with
Allscripts. In connection with these terminations, Allscripts entered into
severance agreements with these executives and employees. Total costs of
$574,000, $204,000 and $430,000, including amounts payable in the future
related to these agreements, have been included as management restructuring and
shutdown costs under Other Operating Expenses in 1996, 1997 and 1998,
respectively.
15. Savings Plan
Effective January 1, 1993, employees of Allscripts who meet certain
eligibility requirements can participate in Allscripts' 401(k) Savings and
Investment Plan. Under the plan, Allscripts may, at its
F-20
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
discretion, match the employee contributions. Allscripts recorded expenses from
continuing operations related to its matching contributions for the years ended
December 31, 1996, 1997 and 1998 of $35,418, $44,781 and $36,725, respectively.
16. Enterprise Systems, Inc. Agreement
During 1996 and 1997, Allscripts established a relationship with Enterprise
Systems, Inc. to further develop Allscripts' automated dispensing product and
introduce touch technology to its product. Enterprise developed a product
called TouchScript. On March 13, 1997, Enterprise Systems, Inc. entered into a
Merger Agreement with HBO & Company and subsequently on June 26, 1997 completed
said merger. On July 17, 1997, Allscripts entered into an agreement with HBO &
Company whereby HBO & Company assigned and transferred to Allscripts all of its
rights, title and interest in the TouchScript system and all corresponding
documentation therefor, including all copyrights, copyright registrations,
trademark applications and trademark registrations. In exchange, Allscripts
issued 519,530 shares of common stock.
The shares were recorded at fair market value determined by Allscripts of
$0.06 per share, thus assigning a value of $31,173 to the TouchScript software.
The software is being amortized on a straight-line basis over a three-year
period.
17. Discontinued Operations
On March 18, 1999, Allscripts signed a definitive agreement to sell certain
assets of its pharmacy benefit management operation to Pharmacare Management
Services, Inc., Pharmacare Direct, Inc., and Procare Pharmacy, Inc. The sale
closed on March 31, 1999. The aggregate purchase price is $15,400,000, payable
in the form of an up front payment at closing of $7,000,000 and a contingent
payment of up to $8,400,000 payable within 10 business days after the first
anniversary of the closing date. Additionally, the buyers purchased the
inventory at Allscripts' net cost, approximately $500,000, while Allscripts
retained the remaining working capital. The contingent payment is based upon
the number of prescription fillings (including original fillings and subsequent
refills) for the one-year period following the closing. Allscripts will receive
$23.12 for each traditional mail order prescription filling up to a maximum of
$5,000,000, $11.67 for each specialty mail order prescription filling up to a
maximum of $700,000 and $4.48 for each retail pharmacy prescription filling up
to a maximum of $2,700,000, in each case for fillings only from customers that
have been retained as of the anniversary date. Under certain circumstances, a
portion of the contingent payment can be paid prior to the anniversary date.
Allscripts expects to receive less than the maximum contingent payment.
The operating results of the pharmacy benefit management segment have been
segregated from continuing operations and reported as a separate line item on
the Consolidated Statements of Operations under the caption "Income (loss) from
discontinued operations." Additionally, Allscripts has restated its prior
financial statements to present the operating results of the pharmacy benefit
management operations as a discontinued operation.
F-21
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Operating results from discontinued operations were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue............................ $42,225,000 $44,719,000 $52,866,000
Cost of revenue.................... 39,001,000 41,413,000 49,313,000
----------- ----------- -----------
Gross profit................... 3,224,000 3,306,000 3,553,000
Selling, general and administrative
expenses.......................... 1,735,000 5,114,000 2,583,000
----------- ----------- -----------
Operating income (loss)............ 1,489,000 (1,808,000) 970,000
----------- ----------- -----------
Income (loss) from discontinued
operations........................ $ 1,489,000 $(1,808,000) $ 970,000
=========== =========== ===========
</TABLE>
Included in revenue is $1,580,000 in 1997 and $2,982,000 in 1998 from
Anthem, Inc., a related party (see Note 20). Included in selling, general and
administrative expenses in 1997 is approximately $3,300,000 pertaining to the
writedown of intangible assets.
The components of assets and liabilities of discontinued operations
included in Allscripts' consolidated balance sheets at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Assets:
Accounts receivable............................... $5,715,000 $7,015,000
Inventory......................................... 317,000 521,000
Other............................................. 3,611,000 2,936,000
---------- -----------
Total assets....................................... $9,643,000 $10,472,000
Liabilities........................................ 4,879,000 6,192,000
---------- -----------
Net............................................ $4,764,000 $ 4,280,000
========== ===========
</TABLE>
18. Supplemental Cashflow Information
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Interest paid.................................... $640,057 $509,292 $ 294,171
Noncash investing and financing activity:
Exchange of 6,837 shares of common stock held
by a former executive for a note receivable
held by Allscripts, totaling $35,000 plus
interest...................................... 35,000 -- --
In connection with the agreement with HBO &
Company, issuance of 519,530 common shares
valued at $0.06 per share, in exchange for
software valued at $31,173.................... -- 31,173 --
Accretion of mandatory redemption value of
preferred shares.............................. 219,400 219,399 323,278
In connection with the $10,000,000, 8.0%
convertible subordinated debentures issued
April 30, 1996, issuance of $400,000 and
$875,680 of additional debentures in
satisfaction of accrued interest thereon for
the years ended December 31, 1996 and 1997,
respectively.................................. 400,000 875,680 --
In connection with the Series I Unit Offering,
issuance of 1,803,838 shares of Series J
Redeemable Preferred shares and 1,326,661
warrants in exchange for Allscripts'
outstanding convertible subordinated
debentures (in the aggregate principal amount
of $11,219,303) plus accrued interest thereon
through April 15, 1998 ($437,085 in
aggregate).................................... -- -- 11,656,388
Cumulative dividends in arrears on redeemable
preferred shares.............................. 704,000 704,000 1,926,865
</TABLE>
F-22
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
19. Recently Issued Accounting Pronouncements
During 1997 the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." In
February 1998 the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and other Postretirement Benefits." SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. This standard requires that
management identify operating segments based on the way that management
desegregates the entity for making internal operating decisions. SFAS No. 132
standardizes the disclosure requirements for pension and other postretirement
benefits.
As a result of the March 1999 sale of the pharmacy benefit management
segment, Allscripts currently operates in one segment. Allscripts does not
offer the types of benefit programs that fall under the guidelines of Statement
of Financial Accounting Standards No. 132--Employers' Disclosures about
Pensions and other Postretirement Benefits.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. To date, Allscripts has not entered
into any derivative financial instruments or hedging activities.
In June 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This standard requires companies to
capitalize qualifying computer software costs that are incurred during the
application's development stage and amortize them over the software's estimated
useful life. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. Such costs were not material for the three-year period ended December
31, 1998. Allscripts is currently evaluating the impact of SOP 98-1 on its
financial statements and related disclosures.
20. Related Party Transactions
Since June 1997, Allscripts has provided pharmacy benefit management
services for Anthem, Inc. One of Allscripts' directors is Chairman of the
Board, President and Chief Executive Officer of Anthem (see Note 17).
21. Subsequent Events--Acquisitions
In May 1999, Allscripts acquired all of the outstanding stock of TeleMed
Corp., which does business as MedSmart, in exchange for 117,500 shares of
common stock and additional shares of common stock under certain circumstances.
MedSmart has recently entered the business of informing, or "detailing,"
physicians about specific pharmaceuticals over the Internet and through
Interactive Voice Response. MedSmart also sells medical books and practice-
related software to physicians.
In May 1999, Allscripts agreed in principle to acquire substantially all of
the assets of Shopping@Home, Inc., a development stage Internet retailer, in
exchange for a promissory note in the principal amount of $650,000, bearing
interest at a rate of 6.0% per year, and payable upon the consummation of this
offering. Allscripts' Chief Executive Officer and Chief Operating Officer are
principal shareholders of Shopping@Home, Inc.
Allscripts intends to account for these business combinations as purchases.
F-23
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
22. Subsequent Events--Other
On May 2, 1999, Allscripts' Board of Directors authorized (1) the merger of
Allscripts into a subsidiary incorporated in Delaware upon the closing of the
offering contemplated by this prospectus and (2) a one-for-six reverse common
stock split.
The reverse stock split and the reincorporation merger in Delaware were
subject to shareholder approval. Shareholder approval was obtained on June 18,
1999. Consequently, all common share information in the accompanying financial
statements has been adjusted to reflect the reverse stock split.
F-24
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1999
<TABLE>
<CAPTION>
1999 Pro Forma
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 8,023,066 $ 8,023,066
Accounts receivable, net of allowances of $4,532,499,
actual and pro forma................................ 9,389,917 9,389,917
Inventories, net..................................... 2,396,032 2,396,032
Prepaid and other assets............................. 168,939 168,939
----------- -----------
Total current assets............................... 19,977,954 19,977,954
----------- -----------
Fixed assets, net...................................... 1,539,836 1,539,836
Intangible assets, net................................. 963,963 963,963
Debt issuance costs.................................... 45,890 45,890
----------- -----------
Total assets....................................... $22,527,643 $22,527,643
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-25
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET, CONTINUED
March 31, 1999
<TABLE>
<CAPTION>
1999 Pro Forma
LIABILITIES ------------ ------------
<S> <C> <C>
Current liabilities:
Note payable...................................... $ 5,400,000 $ 5,400,000
Accounts payable.................................. 8,569,232 8,569,232
Accrued expenses.................................. 1,291,600 1,291,600
------------ ------------
Total current liabilities....................... 15,260,832 15,260,832
Long-term debt..................................... 58,774 58,774
------------ ------------
Total liabilities............................... 15,319,606 15,319,606
------------ ------------
Redeemable preferred shares:
Series I, cumulative, $1.00 par value, 1,339,241
shares authorized, issued and outstanding,
including $704,954 of cumulative dividends;
liquidation value of $8,654,175.................. 8,766,407 8,766,407
Series J, cumulative, $1.00 par value, 1,812,903
shares authorized, 1,803,838 issued and
outstanding, including $949,510 of cumulative
dividends; liquidation value of $11,656,388...... 12,605,898 12,605,898
Series H, cumulative, $1.00 par value, 1,361,775
shares authorized, issued and outstanding,
including $3,183,430 of cumulative dividends;
liquidation value of $8,800,000 ................. 11,873,730 11,873,730
------------ ------------
33,246,035 33,246,035
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred shares:
Series A, $1.00 par value, 1,050,000 shares
authorized, issued and outstanding, liquidation
value of $1,050,000, convertible to common
shares; no shares issued and outstanding, pro
forma............................................ 1,050,000 --
Series B, $1.00 par value, 533,333 shares
authorized, issued and outstanding, liquidation
value of $2,000,000, convertible to common
shares; no shares issued and outstanding, pro
forma............................................ 533,333 --
Series C, $1.00 par value, 2,187,501 shares
authorized, issued and outstanding, liquidation
value of $7,000,000, convertible to common
shares; no shares issued and outstanding, pro
forma............................................ 2,187,501 --
Series D, $1.00 par value, 1,833,334 shares
authorized, issued and outstanding, liquidation
value of $8,250,003, convertible to common
shares; no shares issued and outstanding, pro
forma............................................ 1,833,334 --
Series F, $1.00 par value, 2,492,781 shares
authorized, issued and outstanding, liquidation
value of $3,115,976, convertible to common
shares; no shares issued and outstanding, pro
forma............................................ 2,492,781 --
Series G, $1.00 par value, 621,819 shares
authorized, issued and outstanding, liquidation
value of $2,798,186, convertible to common
shares; no shares issued and outstanding, pro
forma............................................ 621,819 --
------------ ------------
8,718,768 --
Common shares:
$0.01 par value, 125,000,000 shares authorized,
8,815,599 shares issued and outstanding, actual;
75,000,000 authorized, 11,813,099 shares issued
and outstanding, pro forma....................... 88,156 118,131
Treasury stock at cost; 34,465 common shares actual
and pro forma..................................... (67,817) (67,817)
Unearned compensation.............................. (2,054,999) (2,054,999)
Additional paid-in capital......................... 16,758,013 25,666,993
Accumulated deficit................................ (49,480,119) (49,700,306)
------------ ------------
Total shareholders' equity (deficit)............ (26,037,998) (26,037,998)
------------ ------------
Total liabilities and shareholders' equity
(deficit)...................................... $ 22,527,643 $ 22,527,643
============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-26
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1999
----------- ----------
<S> <C> <C>
Revenue............................................... $ 6,350,799 $6,027,757
Cost of revenue....................................... 4,502,880 4,499,513
----------- ----------
Gross profit...................................... 1,847,919 1,528,244
Selling, general and administrative expenses.......... 3,383,782 3,615,361
Amortization of intangibles........................... 93,442 93,442
Other operating expenses.............................. 111,946 --
----------- ----------
Loss from operations.............................. (1,741,251) (2,180,559)
Interest expense...................................... 396,169 109,145
----------- ----------
Loss from continuing operations....................... (2,137,420) (2,289,704)
Income from discontinued operations................... 386,971 26,394
Gain from sale of discontinued operations............. -- 3,547,161
----------- ----------
Net income (loss)..................................... (1,750,449) 1,283,851
Accretion of mandatory redemption value of preferred
shares and accrued dividends on preferred shares..... (230,850) (699,112)
----------- ----------
Net income (loss) attributable to common
shareholders......................................... $(1,981,299) $ 584,739
=========== ==========
Per share data--basic and undiluted:
Loss from continuing operations..................... $ (0.69) $ (0.35)
Discontinued operations............................. 0.11 0.00
Gain from sale of discontinued operation............ -- 0.42
----------- ----------
Net income (loss)................................... $ (0.58) $ 0.07
=========== ==========
Per share data--pro forma basic and diluted:
Loss from continuing operations..................... $ (0.28)
Discontinued operations............................. 0.00
Gain from sale of discontinued operations........... 0.31
----------
Net income.......................................... $ 0.03
==========
Weighted average shares of common stock outstanding
used in computing basic and diluted loss per share... 3,410,513 8,489,685
=========== ==========
Weighted average shares of common stock outstanding
used in computing pro forma basic and diluted loss
per share............................................ 11,487,185
==========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-27
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(1,750,449) $ 1,283,851
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 461,849 406,847
Provision for losses on accounts receivable...... 38,860 200,490
Gain on sale of discontinued operations.......... -- (3,547,161)
Compensation expense............................. -- 130,410
Changes in assets and liabilities:
(Increase) decrease in accounts receivable..... 727,289 (65,323)
Increase in inventories........................ (244,854) (179,556)
Decrease in other assets....................... 92,008 17,145
Increase in accounts payable................... 1,025,831 735,547
Decrease in accrued expenses................... (239,680) (315,327)
----------- -----------
Net cash provided by (used in) operating
activities.................................. 110,854 (1,333,077)
----------- -----------
Cash flows from investing activities:
Capital expenditures............................... (210,762) (273,649)
Proceeds from sale of discontinued operations...... -- 7,472,509
----------- -----------
Net cash provided by (used in) investing
activities.................................. (210,762) 7,198,860
----------- -----------
Cash flows from financing activities:
Borrowings under bank agreements................... -- 1,400,000
Proceeds from exercise of common share options..... 31,379 39,275
----------- -----------
Net cash provided by financing activities.... 31,379 1,439,275
----------- -----------
Net increase (decrease) in cash...................... (68,529) 7,305,058
Cash, beginning of period............................ 204,981 718,008
----------- -----------
Cash, end of period.................................. $ 136,452 $ 8,023,066
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-28
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The quarterly financial information presented herein should be read in
conjunction with Allscripts' annual financial statements for the year ended
December 31, 1998. The unaudited interim financial statements reflect all
adjustments (all of which are of a normal recurring nature) that are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods. The results for the interim periods are not necessarily
indicative of the results to be expected for the year.
2. Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted average number of shares of common stock
outstanding during the period. Allscripts has excluded all outstanding
convertible preferred stock, which is convertible into 2,977,483 shares of
common stock, all outstanding warrants to purchase 4,892,136 shares of common
stock and all outstanding options to purchase 2,440,757 shares of common stock
from the calculation of diluted loss per share because all such securities are
antidilutive for all periods presented.
3. Notes Payable
Under the revolving credit facility, Allscripts is required to maintain
certain financial ratios, including minimum net working capital, minimum EBITDA
and minimum capital funds. As of March 31, 1999, Allscripts was in violation of
certain financial covenants. In May 1999, Allscripts received a waiver for
these violations.
4. Stock Option Plans
On March 31, 1999, Allscripts granted an additional 308,259 options to
purchase common stock at an exercise price of $3.00. In connection with these
grants, Allscripts recognized approximately $1,850,000 of unearned
compensation, which represents the difference between the exercise price of the
options and the deemed fair market value of the common stock at the date of
grant.
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Options
Outstanding Price Exercisable
----------- -------- -----------
<S> <C> <C> <C>
Balance at December 31, 1998............. 2,697,123 $ 0.68 1,434,122
Options granted.......................... 308,259 3.00
Options exercised........................ (457,066) (0.09)
Options forfeited........................ (107,559) (1.14)
--------- ------ ---------
Balance at March 31, 1999................ 2,440,757 $ 1.05 953,745
========= ====== =========
</TABLE>
5. Warrants
On March 31, 1999, Allscripts issued warrants to purchase 11,666 shares of
common stock at $3.00 per share. Allscripts assigned a value of $9.00 to the
warrants and accordingly recorded expense in the amount of $105,000 in the
first quarter of 1999.
6. Contingencies
The pharmaceutical repackaging industry is subject to stringent federal and
state regulations. Allscripts' repackaging operations are regulated by the FDA
as if Allscripts were a manufacturer. Allscripts is also subject to regulation
by the DEA in connection with the packaging and distribution of controlled
substances.
Allscripts is a defendant in numerous multi-defendant lawsuits involving
the manufacture and sale of dexfenfluramine, fenfluramine and phentermine. The
plaintiffs in these cases claim injury as a result of ingesting a combination
of these weight-loss drugs. These suits have been filed in various
jurisdictions
F-29
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
throughout the United States and in each of these suits Allscripts is one of
many defendants, including manufacturers and other distributors of these drugs.
Allscripts does not believe it has any significant liability incident to the
distribution or repackaging of these drugs, and it has tendered defense of
these lawsuits to its insurance carrier for handling. The lawsuits are in
various stages of litigation, and it is too early to determine what, if any,
liability Allscripts will have with respect to the claims made in these
lawsuits. If Allscripts' insurance coverage in the amount of $15,000,000 per
occurrence and $15,000,000 per year in the aggregate is inadequate to satisfy
any resulting liability, Allscripts will have to defend these lawsuits and be
responsible for the damages, if any, that Allscripts suffers as a result of
these lawsuits. Allscripts does not believe that the outcome of these lawsuits
will have a material adverse effect on its financial condition, results of
operations or cash flows.
7. Discontinued Operations
The operating results of the pharmacy benefit management segment have been
segregated from continuing operations and reported as a separate line item on
the Consolidated Statements of Operations under the caption "Income from
discontinued operations." Additionally, Allscripts has restated its prior
financial statements to present the operating results of the pharmacy benefit
management operation as a discontinued operation.
Operating results from discontinued operations were as follows:
<TABLE>
<CAPTION>
March 31,
----------------------- ---
1998 1999
----------- -----------
<S> <C> <C> <C>
Revenue..................................... $12,087,511 $14,291,828
Cost of revenue............................. 11,182,550 13,377,729
----------- -----------
Gross profit.............................. 904,961 914,099
Selling, general and administrative
expenses................................... 392,485 762,172
Amortization of intangibles................. 125,505 125,533
----------- -----------
Operating income............................ 386,971 26,394
----------- -----------
Income from discontinued operations......... $ 386,971 $ 26,394
=========== ===========
</TABLE>
Included in revenue is $1,242,406 in the first quarter of 1998 and $374,876
in the first quarter of 1999 from Anthem, Inc., a related party.
In the first quarter of 1999, Allscripts recognized a gain on the sale of
this business of $3,547,161, based upon the cash received at closing. This gain
does not reflect contingent payments from the buyer of up to $8,400,000, which
will be recognized if and when they are realized.
8. Income Taxes
Allscripts has made no provision (benefit) for income taxes, as it
anticipates at this time that the annual effective income tax rate will be
minimal or zero.
9. Pro Forma Information
If the offering contemplated by this prospectus is consummated, all of the
outstanding shares of Allscripts' convertible preferred stock would
automatically be converted into common stock. Additionally, 20,017 shares of
common stock are issuable upon the closing of the offering, pursuant to a
contingent share payment obligation. Allscripts has presented a pro forma
balance sheet as if this conversion and contingent stock issuance happened on
March 31, 1999 and pro forma net income (loss) per share information as if
these transactions happened as of January 1, 1999.
F-30
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma financial
information is based on the actual financial statements of Allscripts during
the periods presented, adjusted to give effect to (1) the change in the number
of authorized common shares of Allscripts upon its reincorporation in Delaware,
(2) the issuance of additional shares related to a contingent payment
obligation, (3) the redemption of the Redeemable Preferred Shares upon the
closing of the initial public offering, (4) the Conversion of Preferred Shares
Series A, B, C, D, F, and G into common shares upon the closing of the initial
public offering, and (5) the additional accretion of the Series H preferred
shares due to the initial public offering, collectively referred to as the "Pro
Forma Adjustments."
The unaudited condensed consolidated pro forma financial information for
the fiscal year ended December 31, 1998 and for the three-month period ended
March 31, 1999, gives effect to the Pro Forma Adjustments as if they had
occurred on January 1, 1998. The unaudited condensed consolidated pro forma
balance sheet at March 31, 1999 gives effect to the pro forma adjustments as if
they occurred on March 31, 1999. The adjustments are described in the
accompanying notes.
The pro forma consolidated financial information does not purport to
represent what Allscripts' results of operations would actually have been had
the Pro Forma Adjustments in fact occurred on such date or to project
Allscripts' results of operations for any future period. The pro forma
financial information should be read in conjunction with the consolidated
financial statements included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On May 2, 1999, Allscripts' Board of Directors adopted and, on June 18,
1999, Allscripts' shareholders approved, a one-for-six reverse split of its
common stock. All references in the unaudited condensed consolidated pro forma
financial information to number of shares, as well as per share amounts and
average number of shares outstanding, have been restated to reflect the stock
split as if it had been effective on January 1, 1998.
F-31
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
As of March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro forma adjustments
--------------------------------------------------
Settlement Redemption
of of Conversion
contingent redeemable of Series H
payment preferred preferred and I Pro
Actual obligation shares shares accretion forma
------- ---------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 8,023 $ 8,023
Accounts receivable, net
of allowances of
$4,532................. 9,390 9,390
Inventories............. 2,396 2,396
Prepaid and other
assets................. 169 169
------- -------
Total current assets... 19,978 19,978
Other assets............ 2,550 2,550
------- -------
Total assets........... $22,528 $22,528
======= =======
LIABILITIES
Note payable............ $ 5,400 $ 5,400
Accounts payable........ 8,569 8,569
Accrued expenses........ 1,292 1,292
------- -------
Total current
liabilities........... 15,261 15,261
Long-term debt.......... 59 59
------- -------
Total liabilities...... 15,320 15,320
Redeemable preferred
shares:
Series I............... 8,766 $ (9,359)(c) $ 593 (e) --
Series J............... 12,606 (12,606)(c) --
Series H............... 11,874 (11,983)(c) 109 (e) --
-------
33,246
SHAREHOLDERS' EQUITY
(DEFICIT)
Preferred shares
(convertible):
Series A............... 1,050 $(1,050)(d) --
Series B............... 533 (533)(d) --
Series C............... 2,188 (2,188)(d) --
Series D............... 1,833 (1,833)(d) --
Series F............... 2,493 (2,493)(d) --
Series G............... 622 (622)(d) --
Common shares:
$0.01 par value,
125,000,000 shares
authorized, 8,815,599
issued outstanding,
actual; 75,000,000
shares authorized,
14,899,281 shares
issued and
outstanding, pro forma
(a)................... 88 31 (c) 30 (d) 149
Treasury stock at
cost.................. (68) (68)
Unearned compensation.. (2,055) (2,055)
Additional paid-in
capital............... 16,758 $ 220 (b) 33,917 (c) 8,689 (d) (702)(e) 58,882
Accumulated deficit.... (49,480) (220)(b) (49,700)
------- ----- -------- ------- ----- -------
Total shareholders'
equity (deficit)...... (26,038) -- 33,948 -- (702) 7,208
Total liabilities,
redeemable preferred
shares
and shareholders'
equity (deficit)...... $22,528 $ -- $ -- $ -- $ -- $22,528
======= ===== ======== ======= ===== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated pro forma financial
information.
F-32
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
Year Ended December 31, 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Actual Pro forma adjustments
------------ ------------------------------------------------------
Settlement of Redemption
Year Ended contingent of redeemable Conversion Series H
December 31, payment preferred of preferred and I
1998 obligation shares shares accretion Pro forma
------------ ------------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 23,682 $ 23,682
Cost of revenue......... 17,146 17,146
--------- ----------
Gross profit............ 6,536 6,536
Selling, general and
administrative
expenses............... 12,832 12,832
Amortization of
intangibles............ 372 372
Other operating
expenses............... 430 $ 220 (b) 650
--------- ------ ----------
Loss from operations.... (7,098) (220) (7,318)
Interest expense........ 596 -- 596
--------- ------ ----------
Loss from continuing
operations............. (7,694) (220) (7,914)
Accretion of mandatory
redemption value of
preferred shares and
accrued dividends on
preferred shares....... (2,415) $ 1,927(f) $(794)(g) (1,282)
--------- --------- ----- ----------
Net loss from continuing
operations attributable
to common
shareholders........... $ (10,109) $ (220) $ 1,927 $(794) $ (9,196)
========= ====== ========= ===== ==========
Basic and diluted loss
per share from
continuing operations.. $ (1.66) $ (0.77)
========= ==========
Weighted average shares
outstanding (basic and
diluted)............... 6,075,803 20,017 (b) 2,855,817(h) 2,977,483(d) 11,929,129
========= ====== ========= ========= ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated pro forma financial
information.
F-33
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
Three Months Ended March 31, 1999
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Actual Pro forma adjustments
--------- -----------------------------------------------------
Three
months Settlement of Redemption of
ended contingent redeemable Conversion of Series H
March 31, payment preferred preferred and I
1999 obligations shares shares accretion Pro forma
--------- ------------- ------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 6,028 $ 6,028
Cost of revenue......... 4,500 4,500
--------- ----------
Gross profit............ 1,528 1,528
Selling, general and
administrative
expenses............... 3,615 3,615
Amortization of
intangibles............ 93 93
--------- ----------
Loss from operations.... (2,180) (2,180)
Interest expense........ (109) (109)
--------- ----------
Loss from continuing
operations............. (2,289) (2,289)
Accretion of mandatory
redemption value of
preferred shares and
accrued dividends on
preferred shares....... (699) $ 608(f) $ 91(g) --
--------- --------- ---- ----------
Net loss from continuing
operations attributable
to common
shareholders........... $ (2,988) $ 608 $ 91 $ (2,289)
========= ========= ==== ==========
Basic and diluted loss
per share from
continuing operations.. $ (0.35) $ (0.16)
========= ==========
Weighted average shares
outstanding (basic and
diluted)............... 8,489,665 20,017(b) 2,855,817(h) 2,977,483(d) 14,342,982
========= ====== ========= ========= ==========
</TABLE>
See accompanying notes to the unaudited condensed consolidated pro forma
financial information.
F-34
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
The following is an explanation of the pro forma adjustments.
(a) On May 2, 1999, the Board of Directors approved, and, on June 18, 1999, the
shareholders approved, the reincorporation of Allscripts in the State of
Delaware. This adjustment reflects the change in the number of authorized
common shares to 75,000,000.
(b)Other operating expenses$220
Additional paid-in capital(220)
This adjustment reflects an additional issuance of 20,017 common shares at
an assumed initial public offering price of $11.00 per share, issuable
upon the closing of the initial public offering by the terms of a
contingent payment obligation in connection with an acquisition Allscripts
made in 1995.
<TABLE>
<C> <S>
(c)Series I redeemable preferred shares $ 9,359
Series J redeemable preferred shares 12,606
Series H redeemable preferred shares 11,983
Common stock (31)
Additional paid-in capital (33,917)
</TABLE>
This adjustment reflects:
. the mandatory redemption of 1,339,241 Series I redeemable preferred
shares, including the payment of cumulative dividends of $704,954, and
the reduction of the number of authorized, issued and outstanding shares
from 1,339,241 (actual) to none (pro forma).
. the redemption of 1,803,838 Series J redeemable preferred shares,
including the payment of cumulative dividends of $949,510, the reduction
of the number of authorized shares from 1,812,903 (actual) to none (pro
forma) and the reduction of the number of issued and outstanding shares
from 1,803,838 (actual) to none (pro forma).
. the redemption of 1,361,775 Series H redeemable preferred shares,
including the payment of cumulative dividends of $3,183,430, and the
reduction of the number of authorized, issued and outstanding shares from
1,361,775 (actual) to none (pro forma).
. the issuance of 3,086,182 shares of common stock in the initial public
offering, at an assumed price of $11.00 per share, the proceeds of which
would be sufficient to redeem the Series H, I, and J redeemable preferred
shares.
<TABLE>
<C> <S>
(d)Series A preferred shares $ 1,050
Series B preferred shares 533
Series C preferred shares 2,188
Series D preferred shares 1,833
Series F preferred shares 2,493
Series G preferred shares 622
Common shares (30)
Additional paid-in capital (8,689)
</TABLE>
This adjustment reflects:
.the conversion of 1,050,000 Series A preferred shares to 152,161 common
shares.
.the conversion of 533,333 Series B preferred shares to 207,850 common
shares.
.the conversion of 2,187,501 Series C preferred shares to 885,447 common
shares.
.the conversion of 1,833,334 Series D preferred shares to 1,061,511 common
shares.
.the conversion of 2,492,781 Series F preferred shares to 415,441 common
shares.
.the conversion of 621,819 Series G preferred shares to 255,073 common
shares.
F-35
<PAGE>
ALLSCRIPTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION -- (Continued)
<TABLE>
<C> <S>
(e)Additional paid-in capital $ 702
Series I redeemable preferred shares (593)
Series H redeemable preferred shares (109)
</TABLE>
This adjustment reflects the accelerated accretion of Series H and Series
I redeemable preferred shares due to the initial public offering.
(f) This adjustment reflects the reversal of accrued dividends during the
period on redeemable preferred shares.
(g) This adjustment reflects the accretion on Series H and Series I redeemable
preferred shares assuming redemption occurred on January 1, 1998.
(h) This adjustment reflects the issuance of 2,855,817 shares of common stock
in the initial public offering at an assumed price of $11.00 per share, the
proceeds of which would be sufficient to redeem the Series H, Series I and
Series J redeemable preferred shares as if the transaction occurred on
January 1, 1998.
F-36
<PAGE>
UNDERWRITING
Allscripts and the underwriters named below (the "Underwriters") have
entered into an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each Underwriter has severally agreed
to purchase the number of shares indicated in the following table. Goldman,
Sachs & Co., Bear, Stearns & Co. Inc., CIBC World Markets Corp. and Wit Capital
Corporation are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co.............................................
Bear, Stearns & Co. Inc.........................................
CIBC World Markets Corp.........................................
Wit Capital Corporation.........................................
---------
Total....................................................... 7,000,000
=========
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
1,050,000 shares from Allscripts to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
Underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the Underwriters by Allscripts. Such amounts are
shown assuming both no exercise and full exercise of the Underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Allscripts
------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
At the request of Allscripts, the Underwriters have reserved up to 350,000
shares of common stock for sale to certain directors, employees and associates
of Allscripts at the initial public offering price. There can be no assurance
that any of the reserved shares will be purchased. The number of shares
available for sale to the general public in this offering will be reduced by
the number of reserved shares sold. Any reserved shares not so purchased will
be offered to the general public on the same basis as the other shares offered
hereby.
Allscripts, its directors, officers and certain other securityholders have
agreed with the Underwriters not to dispose of or hedge any of their shares of
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. See "Shares Eligible for Future
Sale" for a discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
negotiated among Allscripts and the representatives of the
U-1
<PAGE>
Underwriters. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Allscripts' historical performance, estimates of
Allscripts' business potential and earnings prospects, an assessment of
Allscripts' management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
Wit Capital Corporation, a member of the National Association of Securities
Dealers, Inc., will participate in the offering as one of the underwriters. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-Manager or selected dealer in over 65 public offerings. Except
for its participation as a manager in this offering, Wit Capital has no
relationship with Allscripts, or any of its founders or significant
stockholders.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "MDRX".
In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The Underwriters may also impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Each Underwriter has, on behalf of itself and its affiliates, represented
and agreed that (a) it has not offered or sold and prior to the date six months
after the date of issue of the shares of common stock will not offer or sell
any shares of common stock to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances that have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995, (b) it has complied, and will
comply, with all applicable provisions of the Financial Services Act 1986 of
Great Britain with respect to anything done by it in relation to the shares of
common stock in, from or otherwise involving the United Kingdom, and (c) it has
only issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issuance of shares of common
stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as
amended) of Great Britain or is a person to whom the document may otherwise
lawfully be issued or passed on.
The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Allscripts estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $900,000.
Allscripts has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 32
Management............................................................... 42
Certain Relationships and Related Party Transactions..................... 50
Principal Stockholders................................................... 52
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 57
Legal Matters............................................................ 58
Experts.................................................................. 58
Where to Find More Information........................................... 58
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
--------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,000,000 Shares
Allscripts, Inc.
Common Stock
--------------
[LOGO]
--------------
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
CIBC World Markets
Wit Capital Corporation
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
In connection with the offering, the underwriters may over-allot or effect
transactions which stabilize or maintain the market price of the securities
offered hereby at a level above that which might otherwise prevail in the open
market. Such transactions may be effected on the Nasdaq National Market or
otherwise. Such stabilization, if commenced, may be discontinued at any time.
PROSPECTUS SUMMARY
This is a summary and does not contain all the information that may be
important to you. You should read the more detailed information included in
this prospectus. All information in this prospectus gives effect to a one-for-
six reverse split of our common stock effected on June 28, 1999. Except as
otherwise noted, the information contained in this prospectus assumes:
. the underwriters will not exercise the over-allotment option, and no
other person will exercise any other outstanding option or warrant;
. we will reincorporate in the state of Delaware upon the closing of this
offering, which will result in, among other things, our adoption of a
new Certificate of Incorporation and By-laws; and
. all outstanding shares of our Series A, B, C, D, F and G preferred stock
will convert into a total of 2,977,483 shares of common stock upon the
closing of this offering.
Allscripts, Inc.
We provide physicians with Internet and client/server medication management
solutions designed to improve the quality and cost effectiveness of
pharmaceutical healthcare. Our technology-based approach focuses on the point
of care, where the prescription originates, and creates an electronic dialogue
between physicians and other participants in the healthcare delivery process,
including patients, pharmacies, managed care organizations and pharmaceutical
manufacturers. We believe physicians find our solutions attractive because
incorporating these solutions into their office work flow can increase
efficiency and profitability and improve the quality of patient care.
The current process for prescribing and delivering medications is
inefficient, unnecessarily costly and error-prone. Our in-office and Internet-
based comprehensive solutions are designed to improve and streamline every step
of the pharmaceutical healthcare process in a way that can benefit each
participant. Our medication management solutions enable physicians to improve
their prescribing at the point of care by providing them with information about
potential adverse drug interactions, patient drug history and managed care
guidelines. This ready access to information during the prescribing process
reduces the time physicians spend clarifying and changing prescriptions and
enables them to better manage financial risk. Our products also enable
physicians to increase practice revenue by dispensing medications. In addition,
our solutions make it possible for patients to have their prescriptions
electronically routed to the pharmacy of their choice or to benefit from the
convenience, immediacy and confidentiality of receiving their medications in
the physician's office. Our solutions also benefit managed care organizations
by promoting higher physician compliance with their pharmacy guidelines, while
pharmacies benefit from improved communication with physicians, which enhances
efficiency and reduces the likelihood of errors.
We currently offer products in four categories: point-of-care medication
management, Internet products and services, information products and
prepackaged medications. Our TouchScript software enables electronic
prescribing, routing of prescription information and capturing of prescription
data at the point of care. Our other e-commerce products and services offer
physicians and their patients medication-related education and information
services. We also sell prepackaged medications to physicians so they can offer
their patients the convenience of receiving prescription medications in the
physician's office.
We believe that our experience in the pharmaceutical healthcare delivery
process gives us a competitive advantage. Through our business relationships
with thousands of physicians, we have developed an understanding of their
office work flow and business practices. Versions of TouchScript are currently
installed and used in over 150 physician practice sites, and we have
facilitated relationships
3
<PAGE>
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution
We will bear the expenses relating to the registration of common stock.
Except for the Securities and Exchange Commission registration fee, the
National Association of Securities Dealers, Inc. filing fee and the Nasdaq
National Market listing fee, the following expenses are estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 26,855
National Association of Securities Dealers, Inc. filing fee..... 10,160
Nasdaq National Market listing fee.............................. 90,000
Blue Sky fees and expenses...................................... 5,000
Legal fees and expenses......................................... 400,000
Accountants' fees............................................... 250,000
Printing fees................................................... 100,000
Transfer agent fees............................................. 3,000
Miscellaneous................................................... 14,985
--------
Total....................................................... $900,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Our Certificate of Incorporation and By-laws provide that we shall, subject
to certain limitations, indemnify our directors and officers against expenses
(including attorneys' fees, judgments, fines and certain settlements) actually
and reasonably incurred by them in connection with any suit or proceeding to
which they are a party so long as they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to a criminal action or proceeding, so long as
they had no reasonable cause to believe their conduct to have been unlawful.
Section 102 of the Delaware General Corporation Law permits a Delaware
corporation to include in its certificate of incorporation a provision
eliminating or limiting a director's liability to a corporation or its
stockholders for monetary damages for breaches of fiduciary duty. The enabling
statute provides, however, that liability for breaches of the duty of loyalty,
acts or omissions not in good faith or involving intentional misconduct, or
knowing violation of the law, and the unlawful purchase or redemption of stock
or payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner. Our Certificate of
Incorporation includes a provision that eliminates, to the fullest extent
permitted, director liability for monetary damages for breaches of fiduciary
duty.
Pursuant to the Underwriting Agreement as set forth in Exhibit 1.1, our
directors and officers are indemnified against certain civil liabilities that
they may incur under the Securities Act in connection with this registration
statement and the related prospectus.
We have purchased directors and officers liability insurance, which
provides coverage against certain liabilities.
In addition, some of our directors are indemnified against liabilities that
they may incur in their capacities as directors by third parties with which
they are affiliated.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement, we
sold the following securities (adjusted to give effect to a one-for-six reverse
stock split) that were not registered under the Securities Act:
II-1
<PAGE>
On April 30, 1996, we issued $10,000,000 principal amount of our 8.0%
Convertible Subordinated Debentures due 2001 to a group of accredited investors
for an aggregate consideration of $10,000,000. Exemption from registration is
claimed pursuant to Section 4(2) of the Securities Act, no public sale having
been involved.
On April 30, 1996, we issued a warrant to purchase 279,181 common shares at
a per share exercise price of $4.2024 to Allstate Insurance Company in
consideration of Allstate's guaranty of $4,692,932 of our indebtedness.
Exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act, no public sale having been involved.
On July 17, 1997, we issued 519,530 common shares to HBO & Company in
exchange for all of HBO & Company's right, title and interest in and to the
TouchScript system. Exemption from registration is claimed pursuant to Section
4(2) of the Securities Act, no public sale having been involved.
On April 16, 1998, we issued warrants to purchase 916,657 common shares
with a per share exercise price of $0.06 and shares of Series H redeemable
preferred stock with modified redemption terms to the holders of Series H
preferred stock in exchange for their shares of Series H preferred stock.
Exemption from registration is claimed pursuant to Sections 3(a)(9) and 4(2) of
the Securities Act.
On April 16, 1998, we issued 1,339,241 shares of Series I redeemable
preferred stock and 4,597,070 common shares to a group of accredited investors
including members of management for an aggregate consideration of $8,930,000.
Exemption from registration is claimed pursuant to Section 4(2) of the
Securities Act, no public sale having been involved.
On April 16, 1998, we issued 1,803,838 shares of Series J redeemable
preferred stock and warrants to purchase 1,326,661 common shares with a per
share exercise price of $0.06 to the holders of the Debentures in exchange for
the Debentures and accrued interest thereon. Exemption from registration is
claimed pursuant to Sections 3(a)(9) and 4(2) of the Securities Act.
On March 31, 1999, we issued warrants to purchase 11,666 common shares with
a per share exercise price of $3.00 to certain non-employees.
On May 12, 1999, we issued an aggregate 117,500 common shares to the
stockholders of TeleMed Corp. in exchange for all of the outstanding capital
stock of TeleMed Corp. Exemption from registration is claimed pursuant to
Section 4(2) of the Securities Act, no public sale having been involved.
On June 30, 1999, we issued a promissory note in the principal amount of
$650,000 to Shopping@Home, Inc. in exchange for substantially all of the assets
of Shopping@Home. Exemption from registration is claimed pursuant to Section
4(2) of the Securities Act, no public sale having been involved.
In the three years preceding the filing of this registration statement, we
have granted options to purchase an aggregate of common shares and have
issued an aggregate of 841,900 common shares to current and former employees
upon exercise of options for an aggregate exercise price of $110,315. Exemption
from registration is claimed pursuant to Rule 701 under the Securities Act.
Upon the closing of this offering, Allscripts, Inc., an Illinois
corporation, will merge with and into its wholly owned subsidiary, Allscripts,
Inc., a Delaware corporation. In connection with the merger, Allscripts, Inc.--
Delaware will issue shares of common stock to the holders of common stock of
Allscripts, in exchange for such holders' shares of common stock of Allscripts.
Exemption from registration is claimed pursuant to Section 3(a)(9) of the
Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits--See Index to Exhibits.
(b) Financial Statement Schedules
Report of Independent Accountants
Schedule II--Valuation and Qualifying Accounts
II-2
<PAGE>
Item 17. Undertakings
The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Libertyville and State of Illinois on the 6th day of July, 1999.
Allscripts, Inc.
/s/ David B. Mullen
----------------------------------------
David B. Mullen
President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the 6th day of July, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Chairman and Chief Executive Officer
_________________________________________ (Principal Executive Officer)
Glen E. Tullman
/s/ David B. Mullen President, Chief Financial Officer and
___________________________________________ Director (Principal Financial Officer)
David B. Mullen
* Senior Vice President, Finance, Treasurer
___________________________________________ and Secretary (Principal Accounting
John G. Cull Officer)
* Director
___________________________________________
Philip D. Green
* Director
___________________________________________
M. Fazle Husain
* Director
___________________________________________
Michael J. Kluger
* Director
___________________________________________
L. Ben Lytle
* Director
___________________________________________
Gary M. Stein
*/s/ David B. Mullen
___________________________________________
David B. Mullen, as attorney-in-fact
pursuant to power of attorney granted in
Registration Statement No. 333-78431
filed on May 14, 1999
</TABLE>
S-1
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors
Allscripts, Inc.
Our audits of the consolidated financial statements referred to in our report
dated May 12, 1999 except for the information in Note 22 for which the date is
June 18, 1999 appearing in this Registration Statement also included an audit
of the financial statement schedule listed in Item 16(b) of this Registration
Statement. In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
May 12, 1999
FS-1
<PAGE>
Allscripts, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Schedule II
<TABLE>
<CAPTION>
Beginning Charged to Deductions Ending
Balance Cost/expenses (Writeoffs) Balance
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Allowance for accounts
receivable
Year ended December 31,
1996................... $ 3,213,086 $ 30,524 $ (102,121) $ 3,141,489
Year ended December 31,
1997................... 3,141,489 666,829 (376,371) 3,431,947
Year ended December 31,
1998................... 3,431,947 1,240,449 (149,889) 4,522,507
Valuation allowance for
deferred tax assets
Year ended December 31,
1996................... $ 9,821,000 $ 1,222,000 $ -- $ 11,043,000
Year ended December 31,
1997................... 11,043,000 2,545,000 -- 13,588,000
Year ended December 31,
1998................... 13,588,000 1,696,000 -- 15,284,000
</TABLE>
FS-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S> <C>
1.1** Form of Underwriting Agreement
2.1**** Form of Plan of Merger between the Registrant and Allscripts,
Inc., an Illinois corporation
3.1**** Form of Certificate of Incorporation
3.2**** Form of By-laws
5.1* Opinion of Gardner, Carton & Douglas
10.1**** Amended and Restated 1993 Stock Incentive Plan
10.2*** Asset Purchase Agreement, dated as of March 19, 1999, by and
among the Registrant, PharmaCare Management Services, Inc.,
PharmaCare Direct, Inc. and ProCare Pharmacy, Inc.
10.3**** Twelfth Restated Registration Agreement dated as of June 18,
1999, by and among the Registrant, those Holders of the
Registrant's Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series F Preferred and Series G
Preferred listed in Schedule I attached thereto, the Holders
of the Extension Guaranty Warrants listed in Schedule II
thereto, the Holders of the 1996 Extension Guaranty Warrants
listed in Schedule II thereto, those Holders of Common listed
in Schedule III thereto, the Holders of Series H Warrants and
H Unit Common listed in Schedule IV thereto, the Holders of
Extension Series H Warrants listed in Schedule IV thereto, the
Holders of I Unit Common listed in Schedule V thereto and the
Holders of Debenture Warrants listed in Schedule VI thereto.
10.4** Industrial Building Lease dated April 30, 1997 between G2
Limited Partnership and the Registrant.
10.5** Lease Agreement between American National Bank and Trust
Company of Chicago, as Trustee, and the Registrant dated
September 1996.
10.6** Employment Agreement effective August 1, 1997 between the
Registrant and Glen E. Tullman.
10.7** Employment Agreement effective August 1, 1997 between the
Registrant and David B. Mullen.
10.8** Employment Agreement effective September 2, 1997 between the
Registrant and Steven M. Katz.
10.9** Agreement dated May 1, 1995 between the Registrant and John G.
Cull.
10.10** Form of TouchScript Master License Agreement
10.11**** Revolving Credit Agreement dated as of April 16, 1998 and
amended as of May 6, 1998 by and between Allscripts, Inc. and
LaSalle National Bank.
10.12++ Supply Agreement dated August 27, 1998 between McKesson U.S.
Health Care and the Registrant.
10.13** Form of Series H Warrant
10.14** Form of Extension Guaranty Warrant
10.15** Form of 1996 Extension Guaranty Warrant
10.16** Form of Debenture Warrant
10.17** Form of Series H Extension Warrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Gardner, Carton & Douglas (included in Exhibit 5.1)
23.3**** Consent of Edward M. Philip
24.1** Powers of Attorney (included on signature page)
27.1** Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Filed on May 14, 1999 as part of this Registration Statement.
*** Filed on June 7, 1999 as part of this Registration Statement.
****Filed on June 29, 1999 as part of this Registration Statement.
++ Confidential treatment requested as to a portion of this exhibit.
E-1
<PAGE>
EXHIBIT 10.12
CONFIDENTIAL AND
SUPPLY AGREEMENT
----------------
This Supply Agreement dated this 27th day of August, 1998, between McKesson U.S.
Health Care, a division of McKesson Corporation ("McKesson") and Allscripts,
Inc. ("Allscripts") shall be to establish a three (3) year program for the
supply of prescription drugs and other health and beauty care products by
McKesson to Allscripts' Mail Order Facility in Columbus, Ohio and Allscripts'
Repackaging Facility in Libertyville, Illinois (referred to herein collectively
as "Facilities" and individually as "Facility"). The parties hereto agree as
follows:
1. MERCHANDISE
For purposes hereof, "Merchandise" shall comprise all items normally
stocked or drop-shipped by McKesson Drug Distribution Centers servicing the
48 contiguous states, including prescription drugs, OTC drugs, health and
beauty aids and sundries. This Agreement does not apply to merchandise sold
to Allscripts by McKesson Corporation divisions or subsidiaries other than
McKesson Drug Company. The Allscripts' Facilities will be serviced by
McKesson's distribution centers in Carol Stream, Illinois and Washington
Courthouse, Ohio.
2. TERM
The term of this Agreement shall be for the three year period
commencing on October 1, 1998, and during such period Allscripts agrees to
designate McKesson as its primary supplier of Merchandise and to purchase
from McKesson in excess of [ ]*% of all of the requirements of its
Facilities for Merchandise and other items covered hereunder.
3. ORDERING AND DELIVERY
Prescription products will be delivered with an invoice to each of
Allscripts' Facilities up to [ ( )]* times per week. (Monday
through Friday) in Libertyville and [ ( )]* times per week in
Columbus. Orders transmitted by 8:00 p.m. local time Sunday through
Thursday will be delivered the next day by 7:00 a.m. at Allscripts'
Libertyville Facility and 7:30 a.m. at Allscripts' Columbus Facility.
Alternate source orders transmitted by 5:00 p.m. will be delivered next day
by noon. Afternoon deliveries transmitted by 2:00 p.m. will be delivered
same day by 7:00 p.m. Penalties for late shipments of $[ ]* per
hour for deliveries after 7:30 a.m. in Libertyville and 8:00 a.m. in
Columbus shall be imposed hereunder; provided, however, this payment shall
not apply during inclement weather conditions.
4. PAYMENT TERMS
A. The invoice payment terms for the Merchandise covered by this
Agreement are as follows:
* Confidential portions omitted and filed separately with the Commission.
1
<PAGE>
[ ( )]* Day Payment Terms: All invoices, (weighted average
----------------------------------
of [ ]* days from date of invoice) are due and payable [ ( )]*
days from the date of invoice via Electronic Funds Transfer
(currently Tuesday/Thursday).
Prepayment Incentives
---------------------
Prepayment Terms (30 day, 15 day and 7 day): The prepayment is a one-
time payment equivalent to thirty (30) or fifteen (15) or seven (7)
days worth of purchases (based on the most recent three-month purchase
history) which is held as a deposit by McKesson. The amount of the
required deposit will be adjusted quarterly, and may be adjusted as
often as monthly, to cover increases or decreases in purchase volume.
Following such one-time payment, all purchases are payable under the
[ ]* Day Payment Terms as described above.
Allscripts shall be entitled to a reduction in the markup set forth in
the cost of goods schedule for prepayment if Allscripts elects this
prepayment option. The prepay incentive shall be as follows:
Prepay Incentive Markup Reduction
---------------- ----------------
30 Days [ ]*%
15 Days [ ]*%
7 Days [ ]*%
B. Any payments made after the due date indicated herein shall result in
a [ ]* percent ([ ]*%) (or the maximum amount permissible
under applicable law, if lower) increase in the purchase price of
the Merchandise. A [ ]* percent ([ ]*%) service charge (or
the maximum amount permissible under applicable law, if lower) will be
imposed semi-monthly on all balances delinquent more than [ ( )]*
days.
C. This Agreement is conditioned upon Allscripts' maintaining a sound
financial condition throughout the term hereof and to that end,
Allscripts agrees to promptly substantiate in writing, at McKesson's
reasonable request, the existence of such condition with audited
financial statements and any other supporting information reasonably
required by McKesson.
D. Each customer of McKesson is required to negotiate its payment terms
and credit line with McKesson individually, based upon such customer's
individual financial and risk characteristics. Nothing in this
agreement is intended to be, nor shall it be construed as, a binding
obligation or continuing commitment by McKesson to extend credit or
payment terms options and all such terms and conditions shall be
subject to the review and approval of McKesson's Credit Department.
Allscripts retains the right to terminate the agreement upon change of
payment terms.
* Confidential portions omitted and filed separately with the Commission.
2
<PAGE>
E. McKesson reserves the right, in its sole discretion, to change a
payment term (including imposing the requirement of cash payment upon
delivery) or limit total credit, if (i) McKesson concludes there has
been an unsatisfactory payment performance; or (ii) Allscripts ceases
to meet McKesson's credit requirements or McKesson determines that
Allscripts is likely to cease meeting such requirements. McKesson
further shall be entitled to suspend or discontinue the shipment of
any additional orders, which have not already been paid for, to
Allscripts' Facilities if the above is not remedied, to McKesson's
satisfaction, within [ ( )]* days. In such event, McKesson,
in its sole discretion, may immediately terminate this Agreement upon
the expiration of said [ ]* day period. Allscripts retains the
right to terminate the agreement upon change of payment terms.
5. SERVICE LEVEL
A. In the event McKesson fails to maintain a Service Level (as defined
below) for pharmaceutical purchases hereunder equal to at least
[ ]*% with respect to each of Allscripts' Facilities (the "Minimum
Service Level"), McKesson will be obligated to issue credits to
Allscripts in accordance with Section 5.D. below, subject to the
following:
1. The Minimum Service Level shall not apply until sixty (60) days
after the later of (i) the date of this Agreement, or (ii) the
date on which Allscripts has furnished to McKesson reasonably
accurate estimates of its pharmaceutical products usage.
2. Items that (i) are new to the market or (ii) have not been
previously ordered by Allscripts shall require a one month start
up period.
3. McKesson shall have at least a six-week start up period for new
manufacturer contract transition.
B. "Service Level" shall mean a percentage amount calculated as follows:
A - B
----- x 100
A - C
where,
A = [ ]*
B = [ ]*
C = [ ]*
C. For any given order, a "Line" shall mean any stock-keeping unit of a
pharmaceutical product ordered by Allscripts, regardless of the
quantity ordered.
* Confidential portions omitted and filed separately with the Commission.
3
<PAGE>
D. In the event McKesson fails to maintain the required Service Level for
[ ]* consecutive months, McKesson will credit Allscripts, {based on
the following schedule};
below [ ]*% [ ]*%
[ ]*% [ ]*%
[ ]*% [ ]*%
of the aggregate net pharmaceutical purchases by Allscripts' affected
Facility for the [ ]* months of reduced service and each
subsequent month of reduced service. So long as McKesson is current
in the crediting of such amounts, such failure shall not in itself
constitute a default hereunder. If the service level for any [ ]*
month during the agreement falls below [ ]*%, Allscripts may elect
to immediately terminate the agreement.
E. In the event a distribution center is out of a particular product,
McKesson can ship shorted product(s) from another McKesson
distribution center and the product will be available to Allscripts
within [ ]* hours of transmitted order.
F. McKesson provides [ ]* hour, [ ]* days per week emergency
service. Emergency telephone numbers and pager numbers for primary
and secondary contacts at each distribution center will be provided
upon execution of this Agreement. When contacted in an emergency
situation, distribution center personnel will access distribution
center inventory and make arrangements for shipment of products to the
facility via air, taxi, truck or police.
G. Each McKesson distribution center has a plan in place in the event of
a natural disaster to guarantee alternate delivery, delivery of
emergency products direct from the manufacturer or from an alternate
McKesson distribution center. Operations personnel at each
distribution center work with the local McKesson Account Manager and
Allscripts to put together an emergency order that is retained at the
distribution center. In the event of a disaster, the emergency order
can be automatically shipped to Allscripts.
McKesson's National Computer Center has the ability to transmit or
receive information to or from any of McKesson's 35 distribution
centers. In the event of telephone line disruption, McKesson uses
satellite technology as back up. The National Computer Center is
completely redundant and self-contained, with a completely separate
water system, electrical system and a mainframe computer. McKesson
maintains a complete back-up system in another location that can be
used in the event of a disaster impacting the primary site.
* Confidential portions omitted and filed separately with the Commission.
4
<PAGE>
6. COST OF GOODS
A. In consideration for the Cost of Goods specified herein, Allscripts
expressly commits to purchase a total of $90 million (net of returns,
allowances and rebates) in Direct Facility Delivery volume of
Merchandise from McKesson during the three year term of this Agreement
("Volume Purchase Commitment"). If after the first year of this
Agreement Allscripts has not achieved the appropriate pro rata
purchase volume based on its Volume Purchase Commitment, McKesson, in
addition to the other rights and remedies available to it hereunder,
reserves the right in its sole discretion to redetermine the Cost of
Goods pricing specified below. Allscripts also retains the right to
immediately terminate the agreement based on such adjustment.
B. Subject to the terms and conditions of this Section, the Cost of Goods
for Merchandise delivered to Allscripts shall be Cost plus the
applicable markup as specified below. Except in the case of contract
items as discussed below, "Cost" for the purposes of this Agreement
shall mean the manufacturer's published acquisition cost (exclusive of
cash discounts) on the date of McKesson's invoice to Allscripts,
adjusted for selected bonus goods, manufacturers' off-invoice
allowances, and manufacturers' deal prices to be made available to
Allscripts in accordance with McKesson's established policies. For
purchases of Merchandise with respect to which Allscripts has entered
into a vendor contract with a manufacturer ("Contract Products")
loaded with McKesson, "Cost" shall mean the "bid price" of the product
as set forth in the vendor contract.
C. Unless otherwise indicated herein, the Cost of Goods under this
Agreement shall be in accordance with the pricing schedule set forth
below. Allscripts hereby agrees to maintain a minimum company-wide
monthly average volume of $2 million in prescription drug and OTC
product purchases (net of returns, allowances and rebates) from
McKesson throughout the term of this Agreement ("Monthly Volume
Commitment"). Unless otherwise indicated, Allscripts shall at the time
of implementation of service under this Agreement ("Implementation
Date") be charged the applicable markup specified below for such
Volume Commitment.
Monthly Group-wide Volume Cost Markup %
(net of returns, allowances Rx/OTC
and rebates) ([ ]* Day Payment Terms)
--------------------------------- --------------------------------
$[ ]* - $[ ]* [ ]*%
$[ ]* - $[ ]* [ ]*%
$[ ]* - and above [ ]*%
Note: Pricing for the first year of the contract will be at the
[ ]*% tier. Monthly purchase volumes will be reviewed after the
first year.
Schedule II *Narcotics [ ]*
----------------------
Contract Products [ ]*
-----------------
* Confidential portions omitted and filed separately with the Commission.
5
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Net Billed Items: The purchase price for selected Merchandise,
----------------
including but not limited to the following product lines, will be net-
billed and not covered by the above-specified Cost of Goods pricing:
[ ]*
7. PHARMACEUTICAL PRODUCT ALLOCATIONS [ ]*
[ ]*
8. RETURNED GOODS
A. Credits for returned goods from McKesson are divided into four
categories, depending on the reason for the claim. Credits will be
issued for any of the following reasons:
1) Non-merchandise problems, such as shortages and pricing errors;
2) McKesson merchandise received in error;
3) Recalls; and
4) Outdated merchandise (defined as items with less than 1 year
dating).
B. The amount of credit allowed by McKesson will vary as follows:
1) 100% credit will be given for:
-----------
(a) Pricing errors, shipping errors and billing errors;
(b) Shortages (required to be phoned into the Distribution
Center within 48 hours of receipt of Merchandise);
(c) Ordering errors (must be returned within 30 days of
receipt);
(d) Manufacturer recalls;
(e) Items received by Allscripts with less than 1 year dating;
and
(f) Merchandise that had concealed damage.
Invoice number is required in each of the above-specified
instances, except recalls, for full credit.
2) 85% credit will be given for:
----------
Clean, salable merchandise with at least nine (9) months dating
returned more than 30 days after location receipt.
3) 75% credit will be given for:
----------
(a) Unsalable merchandise which can be returned to manufacturer;
(b) Outdated items (subject to the approved vendor list); and
(c) Salable merchandise with price tickets not removed.
---
(4) No credit will be given for:
---------
(a) Merchandise damaged in Allscripts' Facilities;
* Confidential portions omitted and filed separately with the Commission.
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(b) Merchandise from manufacturers not listed on the approved
vendor list; and
(c) Merchandise not purchased from McKesson.
These no credit items will be sent back to the facility which
initiated the return.
9. CONTRACT MANAGEMENT
A. McKesson agrees to service all manufacturers' contracts negotiated by
Allscripts, provided such manufacturers are approved suppliers of
McKesson. Such Contract Products will be supplied at Allscripts'
negotiated bid price as described above in the Cost of Goods section.
B. Allscripts' eligibility for participation under a vendor contract must
be authorized by the vendor and Allscripts' group purchasing
organization, if applicable, before the contract is loaded by McKesson
for Allscripts. Allscripts shall be liable for unpaid chargebacks
resulting from eligibility issues.
C. In the event a vendor in the case of an Allscripts negotiated
---------------------
contract, (i) makes an assignment for the benefit of the creditors,
--------
files a petition in bankruptcy, is adjudicated insolvent or bankrupt,
or if a receiver or trustee is appointed with respect to a substantial
part of the vendor's property or a proceeding is commenced against it
which will substantially impair its ability to pay on chargebacks or
(ii) otherwise defaults in the payment of chargebacks to McKesson,
Allscripts shall be invoiced and become liable for the unpaid
chargebacks allocable to its purchases from such vendor.
10. SYSTEM SERVICES AND EQUIPMENT
The following systems and services will be made available to Allscripts
by McKesson:
A. Telxon electronic order entry equipment (including shelf wand) [ ]*.
B. Item price stickers, [ ]*, with Allscripts custom pricing,
where required, and other features such as:
1) Department number
2) Invoice cost
3) Month and year ordered
4) Location name
5) AWP or retail pricing
(Note: Each feature is available for both Rx and OTC.)
C. Bar-coded shelf labels, [ ]*.
* Confidential portions omitted and filed separately with the Commission.
7
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D. Monthly report of all pharmaceuticals purchased from McKesson Drug for
each location, [ ]* (due by 15th of following month). In
addition, Quarterly and Yearly reports:
1) by Drug
2) by Dollar Volume
3) by Manufacturer
E. A complete catalog of items stocked by McKesson's Distribution
Centers, [ ]*.
F. [ ( )]* EconoLink systems and [ ( )]* chain host
system plus printer shall be provided to Allscripts [ ]*.
EconoLink shall be subject to a separate license agreement between the
parties governing use and maintenance.
11. TERMINATION
A. Failure to make any payment when due in accordance with the terms of
this Agreement shall constitute a default. Any other material breach
of this Agreement by either party shall constitute a default if not
cured within thirty (30) days after written notice of such breach is
given by the non-breaching party. Upon default by either party, the
other party may terminate this Agreement on five (5) days' written
notice.
B. Either party may, on ten (10) days notice, terminate this Agreement:
1) If the other party shall file any petition under any bankruptcy,
reorganization, insolvency or moratorium laws, or any other law
or laws for the relief of or in relation to the relief of
debtors; or
2) If the other party shall file any involuntary petition under any
bankruptcy statute or a receiver or trustee shall be appointed to
take possession of all or substantial part of the assets of the
party which has not been dismissed or terminated within sixty
(60) days of the date of such filing or appointment; or
3) If the other party shall make a general assignment for the benefit
of creditors or shall become unable or admit in writing its
inability to meet its obligations as they mature; or
4) If the other party shall institute any proceedings for liquidation
or the winding up of its business other than for purposes of
reorganization, consolidation or merger; or
5) If the other party's financial condition, in the reasonable belief
of the terminating party, shall become such as to endanger
completion of its performance in accordance with the terms and
conditions of this Agreement.
C. In the event of a termination hereunder the following continuing
obligations and liabilities shall survive termination and remain in
full force and effect:
* Confidential portions omitted and filed separately with the Commission.
8
<PAGE>
1) Liability for accounts receivable balances or any other payment
due hereunder to the other party at the date of or upon the
occurrence of such termination; and
2) Obligations imposed on each party under the Proprietary and
Confidentiality Information section set forth below.
3) Accept returns as described in Section 8 of this Agreement for a
period of [ ( )]* days following the effective date of
any such termination.
12. PROPRIETARY AND CONFIDENTIAL INFORMATION
A. Any and all accounts, records, books, files, and lists regarding any
transaction provided for or contemplated hereunder, shall be
confidential and proprietary to the party creating or generating such
information. This Agreement, and the terms and conditions hereof, are
confidential. The parties expressly agree to maintain such terms and
conditions in confidence, and shall take every precaution to disclose
the contents of this Agreement only to those employees of each of the
parties who have a reasonable need to know such information.
B. Allscripts and McKesson each acknowledge that, in connection with
their respective businesses, they have developed certain operating
manuals, symbols, trademarks, trade names, service marks, trade
secrets, Allscripts lists, procedures, formulas, and other patented,
copyrighted, or legally protected materials which are confidential and
proprietary to each of them.
C. Neither party may disclose the terms of this Agreement during the term
hereof and for an additional period of thirty-six (36) months
following the effective date of expiration or other termination of
this Agreement. Furthermore, except upon the prior written consent of
the other party, neither party may divulge, disclose, communicate, or
use any of the other party's confidential or proprietary information
generally described in Subsection A and B above, in any manner or for
any purpose, including, without limitation, use in advertising or for
promotional materials, except upon the prior written consent of the
other party. A party hereto may refuse consent to the use of its
confidential or proprietary information for any or no reason. In the
event that any such confidential or proprietary information is used
during the course of this Agreement it shall retain its confidential
and proprietary nature and shall be returned immediately to its owner
or destroyed upon termination of this Agreement. Notwithstanding
anything herein to the contrary, nothing in this subsection shall
require either party to maintain in confidence any information,
materials, or data which is in the public domain, enters the public
domain through no fault of such party, was in possession of the party
prior to being furnished to it by the other, was supplied to the party
by a third party or parties lawfully in possession thereof, or which
the party is required to divulge pursuant to process of any judicial
or governmental body of competent jurisdiction, provided that notice
of receipt of such process is given to the other.
* Confidential portions omitted and filed separately with the Commission.
9
<PAGE>
13. ALTERNATE SERVICE
If service from an McKesson distribution center to any Allscripts Facility
is interrupted or delayed because of strike, lockout, labor dispute, fire
or other casualty, or any other reasons beyond the reasonable control of
McKesson, McKesson will take such action as may be reasonably necessary,
without additional cost or expense to Allscripts, to maintain service as
mutually agreed upon the affected Facility from an alternate McKesson
distribution center.
14. SUPPORT/PARTNERSHIPS
McKesson agrees to participate in, and contribute towards, (sponsorship)
Allscripts annual national meetings. The funding provided by McKesson for
this will be equal to, or greater than the 1998 annual contribution.
15. NOTICES
All notices pertaining to this Agreement shall be delivered in person, sent
by certified mail, delivered by air courier, or transmitted by facsimile
and confirmed in writing (sent by air courier or certified mail) to a party
at the address or facsimile number shown in this Section, or such other
address or facsimile number as a party may notify the other party from time
to time. Notices delivered in person, and notices dispatched by facsimile
prior to 4:00 p.m. and confirmed, shall be deemed to be received on the day
sent. All other facsimiles and notices shall be deemed to have been
received on the business day following receipt; provided, however, if such
day falls on a weekend or legal holiday, receipt shall be deemed to occur
on the next business day. Notices may also be transmitted electronically
between the parties, provided that proper arrangements are made in advance
to facilitate such communications and provide for their security and
verification.
If to McKesson:
--------------
McKesson Corporation
520 E. North Ave.
Carol Stream, IL 60188
Attention: Pete Winkenbach
Vice President Sales
Fax: 630-462-6641
If to Allscripts:
----------------
Allscripts, Inc.
2401 Commerce Drive
Libertyville, Illinois 60048-464
Attention: Chris T. Zirzow, R.Ph.
Vice President, Pharmaceutical Alliances
Fax: 847-680-3951
15. MISCELLANEOUS
A. This Agreement embodies the entire agreement between the parties with
regard to the subject matter hereof and supersedes all prior
agreements, understandings and representations with the exception of
any promissory note, security agreement or other
10
<PAGE>
credit or financial related document(s) executed by Allscripts or
between Allscripts and McKesson. This Agreement may not be modified,
supplemented or extended except by a writing signed by both parties.
B. This Agreement supersedes any and all prior McKesson agreements and
discount plans in which any Allscripts facility may currently be
participating.
C. Except as provided above in Section 13, neither party shall have any
obligation hereunder for failure or delay of performance due to fire,
shortage of materials or transportation, government acts, or any other
cause beyond its control.
D. Neither party shall have the right to assign this Agreement or any
interest therein without the prior written consent of the other party,
and any such attempted assignment shall be without effect, except that
either party may, without the consent of the other, upon the sale of
the assets of the business to which this Agreement pertains, assign
this Agreement to an affiliate of such party. This Agreement shall be
binding upon all permitted assigns.
E. This Agreement shall be construed in accordance with the State of
California without regard to the provisions of Section 1654 of the
California Civil Code or the rules regarding conflict of laws.
F. If any provision of this Agreement shall be held invalid under any
applicable law, such invalidity shall not affect any other provision
of this Agreement.
G. The failure of either party to enforce at any time or for any period
of time any one or more of the provisions thereof shall not be
construed to be a waiver of such provisions or of the right of such
party thereafter to enforce each such provision.
H. If any federal, state, or local tax currently or in the future is
levied upon McKesson in a jurisdiction where either McKesson or
Allscripts does business and such tax relates or applies to the
Merchandise or any transactions covered by this Agreement (excluding
taxes imposed on McKesson's net income), the Cost of Goods to those
Allscripts Facilities involved will be increased a corresponding
percentage amount.
I. Participation hereunder by any of Allscripts'/McKesson Facilities may
be terminated by McKesson/Allscripts if such Facility fails to comply
with the terms and conditions of this Agreement.
J. Allscripts understands and acknowledges that all product discounts and
rebates earned by or granted to its locations under McKesson's
programs may be subject to certain state and federal laws and
regulations regarding reporting and/or disclosure requirements and may
be required to be reflected in the costs claimed or charges made by
Allscripts' Facilities under Medicaid, Medicare or any other health
care reimbursement program or provider plan.
K. Whenever possible, each provision of this Agreement shall be
interpreted so as to be effective and valid under applicable law, but
if any provision of this Agreement should be prohibited or invalid
under applicable law, such provision shall be ineffective to the
11
<PAGE>
extent of such prohibition or invalidity without invalidating the
other of such provision or the remaining provisions of this Agreement.
L. The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
M. This Agreement may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed an original instrument, but
all such counterparts together shall constitute one agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the date and year written below and the persons signing warrant that they
are duly authorized to sign for and on behalf of the respective parties. This
Agreement shall be deemed accepted by McKesson only upon execution by a duly
authorized representative of McKesson.
ALLSCRIPTS, INC. McKESSON U.S. HEALTH CARE,
a division of McKesson Corporation
By: /s/ John Cull By: /s/ Pete J. Winkenbach
----------------------- ---------------------------------------
Name: John Cull Name: Pete J. Winkenbach
----------------------- --------------------------------------
(Print or Type)
Title: Treasurer Title: Vice President Sales, Central Region
---------------------- --------------------------------------
Date: 8/31/98 Date: 8-28-98
---------------------- --------------------------------------
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Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated May 12, 1999 except for the information in Note 22, for which
the date is June 18, 1999 relating to the financial statements and financial
statement schedule of Allscripts, Inc., which appear in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Selected Consolidated Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
July 7, 1999
